Marc Gabelli is the Senior Managing Partner of Gabelli & Partners, LLC which houses Gabelli's growing alternative investment business
Marc Gabelli is the Senior Managing Partner of Gabelli & Partners, LLC which houses Gabelli's growing alternative investment business. The firm's first partnership offering, Gabelli Associates Fund, L.P., a risk arbitrage partnership, started in 1985. Another partnership was launched in 1986 and two offshore funds in 1989. Several new hedge funds have been added in the past year under Marc Gabelli's leadership. He currently manages Gabelli Global Partners, a long-short hedge fund focusing on global equities which returned 41% in 1999. Marc Gabelli has been ranked number one global equity portfolio manager in the United States for the last three and five years by Lipper Analytical and is a Five Star Rated Manager by Morningstar. His portfolio management responsibilities at Gabelli Asset Management have included Gabelli's Global Growth, Global Opportunity, Global Telecommunications and Westwood Mighty Mites mutual funds. Marc Gabelli joined Gabelli Asset Management in 1993, after working with Lehman Brothers in New York and London in the equity research and arbitrage departments. Gabelli Asset Management was founded in 1976 by Mario Gabelli, his father, and the company's chairman. Building on the firm's strength in value investing, Marc Gabelli has focused on developing and applying Gabelli's value philosophy to global equities. Gabelli Asset Management currently has $25 billion under management, including $700 million in its hedge fund products. Marc Gabelli spoke to HFN publisher, Antoine Bernheim, in mid-April 2000.
Profile of Marc J. Gabelli
Born: New York City
Education: Boston College
Last vacation: 1998-Peru
Last book read: The Roman Legions by Henry D. Parker
Hobbies: Sailing, hunting, martial arts
Favorite quote: "Every day is a gift from God, make it
How he best describes himself: "In this never ending process of idea generation, I try to follow a few simple points on a daily basis. Always question everything and
anything, and usually when something is too good to be true, it usually is; Maintain a balance across the mental, physical
and spiritual; Importantly, never give up and believe in
convictions; It also helps with volatility!!"
Q. Where do hedge funds fit into Gabelli's overall business?
A. Our business is divided into mutual funds, separately managed accounts for high net worth individuals and institutions and absolute performance funds. Our hedge funds fall into the last category which is managed through partnerships, individual accounts and offshore hedge funds. Our hedge funds are an extension of our core skill set of stock picking, following the Graham Dodd value investing discipline. This discipline was further developed in the 80's and 90's by Mario Gabelli with the methodology of private market value analysis and investing with a catalyst.
Q. Could you describe how hedge fund products are developed at Gabelli?
A. We develop new hedge funds when we believe we can bring a competitive value-added product to the market, using our core competency. This happened in the 80's with our risk arbitrage partnership focusing on announced deals, which is right in line with our private-market-value-with-a-catalyst style of investing. Some of our core investments end their life cycle in the form of a takeover and, in these situations, the arbitrage team is able to capitalize on the analytical resources of the firm. Last year, we started Gabelli Global Partners, of which I am the senior portfolio manager, and which follows the same investment discipline in the global markets. We are now launching a European fund focusing just on European equities. In the next twelve to eighteen months, we plan to introduce new products, a Japan fund, a global risk arbitrage product and a media and telecom product. We want to have a family of absolute return products following a similar investment methodology. The managers of the funds have come from within and from outside the firm. For the European fund, we have brought in two individuals who work with me on the portfolio. Emanuele Antonaci came from Fidelity in London and Giovanni Govi from Goldman Sachs London. Both were trained in the Graham Dodd methodology at Columbia Business School where they both took my father's class. One of them actually worked here at Gabelli. As we grow and develop new hedge fund products, I would think that we will continue to bring new people on board.
Q. Could you describe how the hedge fund managers use the research and execution resources of Gabelli Asset Management?
A. We are managing money for 35 different mutual funds, pension funds and other accounts. We have centralized legal, operations, accounting and risk-control functions which are used for the alternative products. We have a dedicated CFO and controller to the alternative products but we are leveraging off of our firm back-office resources. We have traders dedicated to the hedge funds. Some of the hedge funds are able to utilize some of the mutual funds' order flow, yet we segment all the orders up-front, treat them as client orders on a time in and best execution basis. We have 20 specific sector analysts in the firm and the managers of the alternative products have access to their research which is quite differentiated because it looks primarily at private market value analysis. We can also use the resources of the firm's 20 portfolio managers and we all attend the same morning meeting. Despite that, our alternative business conducts its own daily idea meetings, and is very much an independent, stand alone operation.
Q. What is your hedge fund marketing strategy and how does it fit with Gabelli's existing distribution channels?
A. Historically, the partnerships were treated as individual businesses within a larger organization. There was no marketing staff for those funds. Our arbitrage funds have terrific returns over 15 years and $450 million in assets but a capacity to go to $1.5 billion. Earlier this year, we created Gabelli & Partners as a new division to house the alternative investment business. We have recruited a Chief Operating Officer who will work with our CFO and controller in building the franchise for our clients. We have one dedicated salesman who was a partner at Rothschild and at DLJ and we will be adding additional salespeople here, in Europe and Japan so that the alternative community can get to know Gabelli much better. Our clients, both institutional and high net worth individuals, are asking for these products including many universities for which we manage money. That is a primary reason why we are in this business in a very formalized way; our clients want it.
Q. Could you describe your own investment style in managing your hedge fund, Gabelli Global Partners?
A. We look at equities globally, primarily in North America, Western Europe and Japan. Our strategy is based on a long-short equity approach that is valuation-driven and focuses on the value of businesses and its catalysts. We want to determine what an informed buyer would pay for a group of assets in a privately negotiated transaction. We do that by looking at tangible metrics, transactions within sectors such as Vodafone/Airtouch in wireless, or Vivendi/US Filter in environmental. Ideally, we look for stocks across sectors that trade at large discounts or premiums to their private market values, and then build what we call our focus list. We then look for catalysts that obviously drive the return over a 12-18 month time frame. They come in many forms, anything from globalization, technological changes, to mergers and acquisitions activity to company-specific catalysts, such as management changes or share buy-backs. We believe that with the free movement of capital and corporate managements looking to build global scale with local reach, identifying cross border valuation differentials can generate significant returns. We tend to have approximately two thirds of the portfolio in the US and Europe and 20% to 33% in Japan. We generally use risk arbitrage in the portfolio mix, anywhere from 5% to 10% where in this environment we are earning a risk-adjusted 15% return. We can be 25% to 75% net long although it has been closer to 25%, with 100% long and 75% short exposure. We generally do not put more than 5% of our equity in any one name. Last year, we were up 41% net and we had no position greater than 2%.
Q. Could you describe your research process?
A. The portfolio is constructed bottom up but we do manage the portfolio from a risk perspective based on correlations among stocks. We are very sensitive to sector-related risk. We are now seeing a higher level of correlations than has ever been tracked before. We do cash flow multiple comparisons within the same countries and cross-border and we hone in on the values of the assets, franchises and other intangibles of businesses. We do "sum of the parts" analysis and try to buy businesses that are trading at discount and short businesses that are trading at premiums to their private market value when there is a catalyst in place. We look for situations where we can earn a 100% return over an 18 month time frame.
Q. How do you manage risk?
A. We do have stop-losses both on the long and short sides that are situation-specific and relative to valuation. They are typically 20% to 25%. In a highly volatile market as we have seen recently, our stop loss discipline causes us to remove some positions which in fact would have worked and we see a narrowing of our portfolio to very core solid names. We also closely manage our sector exposure through short selling: 20% of our shorts come from industry pairs, one third to a half of our shorts are outright shorts to make money; and the balance are stub-related or special situations shorts.
Q. How do you balance your portfolio responsibilities with your management responsibilities?
A. My management responsibilities within the organization are narrowing specifically to the alternatives business and by this summer I will be exclusively involved in managing the hedge fund portfolios now that we have hired a Chief Operating Officer. I have one goal which is to earn well-above average returns for our clients. As long as I can do that, everything else will follow and that is true for all our products. u