The Wall Street Journal recently posted an article on top performing mutual funds, highlighting the Gabelli ABC Fund (GACBX), a modified merger arbitrage strategy fund as the best YTD performer through March 31, 2009. This survey included 1,663 funds that had greater than $50 million in assets and is at least three years old.
We would like to highlight the Gabelli Global Deal Fund (GDL) also a similar modified merger arbitrage strategy and why we view GDL as a better investment relative to GABCX as well as an overall attractive investment opportunity. Here’s why...
- GDL trades at a 22% discount to its Net Asset Value (NAV). GABCX trades at NAV.
- Both GDL and GABCX currently maintain substantial cash positions, a primary driver for their out performance this year. GDL held 55.6% cash (GDL employs 22% leverage); GABCX held 30.1% cash as of 12/31/08. We do not expect cash levels to remain this high going forward
- If roughly half of GDL’s position is in cash, we view that as the equivalent of owning the equity component at a 40% discount and holding deployable cash at NAV.
- We like the merger arbitrage strategy for its substantially lower correlated returns yet long equity exposure. Both GABCX and GDL’s NAV have a beta of <.2.
- Going forward, we expect the landscape for dealmaking to improve, thus providing ideal opportunities to employ GDL’s large cash position into attractive merger arb spreads.
- GDL pays a quarterly dividend of $0.20, which equates to an annualized yield of 6.49%. The dividend was reduced from $0.40 per quarter at the end of 2008. We attribute the funds wide discount partially to its recent dividend reduction, despite it being a prudent decision in our view.
Overall, we view the ability to purchase high quality assets, a sensible equity strategy for the given environment run by a season professional at a discount of 22% to be an attractive investment for this volatile environment.
Disclosure: Relative Value Partners holds positions in GDL for its clients.