The GDL Fund: Moderate Risk, 13% Discount To NAV

| About: GDL Fund (GDL)

The GDL Fund is traded on the New York Stock Exchange under the symbol GDL. It is managed by the Gabelli Group, of which Mario J, Gabelli is Chairman. This is a risk arbitrage fund which purchases securities of companies that have agreed to be acquired by others. It differs from other risk arbitrage funds in that it only takes long positions and does not short the acquiring company. This does expose you to market risk. The benchmark they use is 3 month treasury bills, which they do well against. Please remember that in this lost decade of equity market losses, treasury bills is a stiff benchmark. GDL's performance is as follows:

1 year 3 year Since 1/31/07
Net Asset Value 1.26% 3.4% 1.88%
Market Value (2.51%) 5.98% (1.42%)
3 Month Treasury Bills 0.05% 0.11% 1.15%
Click to enlarge

GDL does have market risk as they do not short acquiring companies, and just purchase the shares of the company to be acquired. Interestingly, over the past five (5) years, this approach has done them little harm. Needless to say, in an up market, they should benefit greatly.

GDL is a closed end fund originally known as The Gabelli Global Deal Fund. The closed end structure is superior for these types of investment, as after a flurry of activity, volume disappears as does liquidity. An open end structure could cause havoc with redemptions or new monies at times when there is little activity.

As of December 31, 2011, GDL had gross assets of $434,427,125 of which $ 293,767,142 was leveraged with preferred stock, leaving net assets of $293,767,142. In an attempt to offset the leverage, in a turbulent market, GDL had $ 165,191,922 or 38.0% of its gross assets in Treasury Bills.

GDL has a broad, large and diversified portfolio, with its largest holdings being as follows:

Goodrich $25,729,600
RightNow Technologies $17,959,419
SuccessFactors $19,137,600
Netlogic Microsystems $16,853,800
Southern Union $10,190,620
Temple-Inland $19,026,000
Pharmasset $21,922,200
Healthspring $16,362,000
Harleyville Group $ 9,051,200
Progress Energy $ 5,602,000
Click to enlarge

GDL has done moderately well in this market with net realized losses of ($1,344,809) and net unrealized depreciation of ($7,748,048). Nothing to write home about but acceptable,

As would be expected, there is high portfolio turnover, but everything else seems reasonable. These are the ratios, in percent, for the past four (4) years:

2011 2010 2009 2008
Ratio of net investment income to common shares (3.71) (3.60) (3.35) 1.02
Ratio of expenses to common shares including interest and dividends on shares sold short 4.89 4.39 4.67 0.67
Ratio of operating expenses excluding interest and dividends on shares sold short 1.56 1.89 2.53 0.65
Portfolio turnover 336 365 371 334
Click to enlarge

As of 3/20/12, GDL was selling at a 13.35% discount from net asset value, which makes it even more attractive for me. This discount has existed for quite some time.

I like GDL because risk arbitrage does work and is a good substitute for other short term instruments. The fact, that it is presently not hedging its positions, means that in an improving market, the returns generated should be more generous. As usual, you should not put all your money in GDL but it is worth a shot.

Disclosure: I am long GDL.