Gabelli Equity CEFs: Leveraged Funds For A Bull Market (Revisited)

by: Douglas Albo

It was exactly a year ago today that I first reviewed and recommended the Gabelli equity closed-end funds (CEFs), also known under their corporate name GAMCO (NYSE:GBL), and I'd like to revisit those recommendations.

I stated in my article from February 1, 2012, which you can read here, that if the markets continued their bull run in 2012, that no fund family was more in line to benefit than the Gabelli funds. That's because Gabelli manages mostly leveraged and mostly stock only funds that can get a real performance boost in a strong equity market. Most equity CEFs that use leverage include some fixed-income investments to leverage up their interest payments and to reduce the volatility and risk that leverage can bring. Not the Gabelli funds. Almost all of them are pure stock based funds. Combined with Gabelli's equity research and stock picking prowess, which I believe is second to none, and I felt that investors would be well served to overweight several of the Gabelli funds.

First, let me show you the table of all 10 Gabelli CEFs from a year ago that I used in my article.

Of the 10 funds listed, my favorites from a year ago were the Gabelli Equity Trust fund (NYSE:GAB), the Gabelli Healthcare & WellnessRx fund (NYSE:GRX) and the Gabelli Natural Resources, Gold & Income fund (NYSE:GNT). One other fund, the Gabelli Dividend & Income Trust fund (NYSE:GDV), I said was also attractive and one fund, the Gabelli Utility Trust fund (NYSE:GUT) I could not recommend. The rest I didn't express an opinion on and just described them in the article.

Fast forward a year and here is how all 10 of the Gabelli CEFs look today sorted again by their total return market price performances from exactly a year ago through January 31, 2013, i.e. with all distributions added back but not reinvested.

The top performer on a market price basis was the Gabelli Multimedia Trust fund (NYSE:GGT), up 38.5% over the past year. Though I didn't really have an opinion on GGT other than pointing out its high expense ratio (around 3%), its leveraged portfolio of stocks in the entertainment, cable, broadcasting, hotels/gaming and computer software and services sectors did very well in 2012 and for a fund whose primary investment objective is capital appreciation and yet offers a 10% per year NAV distribution policy to boot (9.3% current market yield), this was obviously very attractive to investors.

My concern on GGT now is that the fund may be close to being fully priced after narrowing its discount substantially in 2012. That high expense ratio and high payout can become a liability if the market turns on the sectors GGT invests in. Though GGT is very diversified with over 200 holdings, the fund does have a lot of overseas exposure and is probably the most dependent of all the Gabelli funds on the global growth story.

Coming in second, the Gabelli Healthcare & WellnessRx fund, I pounded the table on numerous times in 2012 and GRX did not disappoint. GRX had the best total return NAV performance of all the Gabelli funds, up 26.2% and its total return market price wasn't too shabby either, up 38.4%.

I still like GRX even at a relatively low 4.4% market yield because of its appreciation potential. Healthcare had a great 2012 and though the healthcare sector may be thought of as being defensive, GRX is more than just about big pharma and healthcare provider names. The fund also concentrates on companies focused on the trend towards better health and nutrition in America and that translated into strong individual performances in 2012. In fact, GRX saw an unprecedented number of its holdings involved in merger and acquisitions in 2012. It seemed each month, another position in the fund was being bought out and I expect that trend to continue.

Though GRX may not offer the high yield as some of the other funds, its exceptionally low 3.9% NAV yield takes a lot of pressure off the fund to maintain a high distribution and allows the fund to do what it does best, and that is grow its NAV. At a -9.6% discount, GRX has reduced its discount substantially from the -16.7% discount back when I first wrote about the fund (1st table above), but in my opinion, GRX remains attractive.

Coming in third, the Gabelli Equity Trust fund, ticker GAB, was another fund I picked last year and also had a great 2012, up 24.2% on a total return market price basis. GAB is the oldest and most well-known of all the Gabelli funds and like GGT, has a 10% NAV distribution policy each year. That long term history and high current 9.3% market yield keeps GAB's market price from straying too far from its NAV as the fund usually stays within a +5% premium and a -5% discount range.

GAB invests in securities across all market sectors and even overseas and with a relatively high leveraged percentage at 30%, should continue to see its NAV solidly outperform the broader market indexes during up market cycles. GAB is attractive when it gets to a -5% or larger discount.

The last fund I picked, the Gabelli Natural Resources, Gold & Income fund, ticker GNT, had a subpar 2012, up only 3.1%, which was still better than its total return NAV performance of -4.4% and better than the SPDR Gold ETF (NYSEARCA:GLD), down -4.8 or its sister fund, the Gabelli Global Gold & Natural Resource fund (NYSEMKT:GGN) down -7.8%.

As I said last year, GNT and GGN are highly dependent on the price of gold, which was an underperformer in 2012, so you really have to keep an eye on gold prices if you're going to invest in these funds. Both GNT and GGN use an option-income strategy as opposed to leverage to offer their high distributions and yields so that does provide some downside offset in case of a continued weak gold sector but with both funds at 3% to 4% premium valuations currently, you're basically betting on higher gold prices in an unsettled global currency and economic environment going forward.

Finally, GGN reduced its monthly distribution from $0.14/share to $0.12/share beginning in October, 2012 (declared in August, 2012) and I would not be surprised if GNT did the same here in 2013 as its NAV yield is over the 12% red flag level which I have identified as the danger zone for a possible distribution adjustment. We should know around March 1st when Gabelli declares for the next three month distributions for both GNT and GGN.

The one Gabelli fund I was negative on last year was the Gabelli Utility Trust, ticker GUT. At the time I wrote my article, GUT had one of the highest market price premiums of all CEFs at 44% which I felt was unsustainable after two years of market price outperformance in 2010 and 2011 on the back of a strong utility sector.

Though GUT's NAV still rose 13.8% over the past year since I wrote my article, far outperforming the utility index as measured by the SPDR utility ETF (NYSEARCA:XLU), GUT's market price couldn't maintain that high premium and ended up down -7.4% on a total return basis. As a result, GUT's premium dropped to a more reasonable 19.4% but I still feel there are better valuations among the Gabelli funds.

Where Do We Go From Here?

Leveraged funds have had a phenomenal past year and three of the Gabelli funds...GGT, GRX and GAB are all in the top 15 in total return market price performances with GGT and GRX in the top 5. That's great for investors who have owned these funds but the question is where do we go from here?

Many of the leveraged equity CEFs I follow are currently at what I would consider to be fully valued levels. That doesn't mean they won't follow a strong market up from here, it's just that I don't see them increasing their valuations much more at this point. On the other hand, there are still some undervalued funds which have shown excellent NAV total return performances but yet continue to trade at double digit discounts for one reason or another.

Of the Gabelli funds, the ones I believe are still attractive currently are GRX at a -9.5% discount and GDV at a -10.3% discount. GDV is also a fund I identified as being in a position to possibly raise its distribution when it declares around March 1st.

Disclosure: I am long GRX, GAB, GDV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.