To Our Shareholders,
For the six months ended June 30, 2023, the net asset value (NAV) total return per class AAA Share of The Gabelli Asset Fund was 7.2% compared with a total return of 16.9% for the Standard & Poor’s (S&P) 500 Index. Other classes of shares are available. See page 4 for the performance information for all classes.
Enclosed are the financial statements, including the schedule of investments, as of June 30, 2023.
Investment Objective and Strategy (Unaudited)
The Fund primarily seeks to provide growth of capital. The Fund’s secondary goal is to provide current income.
The Fund’s investment strategy is to invest primarily in common and preferred stocks. The Fund focuses on companies that appear underpriced relative to their private market value (PMV). PMV is the value the Fund’s investment adviser, Gabelli Funds, LLC, believes informed investors would be willing to pay for a company. Under normal market conditions, the Fund invests at least 80% of its assets in stocks that are listed on a recognized securities exchange or similar market. The portfolio managers will invest in companies that, in the public market, are selling at a significant discount to the portfolio managers’ assessment of their PMV. The portfolio managers consider factors such as price, earnings expectations, earnings and price histories, balance sheet characteristics, and perceived management skills. The portfolio managers also consider changes in economic and political outlooks as well as individual corporate developments.
Performance Discussion (Unaudited)
March saw Silicon Valley Bank become the second biggest bank failure in U.S. history, after losses in its held-to-maturity bond portfolio precipitated a new twist on an old-fashioned bank run. Social media fanned depositor panic and online accounts facilitated withdrawals. New York based Signature Bank (which embarked on an ill considered expansion into cryptocurrency in recent years) failed the same weekend, and bank stocks broadly came under pressure as investors braced for who might be next. The Federal Reserve, FDIC, and Treasury Department acted swiftly, taking over both banks and making depositors whole. This raises the question: will uninsured deposits be guaranteed at other banks if they also fail? So far, this step has not been taken explicitly, though there has been discussion of raising the $250,000 FDIC limit for insured deposits. Trying to balance stability in the banking system while still burnishing its inflation fighting credentials, the Fed, following its 25 bps increase in the federal funds rate in February, ultimately decided to raise rates 25 bps again in March to 4.75%-5%. The Fed has a challenging tightrope walk in decisions on future rate hikes, which will depend on the situation of both inflation and the economy in coming months.
Throughout the quarter, inflation continued to be persistently high, if falling (+6% in February compared with a peak of +9.1% last June), and investors became concerned about how high rates may need to climb to achieve the Fed’s inflation target of 2%. At the same time, economic conditions worsened, stoking a fear of the “hard landing” the Fed has tried so hard to avoid. This initially led to a market decline as higher rates – all else being equal – result in lower equity prices due to a higher discount rate on future cash flows. Commodities also broadly fell, with WTI crude oil prices reaching the mid $60s, down from a peak of over $80 in the quarter and over $120 last year, and gold falling to just over $1,800 per ounce from over $1,950 earlier in the quarter. However, both rallied into the end of quarter (especially after Saudi Arabia’s production cut announced on April 2nd) with oil and gold each sitting at ~$80 and ~$2,000, respectively, as of this writing. Finally, geopolitical tensions have persisted, as Russia’s invasion of Ukraine passed its one year mark with no clear sign of the war being won by either side anytime soon, and the relationship between the U.S. and China continued to be marked by unease.
With the Great Financial Crisis still in recent memory, market reaction to the banking crisis was swift, with equities initially selling off and the yield on the 10-year U.S. Treasury Note falling from 4.1% at its peak to 3.5% at quarter end. Stabilization of the banking situation led to a market rally, as lower rates are good for equities generally, especially so-called growth stocks with more distant future cash flows. Mega cap tech stocks, which also benefited from being considered safe havens with large cash balances, were the main beneficiaries. As these stocks make up a large component of the S&P 500 Index, this dynamic ultimately offset woes for banks and more cyclical sectors during the quarter and gave the market a strong, if tenuous, start to the year, with the S&P 500 increasing 7.5%.
Global equities rose in the second quarter (S&P 500 +9%) and for the first half (+17%) as the market ascribed higher odds to ending the current interest rate hiking cycle with a soft landing (short, shallow recession) rather than a hard landing (long, deep recession). A June extension of the U.S. debt ceiling, limited fallout from the March bank failures, and efforts to temper a hot war in Ukraine and a cold war with China buoyed sentiment. Meanwhile, Artificial Intelligence (AI) injected some serious Fear of Missing Out (FOMO) into the market leading to panic buying of tech stocks. Both inflation and growth are clearly slowing, but with the economy mid-rotation, it is premature to call the landing. We remain cautious but optimistic about the remainder of the year, especially as areas we tend to favor have room to catch up to the narrow few that have led the market thus far.
The Federal Reserve and its peers around the world navigate the triad of growth, inflation, and interest rates with limited tools. Since March 2022, the Fed has raised interest rates ten times/500 basis points and switched from Quantitative Easing to Quantitative Tightening in a quest to bring inflation to its target 2% range. Current expectations include at least one more hike this year, with cuts coming in 2024. The Fed received an assist from a normalizing supply chain and tighter credit standards resulting from March’s bank turmoil; on the other hand, a hot equity market padding consumer wealth has not done the Fed any favors.
Economic data has generally exceeded expectations. Headline inflation likely peaked at 9.1% one year ago in June 2022 and, then flattened.
Selected holdings that contributed positively to performance for the six months ended June 30, 2023, were: AMETEK Inc. (AME, Financial) (3.0% of net assets as of June 30, 2023); Sony Group Corp. (SONY, Financial) (2.3%) which designs, develops, produces, and sells electronic equipment, instruments, and devices for the consumer, professional, and industrial markets; and Republic Services Inc. (RSG, Financial) (1.8%) which offers environmental service in the United States.
Some of our weaker performing holdings during the period were: Deere & Co. (DE, Financial) (3.0%) which manufactures and distributes various equipment worldwide; CVS Health Corp. (CVS, Financial) (0.4%) a provider of health services in the United States; and CNH Industrial NV (CNHI, Financial) (1.2%) an equipment and services company that engages in the design, production, marketing, sale, and financing of agricultural and construction equipment.
Thank you for your investment in The Gabelli Asset Fund.
We appreciate your confidence and trust.
