Do The Gabelli Funds Add Value for Investors?

The following is a synopsis of the most important takeaways from the data in the above table:

• In the four asset classes for which there are comparable funds from DFA, Gabelli funds provided a higher return in only one of them. The outperformance of that asset class was by 2.9 percentage points. Among the three asset classes in which Gabelli funds underperformed DFA, that average underperformance was 1.3 percentage points.

• In the five asset classes for which there are comparable funds from Vanguard, Gabelli funds provided a higher return in only two of them. The average outperformance of those two asset classes was 2.2 percentage points. Among the three asset classes in which Gabelli funds underperformed Vanguard, that average underperformance was 1.3 percentage points.

• A portfolio of Gabelli funds, equal-weighted in the four asset classes for which there are comparable funds from DFA, returned 6.0%. The average expense ratio was 1.75%. An equal-weighted portfolio of DFA funds (in those same asset classes) returned 6.2% annually, outperforming the comparable Gabelli portfolio by 0.2 percentage points a year. The average expense ratio of the funds in the DFA portfolio was 0.22%. The underperformance of the Gabelli portfolio was more than fully explained by the difference (1.53 percentage points) in expense ratios. Even in the supposedly inefficient asset class of U.S. small-cap stocks, the Gabelli funds underperformed.

• A portfolio of Gabelli funds, equal-weighted in the five asset classes for which there are comparable funds from Vanguard, returned 5.0%. The average expense ratio was 1.65%. An equal-weighted Vanguard portfolio (in those same asset classes) returned 4.9% annually and slightly underperformed the Gabelli portfolio. The average expense ratio of the funds in the Vanguard portfolio was 0.07%. Again, in the supposedly inefficient asset class of U.S. small-cap stocks, the Gabelli funds underperformed.

The bottom line is that the Gabelli funds slightly underperformed the DFA funds and slightly outperformed Vanguard’s funds. Given the huge disparity in expense ratios, this could be viewed as quite an accomplishment, and possibly provide evidence of stock-picking skill.

Before moving on, we also need to look at the six Gabelli funds that have 15-year track records but no comparable funds from either DFA or Vanguard. The returns data is from Morningstar. Although they may not be the appropriate benchmarks for these funds, keep in mind that during this 15-year period, the S&P 500 Index returned 4.4% and the MSCI ACWI (All Country World Index) ex-U.S. returned 3.8%.

• The inception date of the Gabelli ABC Fund (GABCX) was May 1993. The firm’s website describes its objective: “[The fund] seeks to achieve total returns that are attractive to investors in various market conditions without excessive risk of capital loss.” For the 15-year period ending June 5, 2015, the fund returned 4.3% a year.

• The inception date of the GAMCO Mathers Fund (MATRX) was August 1965. The firm’s website describes its objective: “[The fund] seeks to achieve capital appreciation over the long term in various market conditions without excessive risk of capital loss.” For the 15-year period ending June 5, 2015, the fund returned -3.0% a year.

• The inception date of the Comstock Capital Value Fund (COMVX) was October 1985. The firm’s website describes its objective: “The Fund seeks to maximize total return, consisting of capital appreciation and current income.” For the 15-year period ending June 5, 2015, the fund returned -6.7% a year.

• The inception date of the GAMCO Global Growth Fund (GICPX) was February 1994. The firm’s website describes its objective: “[The fund] primarily seeks to provide investors with appreciation of capital. Current income is a secondary objective of the Fund.” As part of its principal investment strategy, “the Fund invests in securities of issuers located in at least three countries, and at least 40% of the Fund's total net assets is invested in securities of non-U.S. issuers.” For the 15-year period ending June 5, 2015, the fund returned 1.7% a year.

• The inception date of the GAMCO Global Opportunity Fund (GABOX) was May 1998. The firm’s website describes its objective: “[The Fund] primarily seeks to provide investors with appreciation of capital. Current income is a secondary objective of the Fund.” As part of its principal investment strategy as a “global” fund, “the Fund invests in securities of issuers located in at least three countries, and at least 40% of the Fund’s total net assets is invested in securities of non-U.S. issuers.” For the 15-year period ending June 5, 2015, the fund returned 3.0% a year.

• The inception date of the Gabelli Global Rising Income and Dividend Fund (GAGCX) was February 1994. The firm’s website describes its objective: “[The Fund seeks to provide investors with a high level of total return through a combination of current income and appreciation of capital.” For the 15-year period ending June 5, 2015, the fund returned just 1.6% a year.

Let’s quickly summarize the results posted by these six funds. Two of the funds produced negative returns over the 15-year period, and none managed to return more than 4.3% a year. The average return of these six funds was just 0.2%. During the same period, Vanguard’s 500 Index Fund (VFINX) returned 4.3%, the Vanguard Developed Markets Index Fund (VDVIX) returned 3.2% and the Vanguard Total Bond Market Fund returned 5.2%. When we include these results along with the results from the other 11 Gabelli funds, the evidence is far less favorable for Gabelli.

Factor analysis

I’ll now take another look at the performance of the 11 Gabelli funds we examined previously using the analytical tools and data available at Portfolio Visualizer. Factor analysis often provides important additional insights into the returns of a fund because Morningstar’s asset class categories are very broad and actively managed funds often style drift.

The table below shows the results of a three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis of the firm’s domestic funds. The data covers the 15-year period from April 2000 through March 2015. The t-stats are in parentheses.

April 2000-March 2015

When we examine the results from the three-factor analysis, we find that eight of the 10 Gabelli funds generated positive annual alphas, though only two were statistically significant at the 5% level. The result for one of the two funds that earned negative alpha was statistically significant as well. The average annual alpha was 0.5%.

When we look at results from the four-factor analysis, we also find that eight of the 10 Gabelli funds generated positive annual alphas, though only two were statistically significant at the 5% level. The result for one of the two funds that earned negative alpha was statistically significant at the 5% level as well. The average annual alpha was 0.6%.

When we include all six factors, we find that only four of the 10 funds generated positive annual alphas, and none was statistically significant at the 5% level. However, one of the funds with negative alpha showed statistical significance. The average annual alpha was -0.4%.

Basically, the results demonstrate that the Gabelli funds typically loaded on the low beta and quality factors, which resulted in positive alphas achieved in the three- and four-factor analyses, although not when the two additional factors were introduced and considered in the six-factor analysis.

There are two more important points to consider. First, all of the above data is based on pre-tax results. For investors holding these funds in taxable accounts, active management of the Gabelli funds would very likely have produced more negative tax consequences than the passively managed alternatives of either DFA or Vanguard. Second, Morningstar data unfortunately contains survivorship bias, which may or may not exist in this case. We just have no way of knowing.

In the end, it’s very hard to make a case that the Gabelli funds added value for investors. Certainly, if we include the results of the six funds for which we don’t have comparable funds from DFA or Vanguard, the added value would have been negative, especially for taxable investors.

There’s one other insight I can contribute, at least in terms of the 11 funds for which I did have a comparable fund. Before fund expenses, the Gabelli funds appear to have demonstrated stock-picking skills, even after considering trading costs. This appears in the alphas from the factor analyses, which would be on average highly positive if fund expenses were not considered. Moreover, they would on average be highly positive if the funds charged Vanguard- or even DFA-like expenses.

The problem for investors is that more than 100% of the value added through stock-picking skill landed in the pockets of the fund sponsor and, presumably, Gabelli personally through fees. And that brings me to my last point of interest.

In a May article for The New York Times, Steven Davidoff Solomon pointed out that while Gabelli’s investment firm, Gamco Investors, is a “shareholder warrior telling companies to create value through good corporate governance,” the firm doesn’t practice what it preaches. He pointed out that Gabelli, who owns 72% of Gamco, has arranged for the firm to have a dual-class stock structure that ensures his control. The stock with higher voting rights is owned almost exclusively by GGCP, a private company that Gabelli controls, giving him 94% of the voting power.

Davidoff Solomon wrote: “It is power that Mr. Gabelli converts into personal profit.” By contrast, Laurence D. Fink, the chief executive of BlackRock, the world’s largest asset manager, was paid $23.8 million. Vanguard and DFA are not publicly traded, so executive compensation is not disclosed for either firm. But much can be inferred from the fact that Brian McNabb, Vanguard’s CEO, routinely flies on commercial flights in coach class. I doubt he finds Gabelli among his fellow passengers.

As the controlling owner, Gabelli not only benefited via his compensation, but the high fees charged by his family of funds (along with growing assets under management) led to the superior performance of GAMCO Investors Inc. For the 15-year period ending June 5, 2015, the company’s stock returned 8.7%. That compares to a return of just 4.4% for the S&P 500 Index.

Better corporate governance would have resulted in lower fees to investors, who could then have actually benefited from any stock-picking skills exhibited by the firm.

Larry Swedroe is director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.

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