Global diversification just isn't what it used to be, says Marc J. Gabelli, the lead manager of the US$100 million Gabelli Global Growth fund, which holds about half its assets in the US.
"The correlation among the stock markets in Europe, the United States and Japan has increased over the last few years," Gabelli said from his office in London.
A. Hartswell Woodson III, one of three co-managers who work with Gabelli, says a variety of factors are causing world markets to perform similarly. These include the introduction of the euro, increased efficiency among global markets, tax and pension reform and deregulation of industries.
Morningstar Inc classifies Gabelli Growth, originally named the Interactive Couch Potato fund (for its initial investments in media and entertainment stocks), as part of the specialty communications group, not as an international fund.
The fund has suffered in the bear market, but has done better than many peers. It has lost 21.8 percent a year, on average, for the three years through Thursday, compared with 28.9 percent for all funds in its group, according to Morningstar. The Dow Jones telecommunications index lost 34.8 percent percent during that time.
The fund lost 24.2 percent in the last 12 months, compared with losses of 42.4 percent for its group and 36.7 percent for the index.
Gabelli, 34, is a son of Mario Gabelli, an often-quoted portfolio manager who has focused on media and communications stocks and is the chief executive of Gabelli Asset Management, the holding company that includes the fund's adviser. Marc Gabelli joined the firm as a money manager in 1993. He and Woodson, 44, who is based in London, work with two co-managers based in New York to pick the fund's 100 to 300 stocks. Its biggest 15 holdings account for about 30 percent of assets.
Instead of using computer screens, the managers find potential purchases by visiting more than 100 companies a year in the US, Europe and Japan.
Their financial analysis favors cash flow over earnings, Woodson said. "The accounting differences among markets because of differences in tax, amortization and other rules is less evident in cash flow than in earnings," he added.
They prefer large amounts of free cash flow -- what is left after capital expenditures. "Companies that are building free cash flow generally have good balance-sheet strengths," Gabelli said, "and their earnings per share should be improving."
They sell a stock when they notice fundamental changes in the company's business model or when the share price exceeds their target.
In April, the managers bought shares of the Secom Co, a Japanese provider of electronic security services that trades on the Tokyo exchange. Secom has a solid balance sheet and strong ability to generate free cash flow, Gabelli said, and its subscriber base is growing rapidly.
The fund paid ?5,958, on average, for the shares, which now trade at 4,900 yen, or US$39.04. The managers' 12-month price target is ?7,000.
The managers bought shares of Royal KPN, the Dutch telecommunications company, in January and February, The company, which mainly provides services in the Netherlands, has adopted an aggressive cash conservation strategy that should increase free cash flow and reduce overall debt, Woodson said.
The fund paid an average of 5.3 euros for the shares, which trade on the Amsterdam exchange; they also trade as American depository receipts on the New York Stock Exchange. On Friday, the shares closed at 5.81 euros, compared with their target price of 6.4 euros.
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