RULE MAKER PORTFOLIO

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Eyes on Gabelli
A look at performance

by Tom Gardner (TomG@fool.com)

Note: Tonight we re-present one of Tom Gardner's most requested columns. First featured last December 1, this was part of Tom's Eyes on the Wise series. After you read today's report, feel free to post your thoughts and responses on the Eyes on the Wise message board.

Alexandria, VA (Feb. 26, 1999) -- I don't know Mario Gabelli, the founder and CEO of Gabelli Asset Management. I've never met him.

I know that CNBC has made him a regular on its Squawk Box morning program. I know that Worth Magazine reported in 1993 that, though he has amassed $70 million of personal wealth, he is still a man possessed, working through stock valuations and grilling corporate executives. I've seen Mario Gabelli periodically on CNN's Moneyline with Lou Dobbs. And each year, he shows up in Barrons' year-end gooroo roundtable to talk about the best stocks for the year ahead.

And I also remember the Fool Portfolio poking a little fun at him in June, 1997 when he drove Trump Hotels & Casino Resorts up 17% to $11 3/4 with a prediction that the stock could go back to $30 over the next year. (Author's note: Today, the Donald's stock is asking a sneeze below $5 a stub.)

That's the extent of my contact with Mr. Gabelli and his well-promoted family of funds, but I've never met him.

I did catch a glimpse of him when I was asked to speak again this year at The Fidelity Investor Discovery Conference in San Francisco. Mr. Gabelli was the kickoff, keynote speaker at the conference. Twelve hundred investors from around the country had convened in the city by the Bay to talk about technology stocks, the world economy, the direction of the S&P 500, and the best ways to beat it.

Over doughnuts and coffee, they listened to Mr. Gabelli robustly sharing his stock-selection strategies, talking about the services that his company provides, and musing on the state of the financial world. He even brought videos with him, during which cartoon characters pointed out how the Gabelli group goes around the world researching companies, kicking out the losers, and gathering in the winners.

Then, after a self-assertive hour-long presentation, he yielded back to Fidelity, which opened the floor for questions.

It was about this time that my mind moved back to that Fool Portfolio report, in which Jeff Fischer questioned the logic behind Gabelli's $30 target price for Trump (Fool Portfolio, 06/10/97: Gabelli Loves Trump?). My memory then blinked over to a second image. I seemed to recall listening -- at a dinner function somewhere, some months after that report was published -- to an investor going on about how the Gabelli funds were actually perennial losers to the market, all of their heavy promotions aside. Since I now hear this all the time about a wide variety of celebrated funds (e.g. USA Today reported today that only one of the fifteen largest mutual funds in America has beaten the S&P 500 in 1998), I must've smiled agreeably, and sent it back into the hollow and weak corner of my brain where memory functions are supposed to reside.

The thought did pop back into my head, though, the morning of this keynote address. And so, over in our Motley Fool Booth at the conference, I offered $20 to anyone who would ask Mr. Gabelli my one Foolish question. Of our gang of five, there were no takers. Hungry for some morning amusement, I raised the offer all the way up to a hundred bucks. $100 to anyone who will ask a simple question. Four turned me down, but one hesitated. I set my eyes on her (let's call her Sarah to protect her name) and said, "Okay, I'm making a special early-bird offer now just for you; I'll pony up $150 if you ask this one question." Almost before I could finish, Sarah was making her way to the main microphone among a sea of investors.

A few minutes later, when the MC called on her, she stepped up and asked this simple question:

"Mr. Gabelli, have any of the Gabelli funds beaten the market over the last five years?"

First, a moment of silence. Another second passed. And then he launched into a memorable defense, beginning by listing Gabelli's ratings versus other mutual-fund families, recording the number of stars that Morningstar has heaped on the funds in years past, and finishing up with one of the financial world's most unforgettable lines of 1998, delivered smilingly, yet with a gruff edge:

"Our funds aren't designed to beat the market. They're designed to make you rich."

Indeed.

America Online's Investment Research corner shows that none of the 17 Gabelli funds have beaten the S&P 500 over the past 3- or 5-years (AOL Investment Research: The Gabelli Screen). I encourage you to take a moment and sort through those numbers. Over the last three years, the Vanguard S&P 500 Index Fund (VFINX) has risen at an annual rate of 26.58%. And over the past five years, that index fund has risen at a yearly rate of 22.87%. All while charging just 0.20% in fees per year, well below all seventeen of the Gabelli funds.

Now, I have no grudge to bear against Mr. Gabelli. But I wonder, when he and Merrill Lynch take his company public in the month of December, whether young investment managers will grill him about price and performance. Because while it is true that investing in the Gabelli funds can make you rich over the long-haul, it's also true thus far that they cannot reward you as quickly as just the market's average performance can.

Given all this, I close this first segment of our Eyes on the Wise theme this week with a few questions:

  1. Does the financial media scrutinize investment returns before dubbing a fund manager guru?
  2. Why does the managed-fund business exist, given that over 80% of all stock funds have been worse than average over the past twenty years, while charging investors -- on average -- five times more than an index fund per year?
  3. Does the SEC believe that even more mutual-fund disclosure is necessary to strengthen the function and efficiency of our public markets?
  4. Does everyone here agree that in order to prosper (or at the very least just get average investment returns), we Fools need to keep our Eyes on the Wise?

Have a Foolish weekend!

02/26/99 Close
Stock  Change    Bid
AXP   +  5/8   108.50
CHV   -1 5/8   76.88
CSCO  -11/16  97.81
KO    -  5/8   63.88
GPS   +1 13/16 64.69
EK    -  11/16 66.19
XON   -  3/4   66.56
GM    -  15/16 82.69
INTC  -7 13/16 119.94
MSFT  -3 3/8   150.13
PFE   +1 1/16  131.94
SGP   +1 9/16  55.69
TROW  +  15/16 30.81
YHOO  -1 7/8   153.50

                   Day   Month    Year  History
        R-MAKER  -0.43%  -3.22%   4.24%  31.90%
        S&P:     -0.54%  -3.23%   1.06%  25.09%
        NASDAQ:  -1.67%  -8.69%   4.35%  38.43%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    150.13    91.81%
    5/1/98   55 Gap Inc.      34.37     64.69    88.21%
   6/23/98   34 Cisco Syst    58.41     97.81    67.46%
    2/3/98   22 Pfizer        82.30    131.94    60.31%
   2/13/98   22 Intel         84.67    119.94    41.65%
   2/17/99   16 Yahoo Inc.   125.81    153.50    22.01%
   8/21/98   44 Schering-P    47.99     55.69    16.03%
   5/26/98   18 AmExpress    104.07    108.50     4.26%
   2/27/98   27 Coca-Cola     69.11     63.88    -7.57%
    2/6/98   56 T. Rowe Pr    33.67     30.81    -8.50%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     82.69    14.20%
   3/12/98   20 Eastman Ko    63.15     66.19     4.81%
   3/12/98   20 Exxon         64.34     66.56     3.46%
   3/12/98   15 Chevron       83.34     76.88    -7.76%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3603.00  $1724.55
    5/1/98   55 Gap Inc.    1890.33   3557.81  $1667.48
   6/23/98   34 Cisco Syst  1985.95   3325.63  $1339.68
    2/3/98   22 Pfizer      1810.58   2902.63  $1092.05
   2/13/98   22 Intel       1862.83   2638.63   $775.80
   2/17/99   16 Yahoo Inc.  2013.00   2456.00   $443.00
   8/21/98   44 Schering-P   2111.7   2450.25   $338.55
   5/26/98   18 AmExpress   1873.20   1953.00    $79.80
   2/27/98   27 Coca-Cola   1865.89   1724.63  -$141.27
    2/6/98   56 T. Rowe Pr  1885.70   1725.50  -$160.20

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1405.69   $174.80
   3/12/98   20 Eastman Ko  1262.95   1323.75    $60.80
   3/12/98   20 Exxon       1286.70   1331.25    $44.55
   3/12/98   15 Chevron     1250.14   1153.13   -$97.02

                              CASH    $185.03
                             TOTAL  $31735.91

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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