Gamco Investors Inc. is going high conviction with its newest fund, the Gabelli Focus Five Fund (GWSAX), intending to put up to half its chips on just five stocks.
“It's our five very best ideas,” said Dan Miller, the fund's portfolio manager. The fund will invest about 10% of assets in each company, with the rest of the fund in anywhere from 10 to 20 stocks Mr. Miller calls “really good ideas.”
The fund is based on Gamco's quarterly research report, “The Focus Five,” which has been published since 2006. Mr. Miller has spearheaded the report since its inception. Each quarter, the report lists five companies determined to be undervalued and have near-term catalysts to spur appreciation.
Madison Square Garden Co. (MSG), for example, is trading at $28 a share, but Mr. Miller has its fair value pegged at closer to $60 a share. The catalysts that can move the stock price up are a resolution to its very public squabble over cable fees with Time Warner Cable or thriving attendance at Madison Square Arena now that basketball is back and the New York Knicks are the talk of the town.
Since it was launched, the report's picks have tripled the return of the S&P 500, when measured quarterly. Even though the report's returns are measured by five new stocks every quarter, Mr. Miller doesn't expect that much turnover in the fund's top five holdings. “We're not going to change our minds overnight,” he said.
The fund has yet to release its holdings publicly, but the most recent quarterly report picked Cameco Corp. (CCJ), Dana Holding Corp. (DAN), Southwest Gas Corp. (SWX), Ixia (XXIA) and Xylem (XYL) as its five focus stocks.
A focused fund can be a double-edged sword for investors. “They can do really well or they can get hammered,” said David Kathman, a mutual fund analyst at Morningstar Inc. A concentration in just a few companies also means it's likely to have higher volatility than the broad market, he added.
The fund faces the additional challenge of picking winning stocks in a market that's been largely driven by macro events rather than fundamentals, Kathman said.
Mr. Miller believes the small number of holdings is the fund's biggest selling point. “It's for investors who want to place a portion of their assets with a team that has demonstrated it can find high-quality ideas,” he said.