M&A Funds

I mentioned before that putting out a daily blog is draining, especially one where I try to offer something original (it always is to me). Well, today is one of those days where the creative juices seem to be stalled. I'd rather be at the beach than tickling the keyboard ivories, but my conscience won't let me play hookey. So to come to a truce between the angel whispering in one ear and the devil in the other, I'm going to put in a short post today.

Post-take over Taco Funds
My last recipe (July 7) concerned itself with buying companies after a takeover was announced. I thought that was my own idea but Mario Gabelli beat me to it by only fifteen years. Apparently he has two funds that operate according to this strategy. The first is the Gabelli ABC Fund (GABCX), so named because the strategy is as easy as ABC. The second is the AXA Mergers & Acquisitions Fund (EMAAX) which has only been around since 2002. It's a bit riskier than the ABC because it can also invest in potential take-over targets. There are two other funds in this space (that I know of): the Merger Fund (MERFX) and the Arbitrage Fund (ARBFX). Compared with these two, the Gabelli Funds have the lower expense ratios combined with higher returns, although they do require a higher initial investment ($10,000 for the ABC Fund compared with $2000 for the Merger Fund). In fact, the ABC Fund has never had an unprofitable year.

The Upside
A major upside is that these funds outperform the S&P during bear markets. For example, in 2000 the ABC Fund returned 10.7% while the Vanguard Index 500 Fund (VFINX) that mirrors the S&P returned a dismal -9.1%. These funds have a bear market decile ranking of 1 which means that they outperform 90% of the fund universe in recessionary markets. Now these funds don't boast stellar returns (ten year average of the ABC Fund is 6.7%) but their other selling point is their low risk making them very safe investments.

The Downside
The downside to these funds is pretty obvious. The S&P clobbers them during bull markets. Also, a souring economy can stem the takeover tide. When M&A activity dries up, Gabelli stuffs fund cash into T-bills so at least the investor is getting that rate of return. However, the falling dollar hasn't stopped global M&A activity, with foreign companies eying the relatively cheap American valuations. (Witness InBev's recent takeover of Anheuser-Busch.)

All-in-all, if you don't know where to park your money and you want a better return than cash during bear markets, these funds could be for you. Based on fees and returns, the Gabelli ABC Fund would be my choice. If you have the time and would rather pick and choose your own stocks, review Recipe #13 as well as my April 29 and 30 blogs. For a current example, look at Community Bankshares (SCB) which I highlighted in the June 26 blog as potentially sporting a return of over 12% in six months (24% annual return).

There. I'm done. I hope the angel on my shoulder is satisfied 'cause I'm treating the little devil to an afternoon off.

Everyone needs the occasional day at the beach.