Recent M&A Activity Bodes Well For Merger Funds

The Gabelli and Enterprise funds and their two competitors engage in merger arbitrage, an investment strategy that tries to profit from the successful completion of publicly disclosed acquisitions. Since they’re tied to deals, results of these types of funds are not correlated to broad market gauges like the S&P 500. In addition, they’re less volatile than the overall market, and can help diversify individual portfolios, observers say.

Although the Gabelli and Enterprise funds are both run by Mario Gabelli, their portfolio composition differs, Pitaro notes. Both invest in announced deals, U.S. Treasurys and cash. But the Enterprise fund, she explains, can hold up to a third of its assets in companies that are judged to be potential acquisition targets, although they have not yet been bid for. Those investments are aimed at boosting returns, she says.

While these funds may hold advantages over general diversified equity funds, there are potential drawbacks to investing in them, says Rosanne Pane, chief mutual fund strategist for Standard & Poor’s. (She is also a shareholder in the Enterprise Mergers & Acquisitions Fund.)

“If you believe that the environment is going to be favorable” for mergers and acquisitions, “then this is a good type of fund to invest in,” she says. “But you also have to realize that when corporations are pessimistic about the future, there’s very little of this type of activity.”

In those instances, shareholders may end up with a fund that has a sizable chunk of its assets in cash while its manager continues to collect a fee for running the fund, Pane said. (Indeed, Gabelli ABC Fund last recorded cash holdings were at 77.2% of assets as of September.) She recommended that investors commit no more than 5% of their assets to merger funds.

Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 10/29/04.

Contact Bob Keane with questions and comments at: [email protected].