The Gabelli Blue Chip Value Fund
Initial Report
September 30, 1999
TO OUR SHAREHOLDERS,
We launched The Gabelli Blue Chip Value Fund on August 25, 1999. Our
objective for The Gabelli Blue Chip Value Fund is to take advantage of the
attractive valuations given to many companies that have been selling at
discounts in the narrow market that has prevailed during the past few years.
This period of declining interest rates, weak global economies and scarce top
line growth has driven investors to over-price a small number of companies with
strong current earnings. At the same time, the current environment has also
created opportunities by leaving many companies that experienced temporary
earnings difficulties or that are economically sensitive, at terrific values.
The past few years were difficult for value investors as larger growth stocks
made the biggest gains and attracted the majority of new assets. The current
market dynamics have resulted in an advantageous time for value investing as the
market abounds with excellent companies at bargain prices. The strong
performance and high valuation of the market averages have been driven by a
small number of large capitalization stocks, while the majority of stocks have
already experienced a bear market.
Finding inexpensive stocks today is easy. The hard part is identifying
those that will outperform in the next year or two. The performance of the
larger capitalization stocks that we target depends largely upon perceived and
actual changes in earnings trends. This means that an investor should understand
the operating environment of an industry or company, as any changes will
determine whether a shift in earnings growth will be positive or negative
relative to the market. We believe that some of the best investment
opportunities come during periods of uncertainty or difficulty for companies
that have good long term earnings prospects.
INVESTMENT PERFORMANCE
Since inception on August 25, 1999 through September 30, 1999, The
Gabelli Blue Chip Value Fund's (the "Fund") net asset value declined 4.60%. The
Standard & Poor's ("S&P") 500 Index and Lipper Large-Cap Value Fund Average
declined 2.74% and 3.43%, respectively. The S&P 500 Index is an unmanaged
indicator of stock market performance, while the Lipper Average reflects the
average performance of mutual funds classified in this particular category.
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OUR APPROACH
The Gabelli Blue Chip Value Fund seeks to invest in common stock of
companies that are temporarily out of favor for which we can identify a
turnaround scenario or a catalyst that would return the company to a higher
valuation. Generally, there are three reasons we believe that a company would be
undervalued: either it would be out of favor relative to the economic or
operating environment, underestimated on an asset valuation basis, or it may be
a growth company that has fallen temporarily out of favor. We especially like to
invest in companies that have strong franchises or brands because this offers us
a margin of safety in valuing a company's assets.
COMMENTARY
THE ECONOMIC OUTLOOK
The U.S. and the global economy appear to be in good shape simultaneously
for the first time in a while. In fact, we may be heading for a period of
concerted global growth.
After a few years of turmoil, the economic news has been more positive in
most regions of the world. We are now in a similar position to the situations we
faced a little over two years ago and then again last year. Two years ago, there
was much optimism regarding the world's economies. However, in July of 1997,
Thailand's currency plummeted, followed by fears of Asian currency and economic
collapse and concerns of spillover effects in Latin America. A year ago, Russia
defaulted on its debt and set off a downward spiral of plummeting currencies and
failing stock and bond markets, as money flowed out of emerging markets and
continued to pull out of any asset perceived as low quality. At that point,
value stocks, including those with any current problems as well as those that
are economically sensitive, joined Japanese equities, small cap stocks and
higher yielding bonds in the global market doghouse.
Today, we are starting to see signs of a synchronous economic expansion,
as different regions of the world rebound after two years of turmoil. Headlines
from the past few months describe Germany as being poised for growth over the
next year and France reporting Gross Domestic Product ("GDP") growth slightly
ahead of expectations, driven by stronger domestic demand and improvement in
exports. Even long-dormant Japan reported quarterly economic growth of 0.2%, the
second consecutive quarter of positive growth, although analysts had expected a
contraction. This signals that Tokyo's massive stimulus tactics are working.
Perhaps more importantly, Asia as a whole is emerging from its troubles, as
evidenced by recent economic data out of Singapore, Thailand, Korea and Hong
Kong. On the commodity front, the Middle East and Latin America seem to be
benefitting from higher oil prices. At this point, it is hard to be pessimistic
about the future of the U.S. economy. We have been in an extraordinary period of
growth, combined with declining inflation and interest rates. The overwhelming
characteristic of this business and economic expansion has been its moderate
pace. A resurgence in non-U.S. economies, combined with continued GDP growth in
the U.S., indicates that global economic growth should be in sync to an extent
not seen for years.
Historically, such synchronized growth has been positive for value
stocks. When growth is in short supply, as it has been for the past few years,
investors flock to those few companies that can show solid sales and earnings in
times of economic uncertainty. But when growth becomes plentiful, investors
become more discriminating as to the prices they will pay for that growth, and
they look for better buys in the form of companies that have lower price to
earnings ratios, or low price to cash flows.
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LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Fund.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend which we believe will develop over
time.
BELL ATLANTIC CORP. (BEL - $67.3125 - NYSE), upon completion of its merger with
GTE (GTE - $76.875 - NYSE), will become one of the top four telecommunications
providers in the United States, with the potential for accelerated earnings
growth. We look at the merger approval, strong sales of digital subscriber lines
for Internet access, and progress in entering the long distance market as
positive catalysts that should narrow the stock's price to earnings ratio
discount to the market over the next year.
CENDANT CORP. (CD - $17.75 - NYSE) controls franchised brands that include Avis,
Ramada Inns, Howard Johnson's, Coldwell Banker, and Century 21. Cendant receives
a royalty every time one of its brands' rooms or cars are rented or its real
estate is sold. The company became known as "descendant" last year when its
stock price declined due to accounting discrepancies, but Cendant is fulfilling
its promises to shareholders, selling off non-core assets and buying back stock
to shrink the equity base. The stock is poised for a rebound as earnings and
cash flow are strong and the accounting tarnish begins to wear off. A further
catalyst over the next year should be the resolution of a shareholder suit over
the accounting issues.
HUGHES ELECTRONICS (GENERAL MOTORS CORP., CL. H) (GMH - $57.25 - NYSE), a
tracking stock of GM, has transformed itself in recent years from a defense and
aerospace company into a satellite and consumer media distribution company.
Hughes, via its DIRECTV subscription service, is the largest provider of
satellite television service to the consumer. In the past year, the company has
had explosive growth in this service - but has had to invest heavily up front in
an effort to obtain this growth. In 2000, Hughes should see a return to earnings
growth and promising cash flow expansion. A potential regulatory change, which
will allow satellite companies to offer local broadcast channels, could unleash
Hughes' potential, as this lack of local access has been listed as the single
biggest drawback for consumers that currently prefer cable to satellite
television service. Another potential catalyst is the pressure on GM to spin the
company off in hopes of removing the discount Hughes receives as a tracking
stock.
LEHMAN BROTHERS HOLDINGS INC. (LEH - $58.3125 - NYSE) is a bargain in the
financial services sector. Lehman has steadily grown earnings while keeping
expenses tightly under control over the past year. The company has also grown
the earnings that it obtains from operations outside the U.S. Fully one-third of
Lehman's most recently posted quarterly earnings came from Europe. The company's
stock sells at a discount to its peers, at only 1.4 times book value and 9 times
earnings, and has tremendous potential as well as operations attractive to
acquirers.
MATTEL INC. (MAT - $19.00 - NYSE) has lost over half its value in the last year
because of slower toy sales. Mattel possesses extremely strong and enduring
brands - including Barbie, Fisher Price, Hot Wheels and American Girl. The
company has disappointed investors by paying too much for higher growth
acquisitions. However, Mattel's core brands are starting to show improvement.
Management has promised to outline the problems and find a solution and is under
pressure to increase value. The drop in sales from Barbie's slowdown has run its
course and earnings growth should start to revive next year. Finally, the
opportunities for cross product development are tremendous, as each of the
brands lends itself to games and interactive learning toys.
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PROVIDIAN FINANCIAL CORP. (PVN - $79.1875 - NYSE) is a credit card company which
continues to grow its top line in a fairly mature industry through constant
innovation and the use of technology to target and segment customers. Last year,
the company offered an Internet based credit card, Aria, which has seen
tremendous growth.
MINIMUM INITIAL INVESTMENT - $1,000
The Fund's minimum initial investment for both regular and retirement
accounts is $1,000. There are no subsequent investment minimums. No initial
minimum is required for those establishing an Automatic Investment Plan.
Additionally, the Gabelli Blue Chip Value Fund and other Gabelli Funds are
available through the no-transaction fee programs at many major discount
brokerage firms.
IN CONCLUSION
While the Fund's performance during the third quarter of 1999 was
unsatisfying, we definitely see a more positive outlook on the horizon. As
favorable economic dynamics fall into place around the globe, the U.S. equity
markets should continue to move toward recently out-of-favor stocks. We believe
that the Gabelli Blue Chip Value Fund is in an optimal position to take
advantage of this turn around.
The Fund's daily net asset value is available in the financial press and
each evening after 6:00 PM (Eastern Time) by calling 1-800-GABELLI
(1-800-422-3554). Please call us during the business day for further
information.
Sincerely,
/s/Barbara G. Marcin
BARBARA G. MARCIN, CFA
Portfolio Manager
October 25, 1999
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TOP TEN HOLDINGS
SEPTEMBER 30, 1999
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General Motors Cl. H (Hughes Electronics)
Gilat Satellite Networks Ltd.
Cendant Corp.
Lehman Brothers Holdings Inc.
Providian Financial Corp.
MediaOne Group Inc.
KN Energy Inc.
Bell Atlantic Corp.
Compaq Computer Corp.
Sprint Corp.
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NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period stated in this report. The manager's views
are subject to change at any time based on market and other conditions.
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The Gabelli Blue Chip Value Fund
Portfolio of Investments - September 30, 1999 (Unaudited)
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SHARES MARKET VALUE
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COMMON STOCKS - 90.5%
AEROSPACE - 3.5%
2,400 Lockheed Martin Corp. $ 78,450
600 Raytheon Co., Cl. B 29,775
500 Rockwell International Corp. 26,250
------------
134,475
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BUILDING AND CONSTRUCTION - 1.2%
1,200 Vulcan Materials Co. 43,950
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BUSINESS SERVICES - 6.2%
9,000 Cendant Corp. + 159,750
2,600 Seagate Technology Inc. + 80,113
------------
239,863
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CABLE - 3.6%
2,000 MediaOne Group Inc. + 136,625
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COMMUNICATIONS EQUIPMENT - 5.9%
3,200 Gilat Satellite Networks Ltd. + 171,600
1,500 L-3 Communications Holdings Inc. + 56,625
------------
228,225
------------
COMPUTER HARDWARE - 3.2%
4,400 Compaq Computer Corp. 100,925
800 3Com Corp. + 23,000
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123,925
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CONSUMER PRODUCTS - 3.8%
1,000 Eastman Kodak Co. 75,437
3,800 Mattel Inc. 72,200
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147,637
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DIVERSIFIED INDUSTRIAL - 1.1%
1,800 Crane Co. 40,388
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ENERGY AND UTILITIES - 9.0%
1,000 Baker Hughes Inc. 29,000
2,400 Burlington Resources Inc. 88,200
1,600 Conoco Inc., Cl. A 44,400
5,000 KN Energy Inc.+ 112,187
2,100 New Century Energies Inc. 70,219
------------
344,006
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ENTERTAINMENT - 2.5%
1,200 Viacom Inc., Cl. B + 50,700
1,800 Disney (Walt) Co. 46,575
------------
97,275
------------
EQUIPMENT AND SUPPLIES - 3.0%
600 Caterpillar Inc. 32,887
1,800 Parker Hannifin Corp. 80,663
------------
113,550
------------
FINANCIAL SERVICES - 18.4%
2,000 AFLAC Inc. 83,750
1,000 Allstate Corp. 24,938
100 American Express Co. 13,462
300 Chase Manhattan Corp. 22,613
1,000 Countrywide Credit Industries Inc. 32,250
1,100 Everest Reinsurance Holdings Inc. 26,194
1,000 Hartford Financial Services Group Inc. 40,875
2,600 Lehman Brothers Holdings Inc. 151,613
300 Merrill Lynch & Co. 20,156
1,300 Nationwide Financial Services Inc., Cl. A 45,987
1,800 Providian Financial Corp. 142,537
2,700 Travelers Property Casualty Corp., Cl. A 79,650
800 UnumProvident Corp. 23,550
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707,575
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The Gabelli Blue Chip Value Fund
Portfolio of Investments - September 30, 1999 (Unaudited)
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FOOD AND BEVERAGE - 2.8%
1,500 Hershey Foods Corp. 73,031
800 Seagram Co. 36,400
------------
109,431
------------
HEALTH CARE - 2.3%
1,000 American Home Products Inc. 41,500
1,600 McKesson HBOC Inc. 46,400
------------
87,900
------------
PAPER AND FOREST PRODUCTS - 2.4%
2,500 Fort James Corp. 66,719
800 Mead Corp. 27,500
------------
94,219
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PUBLISHING - 2.0%
600 Dow Jones & Co. Inc. 32,025
1,200 New York Times Co., Cl. A 45,000
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77,025
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RETAIL - 4.4%
800 Albertson's Inc. 31,650
1,600 Federated Department Stores Inc. + 69,900
5,700 Kmart Corp. + 66,619
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168,169
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SATELLITE - 5.9%
316 COMSAT Corp. 9,361
3,000 General Motors Corp., Cl. H 171,750
2,000 Globalstar Telecommunications Ltd. + 46,000
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227,111
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SPECIALTY CHEMICALS - 1.8%
5,300 Lyondell Chemical Co. 70,887
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TELECOMMUNICATIONS - 7.5%
1,500 Bell Atlantic Corp. 100,969
1,800 Sprint Corp. 97,650
1,600 US West Inc. 91,300
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289,919
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TOTAL COMMON STOCKS 3,482,155
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PREFERRED STOCK - 0.7%
SATELLITE - 0.7%
1,600 Loral Space & Communications Ltd.,
6.00% Cv. Pfd. 27,500
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PRINCIPAL
AMOUNT U.S. GOVERNMENT OBLIGATIONS - 5.1%
$ 196,000 U.S. Treasury Bills, 4.57% to 4.78% ++,
due 10/14/99 to 10/21/99 195,639
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TOTAL INVESTMENTS - 96.3%
(Cost $3,848,524) 3,705,294
OTHER ASSETS AND LIABILITIES (NET) - 3.7% 141,124
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TOTAL NET ASSETS - 100.0%
(403,378 shares outstanding) $ 3,846,418
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NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $9.54
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+ Non-income producing security.
++ Represents annualized yield at date of purchase.
