THE GABELLI ASSET FUND
ANNUAL REPORT
DECEMBER 31, 1998
* * * *
Morningstar rating(TM) of The Gabelli Asset Fund was 4 stars overall and for the
three year period ended 12/31/98 among 2802 domestic equity funds, and for the
five and ten year periods ended 12/31/98 among 1702 and 732 domestic equity
funds, respectively.
TO OUR SHAREHOLDERS,
In the fourth quarter of 1998, the stock market came roaring back.
Emboldened by three Federal Reserve interest rate cuts, investors forgot all
about the world's problems and dove back into equities. Treasury bond prices
retreated from 30 year highs as investors migrated back to stocks.
Despite global economic turmoil and lingering concern over its impact on the
U.S. economy and corporate profits, the Standard & Poor's 500 Index recorded its
fourth consecutive year of double digit gains. Mid-cap and small cap stocks did
not fare nearly as well, with the S&P Mid-Cap Index posting a modest gain and
the Russell 2000 Index closing the year with a loss.
INVESTMENT PERFORMANCE
For the fourth quarter ended December 31, 1998, The Gabelli Asset Fund's
(the "Fund") total return was 18.2%. The Standard & Poor's ("S&P") 500, Value
Line Composite and Russell 2000 Indices had returns of 21.4%, 18.1% and 16.3%,
respectively, over the same period. Each index is an unmanaged indicator of
stock market performance. The Fund was up 15.9% for 1998. The S&P 500 and Value
Line Composite rose 28.7% and 5.8%, respectively, while the Russell 2000
declined 2.6% over the same twelve month period.
For the ten year period ended December 31, 1998, the Fund's total return
averaged 16.2% annually versus average annual total returns of 19.2%, 14.2% and
12.9% for the S&P 500, Value Line Composite and Russell 2000, respectively.
Since inception on March 3, 1986 through December 31, 1998, the Fund had a
cumulative total return of 671.7%, which equates to an average annual return of
17.2%.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Morningstar proprietary
ratings reflect historical risk adjusted performance as of December 31, 1998 and
are subject to change every month. Morningstar ratings are calculated from a
Fund's three, five and ten year average annual returns in excess of 90-day
T-Bill returns with appropriate fee adjustments and a risk factor that reflects
fund performance below 90-day T-Bill returns. The top 10% of the funds in an
investment category receive five stars, the next 22.5% receive four stars, the
next 35% receive three stars, the next 22.5% receive two stars and the bottom
10% receive one star.
<PAGE>
INVESTMENT RESULTS (a)
<TABLE>
<CAPTION>
Quarter
------------------------------------------------
1st 2nd 3rd 4th Year
--- --- --- --- ----
<S> <C> <C> <C> <C> <C>
1998: Net Asset Value........... $36.00 $36.41 $31.24 $35.47 $35.47
Total Return.............. 13.0% 1.1% (14.2)% 18.2% 15.9%
- ---------------------------------------------------------------------------------------------------------
1997: Net Asset Value........... $27.00 $31.45 $34.99 $31.85 $31.85
Total Return.............. 2.2% 16.5% 11.3% 4.3% 38.1%
- ---------------------------------------------------------------------------------------------------------
1996: Net Asset Value........... $27.44 $28.09 $27.92 $26.42 $26.42
Total Return.............. 6.6% 2.4% (0.6)% 4.5% 13.4%
- ---------------------------------------------------------------------------------------------------------
1995: Net Asset Value........... $23.84 $25.10 $26.76 $25.75 $25.75
Total Return.............. 7.3% 5.3% 6.6% 3.7% 24.9%
- ---------------------------------------------------------------------------------------------------------
1994: Net Asset Value........... $22.63 $22.36 $23.56 $22.21 $22.21
Total Return.............. (2.9)% (1.2)% 5.4% (1.2)% (0.1)%
- ---------------------------------------------------------------------------------------------------------
1993: Net Asset Value........... $21.10 $22.10 $23.63 $23.30 $23.30
Total Return.............. 6.1% 4.7% 6.9% 2.5% 21.8%
- ---------------------------------------------------------------------------------------------------------
1992: Net Asset Value........... $19.04 $18.91 $19.02 $19.88 $19.88
Total Return.............. 6.0% (0.7)% 0.6% 8.5% 14.9%
- ---------------------------------------------------------------------------------------------------------
1991: Net Asset Value........... $17.36 $17.36 $17.90 $17.96 $17.96
Total Return.............. 11.1% 0.0% 3.1% 3.2% 18.1%
- ---------------------------------------------------------------------------------------------------------
1990: Net Asset Value........... $16.48 $16.81 $15.21 $15.63 $15.63
Total Return.............. (4.5)% 2.0% (9.5)% 7.8% (5.0)%
- ---------------------------------------------------------------------------------------------------------
1989: Net Asset Value........... $16.46 $18.01 $18.73 $17.26 $17.26
Total Return.............. 12.0% 9.4% 4.0% (1.0)% 26.2%
- ---------------------------------------------------------------------------------------------------------
1988: Net Asset Value........... $13.49 $14.62 $14.94 $14.69 $14.69
Total Return.............. 14.4% 8.4% 2.2% 3.5% 31.1%
- ---------------------------------------------------------------------------------------------------------
1987: Net Asset Value........... $12.97 $13.93 $14.66 $12.61 $12.61
Total Return.............. 19.6% 7.4% 5.2% (14.0)% 16.2%
- ---------------------------------------------------------------------------------------------------------
1986: Net Asset Value........... $10.44 $11.21 $11.29 $11.28 $11.28
Total Return.............. 4.4%(b) 7.4% 0.7% (0.1)% 12.8%(b)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Average Annual Returns - December 31, 1998 (a)
- -----------------------------------------------
<TABLE>
<S> <C>
1 Year 15.9%
5 Year 17.8%
10 Year 16.2%
Life of Fund (b) 17.2%
</TABLE>
<TABLE>
<CAPTION>
Dividend History
- ----------------------------------------------------------
Payment (ex) Date Rate Per Share Reinvestment Price
- ----------------- -------------- ------------------
<S> <C> <C>
December 28, 1998 $1.419 $34.60
December 30, 1997 $4.610 $31.73
December 31, 1996 $2.770 $26.42
December 29, 1995 $2.000 $25.75
December 30, 1994 $1.056 $22.21
December 31, 1993 $0.921 $23.30
December 31, 1992 $0.755 $19.88
December 31, 1991 $0.505 $17.96
December 31, 1990 $0.770 $15.63
December 29, 1989 $1.278 $17.26
December 30, 1988 $0.775 $14.69
January 4, 1988 $0.834 $12.07
March 9, 1987 $0.505 $12.71
</TABLE>
(a) Total returns and average annual returns reflect changes in share price and
reinvestment of dividends and are net of expenses. The net asset value of the
Fund is reduced on the ex-dividend (payment) date by the amount of the dividend
paid. Of course, returns represent past performance and do not guarantee future
results. Investment returns and the principal value of an investment will
fluctuate. When shares are redeemed they may be worth more or less than their
original cost. (b) From commencement of investment operations on March 3, 1986.
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
GABELLI ASSET FUND, THE CONSUMER PRICE INDEX +10% AND THE S&P 500 INDEX
<TABLE>
<CAPTION>
Gabelli Asset Fund Consumer Price Index + 10% S&P 500 Index
<S> <C> <C> <C>
3/3/86 $10,000 10000 10000
12/86 $11,280 11110 10930
12/87 $13,107 12713 11487
12/88 $17,184 14546 13383
12/89 $21,686 16677 17612
12/90 $20,602 19364 17066
12/91 $24,331 21893 22271
12/92 $27,956 24717 23384
12/93 $34,051 27869 25746
12/94 $34,017 31400 26081
12/95 $42,530 35337 35884
12/96 $48,229 40044 44137
12/97 66590 44729 58857
12/98 77178 49923 75749
</TABLE>
[GRAPHIC]
WHAT WE DO
The success of momentum investing in recent years and investors' desire for
instant gratification have combined to make value investing appear dull. At the
risk of being dull, we will once again describe the "boring" value approach that
has seen us through both good and bad markets over the last 12 years at The
Gabelli Asset Fund and for over 21 years at Gabelli Asset Management Company. In
past reports, we have tried to articulate our investment philosophy and
methodology. The accompanying graphic further illustrates the interplay among
the four components of our valuation approach.
Our focus is on free cash flow; earnings before interest, taxes,
depreciation and amortization ("EBITDA") minus the capital expenditures
necessary to grow the business. We believe free cash flow is the best barometer
of a business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value ("PMV") estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a
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regulatory change. In the agricultural equipment business, it is the increasing
worldwide demand for American food and feed crops. In other instances, it may be
a change in management, sale or spin-off of a division or the development of a
profitable new business.
Once we identify stocks that qualify as fundamental and conceptual bargains,
we then become patient investors. This has been a proven long term method for
preserving and enhancing wealth in the U.S. equity markets. At the margin, our
new investments are focused on businesses that are well-managed and will benefit
from sustainable long term economic dynamics. These include macro trends, such
as the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
COMMENTARY
OUTLOOK FOR 1999
Mario Gabelli, our Chief Investment Officer, has appeared in the prestigious
BARRON'S Roundtable discussion annually since 1980. Many of our readers have
enjoyed the inclusion of selected and edited comments from BARRON'S Roundtable
in previous reports to shareholders. Once again, we are including selected
comments of Mario Gabelli from BARRON'S 1999 Roundtable. For our shareholders
who prefer to view the entire interview, the complete text is available on the
Internet at www.barrons.com.
January 18, 1999 BARRON'S - Roundtable'99
BARRON'S
ROUNDTABLE
----------------------
MARIO GABELLI
Chairman and Chief Investment Officer,
Gabelli Funds, Rye, New York
BARRON'S ("Q"): A new year, a new market environment? Meaning, are investors
going to have to grapple with seismic economic shifts as well as impeachment
and Y2K?
GABELLI ("G"): Let's focus on the U.S. economy. I'm in the camp that argues
that consumers are going to get another tailwind. There is going to be a major
tax cut that is going to be very stimulative to the consumer. If I'm a consumer
today, I feel good. I'm working. Gasoline, I just went and bought a tankful. I
paid 20 cents a gallon less than it cost me the last time I filled up.
Q: You obviously don't do it often.
G: What I mean is that on 500 gallons of gas, I save 100 bucks. That's two bucks
a week. That's terrific. There are
4
<PAGE>
January 18, 1999 BARRON'S - Roundtable'99
50 million vehicles on the road. At two bucks a week, that's $100 million a
week, that's around $5 billion annually going back into consumers' pockets. I
just refinanced my mortgage. I got a jumbo $240,000 loan at 6 7/8%. I'm saving
1%, that's $2,400, that's another $45 or so a week and I'm going to get a tax
cut. And I own Internet stocks. I think this is terrific.
Q: But you could see long-term interest rates going up soon because Japan may be
asking for their savings back.
G: Well, they have gone up to 5.3%, but still, I just refinanced my house, so I
feel good. You can talk about long-term rates, but my mortgage is what I look at
as a consumer. Besides, looking at the redressing of imbalances, one of the
concerns we had was that the dollar was too strong. Now if you look at the
dollar versus the euro, this morning it was 114, and versus the yen it was 107.
So when translating Euroland earnings into U.S. dollars, companies that are
operating there could get a terrific tailwind. Reported S&P earnings, I think,
could be a lot better than people expect, because they've forgotten the currency
factor. Especially if I have 2% real growth in Euroland and I have companies
that are now rationalizing and getting the benefit of synergies. The companies I
talk to in the U.S. that have big operations in Europe are all saying, "Hey, in
the last couple of months, we are getting a big benefit from currency." That
could continue for the next half. So the U.S. economy is reasonably good.
Earnings and cash flow for the companies I follow should be up 5%, 7%, 8% in
1999. I think the U.S. portion of non-U.S. earnings could translate better. So I
can't make anything but an optimistic case, let's put it that way, for corporate
profits. The other element in 1999 that I have to factor in is that some of the
companies I'm talking to and listening to say they are worried about a Y2K
problem. So the fourth quarter of 1999 will likely have a big inventory bulge.
That is certainly a plus, from what I see, for shipments.
Let me give you one other element on earnings: A lot of corporate controllers
and a lot of CFOs squirreled away earnings in the first and second quarters of
last year. Then the accounting problems of Cendant and others emerged. So now
you will not squirrel away earnings in that fourth quarter or in the first half
anymore. You are not going to play that game -- as much. I can see reported
earnings doing better than economic earnings over the next couple of quarters,
just because you are not going to use the other side of your pencil or whatever
they use nowadays.
Another item to consider is that virtually every country in Europe now has a
socialist government. The Italians probably have a Communist government. I mean,
how are they going to sit back and not undo what they've done? They've
constrained, they constrained, until they could introduce their single economic
unit. Now, why not do the reverse of that? Why don't you factor that into your
thinking?
Q: It may be bullish for those economies. But it means reflation, it means
higher interest rates, lower P/E ratios.
G: Oh, yes. That's what I'm saying. It's the reflationary theme.
Changing gears to the manufacturing sector of the economy -- people are
asking, "Where is it?" It is being transported outside of the United States.
Machine-tool orders in November were $440 million, down from $532 million. You
see it in the farm-equipment industry, the domestic construction equipment
industry; and manufacturing jobs are disappearing, probably. When Cuba opens up,
labor rates will go from $1 an hour to $1 a day, if you are looking at Mexico
versus Cuba.
Q: But is this a hollowing-out of the economy? Or is this a transition to the
brave new Internet Age?
G: Adam Smith is alive and well.
I have to stay with the bullish interpretation of all these dynamics. The
notion of globalization of the economy and the movement of capital around to the
lowest cost . . . every country, as long as you have free trade, is going to
contribute to global wealth at some point. What's more, the Japanese, as they
come out of their problems, eventually will be going from seeking share of
market on a global basis to seeking share of profits. That has to be good for
corporate profitability around the world.
5
<PAGE>
January 18, 1999 BARRON'S - Roundtable'99
Q: What is your conclusion on the market?
G: Let me give you some numbers on the flow of funds. Cash into the market from
stock buybacks in 1998 was $207 billion, up from $181 billion. Mutual-fund
inflow was $176 billion, down from $232 billion. IPOs, which hit a big air
pocket, are starting to accelerate again but were $108 billion last year, down
from $118 billion. Other elements were foreign purchases of U.S. stocks and U.S.
purchases of non-stock assets. But the big element that makes those flows look
tiny was that deals in the U.S. alone amounted to $1.6 trillion. Now, for you
cynics who'd argue how much was in cash, the cash portion was $672 billion, up
from $414 billion last year. So money moving from savers into the stock market
wasn't as dynamic a flow-of-funds element as how much came into the market being
recycled from transactions. Again, incrementally in 1998 an unprecedented $250
billion came into the market from the cash portion of deals, that's 1 1/2 times
the amount that came in via mutual funds --U.S. only, not globally. It is just a
phenomenon that has to be constantly hammered away at.
Q: [Some of the biggest cap stocks are up over 100%. Such moves are clearly
unsustainable.]
G: Some of that is part of the migration of money into indexing -- which is
mindlessly buying stocks based on their index weightings. It's just
self-reinforcing. I don't know the numbers for 1998, but the trend has been more
mutual-fund purchases of index funds. More defined-benefit plans going into the
index funds. And those funds have to, by definition, buy mindlessly based on
capitalization. And that is going to continue.
Q: Until you get to the last guy.
G: I will tell you a story. I'm creating this. But in 1973, it was conventional
wisdom that McDonald's had a market capitalization greater than all of the steel
industry's, and that we were going to become a nation of hamburger flippers --
indeed, that the world was going that way. Every cycle has the same thing. You
know, somebody sits up and says AOL and Amazon.com have caps greater than the
steel industry's. But that is what Schumpeter said, creative destruction is one
of the great virtues of capitalism. It's very positive.
Q: [How about what is going on in Washington?]
G: Going back to interest rates, I think there's plenty of margin of flexibility
on the short end. Real rates are much too high here. They should migrate down.
The dollar -- I don't know how Greenspan handles it. It is a challenge. The
balance-of-payments deficit is going to go way up. I believe, based on last
month's deficit, the run rate was about $180 billion. But $250 billion sounds
like a reasonable number. That has got to, with a new currency bloc in Europe,
create all sorts of question marks that I don't have an answer to. Those are
moving parts. We don't invest that way. We just think about these things.
Q: Doesn't anyone find all this blind faith in Greenspan and Rubin "doing the
right thing" a mite discomforting?
G: The concern isn't that they won't do the right thing, but that Rubin and
Greenspan retire like Mantle and Maris.
Q: But in general, you are bullish?
G: On the world economy.
Q: And on equities?
G: No, not on equities. There is no margin of safety in stocks. Absolutely none.
But I do think Adam Smith is alive and well. Once you can start migrating labor
and goods to the highest efficiency, you create incredible opportunities on a
global scale. We don't have those efficiencies baked into the system. But there
are enormous birthing pains. You saw these birthing pains in Southeast Asia. But
I don't think that's a big depressive because the sunshine in the valley is that
we'll come out in a world in which profits are the driver. That is pretty
interesting.
Q: But Mario, where will rates go?
G: Like 5 3/4%-6%. Long rates have already started up. But I see short rates
coming down.
Q: If Ed Hyman is right and there isn't much nominal growth in the economy,
won't that make it difficult for small companies?
G: The comment I want to make -- this is very important -- is that the business
people I talk to really were shocked by the virtual shutdown of the capital
markets following the [John]
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<PAGE>
January 18, 1999 BARRON'S - Roundtable'99
Meriwether debacle. Not only did the spreads widen, but the market started
closing on them. That is creating a backlash in terms of either selling out --
the option which I happen to be fond of -- and also in terms of bringing back a
margin of safety to their balance sheets and their perspectives on how to run
their businesses. From the market's point of view, looking out over the next
five years, I still think we are in a world in which corporate profits can rise
- -- not return on equity, where I can't see much improvement, not return on
sales, where I can't see much improvement from here. But I can see maintaining
some of these levels. I see these global synergies, the Exxon-Mobils, adding to
profitability. There won't necessarily be revenue synergies in some of these,
but there will certainly be margin synergies, capital synergies, and efficiency
elements. So I still see a 6%-8% secular growth rate over the next five years in
corporate profits. For 1999 I am in the camp that has S&P earnings up, because
over one-third of the earnings mix in the S&P is non-U.S. Now, that's leaving
Brazil aside, because it is part of my wall of worry -- I have my A-B-C-D
issues: Asia, Brazil, Clinton and the Dollar are the things I worry about. But
in terms of my model, where I have interest rates backing up, and earnings at
that level, the market has absolutely no margin of safety. So we could see it up
3%, down 20%. Probably somewhere in-between at the end of the year. With much
more volatility. I think volatility is increased by the new generation of
traders. Individuals now come in to work and trade. Or they don't even come in
to work. There is nothing between them and a buy/sell decision except their
finger on a mouse. There is no broker who has a boss asking, "Hey, is he
churning? Is he overinvesting?" There is nothing there. So the volatility you
saw from July through the beginning of January I think is just the way the
world's going to be. As long as you are treating stocks like commodities, you
have to expect that to continue. And they are trading stocks like they are
soybeans.
Q: So the stock market will be the pits?
G: There will be great opportunities to make a lot of money if you short. If
you go long, then it's just going to be a terrific eclectic market.
Q: What will make the small-fry go up, especially if the S&P sells off and the
economy is no great shakes?
G: Forcing transactions, by managements, that narrow the spreads between their
intrinsic values and the stock prices.
Q: It looks like Mario wants to talk tulips next.
G: Our goal always has been to make 10% real by picking stocks that we hope,
after taxes, after inflation, accomplish that. So we try to find companies at a
significant margin of safety to intrinsic value. The second part of our strategy
is to try to buy things for the long term, because it's not only what you make,
but what you keep. We'd rather pay 20% long-term capital-gains taxes than 40% on
ordinary income from trading. But we're here in January of 1999, and even 25%
looks awfully dull when you make that in one week -- 50%, in Amazon. So I have
succumbed and I am going to recommend only stocks that have grown to the sky --
Excite, uBid, eBay, Amazon and that's it. Nothing else! You can also have my
tulips, Arthur. Don't say I never gave you anything. They're starting to wilt --
ART SAMBERG: Am I allowed to eat them?
G: Do anything you like. Charles MacKay wrote about all this in 1841, in
Extraordinary Popular Delusions and the Madness of Crowds.
Anyway, when we look at stocks, we also look for a catalyst. Forcing
transactions. That is, a management, if they are alert and sensitive, can do
things like buying back stock, like LBOs or financial engineering. One of the
dynamics that have been in place for the last four years is deals. Deals will
continue in 1999 -- a year in which the Exxons and the Mobils are driving values
by becoming global, further reinforcing their positions. There are a lot of
areas where that's happening.
Q: Thanks , Mario. [X]
7
<PAGE>
YEAR END REVIEW
For the fourth quarter of 1998, rather than repeating the economic and
market dynamics that we discussed in our third quarter report to shareholders,
we invite our shareholders to review these comments from the third quarter
report. The report is available on our website at www.gabelli.com.
Media stocks, most notably cable television ("CATV"), cable television
networks and entertainment software companies, dominated our Top Twenty
performance list in 1998. We are particularly gratified by CATV stocks' strong
showing. This group was deep in Wall Street's doghouse when we began
aggressively buying in 1995 and 1996. At the time, we believed the competitive
threat from direct broadcast satellite services was overblown and that the
telecommunications capabilities of all those coaxial connections to American
homes would drive values higher. The AT&T/Tele-Communications Inc. merger
validated our investment thesis and portfolio holdings like Cablevision Systems,
Time Warner and Comcast soared.
Invigorated by the turnaround of its Blockbuster Entertainment unit, a
"Titanic" hit from Paramount Pictures and the ongoing strength of its MTV and
Nickelodeon cable networks, Viacom was a big winner. Investors also applauded
Tele-Communications Inc./Liberty Media Group, a treasure chest of cable network
assets.
Although the performance of our telecommunications holdings were mixed,
Century Telephone Enterprises, Sprint, BellSouth and Telefonica de Espana made
our Top Twenty List, and the group as a whole contributed to returns.
Despite strong gains this year, we believe the media and telecommunications
industries' exceptional global growth potential is still not adequately
reflected in stock prices. We bought our media and telecommunications holdings
at opportunistic prices. We will continue to hold them as long as they remain
undervalued.
This year's investment laggards include energy and energy services holdings
that sank along with oil prices. We are not prepared to make a case for a big
pop in oil prices in the immediate future. However, we question the current
consensus viewpoint that oil will remain near $10 per barrel or lower forever.
We note the last time we saw such a consensus on oil prices was in the
mid-to-late 1970s, when all the "experts" were predicting $60 per barrel of oil.
If OPEC can enforce some production discipline among its members, and as Asian
economies recover, oil prices will rebound. In the interim, there will continue
to be consolidation in the group. We have already seen two big deals, British
Petroleum/Amoco and Exxon/Mobil. In the year ahead, we expect to see more deals,
particularly in the oil services industry, as energy companies cut costs in
response to lower oil prices. Remember, John D. Rockefeller built Standard Oil
and an enormous personal fortune by buying oil companies during periods when oil
prices were severely depressed.
Our Latin American investments, primarily telecommunications companies, fell
sharply on fears that Latin America would go the route of Southeast Asia. Latin
American currencies remain under pressure and the region's economies are
vulnerable. However, the long term upside potential of
8
<PAGE>
privatized telecommunications companies is still exceptional. Freed from the
control of government bureaucrats and now being run by professional managers,
these communications companies will be run more efficiently and profitably. We
believe longer term demand for telecommunications services will be strong. A
year ago, Telebras (now divided into regional operating companies) was one of
Wall Street's favorite stocks. Today, it is an investment pariah. Eventually,
"Mr. Market" will price it more appropriately.
Industrial cyclicals like Boeing, Deere and a host of smaller portfolio
companies closed the year with losses as Asian economic weakness materially
reduced demand and restrained earnings. These remain high quality, dominant
market share companies that we are confident are well-positioned over the long
term.
DEALS: "THE EUROPEANS ARE COMING! THE EUROPEANS ARE COMING!"
Daimler Benz/Chrysler, British Petroleum/Amoco, Deutsche Bank/Bankers Trust
and Scottish Power/Pacificorp--Europe is discovering America all over again! In
1998, there were a significant number of announced European acquisitions of
American companies. This transatlantic deal volume exceeds that of the last
three years combined. Euroland is here and leading European companies are
beginning to flex their financial muscles. December's coordinated European
interest rate cuts should help invigorate the Euro economy and embolden more
European companies to grab footholds in the American market. We have a portfolio
of red blooded American companies that could be targets. The "Third Great Wave
of Takeovers" is far from cresting. In fact, with Europe now contributing, its
mass and power is growing. Investors in undervalued U.S. companies will continue
to ride this wave.
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.
American Express Co. (AXP - $102.25 - NYSE) and its subsidiaries provide
travel-related services, financial advisory services and international banking
services worldwide. Founded in 1850, the company operates in 160 countries
around the world. Best known for its "green" charge card and its travel-related
services, including travelers checks, American Express also offers financial
planning, brokerage services, mutual funds, insurance and other investment
products. Harvey Golub, Chairman and CEO, has focused AXP on its core charge
card and investment management businesses. The company is expanding the
competitive reach of its credit card operations which should benefit if the U.S.
Department of Justice prevails in its antitrust suit against the Visa and
MasterCard associations.
Cablevision Systems Corp. (CVC - $50.1875 - AMEX) is one of the nation's leading
telecommunications and entertainment companies, with a portfolio of operations
that span state-of-the-art, high-speed multimedia delivery, subscription cable
television services, championship professional sports teams and national cable
television networks. Headquartered in Bethpage, NY, Cablevision serves more than
3.4 million cable customers primarily in three core markets: New York, Boston
and Cleveland. Cablevision is
9
<PAGE>
a leader in delivering cutting-edge technological innovation, such as Optimum
TV. Through its Rainbow Media Holdings subsidiary, Cablevision manages and
develops internationally recognized content offerings such as the popular
national television networks, American Movie Classics, Bravo and The Independent
Film Channel. Cablevision has a controlling interest in New York City's famed
Madison Square Garden which includes the arena complex, the NY Knicks, the NY
Rangers and the MSG network. Cablevision operates Radio City Entertainment and
holds a long-term lease of Radio City Music Hall, home of the world famous Radio
City Rockettes.
Tele-Communications Inc./Liberty Media Group (LBTYA - $46.0625 - Nasdaq) owns a
collection of interests in some of the most powerful programming entities in the
world. Liberty Media is the second largest investor in Time Warner, the world's
largest media company. Liberty Media, News Corp. and Tele-Communications Inc.
have created a global sports joint venture, Fox Sports, that offers an
integrated package of sports programming across network broadcast, national
cable, and regional cable channels. Liberty's 49%-owned Discovery Communications
is a major, advertiser-supported basic cable network that includes the flagship
Discovery Channel, The Learning Channel and developing businesses such as
Discovery Europe and Animal Planet.
Telephone & Data Systems Inc. (TDS - $44.9375 - AMEX) is a diversified
telecommunications company with established cellular and local telephone
operations and a developing personal communications services ("PCS") business.
TDS provides high quality telecommunications services to 2.4 million customers
in 35 states. TDS owns 81.1% of United States Cellular Corp. (USM - $38.00 -
AMEX), the nation's seventh largest cellular telephone company. It also owns
82.4% of Aerial Communications Inc. (AERL - $5.875 - Nasdaq), TDS's PCS
subsidiary which owns the licenses to provide PCS service in six major trading
areas ("MTAs") encompassing approximately 27.6 million population equivalents.
On December 8, 1998, TDS announced its intent to spin-off its Aerial stake to
existing TDS shareholders on a tax-free basis and focus on its core wireline and
cellular operations. The transaction is expected to close in six to nine months.
Time Warner Inc. (TWX - $62.0625 - NYSE), with its 1996 acquisition of Turner
Broadcasting System, became entrenched as the global leader in media and
entertainment with interests in filmed entertainment, television production and
broadcasting, recorded music, cable television programming, magazine and book
publishing, direct marketing and cable television systems. The combined
companies have more than $24 billion in revenues and nearly $5.5 billion in
EBITDA. Time Warner controls a host of powerful brands, such as Warner Brothers,
CNN, HBO, Cinemax and Time and People magazines. Under the leadership of
Chairman Gerald Levin and Vice Chairman Ted Turner, the company is focused on
reducing its debt (now down to approximately $9 billion) and simplifying its
capital structure.
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.
10
<PAGE>
IN CONCLUSION
Despite ongoing global economic uncertainty, the popular market indices are
once again in record territory. While we will always have a "wall of worry", we
believe the economy and the capital market landscape for 1999 will provide stock
pickers like us the opportunity to unearth well-managed companies, trading at
significant discounts to their private market value, that should benefit from
sustainable long term economic dynamics. The Fund is invested in what we believe
to be undervalued companies in much more reasonably priced sectors of the
market. We will continue striving to provide shareholders with our long term
performance goal of a real rate of return of 10% each year.
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). The Fund's Nasdaq symbol is GABAX. Please call us during the
business day for further information.
As always, we thank you for your loyalty and support during a period that
tested all equity investors' resolve. We hope you will continue to share our
enthusiasm and commitment to value investing.
Sincerely,
/s/ MARIO J. GABELLI, CFA
Portfolio Manager and
Chief Investment Officer
January 29, 1999
Top Ten Holdings
December 31, 1998
Time Warner Inc. Century Telephone Enterprises
Cablevision Systems Corp. USA Networks Inc.
TCI/Liberty Media Group Tele-Communications Inc.
American Express Co. United Television Inc.
Telephone & Data Systems Viacom Inc.
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.
11
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS -- 96.3%
AEROSPACE--0.6%
150,000 Boeing Co. ............... $ 5,329,532 $ 4,893,750
55,000 Northrop Grumman Corp. ... 4,456,982 4,021,875
------------ --------------
9,786,514 8,915,625
------------ --------------
AGRICULTURE--0.6%
20,000 Agribrands International
Inc. .................... 282,787 600,000
500,000 Archer-Daniels-Midland
Co. ..................... 8,729,803 8,593,750
10,000 Monsanto Co. ............. 405,188 475,000
------------ --------------
9,417,778 9,668,750
------------ --------------
AUTOMOTIVE--0.6%
140,000 General Motors Corp. ..... 4,054,621 10,027,500
------------ --------------
AUTOMOTIVE: PARTS AND
ACCESSORIES--3.8%
20,000 Borg-Warner Automotive
Inc. .................... 652,845 1,115,000
120,809 Dana Corp. ............... 1,759,438 4,938,068
123,000 Federal-Mogul Corp. ...... 3,262,690 7,318,500
600,000 GenCorp Inc. ............. 3,684,662 14,962,500
255,000 Genuine Parts Co. ........ 6,225,641 8,526,563
115,000 Johnson Controls Inc. .... 2,268,501 6,785,000
238,500 Modine Manufacturing
Co. ..................... 5,125,982 8,645,625
180,000 Standard Motor Products
Inc. .................... 2,323,936 4,365,000
35,000 Superior Industries
International Inc. ...... 693,283 973,438
100,000 TransPro Inc. ............ 788,321 487,500
90,000 Wynn's International
Inc. .................... 1,140,063 1,991,250
------------ --------------
27,925,362 60,108,444
------------ --------------
AVIATION: PARTS AND SERVICES--1.3%
10,000 BE Aerospace Inc.+........ 193,625 210,000
370,000 Coltec Industries Inc.+... 5,060,746 7,215,000
181,000 Curtiss-Wright Corp. ..... 2,275,020 6,900,625
55,000 Fairchild Corp., Cl. A.... 1,047,890 866,250
60,000 Hi-Shear Industries
Inc. .................... 510,932 155,625
40,000 Hudson General Corp. ..... 1,121,008 2,520,000
72,000 Precision Castparts
Corp. ................... 2,725,279 3,186,000
------------ --------------
12,934,500 21,053,500
------------ --------------
BROADCASTING--4.5%
75,000 CBS Corp. ................ 1,874,672 2,456,250
445,255 Chris-Craft Industries
Inc. .................... 9,829,327 21,455,725
69,551 Chris-Craft Industries
Inc., Cl. B (a).......... 1,132,440 3,351,489
8,700 Gray Communications
Systems Inc. ............ 172,878 159,319
181,300 Gray Communications
Systems Inc., Cl. B...... 2,352,215 2,481,544
175,000 Grupo Televisa SA, GDR+... 3,689,840 4,320,313
3,000 Infinity Broadcasting
Corp. ................... 61,500 82,125
129,700 Liberty Corp. ............ 4,361,332 6,371,513
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
115,000 Paxson Communications
Corp., Cl. A+............ $ 1,231,309 $ 1,056,563
400,000 Television Broadcasting
Ltd. .................... 1,815,551 1,032,578
247,500 United Television Inc. ... 15,847,291 28,462,500
------------ --------------
42,368,355 71,229,919
------------ --------------
BUILDING AND CONSTRUCTION--0.3%
167,000 Nortek Inc.+.............. 797,319 4,613,375
4,333 Nortek Inc., Special
Common (a)............... 59,049 119,699
------------ --------------
856,368 4,733,074
------------ --------------
BUSINESS SERVICES--1.0%
48,000 Avis Rent A Car Inc.+..... 1,198,503 1,161,000
54,100 Berlitz International
Inc., New+............... 847,842 1,568,900
140,000 Cendant Corp. ............ 2,249,607 2,668,750
14,100 Dollar Thrifty Automotive
Group Inc.+.............. 227,336 181,538
100,000 Ecolab Inc. .............. 1,571,512 3,618,750
23,046 Hach Co. ................. 186,972 276,552
16,546 Hach Co., Cl. A........... 113,613 169,597
20,000 Hertz Corp. .............. 784,937 912,500
68,000 Landauer Inc. ............ 422,093 2,201,500
200,000 Nashua Corp.+............. 3,675,056 2,662,500
------------ --------------
11,277,471 15,421,587
------------ --------------
CABLE--7.4%
810,000 Cablevision Systems Corp.,
Cl. A+................... 7,971,521 40,651,875
40,000 Comcast Corp., Cl. A...... 593,113 2,297,500
555,000 MediaOne Group Inc. ...... 11,600,961 26,085,000
70,000 Shaw Communications Inc.,
Cl. B.................... 555,126 1,695,391
640,000 TCI Ventures Group........ 3,891,947 15,080,000
522,556 Tele-Communications Inc.,
Cl. A New+............... 9,228,178 28,903,879
65,000 United International
Holdings Inc., Cl. A+.... 884,424 1,251,250
------------ --------------
34,725,270 115,964,895
------------ --------------
CLOSED-END FUNDS--0.1%
84,000 Royce Value Trust Inc. ... 949,972 1,155,000
------------ --------------
COMMUNICATIONS EQUIPMENT--0.4%
110,000 Allen Telecom Inc.+....... 687,440 735,625
47,000 Motorola Inc. ............ 622,493 2,869,939
43,000 Northern Telecom Ltd...... 822,685 2,155,375
------------ --------------
2,132,618 5,760,939
------------ --------------
CONSUMER PRODUCTS--4.2%
10,000 Avon Products Inc. ....... 307,750 442,500
607,000 Carter-Wallace Inc. ...... 9,514,363 11,912,375
2,750 Christian Dior SA......... 307,335 303,971
206,500 Church & Dwight Co.
Inc. .................... 4,664,837 7,421,094
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
CONSUMER PRODUCTS (CONTINUED)
20,000 Department 56 Inc.+....... $ 386,250 $ 751,250
22,000 Eastman Kodak Co. ........ 1,271,475 1,584,000
65,000 First Brands Corp. ....... 910,850 2,563,439
250,000 Fortune Brands Inc. ...... 5,681,567 7,906,250
230,000 Gallaher Group plc, ADR... 2,857,199 6,253,125
100,000 General Cigar Holdings
Inc. .................... 954,213 868,750
93,356 General Cigar Holdings
Inc., Cl. B+ (a)......... 917,834 811,030
85,000 Gillette Co. ............. 1,215,450 4,106,563
40,000 Harley Davidson Inc. ..... 198,900 1,895,000
13,000 National Presto Industries
Inc. .................... 501,400 554,125
25,000 Nine West Group Inc. ..... 489,573 389,063
40,000 Philip Morris Companies
Inc. .................... 1,585,937 2,140,000
505,000 Ralston Purina Group...... 6,131,945 16,349,375
41,700 Syratech Corp.+........... 954,711 667,200
------------ --------------
38,851,589 66,919,110
------------ --------------
CONSUMER SERVICES--0.7%
500,000 Loewen Group Inc. ........ 7,225,157 4,218,750
370,000 Rollins Inc. ............. 5,905,989 6,475,000
------------ --------------
13,131,146 10,693,750
------------ --------------
DIVERSIFIED INDUSTRIAL--3.6%
10,000 Anixter International
Inc.+.................... 90,087 203,125
10,000 Cooper Industries Inc. ... 484,437 476,875
315,000 Crane Co. ................ 3,712,294 9,509,063
205,000 GATX Corp. ............... 4,329,860 7,764,375
16,000 General Electric Co. ..... 394,980 1,633,000
118,000 Honeywell Inc. ........... 6,297,010 8,886,875
270,000 ITT Industries Inc. ...... 7,130,128 10,732,500
145,000 Katy Industries Inc. ..... 1,312,250 2,546,564
13,000 Kyocera Corp., ADR........ 448,063 675,188
350,000 Lamson & Sessions Co.+.... 1,899,408 1,793,750
260,000 Lawter International
Inc. .................... 2,596,834 3,022,500
46,062 Myers Industries Inc. .... 172,636 1,318,525
68,000 National Service
Industries Inc. ......... 1,591,349 2,584,000
8,000 Pentair Inc. ............. 321,588 318,500
125,000 Thomas Industries Inc. ... 1,397,900 2,453,125
80,000 Trinity Industries
Inc. .................... 977,970 3,080,000
------------ --------------
33,156,794 56,997,965
------------ --------------
ELECTRONICS--0.4%
3,000 Hitachi Ltd., ADR......... 302,567 181,314
10,000 Imation Corp.+............ 203,344 175,000
800,000 Oak Technology Inc.+...... 2,960,082 2,800,000
10,000 Sony Corp., ADR........... 544,302 717,500
120,000 UCAR International
Inc. .................... 2,704,342 2,137,500
------------ --------------
6,714,637 6,011,314
------------ --------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
ENERGY AND UTILITIES--3.8%
100,000 Atlantic Richfield Co. ... $ 5,368,509 $ 6,525,000
145,500 BJ Services Co.+.......... 2,263,687 2,273,438
50,000 British Petroleum Co. plc,
ADR...................... 1,110,595 4,750,000
40,000 Brown (Tom) Inc. ......... 653,595 401,250
30,000 Chevron Corp. ............ 1,016,500 2,488,125
202,413 Citizens Utilities Co.,
Cl. B.................... 1,984,213 1,644,604
153,000 Eastern Enterprises....... 4,306,015 6,693,750
15,000 Energy East Corp. ........ 653,767 847,500
60,000 Enron Oil & Gas Co. ...... 548,976 1,035,000
180,000 Exxon Corp. .............. 5,413,043 13,162,500
30,000 Global Marine Inc. ....... 483,312 275,625
40,000 Halliburton Co. .......... 840,758 1,185,000
10,000 New England Electric
System................... 484,301 481,250
20,000 Niagara Mohawk Power
Corp. ................... 307,875 322,500
200,000 PennzEnergy Co.+.......... 6,043,516 3,262,500
195,000 Pennzoil-Quaker State
Co.+..................... 6,098,468 2,888,438
325,000 Southwest Gas Corp. ...... 5,939,311 8,734,375
55,000 Texaco Inc. .............. 1,741,375 2,908,125
------------ --------------
45,257,816 59,878,980
------------ --------------
ENTERTAINMENT--12.4%
230,000 Ascent Entertainment Group
Inc. .................... 2,214,090 1,696,250
19,406 EMI Group plc............. 75,408 129,707
100,000 EMI Group plc, ADR........ 1,246,297 1,362,500
13,600 Fisher Companies Inc. .... 905,975 931,600
40,000 Fox Entertainment Group
Inc. .................... 887,437 1,007,500
150,000 GC Companies Inc.+........ 5,073,921 6,243,750
862,500 Tele-Communications
Inc./Liberty Media Group,
Cl. A+................... 9,062,411 39,728,906
1,170,000 Time Warner Inc. ......... 16,600,406 72,613,125
11,000 Todd-AO Corp., Cl. A...... 30,000 88,000
900,000 USA Networks Inc.+........ 13,134,802 29,812,500
360,000 Viacom Inc., Cl. A+....... 9,191,153 26,482,500
215,000 Viacom Inc., Cl. B+....... 6,644,147 15,910,000
------------ --------------
65,066,047 196,006,338
------------ --------------
ENVIRONMENTAL SERVICES--0.0%
30,000 EnviroSource Inc. ........ 185,450 153,750
------------ --------------
EQUIPMENT AND SUPPLIES--10.6%
700,000 Aeroquip-Vickers Inc. .... 21,533,611 20,956,250
300,000 AMETEK Inc. .............. 3,455,782 6,693,750
155,000 AMP Inc. ................. 6,078,170 8,069,688
98,000 Amphenol Corp., Cl. A+.... 2,582,750 2,958,375
22,000 AptarGroup Inc. .......... 197,343 617,375
88,100 Caterpillar Inc. ......... 1,178,142 4,052,600
110,000 CLARCOR Inc. ............. 1,490,481 2,200,000
285,000 CTS Corp. ................ 1,959,101 12,397,500
410,000 Deere & Co. .............. 6,454,360 13,581,250
230,000 Donaldson Co. Inc. ....... 1,457,271 4,772,500
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
EQUIPMENT AND SUPPLIES (CONTINUED)
32,000 EG&G Inc. ................ $ 567,663 $ 890,000
10,000 Fedders Corp. ............ 59,939 58,125
110,000 Flowserve Corp. .......... 2,660,256 1,821,875
166,300 Gerber Scientific Inc. ... 1,754,645 3,960,019
315,000 Hussmann International
Inc. .................... 3,070,548 6,103,125
445,000 IDEX Corp. ............... 3,661,463 10,902,500
60,000 Ingersoll-Rand Co. ....... 1,496,510 2,816,250
200,000 Kollmorgen Corp. ......... 1,861,980 3,050,000
88,000 Lufkin Industries Inc. ... 1,591,261 1,628,000
35,000 Manitowoc Co. Inc. ....... 367,746 1,553,125
160,000 Mark IV Industries
Inc. .................... 1,227,050 2,080,000
50,000 Materials Sciences
Corp.+................... 452,506 425,000
28,000 Met-Pro Corp. ............ 374,588 350,000
365,000 Navistar International
Corp.+................... 4,974,591 10,402,500
20,000 PACCAR Inc. .............. 522,020 822,500
291,000 Pittway Corp. ............ 2,160,298 9,839,438
313,000 Pittway Corp., Cl. A...... 1,076,919 10,348,563
97,355 Sequa Corp., Cl. A+....... 4,394,277 5,829,131
96,000 Sequa Corp., Cl. B+....... 4,869,340 7,056,000
173,000 SPS Technologies Inc.+.... 2,740,938 9,623,125
50,000 U.S. Filter Corp. ........ 610,576 1,143,750
30,000 Valmont Industries
Inc. .................... 242,908 416,250
------------ --------------
87,125,033 167,418,564
------------ --------------
FINANCIAL SERVICES--6.0%
1 Al-Zar Ltd.+ (a).......... 0 350
3,000 Alleghany Corp.+.......... 596,673 563,625
65,000 American Bankers Insurance
Group Inc. .............. 3,384,286 3,144,375
320,000 American Express Co. ..... 7,431,567 32,720,000
29,700 Argonaut Group Inc. ...... 894,382 727,650
220 Berkshire Hathaway
Inc.+.................... 874,549 15,400,000
130,000 Block (H&R) Inc. ......... 4,448,127 5,850,000
70,000 Commerzbank AG, ADR....... 1,365,494 2,187,500
150,000 Deutsche Bank AG, ADR..... 6,596,875 8,737,500
175,000 Lehman Brothers Holdings
Inc. .................... 3,156,725 7,710,938
5,000 Leucadia National
Corp. ................... 185,050 157,500
20,000 Mellon Bank Corp. ........ 1,220,895 1,375,000
5,000 Merrill Lynch & Co. ...... 351,519 333,750
15,917 Metris Companies Inc. .... 438,360 800,821
255,000 Midland Co. .............. 2,686,195 6,151,875
2,000 MONY Group Inc.+.......... 57,225 62,622
50,000 Paine Webber Group
Inc. .................... 1,351,387 1,931,250
30,000 Pioneer Group Inc. ....... 487,000 592,500
43,000 State Street Corp. ....... 638,075 2,991,185
20,000 SunTrust Banks Inc. ...... 424,879 1,530,000
11,941 Transamerica Corp. ....... 583,636 1,379,186
8,000 Value Line Inc. .......... 115,500 315,000
------------ --------------
37,288,399 94,662,627
------------ --------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
FOOD AND BEVERAGE--7.2%
50,000 Bestfoods Inc. ........... $ 1,329,872 $ 2,662,500
76,300 Brown-Forman Corp., Cl.
A........................ 2,574,752 5,321,925
90,000 Chock Full o'Nuts
Corp.+................... 554,148 562,500
45,000 Coca-Cola Co. ............ 387,203 3,009,375
60,000 Corn Products
International Inc. ...... 1,821,807 1,822,500
29,000 Diageo plc, ADR........... 1,306,076 1,341,250
4,500 Farmer Brothers Co. ...... 476,380 963,000
85,000 General Mills Inc. ....... 2,867,929 6,608,750
60,000 Heinz (H.J.) Co. ......... 2,398,556 3,397,500
48,000 Hershey Foods Corp. ...... 1,016,513 2,985,000
15,000 Keebler Foods Co.+........ 427,150 564,375
240,000 Kellogg Co. .............. 6,053,037 8,190,000
30,000 LVHM Moet Hennessy Louis
Vuitton, ADR............. 1,144,062 1,222,500
410,000 PepsiCo Inc. ............. 13,030,375 16,784,375
330,000 Quaker Oats Co. .......... 11,989,122 19,635,000
50,000 Ralcorp Holdings Inc.+.... 595,439 912,500
310,000 Seagram Co. .............. 9,346,822 11,780,000
129,602 Tootsie Roll Industries
Inc. .................... 2,074,905 5,070,678
560,000 Whitman Corp. ............ 6,164,368 14,210,000
80,000 Wrigley (Wm.) Jr. Co. .... 3,673,016 7,165,000
------------ --------------
69,231,532 114,208,728
------------ --------------
HEALTH CARE--2.7%
12,000 Amgen Inc. ............... 220,320 1,254,747
18,000 Biogen Inc.+.............. 270,450 1,494,000
40,000 Chiron Corp.+............. 550,315 1,047,500
100,000 Genentech Inc.+........... 4,804,136 7,968,750
10,000 Glaxo Wellcome plc........ 549,120 695,000
100,000 IVAX Corp. ............... 884,612 1,243,750
65,000 Johnson & Johnson......... 1,343,465 5,451,875
55,000 Merck & Co. Inc. ......... 1,853,500 8,122,813
105,000 Pfizer Inc. .............. 1,677,963 13,170,938
25,000 SmithKline Beecham plc.... 1,520,214 1,737,500
------------ --------------
13,674,095 42,186,873
------------ --------------
HOTELS AND GAMING--1.7%
200,000 Circus Circus Enterprises
Inc.+.................... 4,440,166 2,287,500
320,700 Gaylord Entertainment Co.,
Cl. A.................... 8,604,007 9,661,088
30,000 GTECH Holdings Corp.+..... 545,939 768,750
12,000 Harrah's Entertainment
Inc.+.................... 113,002 188,250
360,000 Hilton Hotels Corp. ...... 5,950,853 6,885,000
203,389 Ladbroke Group plc........ 535,440 816,668
300,000 Mirage Resorts Inc.+...... 2,782,182 4,481,250
40,000 Starwood Hotels & Resorts
Worldwide Inc. .......... 1,790,993 907,500
60,000 Trump Hotels & Casino
Resorts Inc.+............ 256,680 225,000
------------ --------------
25,019,262 26,221,006
------------ --------------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
METALS AND MINING--0.2%
30,000 Barrick Gold Corp. ....... $ 622,076 $ 585,000
100,000 Echo Bay Mines Ltd.+...... 754,551 175,000
45,000 Homestake Mining Co. ..... 650,187 413,438
65,000 Newmont Mining Corp. ..... 1,546,169 1,174,064
360,000 Pegasus Gold Inc.+........ 263,140 6,300
22,500 Placer Dome Inc. ......... 285,944 258,750
250,000 Royal Oak Mines Inc.+..... 652,034 62,500
40,000 TVX Gold Inc.+............ 91,563 72,500
------------ --------------
4,865,664 2,747,552
------------ --------------
PAPER AND FOREST PRODUCTS--0.9%
180,000 Greif Bros. Corp., Cl.
A........................ 3,637,710 5,253,750
35,000 Sealed Air Corp. ......... 1,318,842 1,787,185
312,000 St. Joe Corp. ............ 3,601,269 7,312,500
------------ --------------
8,557,821 14,353,435
------------ --------------
PUBLISHING--3.4%
70,000 American Media Inc., Cl.
A+....................... 674,812 389,375
4,000 Central Newspapers Inc.,
Cl. A.................... 289,413 285,750
55,000 Dow Jones & Co. Inc. ..... 2,569,066 2,646,875
38,000 Harcourt General Inc. .... 1,749,900 2,023,500
53,600 McClatchy Newspapers Inc.,
Cl. A.................... 1,026,635 1,896,100
80,000 McGraw-Hill Companies
Inc. .................... 2,603,081 8,150,000
325,000 Media General Inc., Cl.
A........................ 7,448,870 17,225,000
88,000 Meredith Corp. ........... 1,787,933 3,333,000
140,000 New York Times Co., Cl.
A........................ 1,148,435 4,856,250
15,000 News Corp. Ltd., ADR...... 255,587 396,563
305,000 Penton Media Inc. ........ 1,064,715 6,176,250
50,000 Reader's Digest
Association Inc., Cl.
A........................ 1,384,340 1,259,375
84,000 Reader's Digest
Association Inc., Cl.
B........................ 1,999,190 2,026,500
1,650,000 Seat-Pagine Gialle SpA+... 343,343 1,556,745
6,000 Scripps (E.W.) Co., Cl.
A........................ 108,669 298,500
68,700 Thomas Nelson Inc. ....... 938,906 927,450
------------ --------------
25,392,895 53,447,233
------------ --------------
REAL ESTATE--0.5%
380,000 Catellus Development
Corp.+................... 3,687,688 5,438,750
48,000 Florida East Coast
Industries Inc. ......... 631,838 1,689,000
70,000 Griffin Land & Nurseries
Inc.+.................... 889,441 892,500
1,000 Lennar Corp. ............. 13,369 25,250
1,000 LNR Property Corp. ....... 21,243 19,938
------------ --------------
5,243,579 8,065,438
------------ --------------
RETAIL--2.3%
41,000 Aaron Rents Inc. ......... 146,083 620,125
20,000 Aaron Rents Inc., Cl. A... 83,263 298,750
105,000 Amercian Stores Co. ...... 2,535,243 3,878,435
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
190,000 Burlington Coat Factory
Warehouse Corp. ......... $ 2,180,142 $ 3,099,372
50,000 Coldwater Creek Inc.+..... 960,937 687,500
50,000 Fingerhut Companies
Inc. .................... 272,975 771,872
70,000 Kroger Co.+............... 818,000 4,235,000
150,000 Lillian Vernon Corp. ..... 2,201,747 2,475,000
50,000 Midas Inc. ............... 376,453 1,556,250
576,700 Neiman Marcus Group
Inc.+.................... 8,105,603 14,381,456
200,000 Republic Industries
Inc.+.................... 3,600,569 2,950,000
200,000 Scheib (Earl) Inc.+....... 1,432,580 1,100,000
------------ --------------
22,713,595 36,053,760
------------ --------------
SATELLITE--0.6%
200,000 COMSAT Corp. ............. 3,731,935 7,200,000
100,000 Globalstar
Telecommunications Ltd... 423,210 2,012,500
------------ --------------
4,155,145 9,212,500
------------ --------------
SPECIALTY CHEMICALS--0.7%
375,000 Ferro Corp. .............. 5,437,040 9,750,000
95,000 Sybron Chemicals Inc. .... 2,038,204 1,282,500
------------ --------------
7,475,244 11,032,500
------------ --------------
TELECOMMUNICATIONS-- 7.5%
122,000 Aliant Communications
Inc. .................... 1,900,906 4,986,750
5,000 Allegiance Telecom
Inc. .................... 74,063 60,625
85,000 Alltel Corp. ............. 2,106,961 5,084,064
140,000 AT&T Corp. ............... 4,923,962 10,535,000
50,000 BC Telecom Inc. .......... 877,855 1,364,405
30,000 BC Telecom Inc., ADR...... 537,319 818,645
210,000 BCE Inc. ................. 3,525,210 7,966,873
36,000 BellSouth Corp. .......... 455,094 1,795,500
130,000 Cable & Wireless plc,
ADR...................... 2,878,267 4,777,500
170,200 Commonwealth Telephone
Enterprises Inc.+........ 2,290,984 5,701,700
186,965 Commonwealth Telephone
Enterprises Inc., Cl.
B+....................... 3,517,737 5,889,398
65,000 Embratel Participacoes
SA+...................... 1,368,933 905,938
110,000 Frontier Corp. ........... 2,648,244 3,740,000
155,000 GTE Corp. ................ 3,595,431 10,452,813
32,000 Hong Kong
Telecommunications Ltd.,
ADR...................... 502,292 562,000
400,000 RCN Corp. ................ 2,835,846 7,075,000
10,000 Rogers Communications
Inc., Cl. B+............. 77,553 89,111
310,000 Rogers Communications
Inc., Cl. B, ADR+........ 2,230,006 2,751,250
270,000 SBC Communications
Inc. .................... 6,265,205 14,478,750
100,000 Sprint Corp. ............. 1,714,705 8,412,500
13,500 Tele Centro Sul
Participacoes SA+........ 784,466 564,469
500,000 Telecom Italia SpA........ 1,046,696 4,263,812
125,000 Telecom Italia SpA, ADR... 2,773,903 10,875,000
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
67,500 Telecomunicacoes
Brasileiras SA, ADR...... $ 5,188 $ 7,383
15,300 Telefonica de Espana,
ADR...................... 596,375 2,071,238
10,000 Telefonos de Mexico SA,
Cl. L, ADR............... 281,828 486,875
67,500 Tele Norte Leste
Participacoes SA+........ 1,032,465 839,531
67,500 Telesp Participacoes SA... 2,531,873 1,493,438
8,000 US West Inc.+............. 245,907 517,000
------------ --------------
53,625,274 118,566,568
------------ --------------
TRANSPORTATION--0.7%
132,000 AMR Corp.+................ 4,051,686 7,837,500
3,000 Burlington Northern Santa
Fe Corp. ................ 94,519 101,250
40,000 CSX Corp. ................ 1,859,563 1,660,000
10,000 Kansas City Southern
Industries Inc. ......... 317,503 491,875
1,000 Norfolk Southern Corp. ... 31,738 31,689
1,000 Providence & Worcester
Railroad Co. ............ 18,050 12,500
1,000 RailAmerica Inc.+......... 6,719 8,500
3,000 Wisconsin Central
Transportation Corp.+.... 60,946 51,563
------------ --------------
6,440,724 10,194,877
------------ --------------
WIRELESS COMMUNICATIONS--5.6%
35,000 AirTouch Communications
Inc.+.................... 791,589 2,524,375
85,000 Associated Group Inc., Cl.
A+....................... 1,677,738 3,655,000
37,000 Associated Group Inc., Cl.
B+....................... 98,787 1,572,500
460,000 Century Telephone
Enterprises Inc. ........ 7,528,687 31,050,000
55,000 NEXTEL Communications
Inc., Cl. A+............. 660,330 1,299,375
50,000 Rogers Cantel Mobile
Communications Inc.+..... 554,438 609,375
50,000 Sprint Corp.(PCS Group)... 220,292 1,156,250
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES COST VALUE
------ ---- ------
<C> <S> <C> <C>
6,750 Tele Celular Sul
Participacoes SA......... $ 107,916 $ 117,703
22,500 Tele Centro Oeste Celular
Participacoes SA+........ 67,447 66,094
1,800,000 Telecom Italia Mobile
SpA...................... 1,661,796 13,281,321
1,350 Tele Leste Celular
Participacoes SA......... 36,110 38,306
3,375 Telemig Celular
Participacoes SA+........ 97,539 71,719
3,375 Tele Nordeste Celular
Participacoes SA......... 49,807 62,438
1,350 Tele Norte Celular
Participacoes SA+........ 20,857 30,459
700,800 Telephone & Data Systems
Inc. .................... 25,126,188 31,492,200
27,000 Telesp Celular
Participacoes SA+........ 863,327 472,500
13,500 Tele Sudeste Celular
Participacoes SA+........ 427,513 279,281
10,000 United States Cellular
Corp. ................... 312,933 380,000
------------ --------------
40,303,294 88,158,896
------------ --------------
TOTAL COMMON STOCKS....... 769,903,864 1,517,230,997
------------ --------------
PREFERRED STOCKS -- 0.2%
METALS AND MINING--0.0%
10,000 Freeport-McMoRan Inc.,
7.00% Conv. Pfd. ........ 213,000 148,750
------------ --------------
TELECOMMUNICATIONS--0.2%
35,000 Sprint Corp.,
8.25% Conv. Pfd. ........ 1,295,406 2,887,500
1,588,267 Telecomunicacoes de Sao
Paulo SA (Telesp),
Preference Shares........ 152,310 216,501
1,588,267 Telecomunicacoes de Sao
Paulo SA (Telesp),
Preference Shares, Cl. B
......................... 60,929 69,801
------------ --------------
1,508,645 3,173,802
------------ --------------
TOTAL PREFERRED STOCKS.... 1,721,645 3,322,552
------------ --------------
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THE GABELLI ASSET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COST VALUE
--------- ---- ------
<S> <C> <C> <C>
CORPORATE BONDS--0.2%
ENTERTAINMENT--0.2%
$2,300,000 Viacom Inc., Sub. Deb.
8.00%, 07/07/06....... $ 1,677,650 $ 2,397,750
------------ --------------
U.S. GOVERNMENT OBLIGATIONS--4.6%
74,665,000 U.S. Treasury Bills,
4.21% to 5.14%++, due
01/14/99 to 03/18/99.. 74,095,837 74,117,524
------------ --------------
TOTAL INVESTMENTS --
101.3%................ $847,398,996* 1,597,068,823
============
OTHER ASSETS AND
LIABILITIES (NET)--(1.3)%.......... (21,092,918)
--------------
NET ASSETS --100.0%
(44,429,209 shares outstanding)..... $1,575,975,905
==============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE.......... $35.47
======
PRINCIPAL SETTLEMENT NET UNREALIZED
AMOUNT DATE DEPRECIATION
- ----------- ------------ --------------
<C> <S> <C> <C>
FORWARD FOREIGN
EXCHANGE CONTRACTS
12,100,000(b) Deliver Hong Kong
Dollars in exchange for
USD $1,561,119............ 02/26/99 $ (52,861)
</TABLE>
- ---------------
<TABLE>
<C> <S> <C>
* For Federal tax purposes:
Aggregate cost........................ $848,880,921
============
Gross unrealized appreciation......... $776,378,475
Gross unrealized depreciation......... (28,190,573)
------------
Net unrealized appreciation........... $748,187,902
============
</TABLE>
- ---------------
(a) Security fair valued as determined by the Board of
Trustees.
(b) Principal amount denoted in Hong Kong Dollars.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR-- American Depositary Receipt.
GDR-- Global Depositary Receipt.
USD-- U.S. Dollars.
See accompanying notes to financial statements.
17
<PAGE>
THE GABELLI ASSET FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $847,398,996).............. $1,597,068,823
Cash and foreign currency, at value (Cost $3,471,091).. 3,491,372
Dividends and interest receivable...................... 1,307,771
Receivable for investments sold........................ 771,071
Receivable for Fund shares sold........................ 1,385,883
Other assets........................................... 3,327
--------------
TOTAL ASSETS......................................... 1,604,028,247
--------------
LIABILITIES:
Payable for investments purchased...................... 7,455,631
Payable for Fund shares redeemed....................... 18,571,777
Payable for investment advisory fees................... 1,290,786
Payable for distribution fees.......................... 322,696
Unrealized depreciation of foreign forward exchange
contracts............................................ 52,861
Payable for shareholder services fees.................. 152,000
Payable to custodian................................... 45,000
Payable to Trustees.................................... 2,989
Other accrued expenses................................. 158,602
--------------
TOTAL LIABILITIES.................................... 28,052,342
--------------
NET ASSETS applicable to 44,429,209 shares
outstanding......................................... $1,575,975,905
==============
NET ASSETS CONSIST OF:
Shares of beneficial interest, at par value............ $ 444,292
Additional paid-in capital............................. 826,832,314
Accumulated distributions in excess of net realized
gain on investments and foreign currency
transactions......................................... (938,014)
Net unrealized appreciation on investments
and foreign currency transactions.................... 749,637,313
--------------
TOTAL NET ASSETS..................................... $1,575,975,905
==============
NET ASSET VALUE, offering and redemption price per share
($1,575,975,905 / 44,429,209 shares outstanding; unlimited
number of shares authorized of $0.01 par value) . . . . $35.47
======
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$62,408).............................................. $ 15,387,284
Interest................................................ 5,747,659
------------
TOTAL INVESTMENT INCOME............................... 21,134,943
------------
EXPENSES:
Investment advisory fees................................ 14,882,733
Distribution fees....................................... 3,708,303
Shareholder services fees............................... 890,284
Custodian fees.......................................... 267,005
Legal and audit fees.................................... 100,600
Shareholder communications expenses..................... 83,521
Trustees' fees.......................................... 73,000
Miscellaneous expenses.................................. 246,949
------------
TOTAL EXPENSES........................................ 20,252,395
------------
NET INVESTMENT INCOME................................. 882,548
------------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments and foreign currency
transactions.......................................... 59,477,782
Net change in unrealized appreciation on investments and
foreign currency transactions......................... 164,961,752
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS......................... 224,439,534
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $225,322,082
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................... $ 882,548 $ 2,547,863
Net realized gain on investments and foreign currency
transactions............................................ 59,477,782 166,963,760
Net change in unrealized appreciation on investments and
foreign currency transactions........................... 164,961,752 207,587,959
-------------- --------------
Net increase in net assets resulting from
operations........................................... 225,322,082 377,099,582
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (689,228) (2,481,578)
In excess of net investment income....................... -- (93,147)
Net realized gain on investments......................... (59,477,782) (166,963,945)
In excess of net realized gain on investments............ (92,619) (40,227)
-------------- --------------
Total distributions to shareholders................... (60,259,629) (169,578,897)
-------------- --------------
SHARE TRANSACTIONS:
Net increase in net assets from shares of beneficial
interest transactions................................... 75,861,674 46,891,821
-------------- --------------
Net increase in net assets............................ 240,924,127 254,412,506
NET ASSETS:
Beginning of period...................................... 1,335,051,778 1,080,639,272
-------------- --------------
End of period............................................ $1,575,975,905 $1,335,051,778
============== ==============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THE GABELLI ASSET FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION. The Gabelli Asset Fund (the "Fund") was organized on November
25, 1985 as a Massachusetts business trust. The Fund is a diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund's primary objective is growth of
capital. The Fund commenced investment operations on March 3, 1986.
2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITY VALUATION. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange as of the close of business on
the day the securities are being valued (if there were no sales that day, the
security is valued at the average of the closing bid and asked prices or, if
there were no asked prices quoted on that day, then the security is valued at
the closing bid price on that day). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees. Short term debt securities with remaining maturities of 60 days or
less are valued at amortized cost, unless the Trustees determine such does not
reflect the securities' fair value, in which case these securities will be
valued at their fair value as determined by the Trustees. Short term debt
instruments having a greater maturity are valued at the highest bid price
obtained from a dealer maintaining an active market in those securities.
FORWARD FOREIGN EXCHANGE CONTRACTS. The Fund may engage in forward foreign
exchange contracts for hedging a specific transaction with respect to either the
currency in which the transaction is denominated or another currency as deemed
appropriate by the Adviser. Forward foreign exchange contracts are valued at the
forward rate and are marked-to-market daily. The change in market value is
included in unrealized appreciation/depreciation on investments. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
The use of forward foreign exchange contracts does not eliminate fluctuations in
the underlying prices of the Fund's portfolio securities, but it does establish
a rate of exchange that can be achieved in the future. Although forward foreign
exchange contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, the Fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
19
<PAGE>
THE GABELLI ASSET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are maintained
in United States (U.S.) dollars. Foreign currencies, investments and other
assets and liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated at the exchange rate prevailing
on the respective dates of such transactions. Unrealized gains and losses, which
result from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the Fund
and the amounts actually received. The portion of foreign currency gains and
losses related to fluctuation in exchange rates between the initial trade date
and subsequent sale trade date is included in realized gain/(loss) on
investments.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
accounted for on the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions to
shareholders are recorded on the ex-dividend date. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
Permanent differences incurred during the year ended December 31, 1998 resulting
from different book and tax accounting policies for currency gains and losses
and certain distributions received by the Fund are reclassified between net
investment income (loss) and net realized gain (loss) on investments at year
end. For the year ended December 31, 1998, reclassifications were made to
decrease undistributed net investment income for $193,320 and increase
accumulated net realized gain on investments and foreign currency transactions
for $193,320.
PROVISION FOR INCOME TAXES. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
Dividends and interest from non-U.S. sources received by the Fund are generally
subject to non-U.S. withholding taxes at rates ranging up to 30%. Such
withholding taxes may be reduced or eliminated under the terms of applicable
U.S. income tax treaties, and the Fund intends to undertake any procedural steps
required to claim the benefits of such treaties.
3. INVESTMENT ADVISORY AGREEMENT. The Fund has entered into an investment
advisory agreement (the "Advisory Agreement") with the Adviser which provides
that the Fund will pay the Adviser a fee, computed daily and paid monthly, at
the annual rate of 1.00% of the value of the Fund's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the
20
<PAGE>
THE GABELLI ASSET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Fund's portfolio, oversees the administration of all aspects of the Fund's
business and affairs and pays the compensation of all Officers and Trustees of
the Fund who are its affiliates.
4. DISTRIBUTION PLAN. The Fund's Board of Trustees has adopted a distribution
plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. For the year ended
December 31, 1998, the Fund incurred distribution costs payable to Gabelli &
Company, Inc., an indirect wholly-owned subsidiary of the Adviser, of $3,708,303
or 0.25% of average daily net assets, the annual limitation under the Plan. Such
payments are accrued daily and paid monthly.
5. PORTFOLIO SECURITIES. Purchases and sales of securities for the year ended
December 31, 1998, other than short term securities, aggregated $357,444,974 and
$290,283,477, respectively.
6. TRANSACTIONS WITH AFFILIATES. During the year ended December 31, 1998, the
Fund paid brokerage commissions of $335,068 to Gabelli & Company, Inc. and its
affiliates.
7. LINE OF CREDIT. The Fund has access to an unsecured line of credit up to
$25,000,000 from the custodian for temporary borrowing purposes. Borrowings
under this arrangement bear interest at 0.75% above the Federal Funds rate on
outstanding balances. There were no borrowings against the line of credit during
the year ended December 31, 1998.
8. SHARES OF BENEFICIAL INTEREST. Transactions in shares of beneficial interest
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold............................................. 50,493,058 $ 1,716,293,181 13,039,709 $ 421,881,081
Shares issued upon reinvestment of dividends............ 1,648,815 57,057,140 4,869,910 154,702,133
Shares redeemed......................................... (49,630,901) (1,697,488,647) (16,898,747) (529,691,393)
----------- --------------- ----------- -------------
Net increase........................................ 2,510,972 $ 75,861,674 1,010,872 $ 46,891,821
=========== =============== =========== =============
</TABLE>
9. SUBSEQUENT EVENT. On February 9, 1999, the Adviser reorganized its
operations and corporate structure by transferring a portion of its assets and
liabilities to a successor adviser, Gabelli Funds, LLC, which is wholly owned by
Gabelli Asset Management Inc., a newly formed publicly traded company that is
80% owned by the former Adviser. Counsel to the former Adviser has concluded
that the ownership change does not constitute an assignment as defined by the
Investment Company Act of 1940, as amended.
21
<PAGE>
THE GABELLI ASSET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 31.85 $ 26.42 $ 25.75 $ 22.21 $ 23.30
----------- ----------- ---------- ---------- ---------
Net investment income............................... 0.02 0.07 0.15 0.26 0.26
Net realized and unrealized gain/(loss) on
investments....................................... 5.02 9.97 3.29 5.28 (0.30)
----------- ----------- ---------- ---------- ---------
Total from investment operations.................... 5.04 10.04 3.44 5.54 (0.04)
----------- ----------- ---------- ---------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income............................... (0.02) (0.07) (0.15) (0.25) (0.25)
In excess of net investment income.................. -- (0.00)(a) -- -- (0.01)
Net realized gain on investments.................... (1.40) (4.54) (2.61) (1.75) (0.76)
In excess of net realized gain on investments....... (0.00)(a) (0.00)(a) (0.01) (0.00)(a) (0.03)
----------- ----------- ---------- ---------- ---------
Total distributions................................. (1.42) (4.61) (2.77) (2.00) (1.05)
----------- ----------- ---------- ---------- ---------
NET ASSET VALUE, END OF PERIOD...................... $ 35.47 $ 31.85 $ 26.42 $ 25.75 $ 22.21
=========== =========== ========== ========== =========
Total return+....................................... 15.9% 38.1% 13.4% 24.9% (0.1)%
=========== =========== ========== ========== =========
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)................ $ 1,575,976 $ 1,335,052 $1,080,639 $1,091,539 $ 982,250
Ratio of net investment income to average net
assets............................................ 0.06% 0.22% 0.52% 0.95% 1.10%
Ratio of operating expenses to average net assets... 1.36% 1.38% 1.34% 1.33% 1.28%
Portfolio turnover rate............................. 21% 22% 15% 26% 19%
</TABLE>
- ---------------
+ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the period
including reinvestment of dividends.
(a) Amount represents less than $0.005 per share.
See accompanying notes to financial statements.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
THE GABELLI ASSET FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Gabelli Asset Fund (the "Fund")
at December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York
February 25, 1999
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1998 TAX NOTICE TO SHAREHOLDERS (UNAUDITED)
For the year ended December 31, 1998, the Fund paid to shareholders, on December
28, 1998, an ordinary income dividend (comprised of net investment income and
short term capital gains) totaling $0.185 per share and long term capital gains
totaling $1.234 per share. For the year ended December 31, 1998, 84.98% of the
ordinary income dividend qualifies for the dividend received deduction available
to corporations.
U.S. GOVERNMENT INCOME:
The percentage of the ordinary income dividend paid by the Fund during fiscal
year 1998 which was derived from U.S. Treasury securities was 1.50%. Such income
may be exempt from state and local tax in all states. However, many states,
including New York and California, allow a tax exemption for a portion of the
income earned only if a mutual fund has invested at least 50% of its assets at
the end of each quarter of the Fund's fiscal year in U.S. Government securities.
The Gabelli Asset Fund did not meet this strict requirement in 1998. Due to the
diversity in state and local tax law, it is recommended that you consult your
personal tax advisor for the applicability of the information provided as to
your specific situation.
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23
<PAGE>
THE GABELLI ASSET FUND
One Corporate Center
Rye, New York 10580-1434
1-800-GABELLI
[1-800-422-3554]
FAX: 1-914-921-5118
HTTP://WWW.GABELLI.COM
E-MAIL: [email protected]
(Net Asset Value may be obtained daily
by calling
1-800-GABELLI after 6:00 P.M.)
<TABLE>
<S> <C>
BOARD OF TRUSTEES
Mario J. Gabelli, CFA Karl Otto Pohl
Chairman and Chief Former President
Investment Officer Deutsche Bundesbank
Gabelli Asset Management
Inc.
Felix J. Christiana Anthony R. Pustorino
Former Senior Vice President Certified Public Accountant
Dollar Dry Dock Savings Bank Professor, Pace University
Anthony J. Colavita Anthonie C. van Ekris
Attorney-at-Law Managing Director
Anthony J. Colavita, P.C. BALMAC International, Inc.
James P. Conn Salvatore J. Zizza
Former Chief Investment Chairman
Officer
Financial Security Assurance The Bethlehem Corp.
Holdings Ltd.
OFFICERS AND PORTFOLIO MANAGERS
Mario J. Gabelli, CFA Bruce N. Alpert
Portfolio Manager President and Treasurer
James E. McKee
Secretary
</TABLE>
DISTRIBUTOR
Gabelli & Company, Inc.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND
AGENT
State Street Bank and Trust Company
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
LLP
- ---------------------------------------
This report is submitted for the
general information of the shareholders
of The Gabelli Asset Fund. It is not
authorized for distribution to
prospective investors unless preceded
or accompanied by an effective
prospectus.
- ---------------------------------------
[PHOTO]
[THE GABELLI ASSET FUND LOGO]
ANNUAL REPORT
DECEMBER 31, 1998
