Gabelli Merger Plus+ (GMP/GMPP) aims to provide uncorrelated absolute returns by investing in announced mergers to earn the spread between the deal price and the market price of the acquired company. Whilst investment is predominantly through equities or instruments tied to equities, it is seeking to benefit from share price uplift offered by the risk premium attached to announced deals; as such, returns will not be driven by wider equity market moves. The company aims to pay a 5% dividend yield on NAV, paid out of the cash received when deals close.
Although this trust was launched in July 2017, Gabelli has managed funds with this approach since 1985; in this period, it has generated annualised returns of 10.5% (gross of fees) with low correlation to equity markets.
While the trust’s NAV total returns have been solid since launch, with returns of c.15.6%, share price returns have lagged as a moderate discount has opened; this now stands at c. -9%.
Dividends have been in line with the proposed payout of 5% since launch on the starting NAV. However, with the trust moving to a discount the annualised yield of the current latest payout is an attractive 5.3%
A sterling quote for the shares has recently been launched and trades under the symbol ‘GMPP’; this is aimed at improving trading volumes and liquidity, and to broaden the shareholder register in the UK.
This is an idiosyncratic and highly differentiated offering relative to most products in the broader market. The managers have exhibited a successful longer-term track record in an investment strategy which itself has historically demonstrated strong absolute returns with low correlation to equity markets. However, it should be noted that historic returns benefitted from higher interest rate environments, which raises the spreads available on announced deals.
With interest rates globally at historic lows, absolute return levels in merger-arbitrage strategies have moderated. However, this product should continue to offer uncorrelated returns and low volatility across market cycles.
|Low to no correlation to wider equity market returns||The low interest rate environment continues to offer a headwind to absolute return levels|
|Should offer a good hedge against a rising interest rate environment||Whilst the sterling quote could help improve liquidity, trading volume remains an issue|
|An attractive level of dividend, at a 5.3% yield|