The Value Fund Manager With the $57 Million PaycheckChristopher Condon
Mario Gabelli, the ubiquitous founder of money-management firm Gamco Investors Inc., likes to compare himself to billionaire Warren Buffett.
His investment methodology, according to the firm’s website, combines the pioneers of value-oriented investing and the iconic boss of Berkshire Hathaway Inc. “Graham & Dodd + Warren Buffett = GABELLI,” it reads. He cites Buffett as a friend, an inspiration for his philanthropy and a model for his silence on who will succeed him at Gamco.
“As soon as Warren Buffett reveals his plans, I will reveal mine,” Gabelli, chief executive officer and majority owner of Gamco, said in a telephone interview from his office in Rye, New York.
It’s vintage Gabelli. Though Gamco’s $2.2 billion market capitalization is a fraction of Berkshire’s $299 billion, Gabelli has gained renown on Wall Street through a combination of savvy stock-picking, self-promotion and a pay package about 160 times that of his idol Buffett. Some analysts say that the firm’s reliance on its 71-year-old founder is leaving investors with greater key-man risk -- the potential for damage from the departure of a top executive -- than most publicly traded U.S. mutual-fund companies.
“The firm is completely based on him and the cult of personality of Mario Gabelli,” Greggory Warren, a senior stock analyst at Chicago-based Morningstar Inc., said in an interview. “The biggest issue facing the firm is it’s based on Mario Gabelli and his reputation. Without him, can they gather and retain assets over a longer period of time?”
Gabelli, the Bronx-born son of Italian immigrants who was nicknamed “Super Mario,” started Gamco almost four decades ago and has run it largely as a one-man show. He conceived the firm’s philosophy, oversees the investment process, recruits the largest clients and has the final say on management decisions. He is the face of the firm as a frequent guest on financial television channels including CNBC and Bloomberg TV. He’s received numerous industry awards and gives out his own, as well.
“He came up at a time when Wall Street was essentially a closed enclave,” Burton Greenwald, a Philadelphia-based consultant who has advised mutual-fund companies for more than 25 years, said in a telephone interview. “Most of it was WASP-ish and a difficult environment to break into. He did it and in a larger-than-life way.”
While his investment performance doesn’t stand out in the same way as Buffett’s, who has compounded the book value of Berkshire at almost 20 percent a year since 1965, roughly twice the return of the Standard & Poor’s 500 Index of U.S. stocks, Gabelli found his followers. Gamco’s assets have increased every year since 2008, reaching a record $47 billion as of Dec. 31, as 2013 net income rose to an all-time high of $117 million.
Gamco’s stock has outperformed the S&P 500 and the S&P index of asset managers and custody banks over the past one, three, five and 10 years ended Dec. 31. Gamco’s largest equity holders after Gabelli include New York-based BlackRock Inc., and Royce & Associates, a unit of Baltimore’s Legg Mason Inc. Melissa Garville, a spokeswoman at BlackRock Inc., and Mary Athridge at Legg Mason, declined to comment.
The shares rallied even as Gabelli’s pay, the subject of a lawsuit more than a decade ago, weighed on earnings. His 2012 compensation, the most recent full year disclosed, totaled $69 million, making him the third-highest paid CEO among all listed companies in the U.S. behind Oracle Corp.’s Lawrence Ellison and Tesla Motors Inc.’s Elon Musk, according to Bloomberg Industries. Unlike Ellison, who got all stock and options except for a $1 salary, Gabelli received all cash.
“There is no precedent for it in money management,” said Warren at Morningstar, referring to the amount of Gabelli’s pay. “What is the appeal of owning the stock when he’s taking 20 cents of every dollar of revenue?”
Gabelli’s 2012 pay equaled 0.19 percent of his firm’s assets, which include a mix of mutual funds, closed-end funds and institutional accounts. If Laurence D. Fink, CEO of BlackRock, which manages $4.3 trillion, were paid at the same level, he would have received $7.2 billion in 2012.
Fink, who doesn’t personally manage any money, made $20.2 million that year, including $500,000 in salary, $8.6 million in a cash bonus, $10.9 million in stock awards and $187,350 in other compensation. BlackRock became the world’s biggest money manager in 2009 and oversees lower-cost investments such as exchange-traded funds in addition to mutual funds and institutional money.
Buffett’s 2012 pay package was valued at $423,923, comprising a $100,000 salary and $323,923 in costs such as personal security. Buffett, who reimburses Berkshire for items such as postage and personal calls, paid back half of his salary to the firm in 2012.
Buffett, the world’s third-richest man with a net worth of $61.1 billion according to the Bloomberg Billionaires Index, said in a letter published in 2012 that more than 98 percent of his net worth is held in Berkshire’s stock.
Gabelli said his compensation formula initially started with 20 percent of pretax profit for his role as CEO and chairman, a portion of which he shared with other senior managers. That was halved in 1999 when the company went public. He receives most of his pay -- $57 million in 2012 -- for managing funds. He has never received restricted stock or options.
“No one objected when I made $5,000 in 1977,” Gabelli said. “I’d swap my W2 with Bill Gross any time,” he added, referring to the U.S. tax document showing an employee’s income and Pacific Investment Management Co.’s billionaire chief investment officer. Gross’s Pimco manages $1.9 trillion. His compensation isn’t disclosed by Pimco’s parent, Munich-based insurer Allianz SE.
Gabelli has the ability to elect all board members, according to regulatory filings. He was paid $277 million in the five years through 2012, according to regulatory filings.
Gabelli caught the stock bug as a high school student caddying for the rich at a country club in Westchester County.
A graduate of Fordham University, Gabelli received an MBA from the Columbia Business School in 1967. He gave $10 million to Fordham in 2010 and pledged $15 million to Columbia in 2013. In his first job, he covered the auto industry for Loeb Rhoades & Co., a now-defunct Wall Street brokerage. By 1977 he started his own firm, in time to catch the bull market of the 1980s, when he began building his television celebrity.
He built Gamco on the investing philosophy pioneered by Benjamin Graham, author with David Dodd of “Security Analysis,” first published in 1934 and considered the bible of value investing. Graham is also the author of “The Intelligent Investor,” a book whose purchase in 1949 was the “best” investment Buffett ever made, the billionaire wrote in Berkshire’s annual report released on March 1.
Gabelli put his own stamp on the industry by developing a method for finding what he calls private-market value. That’s defined as what an informed buyer would pay for 100 percent of a business. When a stock is trading at a sizable discount to private market value, Gabelli looks for a catalyst, an event that will be likely to unlock the company’s full value, such as a potential acquisition or a change in management.
“We’re sticking to a philosophy and a bias of doing a type of bottom-up research in existence since 1934,” Gabelli said. “We’re copying it, but adding a little extra juice.”
His largest and oldest fund, the $3.7 billion Gabelli Asset Fund, has returned an average of 27 percent over the past five years through yesterday, beating 79 percent of similarly managed funds, according to data compiled by Bloomberg. It has returned 24 percent in the past year, beating 60 percent of rivals.
Results across the fund family are mixed. On an asset-weighted basis, 40 percent of money in Gamco funds beat their benchmarks over three years ended Dec. 31, and 80 percent over five years, according to data compiled by Bloomberg.
“Gabelli tends to fall right in the middle of the pack over three, five and 10 years,” said Flynn Murphy, a Chicago-based fund analyst at Morningstar.
Gabelli gathered a base of institutional clients before adding retail funds and hedge funds in 1986. The firm went public in 1999, selling about a 20 percent stake to investors. Gabelli is the majority owner of GGCP Holdings LLC, which owns 74 percent of Gamco’s outstanding common stock, and, because of its holding in B-class shares, 94 percent of voting control, according to a regulatory filing.
Gabelli brushes off concerns about succession, saying the firm is well prepared “in the event a plane landed but not where it’s supposed to.”
Gamco employs a number of younger money managers, he said, such as Kevin Dreyer, Christopher Marangi, Laura Linehan and Barbara Marcin who run substantial assets. He has given his board a sealed envelope, he said, with the names of people he’s chosen to lead the business and investment sides of Gamco, following “the Buffett example.”
“Successors have not been publicly disclosed, but we’ve got a very broad, deep bench from which to choose, if needed,” Dreyer said in a telephone interview.
Buffett hasn’t disclosed his selected successor as CEO, though in 2012 he announced that Ted Weschler and Todd Combs will oversee Berkshire’s investments after he departs, and his son, Howard, will be non-executive chairman.
Moody’s Investors Service rated Gamco’s senior unsecured debt a Baa3 as of Sept. 24, the lowest investment-grade level, citing risks related to Gabelli’s dominance within the firm. Gamco has $122 million in outstanding debt, $100 million of that due in 2021.
“Mr. Gabelli’s prominence limits the firm’s rating potential for two reasons: a) the combination of CEO and investment responsibilities weakens governance and b) the company will eventually face a management succession issue,” Moody’s Robert Callagy, based in New York, wrote in a report.
Succession and other corporate management issues are recurring worries for investment firms where founders may continue to devote their energy to picking stocks and bonds and neglect their own organization as it grows, said James Ware, who advises money managers.
“It’s a huge problem for the industry,” Ware, founder of Focus Consulting Group Inc. in Long Grove, Illinois, said in a telephone interview. “There are many firms where there’s one figurehead who’s in charge, and if that person leaves there’s no clear path.”
For Gabelli, his prominence and fame may be a mixed blessing as clients identify him with the firm he founded.
“There is no one with the visibility of Mario and that, in itself, is an element of risk,” said Geoff Bobroff, an investment industry consultant in East Greenwich, Rhode Island.