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GAMCO's Marangi: Looking Harder at Corporate Management

As a value investor, GAMCO Co-Chief Investment Officer Chris Marangi puts more emphasis on the quality of a company's management and culture. And he sees a future for active management in a choppy or bear market.

GAMCO Investors, the money-management firm founded by Wall Street legend Mario Gabelli, calls itself a value investor, but its approach is a little different than many of its competitors.

Rather than simply using traditional metrics, such as price to earnings, GAMCO seeks to determine a company’s private-market value. The managers also use leveraged-buyout models to estimate company valuations, says Chris Marangi, co-chief investment officer of GAMCO’s value team.

The 42-year-old veteran of J.P. Morgan & Co. and private-equity firm Wellspring Capital Management said he has come to put more emphasis on the quality of companies’ management and culture than he used to. And he noted that environmental, social and government concerns have long played a significant role in GAMCO’s investment decisions. What are the most important elements of your investment philosophy?

Chris Marangi: We’re value investors. We look for companies trading at a significant discount to private-market value. Then we seek to find one or several catalysts that will eliminate that margin of safety. We like companies with competitive moats, skilled management and healthy balance sheets. 

WM: How do you figure out private-market values for publicly held companies?

CM: We use industry-specific analyses with a variety of valuation techniques. That includes transaction comparisons.

WM: Have you changed your own investment philosophy over the course of your career? 

CM: I began my career in private equity. In general here, we look at the world much as private-equity professionals do. We’re very cash-flow focused. Our starting point for valuation work is to run leveraged-buyout models on each company to estimate what kind of valuation the company’s cash flow can support. That provides a floor value for us.

The difference in public investing is getting comfortable making decisions with less information and without the ability to control a company. As a result, our view on the quality of management plays an important role.

My philosophy has evolved in that I put more weight now on the quality of companies’ management and culture than I used to. In these uncertain times. I can’t predict what events will occur. I rely on skilled and honest managers to see the company through it.

WM: Can you give a specific example?

CM: John Malone [chairman of Liberty Media] has been able to recruit some of the best managers in the business to work for him.

WM: Can you talk about the John Malone/Liberty Media–related ETF that you and your colleagues founded, Gabelli Media Mogul NextShares [Ticker: MOGLC]?

CM: We’ve followed him for 40 years here. We had clients ask which Malone stock to buy. Rather than explain different pieces, it was easier to put everything in one product, like an active ETF.

WM: What elements of the current investment environment are most difficult for you to deal with?

CM: One of the dominant themes of the current environment is the automation of the business. Everything from the investment process, including algorithms and big data, to the way products are packaged and sold. That’s no different than the disruption in media, retail and other industries.

Ultimately competition and innovation are good for society to the extent they drive down cost, but at some point, ETFs introduce new risk. What happens when everyone tries to exit the same ETF at the same time? That’s where I think active managers are necessary and will shine.

WM: Any other thoughts on passive investing?

CM: It’s understandable why there’s such a focus on passive. You generally won’t lose your job for underperforming a benchmark if you buy the benchmark. That works when the market is going up, like during the last eight years, but it might not work so well in a choppy or bear market.

WM: What kind of trends do you expect going forward in the investment business? 

CM: We continue to use new sources of data and technology to streamline what we do. The ability of active managers to incorporate big data into their process will be important. Also, ESG (environmental, social and governance) investing will be a differentiator. Still, we haven’t found the Holy Grail. What we’re relying on is the judgment of portfolio managers and analysts, and the relationships they develop with participants in any given industry. 

WM: Can you talk about the ESG focus?

CM: We started with socially responsible products and evolved to ESG. We were doing it before many people were talking about it. We published our magna carta of shareholder rights with principles for good governance in 1988. Governance has long been a focus. We have thought about environmental consequences for any given company action.

Companies that are good corporate citizens and have good governance tend to be better investments. So it makes sense to pay attention to ESG, not just because it satisfies social criteria, but also because it makes financial sense.

WM: What do financial advisors do well, and where can they improve?

CM: The question of what clients should do with their money can be intimidating. The range of choices, particularly today with the explosion of ETFs, can be dizzying. Advisors have a valuable and necessary role to act as tour guides and agents for their clients.

In terms of improvements, advisors shouldn’t be afraid to defend active investment management, because I do believe that over the long term, good active managers will play a role in preserving and growing wealth for clients.

WM: Where do you see attractive investment opportunities now?

CM: Equities are a better place to be than bonds, but clients should have a diversified portfolio by asset class, geography and industry. We focus on a handful of domestic industries. But other managers focus on what they know best. On the equity side, market appreciation from here will be driven more by earnings growth than multiple expansion.

WM: Why are stocks more attractive than bonds?

CM: On a relative-yield basis, equities are more attractive compared with historical norms than bonds. For stocks, that includes dividend yields and free-cash-flow yields.

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