Hurdles Loom for Gabelli Asset Management

According to Lipper, Gabelli's equity funds have performed slightly below average, year to date, despite strong three-year and five-year records. On an asset-weighted basis, Gabelli's funds are up 24.5% vs. 25.6% for peers through November.

Mayer points out that Gabelli shareholders should care intensely about the equity fund fees and equity levels, because the firm's assets are about 85% equity.

Morningstar stock analyst Rachel Barnard, in a report on the stock, echoes Mayer's sentiment by saying the company's lack of diversification makes the stock "vulnerable to bear markets." She adds, "Gabelli is subject to the ebb and flow of the stock market. But the market has been kind to Gabelli in recent months, as higher equity prices have boosted assets under management."

Like Merrill's Mayer, Barnard sees Gabelli shares as being fairly valued at their current levels, with few near-term catalysts to push the stock higher.

Gabelli has been counting on growth from its hedge funds, which seek double-digit gains no matter the market conditions. Although hedge funds constitute only 2% to 3% of Gabelli's $21.2 billion assets under management (as of Dec. 31, 2002), they are free to generate large performance-based fees, even while pricing and regulatory pressure impinges on the two main businesses: separate accounts (50% of assets under management) and mutual funds (47% of assets under management).

In Mayer's downgrade of the company's stock, she notes that conflict-of-interest concerns have arisen over money managers' controlling both hedge funds and mutual funds. Since Gabelli has several money managers -- including Mario Gabelli himself -- pulling double duty, Mayer says, "Gabelli might have to either combine funds or add portfolio managers."

Many analysts, however, see this potential regulatory risk as manageable. "I don't think that having hedge funds and mutual funds in the house is a major problem," says Nataly Frankel, a financial services analyst at Sidoti & Co. "It's only 2% in terms of assets. They would find some way to separate it out."

Mixed Performance Gabelli's equity funds have performed slightly below average year to date, despite strong three-year and five-year records
	Asset-Weighted Return of Equity Funds (Through 11/30/03)
Manager	Total Return - YTD	1-year	3-year	5-year
Alliance Capital	28.60%	21.50%	-4.60%	0.40%
BlackRock	26.40	19.1	-6.2	1.2
Eaton Vance	20.10	15.1	-3	4.2
Federated Investors	27.90	21.9	-0.6	3.4
Franklin Resources	26.70	23.2	4.6	7
Gabelli Funds	24.50	19.3	1.2	5.4
Janus Capital	24.40	17.1	-9.4	1.7
Legg Mason	41.60	33.8	8.7	9.2
T. Rowe Price	28.20	21.8	0.9	4.7
Waddell & Reed	20.10	16.1	-6.2	2.9
Average	25.60	19.9	-1.5	3.8
S&P 500 Return	20.30	13	-6.5	-1.8
Nasdaq Return	46.80	32.6	-8.2	0.1
Source: Lipper