The Gabelli Equity Income Fund

The Gabelli Equity Income Fund Shareholder Commentary December 31, 2015 Mario J. Gabelli, CFA Portfolio Manager To Our Shareholders, For the quarter ended December 31, 2015, the net asset value ( NAV ) per Class AAA Share of The Gabelli Equity Income Fund increased 4.2% compared with an increase of 7.0% for the Standard & Poor s ( S&P ) 500 Index. See page 2 for additional performance information. The macro headwinds of a strong dollar and weak energy prices put a lid on earnings growth and equity returns in 2015. Foreign sourced earnings, which are significant for large and small cap stocks alike, took a hit on both export volumes and the translation of foreign earnings back into dollars. The market s top performers were a handful of hugely disruptive mega-cap growth stocks that are known by the acronym FANG for Facebook, Amazon, Netflix and Google (Google has now changed its name to Alphabet). The stylistic influence on returns in 2015 was more exaggerated than usual, which is typical at inflection points. Growth has largely outperformed value for the 2009 to 2015 stretch, just as it did in the 1995 to early 2000 period. We believe the year ahead will prove more rewarding for value investors, should the macro headwinds of 2015 abate. The broad trade weighted dollar rose about 10% in 2015, after a similar rise in 2014. The dollar typically (but not always) declines when global growth accelerates, which is expected in 2016, albeit not by much. Additionally, the 60% fall in the price of crude oil from July of 2014 is finally causing a domestic supply response, which should be supportive of oil prices during the back half of 2016, if not sooner. While the Saudis have been merciless in pumping oil flat out (presumably to gain share from the U.S. and squeeze Iran), they too have large financial commitments to meet in order to maintain civil order. Yes, the best cure for low oil prices is low oil prices. Monthly Distributions $0.10 per share The Gabelli Equity Income Fund has a $0.10 per share monthly distribution policy in place. For more specific dividend and tax information, please visit our website at www.gabelli.com or call 800-GABELLI (800-422-3554). Shareholders should be aware that a portion of the distribution may represent a non-taxable return of capital. Such distributions will reduce the cost basis of your shares if you hold them in a taxable account. The distributions should not be confused with the yield or total return of the Fund.

Comparative Results Average Annual Returns through December 31, 2015 (a)(b) Since Inception Quarter 1 Year 5 Year 10 Year 15 Year (1/2/92) Class AAA (GABEX).................... 4.16% (4.25)% 8.86% 6.91% 6.98 9.86% S&P 500 Index......................... 7.04 1.38 12.57 7.31 5.00 9.03(e) Nasdaq Composite Index................. 8.76 7.13 15.00 9.78 5.86 9.34(e) Lipper Equity Income Fund Average........ 5.28 (2.96) 10.04 6.02 5.20 8.12 Class A (GCAEX)...................... 4.17 (4.23) 8.87 6.91 6.97 9.85 With sales charge (c).................... (1.82) (9.74) 7.58 6.28 6.55 9.58 Class C (GCCEX)...................... 3.97 (4.97) 8.06 6.11 6.35 9.45 With contingent deferred sales charge (d).... 2.97 (5.92) 8.06 6.11 6.35 9.45 Class I (GCIEX)........................ 4.21 (4.02) 9.13 7.13 7.12 9.95 In the current prospectuses dated January 28, 2015, the expense ratios for Class AAA, A, C, and I Shares are 1.37%, 1.37%, 2.12%, and 1.12%, respectively. Class AAA and Class I Shares do not have a sales charge. The maximum sales charge for Class A Shares and Class C Shares is 5.75% and 1.00%, respectively. (a) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price, reinvestment of distributions, and are net of expenses. 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. Current performance may be lower or higher than the performance data presented. Visit www.gabelli.com for performance information as of the most recent month end. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. Performance returns for periods of less than one year are not annualized. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectuses contain information about these and other matters and should be read carefully before investing. To obtain a prospectus, please visit our website at www.gabelli.com. The Class AAA Share NAVs are used to calculate performance for the periods prior to the issuance of Class A Shares and Class C Shares on December 31, 2003 and Class I Shares on January 11, 2008. The actual performance of the Class A Shares and Class C Shares would have been lower due to the additional fees and expenses associated with these classes of shares. The actual performance of the Class I Shares would have been higher due to lower expenses related to this class of shares. The S&P 500 Index is a market capitalization weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market. The Nasdaq Composite Index is an unmanaged indicator of stock market performance. The Lipper Equity Income Fund Average includes the 30 largest equity funds in this category tracked by Lipper, Inc. Dividends are considered reinvested, except for the Nasdaq Composite Index. You cannot invest directly in an index. (b) The Fund s fiscal year ends September 30. (c) Performance results include the effect of the maximum 5.75% sales charge at the beginning of the period. (d) Assuming payment of the 1% maximum contingent deferred sales charge imposed on redemptions made within one year of purchase. (e) S&P 500 Index and Nasdaq Composite Index since inception performance are as of December 31, 1991. We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the Sarbanes-Oxley Act of 2002. We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. Both the commentary and the financial statements, including the portfolio of investments, are available on our website at www.gabelli.com. 2

Barron s 2016 Roundtable Mario J. Gabelli, our Chief Investment Officer, has appeared in the prestigious Barron s Roundtable discussion annually since 1980. Many of our readers enjoyed the inclusion of selected and edited comments from Barron s Roundtable in previous reports to shareholders. As is our custom, we are including selected comments of Mario Gabelli from Barron s 2016 Roundtable Part 1 and Part 2, published on January 16 and January 23, 2016, respectively. 3 Photo: Brad Trent for Barron's

Barron s: Happy New Year, everyone. It has been a great year so far, if you ignore the stock market, the economy, the Middle East, and anyone running for president. Let s start with the outlook for the economy. Mario Gabelli, the master of GAMCO Investors and a shrewd guide to corporate deal-making, rounds out this week s quartet with a look at media companies that could enrich shareholders by buying, selling, or rearranging valuable assets. There is a lot to chew on in his calculations and commentary. Mario, what lies ahead? MARIO GABELLI Gabelli: The consumer accounts for 70% of the U.S. economy, and is doing well. Wages are rising, jobs are increasing, and consumer balance sheets are OK, even after the decline in the stock market in the past three weeks. Automobile sales will flatten this year, the consumer will spend, and housing is improving. Consumer outlays for food and fuel will continue to decline, at least through the fall. Congress has passed an infrastructure bill and a tax bill. We re finally spending more on the military. We will have to deal with the cost of government entitlement programs, and a strong dollar is having a negative impact on exports. But, overall, the U.S. economy could grow by 2% this year. How do things look in other parts of the world? Gabelli: ln Europe, Mario Draghi [president of the European Central Bank] has stimulated the economy, and things will continue to improve. In China, the consumer economy, which accounts for about 40% of the total, could grow by 10% a year in the next five years. The balance of the economy will grow at a 3% to 4% rate, and has challenges. I like what India s Prime Minister, Narendra Modi, is doing. I like what is happening in Japan. But I don t have much optimism for most Latin American economies. Gabelli: We have talked today about the impact of China s weakening economy on the commodities market, and how problems in the industrial sector will hurt Standard & Poor s 500 earnings. I am going to discuss something unrelated: a company I have followed for some time that has grown more exciting [puts on New York Knicks cap]. I am referring to Madison Square Garden [MSG], which owns the greatest sports arena in the world, Madison Square Garden, in New York. The company has 25 million shares outstanding, selling at $154 each, for a market capitalization of $3.8 billion. It has $1.5 billion of net cash, and has committed to buying back $500 million worth of stock. Madison Square Garden owns several sports franchises, including the New York Knicks, New York Rangers, and New York Liberty women s basketball team. As a group, its sports franchises could be worth $1.7 billion. In addition to the Garden, the company owns properties such as the Forum in L.A., and the Chicago Theatre. It leases Radio City Music Hall and the Beacon Theatre in New York. And it is a real estate play. Gabelli: That s right. From Manhattan s West 34th Street south along the High Line, there has been a construction renaissance. There have been many discussions about renovating Penn Station. The air rights over Madison Square Garden, which sits atop Penn Station, could be worth as much as $500 million, and the company is starting to look at ways to monetize that asset. The combination of cash flow, asset values, and stock buybacks allows me to put a value on the stock of $200 to $300 per share. Another way to look at it is, if you buy the stock, you get the Knicks for free. Through its 4.5 million B shares, the Dolan family controls the company. There are a lot of ways to make money here by monetizing the company s assets. Next, Griffon [GFF] is a small cap stock. The company has 48 million shares. The stock sells for $16.60. Griffon is involved in several industries. Through its home and building products division, the company is involved in the U.S. garage door business. It is a $1.8 billion market, and Griffon s Clopay unit has a 25% market share. It competes with Overhead Door and others. It sells mostly through Home Depot. This is a good business, and it is improving. The company has added a few product lines in its home division, including True Temper garden and snow-removal tools. 4

What are Griffon s other businesses? Gabelli: The company is a component supplier for diapers. Procter & Gamble [PG] accounts for half of Griffon s diaper business and is gaining share. Griffon s costs have fallen as resin prices have come down, and these cost savings are passed on to customers. But, on balance, this too is a good business for the company. Griffon also develops and sells equipment for the military through its Telephonics unit. It makes submarine monitoring hardware for helicopters, and is a first tier supplier to Lockheed Martin [LMT]. Military spending will increase in 2016, 17, and 18, given China s more aggressive posture in the South Photo: Jenna Bascom for Barron's China Sea, North Korea s reported test of a hydrogen bomb, and the events in the Middle East. The U.S. has underspent on its military, and we ll have a new president next year, which means spending will rise. Here are the numbers. Griffon generated revenue of about $2 billion for the fiscal year ended Sept. 30. EBITDA, or earnings before interest, taxes, depreciation, and amortization, was about $171 million. In the current fiscal year, revenue could rise to $2.05 billion and EBITDA, to $180 million. Griffon earned 73 cents a share in its latest fiscal year. It could earn 85 cents a share this year and $1 in fiscal 2017. Goldman Sachs owns more than five million shares. Is there any chance Griffon might break itself up or spin off businesses? Gabelli: We would prefer that they don t break things up. We d like management to focus on using the company s cash flow to grow the businesses it is in, and make a few tuck-in acquisitions. To me, Griffon is in the right businesses. Kaman [KAMN], based in Connecticut, ties into two themes: higher military spending, and the struggles of the energy, metals, and mining industries. Kaman has about 30 million fully diluted shares. The stock is trading for $38. Pro forma, with two acquisitions, net debt is $435 million. Kaman acquired Timken Alcor Aerospace Technologies from Timken [TKR] for $45 million. Kaman sells JPFs, or joint programmable fuzes, used to program precision-guided bombs aboard military planes. The U.S. Air Force has placed orders for Kaman s JPFs, as have other nations. One small but important concern is that the U.S. Navy just awarded a fuze contract to another company, which will be phased in starting in 2021. Witmer: Which company is that? Gabelli: It s Orbital ATK [OA]. Kaman also is a subcontractor to Lockheed Martin for cockpits for the Black Hawk helicopter. It has an aerospace structures business. But the crown jewel is a business that manufactures tapered roller bearings for commercial aircraft. As 5

the ramp rate rises on new planes from Boeing [BA] and Airbus Group [AIR-FR], Kaman benefits. This business has been particularly strong. Including recent acquisitions, bearings revenue could reach about $300 million this year and $320 million in 2017. EBITDA could rise from $105 million in 2016 to $120 million in 2017. The JPF business is operating at capacity. Growth can be accommodated by machinery and labor. What is happening on the industrial side of the company? Gabelli: That business faces challenges. Kaman generates about $1.2 billion in annual revenue from its distribution segment, which mainly includes the sale of MRO [maintenance, repair, and overhaul] supplies. About 20% of distribution revenue is tied to EMM energy, mining, and metals. The company acquired a business with operations in Pennsylvania, near the Marcellus Shale. That has become an air pocket: Revenue in the distribution segment declined at an accelerating rate in the fourth quarter, as energy prices fell, and will probably continue deteriorating. Kaman generates a lot of cash. It is reasonably well managed, and the defense side of the company will get more traction in coming years. Charles Chuck Kaman founded the company in the 1940s. As an aside, the first time I visited his office, the guy s dog, Otto, came over and put his head on my lap. I didn t ask any aggressive questions after that. Chuck Kaman was a smart man. Gabelli: I expect Kaman to earn $2.90 a share this year and $3.10 in 2017. Auto-parts stocks were a tale of two cities last year. O Reilly Automotive [ORLY] was up 31%. Pep Boys Manny, Moe & Jack [PBY] was up 87%. Genuine Parts [GPC] was down about 20%. Genuine Parts is trading for $78 and has 150.8 million shares. The company has raised the dividend annually for the past 59 years. It has four operating segments. The automotive business, conducted under the NAPA name, contributed $8 billion out of a total $15 billion in 2015 revenue. We expect revenue of closer to $16 billion this year and $16.5 billion in 2017. Why has the stock underperformed peers? Gabelli: About 25% of automotive revenue comes from Canada, Australia, New Zealand, and Mexico. Revenue was up nicely in local currency last year, but down significantly when translated into dollars. At some point, the currency head wind will flatten out and the negative impact will disappear. Genuine Parts also has an MRO business, which sells repair parts. It competes with Fastenal [FAST] and W.W. Grainger [GWW]. Annual revenue for this business is about $4.5 billion. It has been declining sequentially in the past few months, but the business is OK. I expect Genuine Parts to earn $4.50 a share for 2015, $5 this year, and $5.50 next year. The company pays an annual dividend of $2.46 a share, which it is likely to raise again this year. Shifting gears [everyone groans], people are uncomfortable with the outlook for emerging markets, but I like Kinnevik [KINV B -SK], a Swedish company that has several emerging market subsidiaries. I recommended it last January. If you give $1 billion to a private equity fund, they take fees and 20% of profits, and you have no liquidity. In MARIO GABELLI S PICKS Company Ticker Price 1/8/16 Madison Square Garden MSG $153.84 Griffon GFF $16.60 Kaman KAMN $38.40 Genuine Parts GPC $78.56 Millicom Intl Cellular MIICF $51.90 CBS CBS 46.46 Discovery Communications DISCA $26.01 Source: Bloomberg 6

Kinnevik s case, you can invest in a basket of companies selling at a discount to net asset value; management doesn t take two-and- 20 [2% in fees and 20% of profits], and you can get your money out. What is the stock price? Gabelli: Kinnevik has 277 million A and B class shares. The stock was priced at 238 Swedish kronor [$28] last Friday. Kinnevik has investments in e-commerce operations. The business I am focused on is Millicom International Cellular [MIICF]. Millicom has 60 million wireless customers in Africa and Latin America. In Africa, it is cash breakeven. At some point, Millicom will be able to monetize its African business. The Latin America business operates in Costa Rica, Honduras, Guatemala, El Salvador, Bolivia, Colombia, and Paraguay. The company already has sold off its Asian operations. How will it monetize the Latin American portion? Gabelli: John Malone [chairman of Liberty Media /LMCA] recently merged Columbus International, a telecom provider in the Caribbean and Central and South America, into Cable & Wireless Communications [CWC-LN], in which he has a stake. Last summer Liberty Global [LBTYA], which he controls, created a tracking stock called Liberty LiLAC Group [LILAK] to track its operations in Latin America and the Caribbean. Next, Malone is likely to use Liberty LiLAC to further consolidate operations in that part of the world. Millicom is likely to be sold at the right price. The current CEO of Millicom previously ran the Chilean operations of Liberty LiLAC. What could Millicom be worth in a break-up and sale? Gabelli: Let me put it this way: If I were running Millicom, I would first sell off the African business for a couple of billion dollars. It has about $200 million in annual EBITDA. Then I would consolidate Latin American operations with Malone s. This is going to be a big winner. Here s the math: Millicom has 100 million shares. The U.S. shares are trading for $52. The company could generate $7 billion in revenue this year, and $2.3 billion in EBITDA. Next year revenue could hit $7.4 billion, and EBITDA, $2.4 billion. Annual capex is $1.2 billion, so the business is cash flow positive. Next, CBS [CBS] has 38 million class A shares, of which Sumner Redstone s National Amusements owns 30 million. There are eight million in public hands. Our clients own about four million of the A shares. The A shares are selling around $50, and the B shares at $46. There are 474 million shares in all. CBS has an equity market capitalization of $22 billion, $8 billion of debt, and an enterprise value of $30 billion. The company operates television stations and produces content for TV. CBS had $13.8 billion in revenue last year, going up to $14.6 billion this year. Election-related and Super Bowl 50 advertising will bolster revenue in 2016. EBITDA was $3.1 billion, and could rise to $3.4 billion. The company might be harvesting assets through the spectrum auction later this year. The prior spectrum auction generated proceeds of more than $40 billion, although this auction won t generate close to that, due to buyer exhaustion. What is CBS likely to generate in earnings? Gabelli: The company earned $3.30 a share last year, and could earn $3.90 this year and $4.25 next year. The stock is selling for 11 times next year s estimate. The broadcasting business accounts for almost $9 billion of revenue. On the programming side, I like Ray Donovan better than Downton Abbey, and I like The Walking Dead. Gundlach: That s a lot of TV. Gabelli: In addition to big sources of advertising and the spectrum sale, there is CBS All Access, the company s over-the-top or streaming service. Black: The stock is cheap statistically, but [CBS CEO] Leslie Moonves makes north of $50 million a year and hasn t delivered much top line growth. Gabelli: Come on, hedge-fund managers make a lot of money. This guy [points to Gundlach, sitting to his right] runs $63 billion in fixed income portfolios, and makes a lot. 7

Give us the range of outcomes at CBS. Gabelli: Redstone is 92. When he passes from the scene, will his family hang on to Viacom [VIAB], which he also controls, and sell CBS? A lot of organizations and individuals might like CBS. Lastly, Discovery Communications [DISCA] has 645 million shares outstanding: 223 million A shares have one vote, seven million B shares have 10 votes, and 415 million C shares don t get a vote. Malone is involved with this company, too; he owns about six million of the B shares. Discovery has $7.3 billion of debt, and a $25 stock price. It has a market cap of $16 billion and an enterprise value of $23.7 billion. The company s various cable TV channels generated $6.4 billion of revenue in the latest year, about half outside the U.S. Revenue could climb to $6.8 billion this year and $7.2 billion next year. We forecast EBITDA of $2.6 billion for 2016, and $2.9 billion for 2017. The company earned $1.80 last year. It could earn $2.15 this year and $2.55 next year. Neither CBS nor Discovery has much capex. They are great cash generators. The big issue for Discovery is how to migrate its content to global platforms, including smartphones. The CEO, David Zaslav, is terrific. Discovery won the non-u.s. broadcast rights for the Olympic Games from 2018 through 2024. That s it. In that case, thank you. Mario J. Gabelli, CFA, is Chairman, Chief Executive Officer, and Chief Investment Officer Value Portfolios of GAMCO Investors, Inc. that he founded in 1977, and Chief Investment Officer Value Portfolios of Gabelli Funds, LLC and GAMCO Asset Management Inc. He is also Chief Executive Officer and Chairman of the Board of Directors of Associated Capital Group, Inc. The securities mentioned in the article are not representative of any portfolio, and the views expressed are subject to change at any time. As of December 31, 2015, The Gabelli Equity Income Fund (the Fund ) held, as a percentage of its net assets, the following companies mentioned in this article: 2.0% of Genuine Parts Co., 1.0% of CBS Corp., less than 1.0% of The Boeing Co., Cable & Wireless Communications plc, Griffon Corp., Kinnevik, Lockheed Martin, Madison Square Garden, Millicom International Cellular SA, O Reilly Automotive Inc., Pep Boys Manny, Moe & Jack, Procter & Gamble and Viacom Inc., and no shares of Airbus Group, Discovery Communications Inc., Fastenal, Kaman Corp., Liberty Global Class A, Liberty Global Class C, Liberty Media Corp., Liberty LiLAC Group Class A, Liberty LiLAC Group Class C, Orbital ATK, The Timken Co., and WW Grainger. The views expressed in this article reflect those of the Chief Investment Officer only through the date of the interview. Minor edits were made. The Chief Investment Officer s views are subject to change at any time based on market and other conditions. Favorable earnings or EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) growth prospects do not necessarily translate into higher stock prices, but they do express a positive trend which we believe will develop over time. The information contained in this article is not an offer to sell or a solicitation to buy any security. No security or other product is offered or will be sold in any jurisdiction in which such offer or solicitation, purchase or sale would be unlawful under the securities, or other laws of the jurisdiction. Stocks are subject to market, economic and business risks that cause their prices to fluctuate. Consequently, you can lose money by investing in the Fund. Investors should carefully consider the investment objectives, risks, sales charges and expenses of the Fund before investing. The prospectuses contain information about these and other matters and should be read carefully before investing. To obtain a prospectus, please call 800 GABELLI or visit www.gabelli.com For more information, visit our website: www.gabelli.com or call: 800-GABELLI 800-422-3554 914-921-5100 Fax: 914-921-5118 info@gabelli.com Distributed by G.distributors, LLC., a registered broker-dealer and member of FINRA One Corporate Center, Rye, New York 10580 8

Our record shows periods of underperformance have always been followed by periods of outperformance. Because we don t worship a particular index, it is not unusual for us to have returns quite divergent from the market. Being value investors, our portfolios tend to do best during cyclical upswings when earnings and interest rates are rising, which we anticipate for 2016. Growth typically excels when earnings growth is decelerating or is non-existent, as happened in 2015. As many of you remember all too well, our approach to value investing has generated significant alpha during bear markets, which have been in hibernation since 2008. We are not forecasting a bear market for next year, but bear markets are not always well telegraphed, and at some point that challenge will present itself, hopefully later rather than sooner. The point is, we know that value and growth investing follow a cyclical course. We believe an inflection point in stylistic performance is near, and believe our portfolio is well positioned to benefit. The Year in Review The World Economy In many ways the issues confronted by investors in 2015 had a familiar ring. There was turmoil in Greece, complete with tear gas, riot police and smashed windows. There was ISIS and its followers committing various acts of terror throughout the Middle East and elsewhere. The price of oil and most commodities plunged, hurting emerging market producers and the domestic energy industry, and reminding investors of the 2008 rout. Russia expanded its military presence, this time to the Middle East. China s naval presence grew while its economic growth continued to slow, hurting industrial profits and prompting a devaluation of the yuan to bolster exports. The success of Abenomics in Japan is still a question mark, as the challenge of overcoming a shrinking population appears so difficult that Prime Minister Abe appointed a Minister of Demographics this October. At nearly the same moment, China vanquished its one child policy in favor of two, as its labor supply is now on the decline. Demographics matter. It could be argued that monetary and fiscal policies have taken a back seat to procreation policy, as the only age groups that are expanding in the developed world are those over the age of fifty. Europe has its own set of challenges unique to its eurozone currency block (19 countries), namely diverse cultures between the north and south and geographic proximity to a violent Middle East, from which whole cities of people are fleeing. For better or worse, the great migration to Europe from Syria, Iraq and elsewhere is well underway. Led by a former physicist from East Germany, Angela Merkel, Germany has taken the lead role in welcoming nearly 800 thousand refugees this year. This is a humanitarian disaster of epic proportions. There is a real concern that terrorists will gain access to Europe among the refugees, as was apparently the case with at least one of the Parisian attackers. If viewed as a single market, the European Union (28 countries) is the largest economy in the world, so it is important. Europe s recovery has lagged that of the U.S. coming out of the Great Recession. Critics point to the European Central Bank (ECB), as it did not act as quickly and forcefully as the Fed, with its aggressive quantitative easing (QE) policy under Bernanke and subsequently, Yellen. The ECB chose to grow its balance sheet by loaning money to European banks, who in turn bought sovereign debt, so it had not technically engaged in QE, in which it would have bought securities outright for its own account. 9

The head of the ECB, Mario Draghi, had hinted strongly at QE since July of 2012, when he made his now infamous statement to do whatever it takes to save the euro. But there was endless bickering among various countries over whether the ECB actually had the power to engage in QE. Finally, in January of 2015, Draghi announced his plan. The ECB would commit to buying at least $1.3 trillion (at then prevailing exchange rates) of securities over the 18 months beginning in March. Global stock markets rallied and the euro fell to an 11 year low. The plan directed the 19 national banks in the eurozone to buy at least 80% of the securities and assume the underlying risk. The program was slated to end in September of 2016, but Draghi announced in December that he would extend it and increase the targeted level of buying if conditions warranted. So far, QE arguably appears to have provided a modest bump to eurozone GDP growth (1.5% up from 0.9%) but has been less successful in lifting inflation (at about 0.1%), and it was fear of deflation that gave rise to the QE program. Because monetary policy works with a lag, inflation expectations for 2016 have risen to 1.1% and deflation is less of a concern outside of the world of commodities. So Europe is growing, albeit slowly and not more than expected. The same is true of Japan. China is growing but true growth is meaningfully below 7%. The private consumption side of China is still doing reasonably well but anything impacted by the slowdown in fixed asset investment is not. Domestically, our economy is in reasonable shape due to the relative health of consumer spending, which comprises nearly 70% of GDP. We have added about 210 thousand jobs per month this year, on average, down from 2014 but still solid. Weekly unemployment claims have been near a 41 year low hit a few months ago. The Misery Index, which combines the unemployment rate and the inflation rate, is at a 30 year low. Auto sales may establish a new record in 2015. Homebuilder sentiment is at a 10 year high. Consumer real income expectations are rising for the first time in 20 years according to the University of Michigan. Capital spending and government spending will increase in 2016. Importantly, the dollar is unlikely to continue to rise over the course of 2016, just as the price of oil is unlikely to continue to fall. We may grow at 3.0% in 2016, although the consensus is closer to 2.5%. Sentiment is a bit sour now but that may change quickly if the headwinds of 2015 convert to tailwinds (falling dollar, rising oil prices and rising earnings) in 2016. The Markets The ECB s bigger than expected QE program provided a generally bullish backdrop for stock markets in the first half of the year. The ECB joined the Bank of Japan which has been a member of the QE club under the Abenomics stimulus program for some time and continues in that capacity today. The Fed, however, halted expanding its balance sheet in October of 2014, but continues to reinvest interest and maturing principal payments so the Fed s balance sheet run-off has yet to begin. While the People s Bank of China was not doing QE, it was encouraging stock market investment with other forms of monetary accommodation. With fixed asset investment in China slowing, the People s Bank wanted to boost private sector consumption by way of the wealth effect, courtesy of rising stock prices. Sound familiar? By June, the Chinese stock market had more than doubled over twelve months. Margin debt had ballooned, valuations were in bubble territory and volatility was increasing. Stocks peaked on June 12 and the market lost 40% of its value by the end of August. In an attempt to boost exports and stem the stock market decline, China devalued the yuan on August 10. With QE in Europe and Japan driving down the value of the euro and yen, China was disadvantaged, along with the U.S. The move was viewed as an admission that China s growth was much 10

worse than the 7% GDP growth being reported and it triggered a global stock market correction, the first in several years. The S&P 500 fell 12%. Commodity prices, already weakened by falling fixed asset investment in China, fell further. Oil prices, which had already fallen $30 per barrel to $60 since July of 2014, dropped to $40, hit by China s slowdown, the price war being waged by Saudi Arabia, and a rising dollar. The Commodity Supercycle was in full reverse. Growth fears escalated. The August payroll report disappointed. The Fed, widely expected to raise rates in September, got spooked and backed off. The market worried about what the Fed feared or knew. Corporations, always sensitive to headline risk, reined in spending plans, knowing their foreign profits were well below plan. In Houston and in the Bakken, the collapse in oil prices changed the narrative. Most exploration and production oil companies were cash flow negative with $90 oil. With oil at $40, the calculus changed and investors began to seriously question the safety of oil companies interest and dividend payments. The valuation argument for stocks is largely conditioned upon rising earnings and a continuation of historically ultra-low interest rates. In other words, stocks are cheap in a very low interest rate environment that maximizes the present value of future earnings and offers no compelling fixed income alternative. The market is selling at about 16 times next year s earnings, which is pretty average, but interest rates near 2% on 10-year U.S. Treasuries are well below average (average is north of 6%). We also note that both individual investors and pension funds have equity allocations hovering at or below 40%. Historically, equity allocations tend to exceed 50% at market peaks (not always) during periods when interest rates have been much higher. With the stock market having now trounced the collective hedge fund returns over the last 6 years, there is bound to be an increase in the allocation to long only equity managers. Make no mistake, capital chases returns. Some investors have sworn off stocks due to what can seem like extreme levels of volatility. Unfortunately, regulators appear to have no stomach for taking on High Frequency Trading (HFT), which accounts for the majority of trades on any given day and drives volatility. Earnings ultimately drive share prices. The tepid earnings growth of 2015 translated into a very narrow stock market advance with the majority of stocks (in the Russell 3000 Index) actually declining. Foreign profits of U.S. multinationals were for the most part savaged by the strong dollar. Profits derived in part or in whole from the energy patch were decimated. Consumer driven earnings were okay except for brick and mortar retailers doing battle with Amazon.com or suffering from unseasonably warm weather. The key to the stock market s direction has been, and will likely continue to be, telegraphed by movements in the dollar, commodity prices and the global purchasing manager s index (PMI). Rising global growth, confirmed by a rising global PMI, higher commodity prices and a falling dollar, would provide a bullish set of conditions for the stock market in 2016. Dividends The year 2015 was yet another record setting year for dividends. If one looks at the S&P 500, dividend increases were up 13.08% for 2015, versus 17.50% in 2014. The slowdown in dividend increases is likely to continue. As Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices noted, This trend is likely to continue given the earnings, cash flow, low inflation and slow economic recovery. Based on current dividend policies, with an eye on issues that may be straining themselves, as well as those with higher dividend coverage rates and a strong history of annual increases, 2016 would appear to extend the record payment years, but with mid-single digit dividend increases. 11

Investment Scorecard Some of the stock in (y)our portfolio performed very well during the fourth quarter. One of the top holdings in the portfolio, American International Group (1.5% of net assets as of December 31, 2015), was up about 10% as the company continued to simplify its business organization, improve efficiency and rationalize businesses. Another large holding that performed exceptionally well during the quarter was General Electric (1.2%), up about 25%. General Electric is also simplifying its business structure, by exiting the financial area and focusing on its industrial businesses. Another large holding that performed exceptionally well during the quarter was Home Depot (HD) (2.7%), which was up about 15%. Home Depot is the largest home improvement center company in the United States and as the housing recovery continues in full swing across the country, Home Depot was able to benefit. Of course, not all the stocks in the portfolio performed well during the quarter and some stocks were down by double digits. The energy and material sectors were hit particularly hard during the quarter as commodity prices struggled in the wake of China s slowing growth and the decline in oil prices. National Fuel Gas (0.6%) has a meaningful natural gas business and its stock was down during the quarter. One of the larger holdings in the portfolio, American Express (1.2%), was down about 6% in the quarter as financial results were hurt by both the pending end of a co-branding relationship with Costco (1.3%) and a strong U.S. dollar. Another stock that performed poorly during the quarter was Macy s (0.8%), the large retailer, which was hurt by more holiday shoppers moving their purchases online. 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 that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the share prices are listed first in United States dollars (USD) and second in the local currency, where applicable, and are presented as of December 31, 2015. American International Group Inc. (1.5% of net assets as of December 31, 2015) (AIG $61.97 NYSE) is a multi-line insurance company, offering property and casualty and life insurance, and serving customers in more than 130 countries and jurisdictions. AIG s annuity and private mortgage insurance businesses have good growth prospects. The company is well positioned as it has excess capital, sophisticated products, and broad global distribution. In addition, the company is committed to returning capital to shareholders with dividends and share buybacks. We believe it can increase these capital returns to shareholders, given greater stability of the business lines. Bank of New York Mellon Corp. (2.2%) (BK $41.22 NYSE) is a global leader in providing financial services to institutions and individuals. The company operates in more than one hundred markets worldwide and strives to be the global provider of choice for investment management and investment services. As of September 30, 2015, the firm had $27.4 trillion in assets under custody and $1.5 trillion in assets under management. Going forward, we expect BK to benefit from rising global incomes and the cross border movement of financial transactions. BK is also well positioned to grow earnings in a rising interest rate environment, given its large customer cash deposits and significant loan book. 12

Corning Inc. (0.6%) (GLW $18.28 NYSE) is a leader in the manufacture of specialty glass and ceramic. The company manufactures glass substrates for liquid crystal displays (LCD), optical fiber, and cable, hardware and equipment products for the telecommunication industry, ceramic substrates and filter products for emission control, specialty materials, and scientific laboratory products. Corning offers a diverse business portfolio, strong financial discipline, technology and cost leadership, and new product innovation. We expect Corning to benefit from high definition 4K televison and diversified growth opportunity in its optical communication, life science, environmental science, and tough resistance Gorilla Glass. CVS Health Corp. (2.4%) (CVS $97.77 NYSE) is the leading pharmacy and pharmacy benefits manager in the country, with over $150 billion in annual revenue. The company s recent acquisitions of institutional pharmacy Omnicare and the pharmacies inside Target stores should add $0.15 to earnings in 2016 and further CVS s dominance across the pharmacy channel. Same store sales should improve in 2016 now that the company has annualized its decision to stop selling tobacco, and that decision has helped them win over $11 billion in net new business for its pharmacy benefits management (PBM) division. Genuine Parts Co. (2.0%) (GPC $85.89 NYSE) is an Atlanta, Georgia based distributor of automotive and industrial replacement parts, office products, and electrical and electronic components. We expect GPC s well known NAPA Auto Parts group to benefit as an aged vehicle population, which includes the highest percentage of off warranty vehicles in history, helps drive sales of automotive aftermarket products over the next several years. Additionally, economic indicators remain supportive of the company s industrial and electrical parts distribution businesses amid steady economic expansion. Finally, GPC s management has shown consistent dedication to shareholder value via share repurchases and dividend increases. Home Depot Inc. (2.7%) (HD $132.25 NYSE), based in Atlanta, Georgia, is the world s largest home improvement retailer, with fiscal 2014 revenue of $83.2 billion and EBITDA of $12.1 billion. Home Depot has 2,270 retail stores, which sell a range of building materials, home improvement products, and lawn and garden products, to do-it-yourself, do-it-for-me, and professional customers. We expect the continued improvement in the housing market to provide uplift to Home Depot s business, encouraging consumers to invest in their homes. Notably, the company generates significant cash flow, has a strong balance sheet, and should continue to benefit as the housing recovery improves. To make use of its available cash flow, we expect Home Depot to continue to repurchase stock. Honeywell International Inc. (1.1%) (HON $103.57 NYSE) operates as a diversified technology company with highly engineered products, including turbine propulsion engines, auxiliary power units, turbochargers, brake pads, environmental and combustion controls, sensors, security and life safety products, resins and chemicals, nuclear services, and process technology for the petrochemical and refining industries. One of the key drivers of HON s growth are acquisitions that increase the company s growth profile globally, creating both organic and inorganic opportunities. The company recently acquired Elster Industries, a leading provider of thermal gas solutions, smart meters, software and data analytics for the commercial, industrial and residential heating market. Elster s gas business offers products in high demand among natural gas customers and brings a strong, global distribution network and numerous cross-selling opportunities for existing HON technologies to new customers. Elster s gas, electric and water meters are highly valued for their reliability, safety and accuracy. The company maintains an installed base of more than 200 million meter modules deployed over the course of the last 10 years that generate significant recurring revenues. We believe acquisitions such as Elster 13

should drive meaningful and sustained growth for HON spurred by global energy efficiency initiatives and natural resource management. International Flavors & Fragrances (1.3%) (IFF $119.64 NYSE), based in New York, is a leading global supplier of flavor and fragrances and ingredients used in food, beverage, and personal and household care products. It is the third largest manufacturer in the estimated $18 billion global industry, generating revenue and EBITDA of approximately $3 billion and $705 million, respectively. IFF should continue to benefit from the growth of packaged food and personal/household care products in emerging markets, which represent 50% of its revenue, as well as from new product innovation in developed markets. Over the next five years, we expect IFF to generate high single-digit earnings growth (assumes share repurchases). Acquisitions may further enhance this growth rate as the company looks to supplement its technology, geographic reach and/or expand into relevant adjacencies. IFF recently completed the acquisitions of Ottens Flavors, expanding its flavors business in the U.S., and Lucas Meyer Cosmetics, entering the active and functional cosmetic ingredients market. JPMorgan Chase & Co. (0.8%) (JPM $66.03 NYSE) is one of the oldest financial institutions in the U.S. The firm, with assets of over $2.4 trillion, provides services to millions of consumers, small businesses, and many of the world s largest corporate, institutional, and government clients. The bank is divided into several reporting segments, including investment banking, commercial banking, financial transaction processing, asset management, and private equity. CEO Jamie Dimon is well regarded among corporate leaders, and he has positioned the company for future growth, despite the recent challenges related to the financial crisis, increased regulations, and low interest rates. Legg Mason Inc. (0.9%) (LM $39.23 NYSE) is a consortium of investment managers, known as affiliates, which operate under separate brand names, including Royce & Associates in small cap equities, Western Asset Management in fixed income, and Permal in alternative strategies. As of November 2015, the firm had approximately $690 billion of assets under management. The company has generated strong investment performance while improving operating fundamentals. Using free cash flow, the company continues to actively retire shares through repurchases. Rolls-Royce Holding plc (0.6%) (RR $8.48/ 5.75 London Stock Exchange) provides jet engines, power and propulsion systems, and services to commercial aviation, defense, marine, oil, and gas, and other industries. RR has leading engine positions as the sole supplier on the Airbus A350 and reengineered A330 (i.e. A330neo), and one of two suppliers on the Boeing 787 Dreamliner, two new wide body programs with healthy backlogs, to be delivered over the next decade. Engine deliveries lead to recurring, higher margin parts and service revenues, which benefit the company more than twenty years after new engines are delivered. RR s stock continues to struggle given a recent view on 2016 earnings that calls for further medium-term headwinds, including reduced aftermarket revenue on parked legacy Boeing 777 aircraft, and weak demand in business jet, regional jet, and marine markets. Given current demand trends, the company is taking aggressive cost that includes relocating production, modernizing factories, eliminating manufacturing redundancy, and trimming layers of management. Just as important is the reinvigoration of firm culture and decision-making under new CEO Warren East, with a focus on improving information systems to drive timely and adaptive decision-making. While a meaningful inflection in earnings and cash flow will not occur before the end of the decade, Rolls has a valuable franchise as one of two commercial wide body engine providers, and a new management capable of turning the organization around in the medium term. 14

In Conclusion There is an old Wall Street maxim that says it is always darkest before dawn. While most investors would characterize 2015 as a year of treading water in stocks (although it felt worse), 2016 is actually promising and an upside surprise should not be ruled out. We say this as the biggest headwind to earnings growth the last two years, the strong dollar, should stabilize if not decline. Additionally, monetary policy operates with a lag, as do lower energy prices. So consumers, many with new jobs and rising wage rates not to mention repaired balance sheets are in a position to spend. Expect the Fed to raise interest rates once, maybe twice in 2016. That means historically low interest rates are here to stay and that is the gift that keeps on giving to equity investors. As always, we thank you for your continued confidence in us, and we wish you and your family good health, good returns and a happy New Year! January 6, 2016 Top Ten Holdings (Percent of Net Assets) December 31, 2015 The Home Depot Co. 2.7% CVS Health Corp. 2.4% Wells Fargo & Co. 2.3% The Bank of New York Mellon Corp. 2.2% Bristol-Myers Squibb Co. 2.1% Mondelēz International Inc. 2.0% Genuine Parts Co. 2.0% Swedish Match AB 2.0% Eli Lilly & Co. 1.8% Pfizer Inc. 1.5% Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Manager only through the end of the period stated in this Shareholder Commentary. The Portfolio Manager s views are subject to change at any time based on market and other conditions. The information in this Portfolio Manager s Shareholder Commentary represents the opinions of the individual Portfolio Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Manager and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed. Minimum Initial Investment $1,000 The Fund s minimum initial investment for regular accounts is $1,000. There are no subsequent investment minimums. No initial minimum is required for those establishing an Automatic Investment Plan. Additionally, the Fund and other Gabelli/GAMCO Funds are available through the no-transaction fee programs at many major brokerage firms. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. See the prospectuses for more details. 15

www.gabelli.com Please visit us on the Internet. Our homepage at www.gabelli.com contains information about GAMCO Investors, Inc., the Gabelli/GAMCO Mutual Funds, IRAs, 401(k)s, current and historical quarterly reports, closing prices, and other current news. We welcome your comments and questions via e-mail at info@gabelli.com. The Fund s daily NAVs are available in the financial press and each evening after 7:00 PM (Eastern Time) by calling 800-GABELLI (800-422-3554). Please call us during the business day, between 8:00 AM 7:00 PM (Eastern Time), for further information. You may sign up for our e-mail alerts at www.gabelli.com and receive early notice of quarterly report availability, news events, media sightings, and mutual fund prices and performance. e-delivery We are pleased to offer electronic delivery of Gabelli fund documents. Direct shareholders of our mutual funds can elect to receive their Annual and Semiannual Reports, Manager Commentaries, and Prospectus via e-delivery. For more information or to sign up for e-delivery, please visit our website at www.gabelli.com. Multi-Class Shares The Gabelli Equity Income Fund began offering additional classes of Fund shares on December 31, 2003. Class AAA Shares are no-load shares offered directly through selected broker/dealers. Class A and Class C Shares are targeted to the needs of investors who seek advice through financial consultants. Class I Shares are available directly through the Fund s distributor or brokers that have entered into selling agreements specifically with respect to Class I Shares. The Board of Directors determined that expanding the types of Fund shares available through various distribution options will enhance the ability of the Fund to attract additional investors. 16

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Gabelli/GAMCO Funds and Your Personal Privacy Who are we? The Gabelli/GAMCO Funds are investment companies registered with the Securities and Exchange Commission under the Investment Company Act of 1940. We are managed by Gabelli Funds, LLC and GAMCO Asset Management Inc., which are affiliated with GAMCO Investors, Inc. GAMCO Investors, Inc. is a publicly held company that has subsidiaries that provide investment advisory services for a variety of clients. What kind of non-public information do we collect about you if you become a fund shareholder? If you apply to open an account directly with us, you will be giving us some non-public information about yourself. The non-public information we collect about you is: Information you give us on your application form. This could include your name, address, telephone number, social security number, bank account number, and other information. Information about your transactions with us, any transactions with our affiliates, and transactions with the entities we hire to provide services to you. This would include information about the shares that you buy or redeem. If we hire someone else to provide services like a transfer agent we will also have information about the transactions that you conduct through them. What information do we disclose and to whom do we disclose it? We do not disclose any non-public personal information about our customers or former customers to anyone other than our affiliates, our service providers who need to know such information, and as otherwise permitted by law. If you want to find out what the law permits, you can read the privacy rules adopted by the Securities and Exchange Commission. They are in volume 17 of the Code of Federal Regulations, Part 248. The Commission often posts information about its regulations on its website, www.sec.gov. What do we do to protect your personal information? We restrict access to non-public personal information about you to the people who need to know that information in order to provide services to you or the fund and to ensure that we are complying with the laws governing the securities business. We maintain physical, electronic, and procedural safeguards to keep your personal information confidential. 18

Portfolio Manager Biography Mario J. Gabelli, CFA, is Chairman, Chief Executive Officer, and Chief Investment Officer Value Portfolios of GAMCO Investors, Inc. that he founded in 1977, and Chief Investment Officer Value Portfolios of Gabelli Funds, LLC and GAMCO Asset Management Inc. He is also Chief Executive Officer and Chairman of the Board of Directors of Associated Capital Group, Inc. Mr. Gabelli is a summa cum laude graduate of Fordham University and holds an MBA degree from Columbia Business School, and Honorary Doctorates from Fordham University and Roger Williams University. 19

Gabelli Equity Series Funds, Inc. THE GABELLI EQUITY INCOME FUND One Corporate Center Rye, NY 10580-1422 t 800-GABELLI (800-422-3554) f 914-921-5118 e info@gabelli.com GABELLI.COM Net Asset Value per share available daily by calling 800-GABELLI after 7:00 P.M. BOARD OF DIRECTORS Mario J. Gabelli, CFA Chairman and Chief Executive Officer, GAMCO Investors, Inc. Chairman and Chief Executive Officer, Associated Capital Group Inc. Anthony J. Colavita President, Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer, KeySpan Corp. John D. Gabelli Senior Vice President, G.research, Inc. Robert J. Morrissey Partner, Morrissey, Hawkins & Lynch Kuni Nakamura President, Advanced Polymer, Inc. Anthony R. Pustorino Certified Public Accountant, Professor Emeritus, Pace University Anthonie C. van Ekris Chairman, BALMAC International, Inc. Salvatore J. Zizza Chairman, Zizza & Associates Corp. OFFICERS Bruce N. Alpert President Andrea R. Mango Secretary Agnes Mullady Treasurer Richard J. Walz Chief Compliance Officer DISTRIBUTOR G.distributors, LLC CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP T H E G A B E L L I E Q U I T Y I N CO M E F U N D Shareholder Commentary December 31, 2015 This report is submitted for the general information of the shareholders of The Gabelli Equity Income Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB444Q415SC