The Gabelli Dividend Growth Fund Shareholder Commentary September 30, 2015 Barbara G. Marcin, CFA Portfolio Manager To Our Shareholders, For the quarter ended September 30, 2015, the net asset value ( NAV ) per Class AAA Share of The Gabelli Dividend Growth Fund decreased 11.7% compared with the decrease of 6.4% for the Standard & Poor s ( S&P ) 500 Index. See page 2 for additional performance information. Performance Nine of the ten industry sectors of the S&P 500 declined, with Utilities as the exception. Fears of global slowdown pressured stocks as growth in China, Europe, and Japan deteriorated. The two worst performing sectors were the most economically sensitive, Energy and Materials. The top two contributors to performance in the Fund in the third quarter were our positions in Google (2.8% of net assets as of September 30, 2015) and Best Buy (3.9%). Google announced a corporate restructuring to separate out its core and highly profitable businesses, which include search, advertising and YouTube, from the speculative and developing businesses, such as self-driving cars, Nest, life sciences, and private investments in companies such as Uber. As investors, we appreciate the increased transparency this will provide. Best Buy shows strong momentum in sales and margins heading into the fourth quarter, driven by new products such as larger screen and high definition televisions and gaming, boosted by share gains from the bankruptcy of competitor Radio Shack. The other top five contributors to performance included Mondelez (1.8%), Eli Lilly (1.2%), and the CME Group (3.9%). The contribution of a position to performance is a function of the position s size and its gains in the quarter. In the large cap value we invest in a bottom up, research driven method. We have a disciplined and well-defined investment process that we have repeated for many years. Our underperformance over the past year is due largely to starting an overweight of the two worst performing sectors, energy and materials.
Comparative Results Average Annual Returns through September 30, 2015 (a) Since Inception Quarter 1 Year 5 Year 10 Year 15 Year (8/26/99) Class AAA (GABBX).................. (11.69)% (10.65)% 8.63% 4.92% 3.30 4.95% S&P 500 Index....................... (6.44) (0.61) 13.34 6.80 3.96 4.11 Lipper Large Cap Value Fund Average.... (8.91) (5.34) 11.03 5.32 4.19 4.09 Class A (GBCAX).................... (11.72) (10.69) 8.61 4.92 3.32 4.97 With sales charge (b).................. (16.79) (15.82) 7.33 4.30 2.91 4.58 Class C (GBCCX).................... (11.88) (11.32) 7.80 4.13 2.70 4.39 With contingent deferred sales charge (c).. (12.76) (12.20) 7.80 4.13 2.70 4.39 Class I (GBCIX)...................... (11.63) (10.44) 8.90 5.18 3.50 5.14 In the current prospectuses dated April 30, 2015, the expense ratios for Class AAA, A, C, and I Shares are 1.89%, 1.89%, 2.64%, and 1.64%, 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. Returns would have been lower had Gabelli Funds, LLC (the "Adviser") not reimbursed certain expenses of the Fund. 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 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 Lipper Large Cap Value Fund Average reflects the average performance of mutual funds classified in this particular category. Dividends are considered reinvested. You cannot invest directly in an index. 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 the Class I Shares on June 30, 2004.The actual performance of the Class A and Class C Shares would have been lower due to the additional fees and expenses associated with these classes of shares. The actual performance for the Class I Shares would have been higher due to the lower expenses related to this class of shares. (b) Performance results include the effect of the maximum 5.75% sales charge at the beginning of the period. (c) Assuming payment of the 1% maximum contingent deferred sales charge imposed on redemptions made within one year of purchase. 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
Some of our larger position stocks that contributed to the underperformance were holdings in the two worst performing sectors, Energy and Materials. These holdings include ConocoPhillips (0.9%), Chevron (0.6%), Weatherford International (1.5%), Freeport McMoran (1.7%), and International Paper (2.3%). The decline in these stocks has been severe, and we realize that it will take longer for energy companies to reduce their output and for the supply and demand to reach equilibrium. We believe there is good longer term value in these energy holdings, although the time frame to realize this value has been extended. We are working to determine when this sector might bottom out, and hope to re-capture lost performance on the upside. The Economy and Markets The September employment report came in significantly weaker than expected, with 142,000 jobs added versus the expected 200,000, and it contained disappointing revisions to prior months data. Also disappointing was the fact that there was no growth in the monthly earnings figure, resulting in mediocre year over year gains of 2.2 percent. On a positive note, we have had sixty months in a row of job gains. The economy has been resilient, albeit at a low level, supported by the firm auto industry and good household formation fueling housing demand, both of which are so important to the health of the economy. We can t seem to shift a gear up to a stronger economy, with this expansion now five years old; this has been the slowest recovery we have experienced after a recession. 2015 continues that trend, with GDP growth this year on track to post a gain of less than 2½ percent year over year. This weak job news, reported on a Friday, was greeted by the stock market with some disappointment at first; the Dow dropped 250 points and then, confounding all, reversed to end up 200 points, a swing of 450 points! Investors apparently concluded that bad news is good news here, meaning that with this weak report, the Fed would be even less likely to raise rates any time soon. In fact, this report revived talk of the possibility of more of the quantitative easing that the Federal Reserve has used to help support the markets and economy for the past few years. From the end of 2011 to the end of 2014, the economy expanded at a 2.1 percent annualized rate, compared to the 2.4 percent pace reported before. GDP grew 1.5 percent in 2013, the weakest since the depths of the recession in 2009. Since 2010, median incomes have risen for only the wealthiest 10 percent of households, according to a Federal Reserve survey. The sluggishness in incomes explains why many Americans remain downbeat about the economy, although some confidence has come from improvement in housing values and record stock prices. The unemployment rate has declined to 5.1 percent, which indicates there should be some upward pressure on wages going forward. 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 September 30, 2015. 3
American Express Co. (2.2% of net assets as of September 30, 2015) (AXP $74.13 NYSE) is the largest closed loop credit card company in the world. The company operates its eponymous premiere branded payment network and lends to its largely affluent customer base. American Express has 114 million cards in force and over $68 billion in loans, while its customers charged nearly $1.0 trillion of spending on their cards in 2014. The company s strong consumer brand has allowed American Express to enter the deposit gathering market as an alternate source of funding, while the company s affluent customers have picked up spending. Longer term, American Express should capitalize on its higher spending customer base and continue to expand into other payment related businesses, such as corporate purchasing, while also growing in emerging markets. Similarly, the company is looking at the growing success of social media as an opportunity to expand its product base and payment options. American International Group Inc. (4.2%) (AIG $56.82 NYSE) is a multi-line insurance company, offering property and casualty and life insurance, 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. Apple Inc. (1.7%) (AAPL $110.30 Nasdaq) designs Macs, arguably the best personal computers in the world, and has a dominant position in smart phones and tablets where its products represent the gold standard in both categories. Apple leads the digital music revolution with its ipods and itunes online store. Google Inc. (2.8%) (GOOG $608.42 NASDAQ) is widely recognized as the world s leading Internet search engine. Google s stated mission is to organize the world s information and make it universally accessible and useful. Google generates revenue by providing advertisers with the opportunity to deliver measurable, cost effective online advertising that is relevant to the information displayed on any given webpage. This makes the advertising useful to consumers as well as to the advertiser placing it. We believe this highly innovative and fast growing company is uniquely positioned to create new market opportunities while maintaining its lead in online search. Beginning October, 2015, Google will be known as Alphabet as part of a corporate restructuring. Honeywell International Inc. (3.3%) (HON $94.69 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 is that the company is constantly developing new products and services for the marketplace. One new product the company has developed is Solstice, a fluorocarbon with zero depleting ozone qualities and negligible global warming contribution. The product will be used in various aerosol applications and in the air conditioning systems of vehicles. Driven by consumer demand and European Union regulation, demand for Solstice is expected to increase significantly. A new service that the company is providing is connectivity in airplanes, as well as residential, commercial, and industrial buildings. In airplanes, HON has products across the entire connectivity chain, from hardware to apps and data services, which can provide high speed Internet service. In buildings, the company has a large installed base of devices, including security and fire systems, room controls, and smoke detectors that can be connected with smart devices to increase productivity, efficiency, and safety. These products and services should continue to drive HON s future earnings higher. 4
Legg Mason Inc. (1.0%) (LM $41.61 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 August 2015, the firm had approximately $680 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. Mondelēz International Inc. (1.8%) (MDLZ $41.87 NASDAQ), headquartered in Deerfield, Illinois, is the renamed Kraft Foods Inc. following the 2012 tax-free spin-off to shareholders of the North American grocery business. Following the contribution of coffee into a new joint venture, nearly 85% of Mondelēz s $28 billion of revenue is derived from snacks, which include leading brands such as Oreo, LU, and Ritz biscuits, Trident gum, and Cadbury and Milka chocolates. On July 2, 2015, Mondelēz contributed its coffee business with DE Master Blenders 1753 to form a new coffee company, Jacobs Douwe Egberts, in return for 3.8 billion of proceeds and a 44% stake. This narrows the company s product focus, as only 15% of revenue will be outside snacks, mostly Tang beverages and products such as Philadelphia cream cheese, which management may look to divest in the future as it executes on its plan to accelerate growth and improve margins in the faster growing snack business. Twenty-First Century Fox Inc. (2.3%) (FOXA $26.98 NASDAQ) is a diversified media company with operations in cable network television, television broadcasting, filmed entertainment, and direct broadcast satellite television. Cable networks account for 70% of the company s EBITDA, and benefit from contractually recurring affiliate fees and exposure to the fast growing global pay television market. We also expect the company to benefit from rising demand for premium content, driven by emerging distribution platforms such as Netflix, retransmission revenue, and aggressive share repurchases. Looking Ahead Two dramatic changes, in the strength of the dollar and the price of oil, are having a visible effect on the economy and on corporate earnings. No one knows how long today s low oil price will last. While there are signs that production is beginning to fall in the U.S. and some other oil producing countries, demand is weak. The economies of China, Europe, and developing countries have been weakening in the third quarter, and vehicles are becoming more fuel efficient. Perhaps oil can stabilize in price here in the U.S., although the price could remain low and take a few years to return to $90 to $100 a barrel, which was the norm for the past few years. This has and will continue to hurt the domestic oil producing economies of Alaska, North Dakota, Oklahoma, and Louisiana, and internationally those of Venezuela, Iran, Nigeria, Ecuador, Brazil, Russia, and Norway. Since July 2014, the U.S. dollar has risen more than twenty percent against the world currencies. The strong dollar has been the most common reason cited by U.S. corporations for missing sales and earnings estimates in the second quarter and this has continued into the third. Companies that reported a material impact from the strong dollar include retailers such as Macy s, Walmart, and Tiffany s; international food franchiser Yum Brands, which has a large presence in China; healthcare company Johnson & Johnson; Proctor & Gamble; as well as car manufacturers and mining and construction equipment companies, such as Caterpillar. The IMF cut its forecast for global growth again as the fourth quarter started, citing weakness in China and the emerging markets, as the commodity slump takes a toll. 5
Overall, corporate earnings estimates for the third and fourth quarters of this year and for 2016 continue to be revised down, due to slowing global growth and the strong dollar. The housing market appears to be firm and supported by demand from good household formation over the next year or two. Personal consumption has been muted, even with the expected gift to personal incomes of much lower energy costs. We are hopeful that average hourly earnings, which have been on hold during this slow expansion, might finally start to rise and help personal consumption. We invest in companies, some of which are noted in our "Performance" and "Let's Talk Stocks" sections, to participate in the growth of their earnings and cash flow. We look for those companies that we believe will continue to return cash flow to shareholders, not only through dividends but also through reinvestment in their businesses, resulting in greater cash flow and earnings and higher share price valuation. We look to build a steady component of not only current return from dividend yields, but also a rising dividend payout from most of our portfolio in order to contribute to the performance of the Fund. October 7, 2015 Apple Inc. 6.4% American International Group Inc. 4.2% Best Buy Company Inc. 3.9% CME Group Inc. 3.9% Honeywell International Inc. 3.3% Top Ten Holdings (Percent of Net Assets) September 30, 2015 Microsoft Corp. 3.3% The Walt Disney Co. 3.2% Pfizer Inc. 3.2% Citigroup Inc. 2.8% Google Inc. 2.8% 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. 6
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 net asset value is 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 Prospectuses via e-delivery. For more information or to sign up for e-delivery, please visit our website at www.gabelli.com. Multi-Class Shares 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 Trustees determined that expanding the types of Fund shares available through various distribution options will enhance the ability of the Fund to attract additional investors. Portfolio Manager Biography Barbara G. Marcin, CFA, joined GAMCO Investors, Inc. in 1999 and currently serves as a portfolio manager of Gabelli Funds, LLC and manages several funds within the Gabelli/GAMCO Funds Complex. Prior to joining GAMCO, Ms. Marcin was head of value investments at Citibank Global Asset Management. Ms. Marcin graduated with Distinction as an Echols Scholar from the University of Virginia and holds an MBA degree from Harvard University s Graduate School of Business. 7
THE GABELLI DIVIDEND GROWTH 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 TRUSTEES Mario J. Gabelli, CFA Chairman and Chief Executive Officer, GAMCO Investors, Inc. Anthony J. Colavita President, Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer, KeySpan Corp. Mary E. Hauck Former Senior Portfolio Manager, Gabelli-O Connor Fixed Income Mutual Fund Management Co. Kuni Nakamura President, Advanced Polymer, Inc. Werner J. Roeder, MD Former Medical Director, Lawrence Hospital 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 D I V I D E N D G R OW T H F U N D Shareholder Commentary September 30, 2015 This report is submitted for the general information of the shareholders of The Gabelli Dividend Growth Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB403Q315SC