Gabelli Growth Fund Q4 Commentary

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Feb 24, 2015

To Our Shareholders,

Thank you for your investment in The GAMCO Growth Fund.

For the quarter ended December 31, 2014, the net asset value (“NAV”) per Class AAA Share of The GAMCO Growth Fund increased 4.8% compared with increases of 4.9% and 4.8% for the Standard & Poor’s (“S&P”) 500 Index and the Russell 1000 Growth Index, respectively. See page 2 for additional performance information.

The financial markets were pretty steady in 2014. Stocks and bonds traded in relatively narrow ranges. Like 2013, the market did not have a full 10% correction, although it came close. Interest rates surprised by quietly falling. Stocks rose through a combination of rising earnings and expanding valuations. Large cap stocks captured the asset class performance derby, taking back more than a little of their relative underperformance since the bursting of the dot com bubble in 2000.

The Year in Review

The World Economy Most of the headline grabbing events of 2014 took place outside the United States, such as the rise of ISIS in the Middle East and the outbreak of Ebola in West Africa. Japan slipped back into recession as confidence in Abenomics waned. It’s hard to grow when your population is shrinking, no matter how much stimulus you employ. China is slowing as its economy makes the transition from investment (think construction) led growth to more consumption led growth. Every dollar spent on investment in China has a bigger impact on job creation than a dollar spent on consumption. Reports of China growing anywhere near 7% appear overstated. Countries that export commodities to China are seeing their growth slow too. Russia essentially invaded and annexed Crimea (formerly part of Ukraine). Russian backed rebels reportedly shot down a civilian airplane. The falling price of crude oil, acting with the sanctions imposed upon Russia, are destroying Russian

wealth via lower stock prices, lower ruble prices and less investment in Russia. The ruble has fallen about 45% relative to the dollar to a new low. Russia has a date with recession in 2015.

In Europe, the spotlight has been on Mario Draghi, the head of the European Central Bank. Europe’s recovery has lost momentum and talk of looming deflation has returned. Draghi has promised to “do whatever it takes” to sustain the recovery and the euro, implying a change in policy to full scale quantitative easing (QE). Some believe Germany has kept him from acting more forcefully and may not capitulate until deflation is more widespread. The market is expecting a move to full scale QE in the first quarter of 2015. Of course QE may not be strong enough to overcome Europe’s poor demographics, high taxes and relatively inflexible labor markets. The collapse in the price of oil helps and may provide a sufficient tailwind to elevate the Eurozone’s growth rate above 1% in 2015.

The U.S. too, will benefit from the roughly 50% decline in the price of crude since last June. Every one cent decline in the price of a gallon of gasoline translates into an extra billion dollars of consumer free cash flow. Using national averages, the price of gas has declined from $3.31 per gallon last January to end the year at $2.21 per gallon, according to the American Automobile Association. The highest average price for regular unleaded in 2014 was $3.69, posted in April. The U.S. economy, with the best demographics in the developed world, appears to be gaining momentum as we exit the year. The monthly payroll report for November was the best in years. Growth has accelerated as inflation has declined, signifying a true decoupling from the weakness infiltrating many overseas economies. Our economy is not export or investment driven, it is consumer driven (72% of GDP). With falling gas prices, rising employment, a stronger dollar, and record consumer free cash flow, expect positive revisions to GDP and profit forecasts for 2015, currently calling for 3.0% GDP growth and 8% profit growth (operating earnings for Standard & Poor’s 500).

Oil has seen the perfect storm, with rising supply (primarily U.S.) and tempered demand (primarily foreign). This dynamic helps limit inflation and is dollar supportive, as it helps margins and consumers, although some companies, primarily energy and export oriented, may be negatively impacted. It will take China years to fully transition from an investment led economy to a consumer led economy. This means many commodities could be in excess supply for a period of years, which is good for continued low inflation and interest rates and relatively higher price to earnings ratios for stocks. While the housing recovery has been slow on the uptake this past year, the rest of the economy has thrived. Witness the records for consumer free cash flow (disposable personal income less financial obligations and food and energy expenses), household net worth, stock prices, corporate cash levels, total employment, industrial production, exports, capital spending, gross domestic product, and commercial and industrial loans, to name a few. We have just seen multi-year highs for consumer confidence and factory orders.

Could weakness in China, Japan or Europe or some combination thereof reach a point where our healthy outlook is compromised? Yes, but it is not the most likely outcome. We are far and away the largest economy in the world and the momentum building now won’t evaporate in the near term. It seems more likely that growth here accelerates and overseas weakness will result in additional stimulus measures in those economies

The Markets

It seemed like a given that interest rates would rise in 2014. The economy would gain momentum, the Fed would terminate QE and signs of inflation would surface. It just didn’t quite work out this way. The economy did accelerate, the Fed did end QE, but interest rates fell, as falling commodity prices and overseas weakness put a strong bid under the dollar and domestic bond prices. The 10-year Treasury historically trades near the nominal GDP growth rate. Nominal growth this year is about 4% and next year (2015) is expected to be around 5%. Yet the 10 year is yielding 2.2%, a level that towers over the 10-year government bonds of Germany and Japan, yielding 0.7% and 0.4%, respectively.

These ultra-low rates abroad complicate the management of monetary policy. Former Fed Chairman Greenspan raised the Fed Funds rate many times during 2004-2005. Short rates rose and long rates declined, primarily due to strong foreign demand. Greenspan referred to this as a “conundrum.” Such a conundrum could return next year. Meanwhile, low inflation remains the gift that keeps on giving. It assists the Fed in keeping rates down. That overseas weakness has kept pressure on commodity prices, supported the dollar and prevented inflation from rising. Inflation is expected to be about 1.7% in 2015, similar to this year. With commodity prices still trending lower, we doubt inflation fears will be a problem for some time. Wages are growing at about a 2% annualized rate. Inflation does not typically become a problem until wage growth hits 4%, and then it is with a lag.

Low inflation promotes healthy price to earnings ratios (P/E ratios), typically higher than the 32 year average of about 14.5 times. The average P/E ratio for inflation of this level is about 17 times forward year earnings. As we approach 2015, the market is selling at about 16.5 times forward earnings, close to what we would expect. In 2000 the forward P/E was 28. In 2008 it was about 11. We won’t make the case for further P/E expansion, but you could, given the decline in oil prices, low inflation, less than peak equity allocations by institutions and households, and the lack of competitive returns from other asset classes. The plunge in oil is unequivocally positive for growth but the speed of the decline is unnerving. When prices stabilize, investors will be staring at a rainbow of opportunities.

As of the end of June, households held 42% of their $47 trillion in financial assets in stocks. This compares to 54% at the peak of the market in 2000, when the 10-year Treasury yield was over 6%. Pension funds (private plus public) held 37% of their $14 trillion in financial assets in stocks as of June, compared to 55% at the peak in 2000. Stocks don’t have to work much magic to outperform cash and bonds when most yields are 2% or lower. Earnings growth of 6 to 8%, a near 2% dividend yield and a smidgeon of P/E expansion and stocks could return north of 10% in 2015. Of course, the range of outcomes is quite large, but that is not an unreasonable target. We are constructive.

Portfolio Observations

During the fourth quarter, we added AbbVie (0.9% of net assets as of December 31, 2014), Boeing (0.4%), Delta Air Lines (0.8%), and Time Warner Inc. (0.7%) to the portfolio. In addition to competing with Gilead Sciences (1.4%) in the Hep C market with its Viekira Pak regimen, AbbVie’s Humira drug is a blockbuster for treatment of rheumatoid arthritis. Importantly, the company has committed to a more shareholder friendly

posture by raising its share buyback authority and boosting its dividend significantly. Similarly, Boeing just announced a major increase in its buyback as well as a material hike in its dividend. Boeing and Airbus essentially own the large commercial jet market and each have about half the market. Both production and orders are robust given growth in the emerging markets and the demand to refresh older fleets in the developed markets.

Delta Air Lines (0.8%) is enjoying the benefits of strong traffic demand, declining jet fuel prices and extra revenue from fees for checked bags. Delta is free cash flow positive, has the best balance sheet in the business and is returning cash to shareholders. In May, Delta boosted its dividend by 50% and announced a $2 billion share buyback. Time Warner Inc., owner of HBO, Warner Bros., and other content vehicles, increased its buyback by $5 billion and raised its dividend by double digits in 2014. Twenty-First Century Fox (1.3%) made an attempt to acquire Time Warner Inc. during the year but were rebuffed as Time Warner Inc. said the offer was too low.

We added to a number of holdings. The most significant increases were in Adobe Systems (1.2%), B/E Aerospace (1.1%), Bristol-Myers Squibb (0.8%), CBS Corp. (1.2%), CVS Health Corp. (1.9%), and Texas Instruments (1.5%). We eliminated holdings which we believe are experiencing growth problems or are likely to in the near future. We sold Diageo PLC, eBay, EMC Corp., Flowserve, Pentair, Qualcomm, IBM and Boulder Brands. We also trimmed a number of holdings, including Coca-Cola (0.7%), Colgate-Palmolive (0.5%), Comcast Corp. (1.3%), Facebook (3.0%), Google (3.1%), PepsiCo (0.9%) and the Priceline Group (0.8%).

Performance Commentary

Holdings that made the most positive contribution to performance for the quarter (based upon price change and size of holding) were, in order, Apple Inc. (5.8% of net assets as of December 31, 2014), MasterCard (2.8%), Visa (1.9%), Home Depot (2.5%), CVS Health (1.9%), Whole Foods Market (1.1%), Parker- Hannifin (1.6%), Sherwin-Williams (1.3%), PPG Industries (1.5%), and Union Pacific Corp. (2.1%). These companies cover a cross section of businesses but each has some degree of sensitivity to the economy. Their revenues are all positively correlated to GDP growth.

Holdings that detracted the most from performance for the quarter were, in order, Continental Resources (1.0%), Pioneer Natural Resources (1.1%), Google (3.1%), IBM Corp., Gilead Sciences (1.4%), Boulder Brands, EOG Resources (1.4%), Novo-Nordisk (0.7%), and Ecolab (0.9%). Three of the worst performers were energy stocks that sank with the price of crude oil.

For the full year, holdings that helped performance the most were Apple Inc., our largest holding, followed by Union Pacific (2.1%), Microsoft (2.4%) (sleeper of the year), Facebook (3.0%), Home Depot, Allergan (0.6%), CVS Health, Sherwin-Williams, Amgen (1.2%), and Gilead Sciences. Technology and healthcare each contributed three names to our top ten.

Hurting us the most measured over the course of the year were Continental Resources, Amazon.com (1.8%), Pioneer Natural Resources, Michael Kors (0.4%), Precision Castparts (1.3%), Viacom (0.5%), Boulder Brands, Google Class C, Discovery Communications (0.7%), and IBM. Boulder Brands was no longer held at year’s end due to problems they are experiencing in their traditional Smart Balance spread business.

In Conclusion

It is widely believed the Federal Reserve Board will hike interest rates in mid-2015. While some may shy from stocks whenever the Fed does tighten, increasing the Federal Fund’s target rate from a 0 to 25 basis point range to a 25 to 50 basis point range is appropriate and potentially bullish for U.S. financial assets. A rate increase is pro dollar and anti-inflationary in nature. Meanwhile, interest rates will remain near record lows and economic momentum will continue to build. We have had six consecutive years of economic growth with little inflation. The unemployment rate is 5.8%, down from over 10% in 2009. The economy and the stock market have made remarkable gains. The Fed ended quantitative easing in October and, contrary to conventional wisdom, stocks rallied. The U.S. economy is moving forward and neither overseas weakness nor a timely Fed tightening is likely to change that.

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 in 2015.

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 percentages of net assets, and their share prices are stated as of December 31, 2014.

Apple Inc. (5.8% of net assets as of December 31, 2014) (AAPL, Financial)(AAPL – $110.38 – NASDAQ) designs Macs, arguably the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with the iPad.

Google Inc. (GOOG – $526.40 – 1.8%) (GOOGL, Financial)(GOOGL – $530.66 – 1.3%) 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.

Facebook Inc.’s (3.0%) (FB, Financial)(FB – $78.02 – NASDAQ) mission is to give people the power to share and make the world more open and connected. People use Facebook to stay connected with friends and family, to discover what's going on in the world, and to share and express what matters to them. As of September 30, 2014, Facebook had more than 1.3 billion monthly active users (MAUs) worldwide and an average of 864 million daily active users (DAUs), creating a powerful targeted advetising platform.

MasterCard Inc. (2.8%) (MA, Financial)(MA – $86.16 – NYSE) is a technology company in the global payments industry that operates the world’s fastest payments processing network, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. MasterCard’s products and solutions make everyday commerce activities – such as shopping, traveling, running a business and managing finances – easier, more secure and more efficient for everyone.

The Home Depot Inc. (HD, Financial)(2.5%) (HD – $104.97 – NYSE) is the world's largest home improvement specialty retailer, with 2,269 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces, and Mexico. In fiscal 2013, The Home Depot had sales of $78.8 billion and earnings of $5.4 billion. The Company employs more than 300,000 associates.

Microsoft Corp. (2.4%) (MSFT, Financial)(MSFT – $46.45 – NASDAQ), the world’s largest software company, develops, manufacturers, and licenses a range of software products for a variety of computing devices from PC’s to servers to its Xbox game console. While the company’s core desktop operating system and applications software franchise (Windows/MS Office) is maturing, Microsoft is gaining share in the enterprise market and, with its Internet and Xbox efforts, in the consumer markets also. With gross margins above 70%, Microsoft is one of the most profitable companies in history. The company’s latest operating system for PC’s, Windows 8.1, was released in April, 2014.

Honeywell International Inc. (HON, Financial)(2.2%) (HON – $99.92 – NYSE) is a Fortune 100 company that invents and manufactures technologies to address some of the world’s toughest challenges linked to global macrotrends such as energy efficiency, clean energy generation, safety and security, globalization and customer productivity. Based in Morris Township, N.J., the company employs approximately 132,000 people worldwide, including more than 22,000 engineers and scientists.

Union Pacific Corp. (UNP, Financial)(2.1%) (UNP – $119.13 – NYSE) links 23 states in the western two-thirds of the country by rail and provides freight solutions and logistics expertise to the global supply chain. Union Pacific’s diversified business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal. The railroad serves many of the fastest growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways.

CVS Health Corp. (CVS, Financial)(1.9%) (CVS – $96.31 – NYSE) is a pharmacy innovation company helping people on their path to better health. Through their 7,800 retail pharmacies, more than 900 walk-in medical clinics, a leading pharmacy benefits manager with nearly 65 million plan members, and expanding specialty pharmacy services, CVS Health enables people, businesses and communities to manage health in more affordable, effective ways. Their unique integrated model increases access to quality care, delivers better health outcomes and lowers overall health care costs.

Visa Inc. (1.9%) (V, Financial)(V – $262.20 – NYSE) is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Visa operates one of the world's most advanced processing networks — VisaNet — that is capable of handling more than 56,000 transaction messages a second, with fraud protection for consumers and assured payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for consumers. Visa's innovations, however, enable its financial institution customers to offer consumers more choices: pay now with debit, pay ahead of time with prepaid or pay later with credit products.

January 12, 2015

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. 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 [email protected]. 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). The Fund’s Nasdaq symbol is GABGX for Class AAA Shares. 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. Top Ten Holdings (Percent of Net Assets) December 31, 2014 Apple Inc. 5.8% Google Inc. 3.1% Facebook Inc. 3.0% MasterCard Inc. 2.8% The Home Depot Inc. 2.5% Microsoft Corp. 2.4% Honeywell International Inc. 2.2% Union Pacific Corp. 2.1% CVS Health Corp. 1.9% Visa Inc. 1.9%9 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 The GAMCO Growth 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 Trustees determined that expanding the types of Fund shares available through various distribution options would enhance the ability of the Fund to attract additional investors