The Gabelli funds are in a funk. But the boss contends everything is just fine. By Steven Goldberg, Contributing Columnist June 30, 2006 [Editor's note: This story appears in the July issue of Kiplinger's Personal Finance. Justice Department lawyers are now in settlement talks with Mario Gabelli over civil allegations that the famed money manager was involved in sham small-business corporations set up to obtain federal wireless telecommunications licenses, according to a filing with the Securities and Exchange Commission. The filing, by Lynch Interactive, a communications firm Gabelli chairs, says the firm sought settlement talks "to avoid the further costs and uncertainties associated with a possible trial." Gabelli has denied any wrongdoing in the matter.]First as a private money manager and later as the skipper of Gabelli Asset fund, Mario Gabelli was super. From Asset's inception, in 1986, through 1999, the fund returned an annualized 18%, making it number one among all value funds over that stretch, according to Morningstar. Gabelli was a star. Columbia Business School credited him with inventing the form of value investing that unearths stocks that not only trade for less than their private market value (what the whole company would sell for in a takeover or other deal), but also possess a catalyst to unlock that value. Then those fabulous returns dribbled away. From 1999 through April of this year, Gabelli Asset ranked in the bottom 42% of value-oriented funds and returned only 7% annualized. Today, Gabelli presides over a $27-billion empire that runs 33 funds under the Gabelli and Gamco names, as well as private accounts. But Gabelli's success may well have planted the seeds of his subsequent problems. A surge in investments can cripple the performance of funds that, like most of Gabelli's, invest a chunk of their assets in midsize and small companies. Advertisement Whatever the cause, performance has soured -- and not just for Asset and the other funds that Gabelli personally manages. Among the firm's broad-based funds, Blue Chip Value ranks in the bottom 5% in its category, Global Growth in the bottom 15%, Value in the bottom 10% and Growth in the bottom 30% over the past five years. (Equity Income, which is in the top 10% of its peer group, and Small Cap Growth, which is in the top 20%, have bucked the trend.) Has Super Mario been too busy extending his dominion to focus on stock picking? Gabelli dismisses the notion. "When I started in this business 40 years ago, I spent half my time on research and the other half on things like investment banking," he says. "Today I spend half my time on research and the rest hiring analysts." Gabelli says his funds "continue to be in the forefront of value investors." Now a new problem threatens to distract Gabelli. The U.S. Department of Justice is seeking to join a civil suit charging Gabelli with creating "sham" small businesses. The firms received Federal Communications Commission licenses for access to the wireless spectrum at a discount, then sold some of the licenses for quick profits. Says Gabelli: "We followed all the rules." To investors, it may not matter whether Gabelli played fast and loose with the FCC. The real problem is his funds' subpar returns. There's nothing super about them anymore.