Mario Gabelli's ABC Fund (GABCX) has never had a down year. Until now.

In a sign of the times, Gabelli's midcap-blend stock fund looks set to break its 14-year winning streak. It's lost about 3.5% through late December. A key part of the fund's strategy -- investing in "event-driven" situations such as mergers and acquisitions -- has suffered amid a tough climate for deal-making.

Even so, Gabelli has managed to avoid much of the mayhem that's led to huge losses at other U.S. stock mutual funds this year. The average general midcap stock fund is down more than 40% in 2008, as is the S&P 500 index. So even with its negative return, Gabelli ABC ranks at the top. It was the No. 3-performing U.S. stock fund as of Dec. 22, according to Morningstar.

How has Gabelli done it? We caught up with him by phone before the holidays to get his take on what happened in 2008 and what investors should expect in the new year.

SmartMoney.com: What went wrong in 2008?

Mario Gabelli: This year we stumbled. We wanted to be up. We've never had a down year but this could be one. We've had investments in certain companies that have not worked out well, like Take-Two (TTWO) and Yahoo (YHOO), where they had a generous deal on the table but the stocks collapsed.

SM: Were you surprised by the financial crisis?

MG: We saw the challenges private-equity firms were having in closing deals like Sallie Mae (SLM). But what was not visible to us was the devastation that took place when Bear Stearns collapsed and how widespread the loss would be and hedge funds unwinding leverage.

SM: What worked in 2008?

MG: What helped us was we were very selective in our transactions. We walked away from Bell Canada (BCE) so we didn't take a hit there. We got a major benefit from concentrated positions in Wrigley, and we had a fairly significant position in Budweiser.

Gabelli ABC Fund

* From inception 5/14/1993
** Through September 30, 2008.
Source: Gabelli ABC Fund

SM: What's the game plan for 2009?

MG: We believe that 2009 will see a flurry of merger activity. Companies like J&J (JNJ), Pfizer (PFE). Roche could announce a bid for Genentech (DNA). These are billion-dollar companies, so it'll be easy to buy. The second thing is more financial engineering, companies splitting up and refocusing on how to grow. You can make money by seeing a company like Brink's (BCO)split into two parts. Cadbury Schweppes split into Dr. Pepper (DPS). In addition we're looking at Liberty Media (LINTA) being restructured by John Malone.

SM: Any other interesting themes in the new year?

MG: The economy is not going to do well. Unemployment is going to rise probably closer to 9% [from 6.7% in November] before this is over. The good news is confidence is at an all-time low and it's going to improve from that. [President-elect Barack] Obama is going to give us a vision for 2010, a massive stimulus package with regards to infrastructure. That's not just roads and bridges -- it's also broadband and the (electric) grid. Those are things intriguing to us.

SM: What's the biggest challenge you see in 2009?

MG: Whatever black swan event is out there. What Russia did to Georgia was unpredictable. Mumbai was unpredictable. Is Obama going to be tested? From an economic point of view, there is the question about China being able to restart its growth engine. Is the world going to think about inflation and how quickly will it come back? The hope is that [Federal Reserve Chairman Ben] Bernanke is smart enough to start pulling back once the patient gets out of the operating room.