In the third calendar quarter of 2014, the KEELEY All Cap Value Fund (KACVX) fell 4.74 percent compared to a 0.87 percent decline for the Russell 3000 Value Index. After a lengthy hiatus, volatility returned to the markets in the third quarter. The weakness was especially evident in small cap stocks, where the divergence between small and large-cap stocks was substantial. The S&P 500 Index posted a positive return in the third quarter, climbing just over 1 percent compared to the broad sell-off that occurred in small and mid-cap companies. Although the market capitalization of the portfolio has moved higher in recent years, it remains substantially below our benchmark as we continue to find attractive opportunities in small and mid-cap companies. Heightened geopolitical risks were the primary culprit for the renewed volatility, as uncertainty in foreign markets added to global growth concerns and pressured investors to shun risk. Fortunately, economic news on the domestic front was more positive. Better export growth, improving housing activity, and continued low interest rates has allowed the economy to recover from the negative effects of the harsh weather early in the year. However, subpar projections for long term GDP growth remain a signficant hurdle and puts further pressure on a fragile consumer to pick up the slack. From sector perspective the quarter was mixed, with five of ten economic sectors in the Russell 3000 Value Index producing negative returns. Stock selection within the financial and industrials sectors was the key factors in our relative underperformance during the quarter. The Fund was also negatively impacted by an overweight position to energy, which was the worst performing sector in our benchmark.
Civeo Corp. (CVEO) was the Fund's largest detractor during the quarter after shares fell sharply in September when the company announced that electing REIT status would not be preferable and simultaneously announced a rather large reduction in Canadian guidance for Q4 2014 and 2015 due to project deferrals. The reduction in earnings guidance, while never pleasant, is understandable, but the decision to not seek a REIT election was both disappointing and confusing. Frankly, we've not seen a case where the reason a company gets spun off is so quickly abandoned. Activist investors have become involved seeking, among other things, the resignation of the CEO. Nonetheless, the failure to seek a REIT election was a sufficient blow relative to our investment thesis that we elected to sell the stock. Continue Reading »