In the second calendar quarter of 2014, the KEELEY Small Cap Value Fund (KSCVX) climbed 3.21 percent compared to a 2.05 percent rise for the Russell 2000 Index and a 2.38 percent increase for the Russell 2000 Value Index. After a volatile first quarter of the year, equity markets gradually pushed higher for much of the second quarter. The global uncertainty that unsettled markets early in the year subsided, which allowed investors to regain focus on domestic fundamentals that overall seem to show progress. The economic surprise of the month and the quarter was the unexpectedly low final result for first-quarter gross domestic product (GDP), which was revised down to a decline of 2.9 percent from a previous estimate of minus 1 percent. Although the first quarter's weakness was well known due to the harsh winter months, the magnitude of the downward revision called into question whether the recovery was faltering. The consensus, however, is that economic growth continues and may be accelerating. Much of the U.S. economic data, in fact, is at multi-year highs stemming from before the financial crisis, especially with respect to durable goods, private-sector employment, and housing numbers which were all strong in June. Corporate earnings growth continues to be the primary driver of gains in equities, and we remain pleased with the fundamental outlook for the majority of our holdings. However, an increase in the number of negative earnings pre-announcements raised eyebrows, and the sustainability of earnings growth bears watching. Our strong relative results during the second quarter were primarily driven by positive stock selection in the energy and industrials sectors. An overweight position in energy, which was easily the best performing sector in the Russell 2000 Index, also made a positive contribution.
Our holdings in the energy sector proved to be exceptionally strong during the second quarter, with four of the Fund’s top five performing positions residing in that sector. Triangle Petroleum (TPLM) was the Fund’s top performer, rising over 42 percent and adding 41 basis points of return during the quarter. Overall, our holdings in this sector are experiencing superior production growth. Triangle is strategically evaluating its business units and may spin-off or sell a division in the future. We have a favorable opinion of this potential restructuring, as we believe that decision could unlock significant value. However, many of our energy holdings are very early in their life cycle and despite the potential upside, we may experience enhanced volatility from these positions as they grow. Continue Reading »