In the fourth calendar quarter of 2014, the KEELEY All Cap Value Fund (KACVX) climbed 0.94 percent compared to a 5.31 percent rise for the Russell 3000 Value Index. For the year ending December 31, 2014, the Fund increased 2.91 percent compared to a 12.70 percent rise for the Russell 3000 Value Index. Although equities rebounded from a challenging third quarter, a number of the issues that facilitated much of the recent volatility continue to exist. The volatility in the price of oil garnered the majority of the attention here in the U.S. although growing concerns about the efcacy of global growth deepened toward the end of the year. Global deationary pressures have become the heart of these concerns and although the European Central Bank (ECB) has communicated their desire to consider Quantitative Easing (QE), it is difcult to project its effectiveness given the structural reforms needed at a local level. Despite the strong bounce in equities during the quarter, and especially in small caps which lagged for much of the year, broadly speaking, investors continued to rotate toward more defensive sectors. In the fourth quarter, the top performing sectors in the Russell 3000 Value Index were traditional safe havens such as utilities and consumer staples, although consumer discretionary stocks surprised as the second best performing sector in the fourth quarter. Additionally, the performance dispersion across all ten economic sectors was very high which had a signicant impact on performance amongst active managers. For example, three sectors (consumer staples, consumer discretionary, and utilities) all produced double digit returns during the quarter, while energy fell over 10 percent. Industrials and materials, which represent almost 15 percent of the benchmark, returned only 4.96 percent and -2.80 percent respectively. The Fund trailed the Russell 3000 Value Index during the quarter due in large part to negative stock selection in the energy sector. A slight overweight in the lagging energy sector also detracted, as did stock selection in the industrials sector. Energy clearly had a signicant impact on the equity markets in recent months and it also had a strong inuence on the Fund. After making a positive contribution for much of 2014, our energy holdings succumbed to the pressure from the abrupt price decline the price of oil and the long-term impact a suppressed price may have on the entire industry. Lastly, overweight positions in consumer discretionary and health care stocks made a positive impact on the Fund during the quarter.
The rapid decline in the price of oil sent shock waves across the global economy, and the volatility in the space has forced us to reassess a few of our positions in the sector. OPEC’s decision to maintain production despite the signicant decline in the price of oil surprised many investors and exacerbated the fall in the commodity. Going into the meeting our thoughts were mixed on a cut to stabilize, but OPEC’s decision indicates that they are focused more on enforcing compliance only – which implies a modest cut if any in the future. We were mixed on the OPEC production cut decision because they do have some incentive to the let the price of oil decline (maybe to the lower 80’s) due to the negative impact it would have on their international competitors, and more specically on the shale oil industry here in the U.S. We believe most of the pain will be felt by the lower end service companies that had been forecasting increasing rates and higher utilizations in the future. In response, we began to pare back our exposure to those types of service companies by selling Superior Energy Services (SPN). Bonanza Creek (BCEI) was the largest detractor in the fourth quarter after falling over 57 percent and costing the Fund 88 basis points in performance. Bonanza was also negatively impacted by the price decline in oil and is more vulnerable to lower oil prices due to the size of the company and its reliance on higher prices. Continue Reading »