In the third calendar quarter of 2015, the KEELEY All Cap Value Fund (KACVX) fell 11.38 percent compared to an 8.59 percent decline for the Russell 3000 Value Index. Equity markets proved to be very volatile in the third quarter and U.S. stocks produced some of their worst returns since 2011. The macroeconomic environment, led by concerns of an interest rate hike by the U.S. Federal Reserve and concerns of a slowdown in China, were the primary factors in investors’ decision to become more defensive as high quality and traditional safe havens performed best during the quarter. We look forward to the day when markets return their attention to individual company fundamentals, but we are well aware that volatility will most likely remain while investors place their attention on concerns about global growth and central bank policies. Fortunately, valuations measures have become much more reasonable and a number of areas of the economy continue to show strength. Additionally, although a slowdown in China is a concern and can have an indirect impact on some of our companies, we believe the net impact of a slowdown there is minimal to our portfolio and any price dislocation may actually create some attractive investment candidates in the future. The Keeley All Cap Value Fund was not immune from the broad equity market volatility that occurred during the third quarter and underperformed the Russell 3000 Value Index. For the quarter, nine of ten economic sectors was negative for the Russell 3000 Value Index but with significant dispersion. Returns ranged from +4.3% (utilities) to -19.2% (materials) and -18.2% (energy). Overall, stock selection was the key factor in our relative under performance as sector allocation had a minor impact. An underweight position in the lagging energy was the most significant contributor to our results during the quarter. As you may recall, we have been decreasing our energy exposure over the past year as energy-related commodity prices have fallen dramatically. Although valuations in the sector are becoming more attractive, the price of the commodity remains very speculative at the moment and we plan on being very patient and selective with respect to any potential additions in the sector. Over the quarter, our average energy weight was 6.3 percent versus the benchmark’s average weight of 12.6 percent. Stock selection in the consumer discretionary and health care sectors both had a negative impact, and were the key drivers in our relative under performance during the quarter.
The largest detractor during the quarter was in the health care sector after Mylan NV (MYL) fell over 40 percent and cost the Fund 83 basis points in performance. The key development that pressured the stock was when rival TEVA Pharmaceutical (NYSE:TEVA) removed its takeover bid and instead acquired Allergan PLC’s (NYSE:AGN) generic business. Mylan remains interested in acquiring Perrigo (NYSE:PRGO) who prefers to remain independent. In addition, all of healthcare, and drug makers specifically, are seeing considerable selling pressure due to Valiant Pharmaceutical’s (NYSE:VRX) specialty pharmacy sales and Mylan does not use specialty pharmacies. Lastly, political rhetoric about price controls in health care is being bandied about by the Democratic frontrunner and those comments have had a negative impact on the entire industry. Continue Reading »