In the fourth calendar quarter of 2014, the KEELEY Alternative Value Fund (KALVX) fell 2.71 percent compared to a 6.09 percent increase for the Russell 2500 Value Index and a 4.93 percent rise in the S&P 500 Index. For the year ending December 31st, 2014 the Fund declined 8.15 percent compared to a 13.69 percent increase by the S&P 500 Index and a 7.11 percent rise by the Russell 2500 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 difficult 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 2500 Value Index were traditional safe havens such as utilities, health care, and consumer staples. The Fund trailed the Russell 2500 Value Index during the quarter due in large part to an overweight position in the lagging energy sector and poor stock selection in the nancial sector by the long side of the portfolio. Holdings in the nancial sector were negatively impacted by our lack of interest rate sensitive positions, as REITs did exceptionally well during the quarter. Our lack of REIT exposure is a consistent part of our process as we believe those types of companies do not possess the catalyst / corporate restructuring characteristics that we seek within our investment philosophy. As we mentioned earlier, our overweight position in energy had a negative impact on the portfolio. After making a positive contribution for much of 2014, our holdings succumbed to the pressure from the abrupt price decline in the commodity. Sub-advisor Broadmark Asset Management had difculty hedging the portfolio in such a volatile environment with the market never really nding a consistent direction. Some of their hedges were ill-timed, and the subsequent removal of those hedges were also poorly timed which collectively detracted from the portfolio’s results during the quarter.
During the fall pullback, Broadmark was able to hedge some of that decline, but the rise in volatility in December was a challenge to performance as their risk-averse approach can at times inhibit performance. Continue Reading »