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Keeley All Cap Value Fund Fourth Quarter 2013 Commentary

February 05, 2014 | About:
Holly LaFon

Holly LaFon

276 followers

In the fourth calendar quarter of 2013, the KEELEY All Cap Value Fund (KACVX) increased 9.39 percent compared to a 9.95 percent increase fo r the Russell 3000 Value Index. For the full year ending December 31, 2013, the Fund rose 3 5.90 percent compared to a 32.69 percent rise in the Russell 3000 Value Index. The f ourth quarter capped off a remarkable year for equities in 2013. After strong results in 2012 and a number of concerning political and economic issues, the fourth quarter completed an im pressive climb in 2013 that took many investors by surprise. U.S. equities have more than doubled since the lows set in 2009 and the S&P 500 Index produced its best return in 2013 in nearly fteen years. Small-cap stocks were even better, setting record highs in 2013 as h igher-beta stocks outperformed for much of the year. During the fourth quarter the Fund sli ghtly trailed the Russell 3000 Value Index, but outpaced the index during 2013. Overall, the past y ear the portfolio beneted from both positive stock selection and good sector allocation . The Fund's overweight position in the strong performing consumer discretionary sector ben eted returns, but stock selection in the sector was the key driver in 2013. Additionally, st rong stock selection in the energy sector as well as an underweight position in the lagging util ities sector contributed to our results in 2013.

Fiesta Restaurant Group (FRGI) was the Fund's best performing position in the fourth quarter and for all of 2013. Over the past year the stock g ained over 240 percent and added 212 basis points of return. The fast-food chain has con tinued to restructure after spinning off Burger King restaurants and is now successfully ach ieving organic growth. We continue to believe the stock is undervalued and expect further growth ahead.

Bancorp South (BXS) was another position that made a positive contribution during the quarter and for the year. In 2013, the regional ban k climbed over 61 percent and added 91 basis points of return to the portfolio. The compan y produced a very solid quarterly earnings report and remains a core restructuring holding fea turing a new CEO, Dan Rollins, who comes from a successfully run bank in Texas, Prospe rity Bank. We believe there are consider- able operating costs that can be taken out of the b ank over a multi-year period so we remain very positive on the stock and believe it should pr oduce earnings upside over the next few years.

NCR Corporation (NCR) was the Fund's largest detrac tor during the fourth quarter, falling over 14 percent and detracting 25 basis points of return . The nancial technology company delivered a slightly weaker than expected quarter t hat surprised us as well as the Street. They reafrmed guidance which implies a strong fourth qu arter and suggested that cash ows will continue to be cautiously managed. Since we like th e business and valuation, as well as the improved balance sheet, we are inclined to stay the course.

As we look out into 2014, we are truly excited abou t the plethora of restructuring opportuni- ties and spin-offs the market is providing. The las t three years have been the best in over a decade, with 2011 producing 47 spin-offs, 2012 post ing 37, and 2013 creating another 37. We already anticipate establishing positions in som e new attractive spin-off opportunities early in 2014 and expect this area to be a strong source of alpha in the new year. However, our excitement about the sheer quantity of opportunitie s is tempered by the realism that 2013 was a truly outstanding year that pushed valuations higher largely due to additional corporate margin expansion that fueled solid earnings growth for our companies. In addition, many of our companies augmented sales and margin gains with shareholder return initiatives like share repurchases. Margin expansion has been solid for the past several years as companies were forced to rationalize their businesses when sales fell dramatically during the Great Recession. Meanwhile, share repurchases and dividend payouts have grown as companies still remain cautious about reinvestment due to uncertain scal and monetary policy. The Fed has signaled that it will begin to taper in 2014 and in our opinion, tapering is tightening. As such, we felt compelled to alter our sector weightings slightly and we consequently lowered our exposure to consumer discretionary and industrials holdings that were most economically sensitive. Our weightings did not materially change, rather they were tapered (pun intended) as we believe Fed intervention has been so unconventional since the downturn that we must be more conservative in our positioning given we, like they, are to some extent in uncharted waters. Fortunately, the economic outlook appears stable and while interest rates have risen we do not believe they will move substantially higher this year. In summary, we are cautiously optimistic about 2014 and ready as always for change. Thank you for your support of the All Cap Value Fund.

Performance attribution is commonly used to measure the quality of the separate decisions that go into the management of an investment portfolio compared to a benchmark index. This analysis tries to isolate the effect and measure the return contribution of market allocation, which analyzes the positive/negative impact of a portfolio's allocation to groupings such as geographic regions or market sectors, and stock selection, which analyzes the positive/negative impact of the portfolio manager's security ownership and weighting decisions within a wider grouping. The performance attribution data in this quarterly commentary was prepared by Keeley Asset Management Corp. ("KAMCO") using the following constraints: (1) Fund portfolio holdings are as of the beginning of each day; index constituents are as of the end of the day. That means that the Fund's holdings are not included until the day after acquisition (when it is included in the portfolio as of the beginning of the next business day), and a portfolio holding that is sold is included in the analysis through the end of the day on which it is sold, and that the values at which securities are included in the analysis are the values as of the beginning of the day. For the index, securities are included at their values at the end of the day. (2) The securities' values used in the analysis are the prices used by KAMCO in its internal records for the Fund and the prices used by the index provider for the benchmark index. If a price from either of those sources is unavailable, pricing information from FactSet is used. Pricing information from the index provider or from FactSet may differ from the pricing information used by KAMCO. (3) For the purpose of assigning portfolio security holdings to a particular sector and/or industry, KAMCO assigns the securities in accordance with the sector and industry classications of the Global Industry Classication Standard (GICS) developed by MSCI and Standard and Poor's (to the extent available) as a primary source and FactSet (to the extent available) as a secondary source for this informati on. In the event KAMCO securities information vendo rs do not classify a security's issuer to a particular sector or industry or if the published classication appe ars to be incorrect, KAMCO may classify the security's issuer according to its own judgment, using other securities informa tion vendors, the company description and other publicly availabl e information about the company's peer group. Secto r and/or industry classications may change over time. The a ttribution information provided in this commentary includes summaries of attribution by market sector. Attribut ion is not precise and should be considered to be a n approxima- tion of the relative contribution of each of the se ctors considered. The information on performance by sector reects the aggregated gross return of the Fund's securitie s. Contributions to the Fund's performance by secto r (computed as described above) were compared against the contr ibutions to the aggregate return of the stocks comp rising the index, by sector, as reported by FactSet Databases. GICS was developed by and is the exclusive propert y and a service mark of MSCI Inc. ("MSCI") and Standard & Poor's, a division of The McGraw-Hill Co mpanies, Inc. ("S&P") and is licensed for use by KA MCO. Neither MSCI, S&P nor any third party involved in m aking or compiling the GICS or any GICS classicati ons makes any express or implied warranties or representation s with respect to such standard or classication (o r the results to be obtained by the use thereof), and all such parti es hereby expressly disclaim all warranties of orig inality, accuracy, completeness, merchantability and tness for a part icular purpose with respect to any of such standard or classica- tion. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their afliates or an y third party involved in making or compiling the GICS or any GICS classi cations have any liability for any direct, indirect , special, punitive, consequential or any other damages (including lost prots) even if notied of the possibility of such damages. Data provided for performance attribution are esti mates based on unaudited portfolio results. Performance contributors and detractors were not re alized gains or losses for the Fund during the quar ter. Market performance presented soley for informational purpo ses. The S&P 500 Index is designed to act as a baro meter for the overall U.S. stock market. The index is unmanag ed, consisting of 500 stocks that are chosen on the basis of market size, liquidity, and industry grouping. The S&P 500 is a market value weighted index with each stock's weight in the index proportionate to its market value. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000® Index representing approximat ely 10% of the total market capitalization of that index. The Russell 3000® Value Index is an unmanaged index tha t measures the performance of those Russell 3000 companies wit h lower price-to-book ratios and lower forecasted g rowth rates. The Russell 2000 Value Index measures the pe rformance of small-cap value segment of the U.S. eq uity universe and includes those Russell 2000 companies with lower price-to-book ratios and lower forecaste d growth values. These Index gures do not reect any deduct ion for fees, expenses or taxes, and are not availa ble for direct investment. Securities in the Fund may not match th ose in the indexes and performance of the Fund will differ. The KEELEY All Cap Value Fund, KEELEY Mid Cap Value Fun d, KEELEY Small-Mid Cap Value Fund, KEELEY Small Ca p Value Fund, KEELEY Small Cap Dividend Value Fund, K EELEY Mid Cap Dividend Value Fund, and KEELEY Alternative Value Fund are distributed by Keeley In vestment Corp. The top ten holdings of KACVX as of December 31, 2 013 include Fidelity National Financial, Inc. (1.82 %), BancorpSouth, Inc. (1.80%), Chicago Bridge & Iron ( 1.78%), Dover Corp. (1.71%), Tribune Co. (1.70%), U MB Financial Corp. (1.70%), Pentair Limited (1.67%), I TT Corp. (1.65%), Covidien PLC (1.63%), and Fidelit y National Information Services (1.62%).


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