In the second calendar quarter of 2015, the KEELEY All Cap Value Fund (KACVX, Financial) declined 1.12 percent compared to a 0.00 percent return for the Russell 3000 Value Index. The equity markets continued to focus primarily on global uncertainty (notably the situation in Greece) which weighed on the markets’ ability to move forward. The developments in Greece have garnered the majority of the headlines and left investors wondering what the broad impact could be of a potentially messy default. Volatility in China has also been abnormally high and the possible deterioration of their bull market in equities has added to global uncertainty. Despite those concerns, news here in the U.S. has been better, with continued gains in employment and optimism that we will see a recovery in the second half of the year despite the tempered growth in GDP during the first half of 2015. Corporate earnings were generally positive during the quarter, but stock buybacks, and more recently mergers and acquisitions, continue to be the first use of capital in lieu of long-term investment and expansion. While that has boosted earnings and has been a tailwind for equities for a number of years, the lid on capital spending is a concern with respect to the economy’s ability to produce sustainable long-term growth. The Federal Reserve took a backseat to the global worries during the quarter, and despite those concerns and the potential impact it might have here in the U.S., the Fed continued to indicate that an interest rate hike is imminent toward the end of the year.
The Keeley All Cap Value Fund trailed the Russell 3000 Value Index during the quarter. Stock selection was the primary cause for our relative results as our holdings in the consumer discretionary and health care sectors underperformed. Allocation effect was positive helped by an overweight position in the leading health care sector although an overweight to consumer discretionary had a negative impact. Lastly, positive stock selection in consumer staples, energy, and financials boosted our results during the quarter.
Kohl’s Corp. (KSS, Financial) was the largest detractor during the quarter and accounted for the majority of our selection challenges in the consumer discretionary sector. The retailer declined over 19 percent and cost the Fund 42 basis points of performance. Shares traded down sharply in May after they reported weak sales growth which was below expectations although comps were unrealistically high. The company’s ongoing restructuring efforts are beginning to bear fruit but the process is nascent. We remain optimistic of continued improvement.
Two names in the consumer discretionary sector found themselves in our top five detractors but we continue to view them both favorably. The first, EW Scripps Co. (SSP, Financial) declined over 8 percent and cost the Fund 22 basis points in performance. During the quarter, SSP merged with Journal Communications and then spun out its digital broadcasting business, which we retained, and its newspaper publishing business, which we sold. Costs to implement the restructuring (merger and spins) were slightly higher than projected but we remain very optimistic long term about the broadcasting business. The second, Tribune Media Co. (TRCO, Financial) fell over 12 percent and cost the Fund 28 basis points in performance. The company produced solid revenue and cash flow and they raised guidance in 2015. Unfortunately, these positive developments were mitigated by a secondary offering of selling shareholders who had participated in the company’s emergence from bankruptcy. Tribune continues to be taking the correct steps in their restructuring plans and we remain positive.
The best performing position during the quarter was Texas Capital Bancshares (TCBI, Financial) which climbed over 27 percent and added 40 basis points of performance to the Fund. The regional bank posted results that were in-line with expectations and displayed impressive growth in loans and deposits during the quarter. Prior to the performance this quarter, the company had been hindered due to its perceived reliance on the energy market (due in large part to its Texas base) and shares were under pressure as oil declined.
Overall, we realize that a number of uncertainties remain, especially globally, but here in the U.S. we believe the market is well-positioned for moderate growth. Similar to 2014, the disappointing first quarter is expected to hamper annual growth in 2015. While we are skeptical of the strength of the economy, we still have increased our overweight in consumer discretionary. Although this may seem counter intuitive, nearly 40 percent of our weighting in discretionary is in local broadcast media where we are very bullish such as EW Scripps and Tribune which we discussed earlier in the commentary. Local television broadcasters are reaping the rewards associated with retransmission pricing when distribution contracts with content providers are up for renegotiation. Local TV broadcasters are benefitting from years of under charging content originators for distribution and that is changing significantly leading to enhanced earnings power due to very high levels of incremental profitability on retransmission revenues. In addition, 2016 is shaping up to be a massive political advertising spend year with 16 Republicans battling in the Republican primary and former Secretary of State Hillary Clinton suggesting she plans to spend several billion in the run up to the Presidential election. Additionally, later this year, Uncle Sam is looking for additional spectrum and will conduct a spectrum auction and our broadcast companies may be inclined to sell some if the price is right. In short, local broadcast media remains a bright spot in discretionary despite some of the short-term challenges they experienced this quarter.
Additionally, considering our view that economic activity will produce moderate growth at best, we are generally in line with the benchmark in financials. Given the economy is sputtering along and income and job growth remain anemic, the portfolio management team doubts the Fed will normalize interest rates anytime soon. However, we realize the Fed works for the banks and as such, maybe they will raise short term rates 25-50 basis points. To potentially take advantage of such a move, our positioning remains with banks and insurance companies that have excellent credit profiles but are highly asset sensitive. We have long since passed the credit leverage part of the recovery and as pricing and terms for loans now enters a highly competitive time, we believe it’s necessary to own differentiated franchises with managers who’ve been through numerous cycles and are willing to stay the course on credit quality while forgoing market share for market share sake. At this point, we do not envision a near term scenario that would have us overweight financials.
Lastly, although macroeconomic events have dominated the headlines year-to-date, we believe the equity markets are flush with the type of change we seek that can benefit stock pickers like ourselves. M&A activity is picking up and activist involvement is as robust as ever. These types of trends have historically been a positive catalyst for our approach and we look forward to identifying the best opportunities for our Funds. Thank you for your support of the All Cap Value Fund.
KEELEY All Cap Value Fund Standardized Performance Information
The performance reflected herein is for the Class A shares without load. "Without load" does not reflect the deduction of the maximum 4.50% sales fee (load), which reduces the performance quoted. Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. Most current performance data may be obtained at www.KeeleyFunds.com.
The Fund's adviser has contractually agreed to waive a portion of its management fee or reimburse the Fund if total ordinary operating expenses during the current fiscal year as a percentage of the Fund's average net assets exceed 1.39% for Class A Shares and 1.14% for Class I Shares. The waiver excludes expenses related to taxes, interest charges, dividend expenses incurred on securities that a Fund sells short, litigation and other extraordinary expenses, brokerage commissions and other charges relating to the purchase and sale of portfolio securities. The waiver is in effect through January 31, 2016.
This summary represents the views of the portfolio managers as of 06/30/15. Those views may change, and the Fund disclaims any obligation to advise investors of such changes. For the purpose of determining the Fund's holdings, securities of the same issuer are aggregated to determine the weight in the Fund. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities.
Risks: Smaller and medium-sized company stocks are more volatile and less liquid than larger, more established company securities.
Prior to investing, investors should carefully consider the Fund's investment objective, risks, charges and expenses as detailed in the prospectus and summary prospectus. To obtain a prospectus or a summary prospectus, call us at 800.533.5344 or visit www.keeleyfunds.com. The prospectus/summary prospectus should be read carefully before investing.
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 classifications of the Global Industry Classification 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 information. In the event KAMCO securities information vendors do not classify a security's issuer to a particular sector or industry or if the published classification appears to be incorrect, KAMCO may classify the security's issuer according to its own judgment, using other securities information vendors, the company description and other publicly available information about the company's peer group. Sector and/or industry classifications may change over time. The attribution information provided in this commentary includes summaries of attribution by market sector. Attribution is not precise and should be considered to be an approximation of the relative contribution of each of the sectors considered. The information on performance by sector reflects the aggregated gross return of the Fund's securities. Contributions to the Fund's performance by sector (computed as described above) were compared against the contributions to the aggregate return of the stocks comprising the index, by sector, as reported by FactSet Databases.
The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property and a service mark of MSCI Inc. ("MSCI") and Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and is licensed for use by KAMCO. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
Data provided for performance attribution are estimates based on unaudited portfolio results. Performance contributors and detractors were not realized gains or losses for the Fund during the quarter. Market performance presented solely for informational purposes. The S&P 500 Index is designed to act as a barometer for the overall U.S. stock market. The index is unmanaged, 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 Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. The Russell 2500 Value Index measures the performance of small to mid-cap value segment of the U.S. equity universe. The MSCI World ex USA Small Cap Index captures small cap representation across Developed Market countries excluding the United States. The index is based on the MSCI Global Investable Market Indices (GIMI) Methodology – a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. These Index figures do not reflect any deduction for fees, expenses or taxes, and are not available for direct investment. Securities in the Fund may not match those in the indexes and performance of the Fund will differ. The KEELEY All Cap Value Fund, KEELEY Mid Cap Value Fund, KEELEY Small-Mid Cap Value Fund, KEELEY Small Cap Value Fund, KEELEY Small Cap Dividend Value Fund, and KEELEY Mid Cap Dividend Value are distributed by Keeley Investment Corp.
The top ten holdings of KACVX as of June 30, 2015 include Wright Medical Group, Inc. (2.63%), Baxter International, Inc. (2.61%), Pfizer, Inc. (2.55%), Tribune Media Co. (2.51%), Agilent Technologies, Inc. (2.50%), BancorpSouth, Inc. (2.35%), E.W. Scripps Co. (2.28%), Suntrust Banks, Inc. (2.08%), Lamar Advertising Co. (2.04%), and Hanover Insurance Group, Inc. (1.98%).
