Keeley Mid Cap Dividend Value Fund's 2nd-Quarter Commentary

Discussion of markets and holdings

Author's Avatar
Jul 28, 2020
Article's Main Image

To Our Shareholders,

For the quarter ended June 30, 2020, the KEELEY Mid Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share rose 19.42% compared with a 19.95% gain for the Russell Mid Cap Value Index. For the year-to-date, the Fund is down 21.31% compared with an 18.09% fall for the benchmark.


Following the steep correction of the first quarter, the market rebounded dramatically in the second quarter. At June quarter-end, the market was up almost 40% from its March 23rd low. In the first six months of the year, the market, as measured by the S&P 500 Index, made thirteen new all-time highs after falling into bear market territory. We believe we are in the early stages of a new bull market as evidenced by the 20% market appreciation over a stunning twelve trading days. e S&P 500 Index went from a record high to the bottom of a bear market to the establishment of a new bull market in 35 trading days.

The second quarter market rebound was the mirror image of the first quarter. As the quarter progressed, evidence mounted that an economic recovery was proceeding at a faster pace than investors had initially expected. Recent economic data points present a strong case for a V-shaped recovery. In the May employment report, jobs grew by 2.5 million compared with consensus expectations for an 8 million decline. is is a sharp reversal from the 20.7 million tumble in April and this has been accompanied by a steady stream of better than expected economic reports:

  • May Retail Sales grew a record 17.7% in April, more than double the expectation.
  • Surveys from the New York Fed and the Philadelphia Fed both exceeded consensus forecasts.
  • The ISM Manufacturing and non-Manufacturing surveys both beat forecasts and exceeded 50, which generally signi es economic expansion.
  • June Private non-Farm payrolls grew 4.8 million, double the consensus expectation and the unemployment rate declined to 11.1% from 12.5% in May.

Toward the end of the quarter, new COVID-19 case numbers started to rise. is has driven governors to restrict activity and investors fear a repeat of the March market correction, should economic activity stall. We believe that any new restrictions are likely to be more surgical than those imposed earlier this year and will have less economic impact. At greatest risk are companies in verticals such as travel, leisure, and restaurants.

From a macro viewpoint, the policy response, both scal and monetary, has been unprecedented and extraordinary. e government has now passed three rounds of scal stimulus aggregating several trillion dollars. is has included direct payments, enhanced unemployment bene ts, low-cost forgivable loans to small businesses, and large loans to companies in heavily impacted industries. Another round of stimulus and infrastructure spending is under consideration by the White House and Congress.

At its June meeting, the Federal Reserve Board pronounced that it would maintain a zero Fed funds rate through 2022 and reiterated the Central Bank will increase its holdings of treasury securities and other asset purchases for an extended period. e Fed also said that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program.

Against this backdrop, leading indicators look to show a bottom and there appears to be a clear path forward for recovery in the economy. However, the resurgence of COVID-19 is tearing through the U.S., in places like Arizona, Texas, California and Florida, and forcing businesses to postpone reopening. Until a vaccine or more effective therapeutics are developed, social distancing, masks, handwashing, and other personal actions will be theprimary means to control the virus spread. While states are slowing reopening and reinstituting restrictions, others continue to lift controls.

It is our belief that the extraordinary policy accommodation by the Fed, coupled with trillions in scal stimulus appropriated by Congress, should put a oor under both the economy and stock market. We believe that small-and mid-cap value stocks sell at signi cant discounts to the overall market and that the Keeley Small-Mid Cap Value Fund is well positioned to outperform in the years ahead.

Portfolio Results

This has been a challenging year to be an investor in dividend-paying small- and mid-cap stocks. We estimate that dividend-paying stocks in the Russell MidCap index gained 19.5% in the second quarter, well short of the 24.5% for the overall index and 35.5% posted by the non-dividend-payers. Within the Russell MidCap Value index, results were comparable, with the dividend-payers gaining 18.1% vs. 19.9% overall and 28.6% for the non-payers. e 1.8% negative spread between dividend-payers and the MidCap Value Index is the largest since the second quarter of 2009. It is generally not very wide because more than 80% of the stocks in the Russell MidCap Value Index pay dividends.

Neither Sector Allocation nor Stock Selection added or detracted much value. Within Sector Allocation, the Fund was slightly overweight the Energy sector and bene tted from the strong rebound in that sector during the quarter. A small underweight in the Technology sector o set some of this bene t as did the Fund’s small cash position.

From a stock selection standpoint, the Fund’s holdings materially outperformed the benchmark in the Consumer Discretionary, Real Estate, and Utilities Sectors, while it lagged in the Health Care, Energy, and Industrials sectors.

  • Consumer Discretionary stocks bounced back from Q1’s trouncing and were the second-best performing sector in the Russell Midcap Value benchmark. e Fund’s holdings did even better due to strong gains by Brunswick, and KB Home. In total, six of the Fund’s eight holdings appreciated more than 25%.
  • The Real Estate sector lagged the broader market, but the Fund’s holdings outpaced the overall sector. Strong gains in the Fund’s consumer-oriented REITs (Brixmor, Lamar Advertising, and VICI Properties) drove the outperformance.
  • Utilities was another sector with overall sluggish gains as the sector within the benchmark only gained 3.5%. The Fund’s holdings nearly doubled that pace as gains in NRG Energy, and UGI Corporation o set a loss in Black Hills.
  • Health Care, last quarter’s strongest relative performer for the Fund, was this quarter’s biggest laggard.
  • While being slightly overweight the Energy sector helped the Fund’s performance during the quarter, the Energy holdings failed to keep pace with the strong 55% rebound in the sector in the Midcap Value Index. e Fund held six Energy stocks during the quarter and ve of them appreciated more than 30% including a 105% gain in WPX Energy. e laggard, Cabot Oil & Gas, was one of the Fund’s best stocks in Q1.
  • The Industrial sector was another where the Fund’s holdings failed to match the very strong gains in the overall sector. While seven of the Fund’s eight holdings were up double-digit percentages, GrafTech, a maker of electrodes used in steelmaking, fell slightly in the quarter.

During the quarter, the Fund added one new position and eliminated three positions.

Let’s Talk Stocks

The top three contributors in the quarter were:

Brunswick Corporation (

BC, Financial) (BC - $64.01 – NYSE) is one of the leading producers of engines for recreational marine products. It also manufactures and sells recreational boats. Brunswick was helped by a sharp improvement in boating registration data in the wake of various states relaxing restrictions on boating activity. Channel inventory remains lean in the wake of a poor start to last year’s boating season followed by COVID-19 restrictions on manufacturing in 1H20. While not providing o cial EPS guidance, management was active with covering brokers in terms of conferences and non-deal roadshows and conveyed a message of sharply improving boat market fundamentals in May and June.

KB Home (

KBH, Financial) (KBH - $30.68 – NYSE) is one of the nation’s leading homebuilders. e stock has recovered from the large decline last quarter driven by pandemic related shutdowns halting the strong underlying fundamentals prior to COVID. Demand drivers are expected to accelerate beyond the rst-time homebuyer as pandemic related lockdowns could entice urban dwellers to look for more space in suburbs. Additionally, the current “work-from-home” dynamic has introduced an aspect of mobility that could further accelerate housing trends with additional support from record low mortgage rates.

Franco-Nevada Corporation (

FNV, Financial) (FNV - $139.64 – NYSE) is a leading gold-focused royalty and streaming company that bene ts from the continued rise in gold prices and the expectation for this to continue. In addition to the rise in gold prices, the company has nice organic growth projects with the Cobre Panama mine now operational and the addition of high-quality oil and gas royalties. e company is well positioned with a debt-free balance sheet and plenty of liquidity for potential accretive M&A activity.

The three largest detractors in the quarter were:

CenterState Bank Corporation/South State Corporation (

SSB, Financial) (SSB - $47.66 - NASDAQ) is one of the leading community banks in the Southeastern United States. e merger of CenterState Bank of Florida into South State Bank of South Carolina brings together two banks with a good record of building a bank on solid deposit growth and disciplined credit management. Stocks of banks undergoing mergers of equals often lag their peers until the merger is completed and that did not occur for this bank until very late in the quarter.

Black Hills Corporation (

BKH, Financial) (BKH - $56.66 – NYSE) is a utility headquartered in Rapid City, SD. e company reported a di cult quarter, missing consensus expectations mostly due to warmer than anticipated weather and to a lesser extent due to COVID impacts. However, management lowered full-year guidance to incorporate additional potential impacts stemming from COVID. It is unknown if these impacts will materialize but conservatism of management is welcomed during this uncertain time. Overall, we view utilities in general as attractive given the regulated aspect of the business especially in this “lower for longer” interest rate environment.

GrafTech International Ltd. (

EAF, Financial) (EAF - $7.98 – NYSE) is a leading manufacturer of graphite electrodes used in electric arc furnaces to produce steel. Signi cant COVID challenges are putting pressure on the global steel industry that was on shaky ground prior to this pandemic. As such, end customers are having a rough time with some on the brink of bankruptcy. GrafTech remained pro table despite headwinds but rst quarter results missed consensus expectations. Near-term, the company will focus on reducing costs, lowering capital expenditures, and debt reduction. GrafTech continues to be majority–owned by Brook eld Asset Management.


In conclusion, thank you for your investment in the KEELEY Mid Cap Dividend Value Fund. We will continue to work hard to justify your con dence and trust.

This summary represents the views of the portfolio managers as of 6/30/20. 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.

Also check out: (Free Trial)

» Take a Free Trial of Premium Membership

0 / 5 (0 votes)
Author's Avatar

Request A Demo

Learn more about GuruFocus' key features, including All-In-One Screener, backtesting, 30-year financial, stock summary page, guru trades, insider trades, excel Add-in, google sheets and much more.

GuruFocus Screeners

Related Articles