In the third calendar quarter of 2015, the KEELEY All Cap Value Fund (KACVX, Financial) 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 (TEVA, Financial) removed its takeover bid and instead acquired Allergan PLC’s (AGN, Financial) generic business. Mylan remains interested in acquiring Perrigo (PRGO, Financial) who prefers to remain independent. In addition, all of healthcare, and drug makers specifically, are seeing considerable selling pressure due to Valiant Pharmaceutical’s (VRX, Financial) 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.
Another factor in our relative underperformance during the quarter was stock selection in consumer discretionary names. Specifically, holdings in the media industry, such as Tribune Media Co. (TRCO, Financial) and Tegna Inc. (TGNA, Financial) were large detractors, costing the Fund 68 basis points and 65 basis points, respectively. Media in general has been weak due to concerns about cord cutting. Cord cutting is impacting cable programming and operators while local broadcasters see little if any impact as consumers tend to purchase either skinny bundles including local broadcast or High Definition antennas that capture local broadcast. We continue to have a favorable view of the industry and these names specifically over the long-term.
The Fund’s best performing position during the quarter was Molson Coors Brewing Co. (TAP, Financial) which climbed over 19 percent and added 29 basis points of performance. Industry consolidation is boosting valuations and Molson would be the logical buyer of the MillerCoors Joint Venture that it currently doesn’t own if Anheuser-Busch Inbev SA (ABI) merges with SABMiller PLC (SAB, Financial).
The Fund’s second best performer was Knowles Corp. (KN, Financial) which rose almost 2 percent but added 27 basis points of performance to the Fund. The former spin-off of Dover Corp. is rebounding after they were left off of the Apple IPhone 6 launch due to a manufacturing issue in their microphones. An early breakdown of the newest Apple IPhone shows an increase of microphones to 4 from 3 and Knowles is expected to have gained share after being reintroduced after the limited recall.
From our vantage point, we believe investor behavior is reflecting a ‘risk-on/risk-off’ demeanor, where market participants seem focused on the broader, macroeconomic environment, as opposed to stock-specific fundamentals. As we mentioned earlier, ongoing speculation about the timing of an interest rate hike, as well as geopolitical concerns and China’s stock market correction have pushed investors towards safer harbors. While difficult in the short term, we have always recognized these periods as buying opportunities because this behavior often creates investor dislocation and pricing inefficiency. We have already begun to see this unfold and certain companies that we previously viewed as expensive are now approaching a valuation range that make them potential purchase candidates.
In terms of positioning, our outlook remains positive on consumer discretionary, materials, and especially health care, which represent our largest overweight’s versus the Russell 3000 Value Index. However, as mentioned earlier in the commentary, we are taking a close look at our exposures and may reconsider some of our holdings in sectors where a prolonged macroeconomic headwind may significantly impact the fundamental outlook for some of our holdings. While we are and always have been a bottom-up fundamental investor at the core, we are always cognizant of macroeconomic factors that may negatively impact our long-term investment thesis. The current environment is presenting those types of challenges and we are demanding our analysts dig deeper to uncover any potential headwinds. Fortunately, the environment for M&A, corporate restructurings and spin-offs remains healthy. Although a slow growth environment presents its own unique challenges for equities, this type of environment is typically very attractive for our investment philosophy. When companies are faced with headwinds to grow organically, restructuring is often the most effective way to enhance value. And if management won’t initiate that transaction on their own, in today’s environment, they will most likely attract an activist investor to get them to do it. While we don’t align ourselves or associate directly with activist investors, we are always happy to look at those types of opportunities that drive change. The market has already experienced a great amount of this form of activity, and if we are correct in the type of economic environment we expect going forward, we anticipate more opportunities within our style of investing will present themselves in the future. 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 09/30/15. 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 September 30, 2015 include Baxalta, Inc. (2.94%), Pfizer, Inc. (2.72%), Dril-Quip, Inc. (2.70%), Knowles Corp. (2.60%), Molson Coors Brewing Co. (2.58%), Quanta Services, Inc. (2.57%), Agilent Technologies, Inc. (2.53%), Wright Medical Group, Inc. (2.47%), Hanover Insurance Group, Inc. (2.44%), and Fidelity National Information Services, Inc. (2.32%).
