In the fourth calendar quarter of 2015, the KEELEY All Cap Value Fund (KACVX, Financial) increased 3.16 percent compared to a 5.41 percent rise for the Russell 3000 Value Index. After a challenging third quarter, equity markets rebounded to post positive gains in the fourth quarter. However, many of the factors that weighed on markets throughout 2015 remain, and will most likely play a key role in 2016. The volatility in energy prices continued, and the situation may become even more volatile as companies succumb to the pressure of sustained low energy prices. China’s slowing growth is also having a spillover effect on the global economy and has placed additional pressure on the beleaguered energy sector. The decision by the Federal Reserve to finally end their run of monetary excess was welcomed by the markets, and we hope the decision will allow investors to finally place greater focus on company fundamentals going forward. One bright spot in recent years has been the U.S. consumer. Many factors point to continued momentum from the consumer, as employment growth, strength in housing, improving balance sheets, and an uptick in consumer confidence were all positive elements in the fourth quarter. Although the Keeley All Cap Value Fund posted a positive absolute return during the quarter, we trailed the benchmark. The sluggish energy sector was once again the worst performer and the only sector to produce a negative return in the Russell 3000 Value Index during the fourth quarter. Stock selection was the primary factor in our relative results, as our sector allocation made a positive contribution during the quarter. An underweight position to the lagging energy sector and overweight position in health care, were the key factors in our positive allocation effect. Stock selection in the financials and technology sectors were the key elements that detracted from our results during the quarter. Along with our overweight position, strong stock picking in health care, which had two of the Fund’s top performers, made a strong contribution to our results.
The Fund’s largest detractor during the quarter was Del Taco Restaurants Inc. (TACO, Financial) which fell over 23 percent and cost the fund 62 basis points of performance. The stock traded down during the quarter based on fears that an economic downturn would negatively impact same store sales. We are maintaining our position in the company and have been pleased with the efforts of a new management team that has been tasked with restructuring the company.
The fund’s second largest detractor during the quarter was Knowles Corp. (KN, Financial) which declined over 27 percent and cost the Fund 62 basis points of performance during the quarter. The supplier of acoustic solutions to the mobile communications industry, and former spin-off of Dover Corp., continues to be a challenging position for the firm. Although earnings exceeded expectations due to a lower tax rate, the company lowered guidance despite getting back on the Apple iPhone 6S platform. Additionally, specialty component sales in the wireless base station business were weaker due to lower telecom cap ex, mainly in China, and more recent concerns of depressed demand for smartphones have pressured the stock. Looking out into 2016, the China telecom spend is expected to rebound, the Audience acquisition should become accretive and the company should further increase market share on the iPhone 7.
The Fund’s largest contributor during the quarter was Mylan N.V (MYL, Financial) which rose over 34 percent and added 84 basis points of return to the Fund. Shares were initially weak following its failed bid to merge with rival Perrigo (PRGO, Financial). We viewed the failed bid as a positive as we were skeptical of the synergies between the two companies. We increased our exposure to the stock during the weakness as we believe the shares are very cheap on a valuation basis.
The Fund’s second best performer was Baxalta, Inc. (BXLT, Financial) which climbed over 23 percent and added 68 basis points of return to the Fund during the quarter. The spin-off from Baxter rebounded nicely during the quarter and shares were boosted on takeover speculation. A bid from rival Shire came late in the quarter and we anticipate the share to move closer to that takeover bid in the coming months.
The start of 2016 has been anything but pleasant with major indices declining more than five percent and crude oil weakening further and flirting with bearish forecasts in the $20 a barrel area. While the latest reported employment report looked good on paper, much of the growth appeared to be in minimum wage related industries while higher paying sectors such as energy and industrials continue to contract. To be sure, we remain underweight energy, materials and industrials. The companies we do own in those sectors have very solid balance sheets, are restructuring, and have improving profitability. This should provide nice operating leverage once crude prices turn higher and/or are in some way benefitting from cyclical strength such as strong non-residential construction markets. Ostensibly, lower crude prices and thus lower gasoline prices at the pump should stimulate additional spending but the holiday retail season at this point appears mixed at best so we remain largely devoid of any retail. The long awaited Fed hike of 25 basis points came and our underweight financials position served us relatively well as financials, broadly, have underperformed owing to a flattening of the yield curve. As risk assets globally reprice, its possible investors will continue to flock to treasuries and push the longer end of the curve further down. Despite our lack of retail holdings, we remain overweight consumer discretionary, largely due to our significant positioning in local television; stocks that have been impacted by the general media discussion of cord cutting but not fundamentally impacted by loss of viewers. An election year is right around the corner and as sure as the sun rises in the east, politicians seeking election will spend money on television advertisements. Additionally, a spectrum auction is right around the corner that could significantly unlock some of what we believe is a great deal of hidden value if our companies choose to sell into the auction. Lastly, we remain significantly overweight healthcare owing to solid earnings prospects, reasonable valuations and good spin off/restructuring action. We are of the opinion that 2016 will be a difficult year in the market and as such will remain defensively positioned owning companies with solid balance sheets, relatively cheap valuations and strategic efforts to improve shareholder returns. Thank you for your support of the All Cap Value Fund.
This summary represents the views of the portfolio managers as of 12/31/15. 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.
