KEELEY Mid Cap Dividend Value Fund

Investor Class (A) Shares: KMDVX

Institutional Class (I) Shares: KMDIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 2nd Quarter 2018

To Our Shareholders:

For the quarter ended June 30, 2018, The Keeley Mid Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share rose 4.63% versus compared with a 2.41% gain for the Russell Midcap Value Index. For the year-to-date, the Fund is up 0.48% compared with a -0.16% loss for the benchmark.

Commentary

After a choppy start to the year, stocks rebounded nicely in the second quarter with the major US indices rising in the quarter enough to bring year-to-date results into positive territory. Small cap stocks again led the way with the Russell 2000 up 7.8% compared to the 3.4% rise in the S&P 500 Index and the 3.9% increase in the Russell Top 200 index (largest 200 companies). Mid-caps lagged both large and small with a 2.8% total return in the quarter. Value outperformed growth in small caps, but lagged in mid-cap and large cap.

The rebound is somewhat surprising to us in that most of the issues that unsettled the markets in the first quarter of the year continued in the second quarter. As the quarter ended, the United States was days away from implementing tariffs on tens of billions worth of imports from many countries. Those countries have threatened to retaliate with tariffs on US-made products. If we continue down this path, it is difficult to see how these actions would not negatively impact economic growth. The strength in the markets, however, seems to arise out of investors’ belief that the rhetoric from both sides is just posturing and that a deal will be made to avert these potentially adverse trade actions. Investors seem to have become more comfortable with President Trump’s style of governing – initially hard-nosed and up front, then ultimately leading to a somewhat rational deal.

If the consensus is correct, the stock market has a lot going for it. In the United States, the economy is doing well, and GDP continues to grow, albeit slowly. This long period of growth, however, has driven the unemployment rate to near-record low levels. We hear from companies that it is increasingly difficult to find qualified candidates to staff open positions. Some companies are lowering standards, but some are raising wages which should ultimately drive more growth. The outlook also remains good with the Institute for Supply Management (ISM) survey indices near the 60 level (50 indicates growth). Outside the US, most countries are producing stronger growth than the US.

On the geopolitical front, the global environment seems to have improved slightly. President Trump’s summit with North Korean leader Kim Jong Un turned out to be a little more successful than expected which may cool that hotspot. In Europe, nationalism seems to be on the rise, but so far, the fervor for “my nation first” has thus far been dampened by the reality of what going it alone would mean. In Italy, although nationalist parties gained power, they have pursued policies more similar to their predecessors than different. Also in Europe, the UK is working through the process of leaving the EU. The challenges it faces may be dissuading other countries from going down the same path.

We believe that the relatively good economy, combined with lower corporate tax rates, should drive strong corporate earnings growth in 2018. Analysts expect earnings in the S&P 500 Index to grow by 22% this year and earnings in the S&P Small Cap index to grow by 25%. In addition, earnings estimates continue to trend higher and have increased by 11% since the beginning of the year for the S&P 500 Index. Although most of this increase was likely related the benefit of corporate tax reform, estimates have continued this upward trend even after considering its impact.

The strong increase in earnings plus meager stock market gains in the first half of the year have reduced the forward multiple (the ratio of current stock price to expected future earnings) on stocks. In the case of the S&P 500 Index, the forward multiple has fallen from 18.3x at the beginning of the year to 16.2x at mid-year. While this is still above the long-term average of 15.7x, we do not expect it to be much of an impediment to stock gains. Small cap value stocks, however, look very attractive relative to their past. The Russell 2000 Value Index trades at 15.5x forward EPS compared with a historical average (since 1999) of 16.6x, and its forward multiple relative to the Russell 2000 Growth index is only 0.43, well below the historical average of 0.62. Midcap value stocks similarly appear very attractive relative to their growth counterparts. The forward multiple on the Russell Midcap Value Index is 14.3x compared with 21.3x for the Russell Midcap Growth Index. The relative multiple of 0.67 compares with a historical average (since 1999) of 0.78. As we look ahead, we think that the course of the market over the rest of the year is likely to be determined by whether or not “cooler heads prevail” on the trade front.

Stock valuations seem reasonable, and the economic backdrop seems supportive of rising earnings. Rising trade barriers, however, would likely cause an initial burst of inflation, and then potentially slower economic growth. That would be bad for corporate earnings and stock prices, in our opinion. Over the intermediate term, we have some concerns that earnings expectations beyond 2018 are elevated. Analysts expect S&P earnings to rise 10% in 2019 after growing 22% in 2018. With the economy in its ninth year of growth and unemployment approaching historic lows at around 4%, it is difficult to identify enough slack in the system to grow at that expected rate. Furthermore, higher interest rates and a stronger dollar may also impede growth. With that said, out-year earnings estimates are usually too high, so falling expectations may not be much of a drag on stock prices.

This was a good quarter for the Fund, particularly considering several structural headwinds. Most important of these was that dividend-paying stocks in the benchmark lagged the non-dividend paying stocks; 1.9% vs. 4.6%. The other factor that worked against the Fund’s positioning was valuation, where the highest valued stocks, and stocks of the companies that are unprofitable, outperformed the lower valued stocks by a wide margin. Not all factors, however, worked against the Fund as its emphasis on higher quality (higher ROE) stocks and its tilt towards smaller, mid-cap stocks helped it in the quarter.

At the portfolio level, sector allocation decisions slightly benefited the Fund, while individual stock selection had a more profound impact. As we have remarked many times in the past, stock selection usually drives out or underperformance for the Fund. This quarter was very good with the Fund’s holdings outperforming those of the benchmark in eight of the ten sectors where the Fund has investments. Real Estate, Industrials, and Materials provided the strongest positive impact, while the Fund lagged in the Information Technology and Consumer Discretionary sectors (although the latter was only by a couple basis points). Interestingly, these were the opposite of what happened in the first quarter when Real Estate, Industrials, and Materials were the laggards, while Consumer Discretionary and Information Technology led the way.

On the positive side of the ledger, Real Estate was the biggest outperformer, which was encouraging because the Real Estate sector was the second strongest performer in the index. While the Fed continues to push up short-term rates, longer-term rates flattened out during the quarter and declined toward the end of the quarter. This helped REITs, as well as Utilities, which was the third strongest sector in the quarter. The Fund’s holdings outperformed the benchmark by a solid margin due to the acquisitions of Education Realty Trust and Gramercy Property Trust. Both agreed to be acquired for cash by private equity sponsors. Several other REITs appreciated by double-digit percentages as well, and only one of the thirteen stocks that were held during the quarter declined.

The strength in Industrials was broad-based as all but one of the Fund’s eight holdings outperformed the sector. Many Industrial stocks sold off on concerns about the impact of rising steel and aluminum costs on company profits. We, however, believe the Fund’s positions in the sector are less exposed to this driver.

In the Materials sector, FMC and Vulcan Materials bounced back after weak stock price performance in the first quarter. In addition, long-time holding RPM International received attention from an activist investor late in the quarter. On the negative side, the weakness in Technology is almost entirely due to what we believe to be profit-taking in DXC Technology ahead of the spin/merger of its government services business into Perspecta. We saw similar factors impact Wyndham Destinations in the Consumer Discretionary sector in concert with its spin of Wyndham Hotels and Resorts.

The top three contributors in the quarter were:

SM Energy (SM - $25.69 – NYSE) is a mid-sized oil and gas exploration and production company with most of its core operations in the Permian Basin in Texas. We believe that SM has more leverage than most E&P companies, and its capital plan is not quite as well funded. As a result, its share price tends to be more sensitive to changes in crude prices. The 14% rise in the price of crude combined with strong drilling results drove the shares higher in the second quarter.

HollyFrontier Corporation (HFC - $68.43 - NYSE) is a leading independent refining company with operations in Oklahoma, Kansas, Wyoming, Utah, and New Mexico. Refining profit rises and falls with changes in crack spreads (the difference between the prices of products such as gasoline and diesel fuel and the prices of oil) and differentials (the difference between different types of crude, for example Brent and West Texas Intermediate). With crack spreads strong, due to lower inventories, and differentials wide, due to strong oil production in the United States, inland refiners such as HollyFrontier appear well positioned to benefit. This helped the stock in the second quarter.

Sabra Health Care REIT (SBRA - $21.73 – NASDAQ) is a Healthcare REIT focused on Skilled Nursing facilities (SNF) and Assisted Living and Independent Living facilities.  Sabra got off to a rough start to the year, but shares rebounded nicely this quarter.  Management continues to make progress on the portfolio repositioning of recently acquired Care Capital Properties (CCP) and struggling operator Genesis Healthcare (GEN).  The worry about excessive rent cuts has passed, which benefitted the stock in the quarter.  We believe that the company has ample liquidity, a solid investment pipeline, and it seems like the underlying sentiment on Healthcare REITs is improving.

The three largest detractors in the quarter were:

DXC Technology (DXC— $80.61 —NYSE) is a leading information technology services company. The stock appreciated sharply over the last two years after it spun-out government services provider CSRA and merged with the Enterprise Services business of HP Enterprise. This quarter the shares gave up some of their gains. We think the weakness was due to disappointment associated with guidance for fiscal 2019 (ends March) and some investor positioning ahead of its spin of Perspecta. The guidance was lower mostly due to the removal of profits from the spin out and some stranded costs. We think the issue is transient and that the stock remains one of the least expensive in the portfolio.

Lincoln National Corporation (LNC - $62.25 – NYSE) is an insurance company with an emphasis on retirement services including annuities and corporate and non-profit retirement plans. As interest rates and the stock market rose in 2017, the stock performed very well. For most of this year, the stock market (at least as measured by the S&P 500 Index) has been pretty stagnant, and longer-term rates came down in the second half of the quarter. In addition, the life insurance sector has been pressured by concerns over long-term care insurance, to which Lincoln has limited exposure. Finally, the recent acquisition of Liberty’s group insurance business has put its stock repurchase program on hold for a couple quarters. With it likely to resume in the third quarter, we think LNC will have a better second half.

Oshkosh Corporation (OSK - $70.32 – NYSE) is a leading maker of specialty trucks for fire departments, construction, and the military. Steel is a significant input into most of the company’s product lines. If President Trump’s proposed tariffs on steel and aluminum go into effect, Oshkosh will likely see costs rise which could pinch margins. Concern over this possibility impacted Oshkosh’s stock along with other makers of products made from steel.

Conclusion

Regardless of what direction the market takes, what we do on a daily basis does not change. We consistently seek out companies that we believe are better than their average peers at creating value where the future looks better than the recent past and which are trading at attractive valuations. We do not believe the Fund is overexposed to potential fall-out from a possible trade war. If the stock market becomes more volatile as a result, we believe the Fund may hold up better than its benchmark based upon its performance history during such periods. Furthermore, we perceive periods of volatility to create opportunities to buy stocks at unexpectedly reduced valuations, which can lead to better returns over time.

In conclusion, thank you for investing alongside us in the KEELEY Mid Cap Dividend Value Fund. We will continue to work hard to justify your confidence and trust.

KEELEY Mid Cap Dividend 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 1.29% for Class A Shares and 1.04% 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 February 28, 2019.

This summary represents the views of the portfolio managers as of 06/30/18. 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. Additionally, dividend paying investments may not experience the same price appreciation as non-dividend paying investments. Portfolio companies may also choose not to pay a dividend or it may be less than anticipated.

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-Teton Advisors, LLC ("Keeley-Teton") 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 Keeley-Teton Advisors, LLC ("Keeley-Teton") 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 Keeley-Teton Advisors, LLC ("Keeley-Teton"). (3) For the purpose of assigning portfolio security holdings to a particular sector and/or industry, Keeley-Teton Advisors, LLC ("Keeley-Teton") 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 Keeley-Teton Advisors, LLC ("Keeley-Teton") 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, Keeley-Teton Advisors, LLC ("Keeley-Teton") 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. Holdings returns for this commentary are calculated as total returns, which reflect any dividends or income earned during the period. Prior to 9/30/16, holdings returns were based upon price percentage change.

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 Keeley-Teton Advisors, LLC ("Keeley-Teton"). 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 2000® Value Index is an unmanaged index that measures the performance of the small-cap value segment of the U.S. equity universe and includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index is an unmanaged index that measures the performance of the smallest 2,000 companies by market capitalization of the Russell 3000® Index. The Russell 2500® Value Index is an unmanaged index that measures the performance of the small to mid-cap value segment of the U.S. equity universe and includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500® Index is an unmanaged index that measures the performance of the 2,500 smallest companies by market capitalization of the Russell 3000® Index. The Russell Midcap® Value Index is an unmanaged index that measures the performance of the mid-cap value segment of the U.S. equity universe and includes those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap® Index is an unmanaged index that measures the performance of the 800 smallest companies by market capitalization of the Russell 1000® Index. The Russell 1000® Index is an unmanaged index that measures the performance of the 1,000 largest companies by market capitalization of the Russell 3000® Index. The Russell 3000® Value Index is an unmanaged index that measures the performance of the broad value segment of the U.S. equity universe and includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 3000® Index is an unmanaged index that measures the performance of the 3,000 largest U.S. companies by market capitalization. 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 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 G.distributors, LLC.

The top ten holdings of KMDVX as of June 30, 2018 include FMC Corporation (2.29%%), NRG Energy, Inc. (2.23%), Air Lease Corporation Class A (2.14%), BOK Financial Corporation (2.13%), Extended Stay America, Inc. (2.05%), Hudson Pacific Properties, Inc. (2.05%), Comerica Incorporated (1.97%), Vulcan Materials Company (1.94%), EQT Corporation (1.89%), and Total System Services, Inc. (1.85%).

Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. The prospectus, which contains more complete information about this and other matters, should be read carefully before investing. To obtain a prospectus, please call 800-422-3554 or visit keeleyfunds.com.