KEELEY Mid Cap Dividend Value Fund

Investor Class (A) Shares: KMDVX

Institutional Class (I) Shares: KMDIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 4th Quarter 2017

To Our Shareholders:

For the quarter ended December 31, 2017, the Keeley Mid Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share rose 6.45% versus a gain of 5.50% for the Russell Mid Cap Value Index. For the year, the Fund returned 15.69% compared with a 13.34% gain for the Index.

Commentary

The markets ended the year on a strong note, with the major US equity indices at or near all-time highs. The holiday cheer was not confined to the US as stock markets in the UK, France, Germany, Japan, India, and Brazil all closed the year at highs.  Equity markets, however, were not the only places displaying strength.  Commodities also advanced into the end of the year with the Goldman Sachs Commodity Index closing near its high for the year, as underlying components such as oil, aluminum, and nickel exhibited strength.  This global optimism led yields on the 3-month treasury bill and 5-year treasury note to close 2017 at highs for the year, even though there was little evidence of inflation.  In fact, the only major benchmark seeing a significant retreat in 2017 was the CBOE Volatility index – also known as the VIX Index – which tends to decline when US equities rally.

The global stock rally has been fueled by improving corporate earnings, strengthening economies around the world, and supportive monetary policy from global central banks.  Many of these factors have driven the gains in US stocks, as domestic economic data has been setting six-year records.  And with the passage of a new tax law that will reduce most companies’ corporate tax burdens, investors remain bullish that economic expansion will continue in 2018.

Taking a closer look at economic trends both in the US and overseas, one sees that economic expansion has been broad-based by sector.  Business confidence surveys such as the purchasing manager indices (“PMI”) reveal that 96 percent of the 28 countries tracked showed expansion of their manufacturing sectors and that 83 percent saw services sector expansion.  Recent data suggest business spending is also starting to pick up. Although tax reform was the sole item on the Trump agenda that successfully passed, the new Administration has been quietly reducing regulation which in turn is giving companies confidence to invest.

This strong economic expansion has produced continued job growth.  The Eurozone jobless rate of 8.8% is at the lowest level in nine years.  The picture is even rosier in the US, where the unemployment rate remains historically low and the US continues to add jobs at a brisk clip: December’s unemployment rate held at 4.1%, the lowest in 17 years.

A strong labor-market has helped drive growth in US consumer confidence during the year, despite a small decline in December.  Although wage growth has been slow, consumers have remained confident amid low unemployment and near record levels of job openings.  Confidence may continue to improve as many companies have announced measures to share some of the benefits of lower corporate taxes with employees through wage increases, one-time bonuses and benefits improvements.

Overall, the global economy appears to be on solid ground heading into 2018, with strong business and consumer confidence, further strength in labor markets, higher wages and low borrowing costs.  All this should set a backdrop for growth in consumer spending.

With lower corporate taxes, companies should have greater earnings and operating cash flow leading to other interesting capital allocation options besides stock buy-backs and dividend increases, which have been used more frequently over the past few years.  The new tax law encourages capital spending, so we expect a rebound in corporate investment.  In addition, limits on interest deductibility will likely encourage a few companies to pay down debt or spur highly levered private companies to sell. Other companies will look to use the cash to grow via acquisition, thereby increasing M&A opportunities.

We see another possible impact from the recent tax law which is particularly interesting to us as investors in dividend-paying stocks.  The deployment of increased earnings and cash flow resulting from lower corporate tax rates will be interesting.  The new tax law encourages capital spending, so we expect companies to spend more in this area.  In addition, limits on interest deductibility may encourage certain companies to pay down debt.  Furthermore, these limits may ultimately spur some highly levered private companies to sell, resulting in an increase in M&A opportunities.  After all of this, we still believe that companies will have cash remaining to either buy-back stock or increase dividends.  With both valuations and interest rates higher, the math supporting buy-backs does not work as well as in the past, so we could see an uptick in dividends.

Despite the positive backdrop, we see three potential threats to further stock market gains - higher inflation, elevated valuations and geopolitical risk.  From an inflation perspective, oil and other commodity prices have ticked up and these prices could increase further.  In addition, the tighter labor market may ultimately drive higher wages and cause more inflation.  So far, these factors appear manageable, but if they accelerate, the Fed and other central banks may tighten more aggressively.

Valuation is the second challenge.  We are eight years into a stock market recovery.  Over the last several years, earnings gains have failed to keep pace with stock price appreciation.  At year-end, the S&P 500 traded at 18.2x estimated 2018 earnings, well above the 15.7x average since 1999.  Mid cap stocks, as measured by the S&P 400, traded at 18.5x vs. the long-term average of 15.1x. At this point in the business cycle, the market has historically had a difficult time exceeding 19x forward earnings. However, we think that valuations are not as high as they appear because the impact of tax reform is not yet reflected in analyst estimates that flow into the P/E calculation.  Most strategists believe that reduced tax rates will add 5%-10% to corporate earnings.  When we look at the Fund, we see the impact to potentially be double that, largely owing to the more domestic sources of earnings for the companies in the Fund vs. those in the S&P 500.  There remain many unanswered questions, such as how much of the benefit will be shared with employees, how much will be reinvested, and how much will be competed away.  In addition, even adjusted for the impact of tax reform, valuations remain above average.

Finally, unexpected geopolitical developments now seem likely to be more of a challenge than an opportunity.

Following last quarter’s strong relative performance, we are pleased to report another solid quarter of results for the Fund. This was particularly gratifying in an environment where non-dividend paying stocks outperformed dividend payers. Most of the Fund’s outperformance in the quarter resulted from stock selection while sector allocation was a trivial detractor. The Fund’s holdings in the Energy, Financials, and Consumer Discretionary sectors made the biggest positive contributions while the Real Estate and Utilities sectors were slight detractors.

The Energy sector led the way for the Fund. Strong performance by the Fund’s two refining holdings, HollyFrontier and Delek US, as well as a bounce-back in oil producer SM Energy drove the gains. Financials also contributed to outperformance. Much of this sector’s gains came from Voya Financial, although four other stocks posted double-digit gains in the quarter as well. Finally, appreciation due to the buyout of CalAtlantic and a bounce-back in previously weak Foot Locker drove outperformance in the Consumer Discretionary sector.

Holdings in the Real Estate sector detracted the most from performance during the quarter. Most of the weakness can be attributed to declines in Sabra Health Care and Gramercy Property Trust. Both companies are in the midst of an asset “recycling” process (i.e. the sale of “non-core” assets to reinvest in properties that are more in line with firm goals). We believe these companies will be stronger once these efforts are complete. Although these stocks appear undervalued to us, the process can introduce some unevenness to results. The Utilities sector also held back Fund performance due to softness in PPL and Black Hills (more in the next section).

The top three contributors in the quarter were:

HollyFrontier Corporation (HFC) is one of the leading independent refining companies in the US. Its facilities are located inland and therefore primarily refine domestic crude oil. HollyFrontier reported strong third quarter results on good throughput through its refineries and widening unit margins. While much of the strength in margins was due to tighter gasoline markets because of refinery disruption from Hurricane Harvey, both crude and products (gasoline, diesel, jet fuel) inventories have come into more balance. This has firmed up pricing and improved sentiment towards the refiners.

CalAtlantic Group (CAA) is one of the largest homebuilders in the US. We bought the stock during the first half of 2017 on the idea that CalAtlantic was well positioned to benefit from a continuation in the housing recovery. Our expected returns came early as competitor Lennar agreed to acquire the company at a nice premium to the market.

Voya Financial (VOYA) is a leading provider of retirement and investment services such as life insurance, annuities, and 401(k) plans. It was carved out of Dutch financial services conglomerate ING in 2013 and has worked to lower its risk, change its product mix, and improve returns in recent years. Despite its operating improvements, the stock traded at a discounted valuation due to the overhang from a large closed-block of older, riskier variable annuities. Late in the fourth quarter, Voya announced that it had sold this block and an annuities business to a new private-equity backed company. We believe these transactions will further reduce risk, improve returns, and remove any overhang. The company has already bought back ~ 40% of its outstanding shares since going public in 2013, and has announced that it will buy back another $1.5 billion of stock in 2018.

The three largest detractors in the quarter were:

PPL Corporation (PPL) is a utility holding company with electric generation plants in Kentucky and Pennsylvania and significant electric distribution operations in the United Kingdom.  The stock underperformed during the quarter on concerns about its UK operations - the fallout from Brexit, the current UK political environment, and currency volatility.  While it is difficult to predict the ultimate impact from these events, the company has been able to navigate these risks, especially with FX as the company has a currency hedging program in place.

Black Hills Corporation (BKH) is a utility holding company serving electric and gas customers in the Great Plains states. The company reported lackluster third quarter results due to sluggish sales growth to industrial and agricultural customers which led to a reduction earnings guidance for 2017 and 2018. BKH now trades at a discount to its peers yet still maintains opportunities for earnings and dividend growth from the integration of the SourceGas acquisition, sale of oil and gas assets, plus further rate base and regulatory activity.

EQT Corporation (EQT) is a leading producer of natural gas from its operations in Appalachia. The company is one of the lowest cost producers in the United States and its recent acquisition of Rice Energy looks like it will allow EQT to reduce unit costs further. The stock was weak during the quarter in sympathy with lower natural gas prices, but also may have fallen due to some merger-related stock transactions after the close of the acquisition.

Conclusion

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 12/31/17. 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 December 31, 2017 include Air Lease Corporation (2.47%), FMC Corporation (2.42%), Comerica Incorporated (2.38%), Lincoln National Corporation (2.36%), Voya Financial, Inc. (2.18%), Total System Services, Inc. (2.16%), BOK Financial Corporation (2.10%), DXC Technology Co. (2.09%), Oshkosh Corporation (2.02%), and Cigna Corporation (2.01%).

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 888-933-5391 or visit keeleyfunds.com.