KEELEY Small Cap Dividend Value Fund

Investor Class (A) Shares: KSDVX

Institutional Class (I) Shares: KSDIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 4th Quarter 2017

To Our Shareholders:

For the quarter ended December 31, 2017, the KEELEY Small Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share rose 2.84% versus a gain of 2.05% for the Russell 2000 Value Index. For the year, the Fund gained 7.27% compared with a 7.84% gain for the Index.


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 similarly 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 appears to have been fueled by improving corporate earnings, the strengthening of 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 seems to be giving companies enhanced confidence to invest.

This strong economic expansion has also 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 US labor-market has helped drive growth in 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 for 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 should encourage 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 increased 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 continued 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 inflation.  So far, these factors appear manageable, but if they accelerate, the Fed and other central banks may be forced to 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.  Small caps, as measured by the Russell 2000, traded at 21.5x forward earnings vs. the long-term average of 15.8x. 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 fully reflected in analysts’ estimates.  Most strategists think that the new lower tax rate will add 5%-10% to corporate earnings.  For our smaller, mid-sized companies, we think the positive impact could be double this amount, largely owing to the more domestic sources of earnings for these companies vs. those in the S&P 500.  There remain many unanswered questions, such as how much of the benefit will be shared with employees and/or customers, 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.

The fourth quarter of 2017 was a solid one for the KEELEY Small Cap Dividend Value Fund. This was encouraging since small cap dividend-paying stocks trailed their non-dividend paying peers. As is typically the case for the Fund, good stock selection, as opposed to sector allocation, drove performance.

Selection impacted the Fund most positively in the Consumer Discretionary sector which holds two of the Fund’s three top contributors for the quarter: Regal Entertainment Group and Winnebago. A nice advance in the shares of Nexstar Media also added to the sector’s contribution. The Materials sector also added to the Fund’s performance as all three of the stocks that the Fund owns in that sector were up more than 10%.

On the other side of the ledger, the Fund lagged slightly in the Industrials, Technology, Real Estate, and Utilities sectors. In Technology, the disappointment was due to continued weakness in the shares of Diebold-Nixdorf. In the other lagging sectors, the weakness was distributed amongst a couple stocks in each sector.

The top contributors in the quarter were:

Regal Entertainment Group (RGC) is the second largest chain of movie theaters in the United States with more than 7,000 screens at 561 theaters. Concerns about the soft summer box office and potential on-line competition drove the stock into the mid-teens from the low-20s during the second and third quarters. Believing the weakness was more transient than secular, we added the stock to the Fund. Solid third quarter results seemed to justify our optimism, but the real money was made in the stock when UK theater chain CineWorld offered to buy the company for $23 in cash.

Winnebago Industries (WGO) is one of the leading manufacturers of motorized and towable recreational products (motorhomes, travel trailers, and fifth wheel products). This marked the third quarter in a row where WGO was one of the Fund’s leading contributors. Similar to the past few quarters, last year’s acquisition of Grand Design continues to increase Winnebago’s presence in the faster-growing towable segment.  This drove stronger than expected growth and better profitability. In addition, RV industry fundamentals remain solid.

Delek US Holdings (DK) operates four mid-sized refineries in Texas, Oklahoma, and Louisiana. Its plants are well-located to benefit from wider crude differentials. Earlier in 2017, Delek acquired competitor Alon USA. Because Delek is better capitalized and the combined company is larger, it has opportunities to reduce costs and fund additional capital improvements to generate higher levels of income. We believe that it is early in the process of achieving these synergies. During the quarter, Delek also benefitted from greater profitability in the refining industry as a result of declining crude and product inventories and some price divergences created by the disruption from Hurricane Harvey.

The three largest detractors in the quarter were:

Diebold Nixdorf (DBD) is the second largest maker of ATM machines worldwide following its merger with Wincor Nixdorf last year. The company has underperformed its competitor, NCR, which was aggressively using price reductions to take marketshare while Diebold and Wincor were working to close their transaction. Although the merger integration is proceeding above plan, the company lowered guidance as they are seeing sales cycle lengthening in North America for large-scale ATM deals. The company is in the process of searching for a new CEO who we believe will reinvigorate the company’s growth strategy.

Hamilton Beach Brands (HBB) designs, manufactures, and sells small kitchen appliances, as well as operates a small chain of retail kitchen supplies stores. HBB was spun out of prior Fund holding NACCO (NC) during the quarter. At the time of the split-up, we believed HBB was undervalued and NC, the core coal mining company, was overvalued. While the stock price of HBB initially increased, it has since faded as its first quarter earnings as an independent company came in below expectations due to the timing of larger product shipments into a later quarter. We thus believe the weakness will be short-lived.

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, but we believe that it still maintains opportunities for earnings and dividend growth from the integration of the SourceGas acquisition, the sale of oil and gas assets, and further rate base and regulatory activity.


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

KEELEY Small 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

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 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 KSDVX as of December 31, 2017 include Winnebago Industries, Inc. (2.90%%), Wintrust Financial Corporation (2.21%), BancorpSouth Bank (2.19%), Chemed Corporation (2.17%), Cypress Semiconductor Corporation (2.16%), Nexstar Media Group, Inc. Class A (2.11%), Ensign Group, Inc. (2.11%), KBR, Inc. (2.06%), Delek US Holdings Inc (2.02%), FBL Financial Group, Inc. Class A (1.97%).

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