KEELEY Small Cap Dividend Value Fund

Investor Class (A) Shares: KSDVX

Institutional Class (I) Shares: KSDIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 3rd Quarter 2019

To Our Shareholders:

For the quarter ended September 30, 2019, the KEELEY Small Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share fell 2.03% versus a 0.57% decrease for the Russell 2000 Value Index. Year-to-date, the Fund is up 15.92% compared with a 12.82% gain for the benchmark.

Commentary

Summer is usually a fairly quiet time of year, but the third quarter was anything but quiet. While the market was relatively calm, the cross-currents in the economy and on the political landscape continue to make the outlook cloudy. The trends from last quarter continued as we saw another Fed rate cut, the trade conflict between the U.S. and China churned on, and growth in economies around the world slowed. On the positive side, consumer confidence, as measured by the University of Michigan’s Consumer Sentiment Index, remained steady in July before dropping in August and then strengthening in September. Gains in jobs and incomes helped to offset some of the uncertainty over trade issues. Other positive signs for the U.S. economy included strong growth in housing starts and the labor force participation rate ticked up to 63.2% in August-- a level that matches recent highs posted in early 2019. Meanwhile, some less-encouraging data included lackluster job gains in August, with nonfarm payroll growth well below expectations. In addition, ISM U.S. manufacturing Purchasing Managers’ Index declined for a second straight month in September and the 47.8% reading was the lowest since June 2009.

Two issues that had been simmering on the back burner moved forward during the quarter, one domestic and one international. The domestic issue is the effort in the House of Representatives to impeach President Trump. There is no question that impeachment would introduce to the market yet another element of uncertainty. The international issue involves the recent attack on a major Saudi oil production facility.

The equity market, as measured by the S&P 500 Index, was up 1.2% in the third quarter and is now up 18.7% through the year’s first nine months. Larger cap stocks continue to outperform small caps, with the Russell 1000 Index gaining 1.4%, in the quarter, while the Russell 2000 Index lost 2.4% and the Russell Midcap Index landed in between with a 0.5% gain. For the first time this year, value outperformed growth, although it did so only in small cap and mid cap stocks. Large cap growth stocks continue to beat large cap value stocks and were the best performing style category.

Meanwhile, bond market yields continue to fall with the 3-month US Treasury bill yield falling 24bps to 1.88% and the 10-year bond falling 32bps to 1.68%. The yield curve inverted in the second quarter for the first time since 2007 and remained inverted in the third quarter. In the commodities markets, gold was up 2.8%. Oil fell 3.0% in the quarter.

When the year began, we were optimistic about the outlook for the market. The fourth quarter 2018 market slump had lowered valuations to a very attractive level. Furthermore, we thought the factors that led to the fall (trade wars and the government shutdown), would be resolved. The government shutdown was short-lived, but the trade conflict lingers. The trade disputes had led to some of the softness in the economic numbers in the U.S. and abroad. Over this same time period, the market has been strong with solid double-digit gains across the board. As a result, valuations have moved up, but the only segment where valuation is below its long-term average is small-cap value, while mid-cap value is a little above its long-term average.

Portfolio Results

While the backdrop of the market challenged the Fund, we also had some setbacks in particular stocks which hurt performance. As we have pointed out in the past, Stock Selection drives most of the Fund’s relative performance. This quarter was no exception as Sector Allocation was a slight positive, but Stock Selection had a negative impact on performance. The Fund benefitted a little from a slight underweight in Energy (the worst performing sector) and a slight overweight in Real Estate (the best performing sector). The Fund outperformed in three sectors and it lagged in three, while four were a push. The Fund added the most value in the Energy, Real Estate and Health Care sectors, while the three principal laggards were Industrials, Financials, and Information Technology.

The Energy sector was down almost 21%, but the Fund’s Energy holdings largely avoided the worst of that industry’s carnage, with only one of the Fund’s five Energy holdings, Patterson-UTI Energy, underperforming the sector.

Three of the Fund’s real estate stocks posted double-digit gains, well in excess of the sector’s nearly 6% positive return. These were longtime Fund holdings Sabra Health Care REIT, City Office REIT and National Storage Affiliates. A fourth real estate stock in the Fund, OUTFRONT Media, gained 9%.

Although Health Care was one of the benchmark’s worst-performing sectors in the third quarter, the Fund’s holdings only declined slightly. The Fund only holds two healthcare stocks and one of them, Chemed, rose sharply after it reported strong second quarter earnings.

The Fund’s underperformance in the Industrials sector was driven by declines in Altra Industrial Motion and Granite Construction. Both companies reported disappointing second quarter results and provided cautious outlooks. They were amongst the Fund’s worst detractors and we provide more detail about them in the Let’s Talk Stocks section below.

In Financials, more than half of the contribution shortfall vs. the benchmark came from Virtu Financial. Its earnings suffered from lower market volatility, a leading driver of profitability for the firm. We also saw disappointing performance from three banks, Wintrust, Cadence, and Bank of Butterfield. The first two reported disappointing second quarter results due to credit issues.

During the quarter, the Fund added two new positions and liquidated three positions.

Let’s Talk Stocks

The top contributors in the quarter were:

Sabra Health Care REIT (SBRA - $22.96 – NASDAQ) is a Healthcare REIT focused on Skilled Nursing facilities (SNF) and Assisted Living and Independent Living facilities. The market rewarded Sabra’s second quarter of in-line results as the company has been plagued by missteps and industry woes since the acquisition of Care Capital Properties in August 2017. Investors are starting to become comfortable with management’s focus on fixing the credit quality of the company by cleaning up the portfolio and improving the balance sheet to maintain investment grade ratings. Underlying trends remain favorable and with management’s focus shifting back towards growth should continue to help close the significant valuation gap with peers.

Chemed Corporation (CHE - $417.57 – NYSE) is one of the largest providers of Hospice services through its VITAS segment and provides plumbing, drain cleaning, and water restoration services through its Roto-Rooter segment. The company reported a very strong quarter beating estimates on broad strength in both segments. Following quarter end, the company announced better than expected earnings guidance due to positive developments within each segment. At VITAS, CMS increased reimbursement and moderated headwinds caused by the two-tier payment system. Roto-Rooter announced its largest franchise acquisition in very attractive service territories.

City Office REIT (CIO - $14.39 – NYSE) is a real estate investment trust that owns office buildings in fast-growing urban areas. The company has done a nice job over the past few years in improving newly acquired office buildings and expanding into new markets. Shares have rallied after the company reported a strong earnings report, including healthy organic growth and robust occupancy, and raised full-year guidance. In addition, City Office REIT has meaningfully improved its balance sheet, which should assist in further accretive acquisitions.

The three largest detractors in the quarter were:

Granite Construction (GVA- $32.13 - NYSE) provides construction and infrastructure solutions for the Transportation, Water, and Materials sectors. The company has struggled with a few large legacy fixed priced road projects and these projects required a write-down of roughly $100 million in the quarter sending shares down. These projects are close to completion, but potential risk remains for another write-down. Management is confident that won’t be necessary, but the market is skeptical. Unfortunately, these developments overshadowed positive underlying trends in the remaining segments.

Altra Industrial Motion (AIMC - $27.69 – NASDAQ) is a diversified manufacturer of off-highway vehicle and material handling parts and systems. Due to a transformative acquisition that closed almost a year ago, investors were caught off guard by 2Q19 results that fell well short of expectations and caused the company to lower its guidance for the year. While detractors questioned the wisdom of the acquisition, we would ascribe the weakness to growing pains and see the synergy target as achievable.

Entercom Communications (ETM - $3.34 - NYSE) is the second-largest owner of radio stations in the U.S. and operates digital and events businesses. Shares declined 39 percent in the quarter after the company reported revenue and earnings miss. The main culprit was deteriorating local advertising sales, which has been a longstanding problem for Entercom and other radio station operators. Entercom also experienced weak ticket sales, largely due to poor weather, at some events that the company operated. While Entercom has done a fine job extracting synergies from its 2017 merger with CBS Radio, it has struggled to boost local ad sales thus far. Entercom’s outlook is for better revenue growth by the end of the third quarter, but for now, the investment community remains skeptical.

Conclusion

In conclusion, thank you for your investment 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 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, 2020.

This summary represents the views of the portfolio managers as of 09/30/19. 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 KSDVX as of September 30, 2019 include Atlantica Yield plc (2.75%), Nexstar Media Group, Inc. Class A (2.74%), OUTFRONT Media Inc. (2.36%), Sabra Health Care REIT, Inc (2.35%), Chemed Corporation (2.31%), KBR, Inc. (2.25%), CareTrust REIT Inc (2.17%), Ensign Group, Inc. (1.89%), South Jersey Industries, Inc. (1.88%), Altra Industrial Motion Corp. (1.82%).

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.