KEELEY Small Cap Dividend Value Fund

Investor Class (A) Shares: KSDVX

Institutional Class (I) Shares: KSDIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 2nd Quarter 2018

To Our Shareholders:

For the quarter ended June 30, 2018, the KEELEY Small Cap Dividend Value Fund’s net asset value (“NAV”) per Class A share rose 6.78% versus an 8.30% gain for the Russell 2000 Value Index. For the year-to-date period, the Fund is up 4.06% compared with a 5.44% rise in 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 Index 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 slightly outperformed growth in small and small-mid caps, but lagged more broadly in mid cap and large cap.

The rebound may be surprising as the issues that unsettled markets in the first quarter, namely trade wars and inflation, remained present in the second quarter. Specifically, the United States was days away from implementing tariffs on tens of billions worth of imports from many countries as the quarter ended. Those countries have threatened to retaliate with tariffs on US-made products. If we continue down this path, it is hard to see how these actions would not negatively impact economic growth. Yet, the markets remained strong as investors seemed to believe that the rhetoric from both sides is just posturing and that a deal will be made to avert these trade actions. Investors also 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 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, nationalist parties gained power, but have pursued policies more similar to their predecessors than different. Also in Europe, the UK is working through the process of leaving the EU, and 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 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. Although most of this increase was probably from the benefit of corporate tax reform, estimates have continued the upward trend even after considering its impact.

The strong increase in earnings plus the meager stock market gains in the first half of the year have brought down the forward multiple on stocks. In the case of the S&P 500, the forward multiple (the ratio of current stock price to expected future earnings) 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 perceive it to be much of an impediment to stock gains. In addition, we believe that this has made small cap value stocks appear 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 look reasonable and the economic backdrop seems supportive of rising earnings. Rising trade barriers, however, may cause an initial burst of inflation, and then 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 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.

The second quarter was difficult on a relative basis for the Keeley Small Cap Dividend Value Fund and for most other small-cap managers. The attributes that we seek in an investment and the characteristics typically found in the portfolio were out of favor during the quarter, at least from a stock price performance standpoint. The Fund was on the wrong side of dividends, valuation, quality, and volatility as factors. During the second quarter, non-dividend paying stocks in the Russell 2000 Value Index climbed 9.8% while the dividend payers were up only 7.5%. Furthermore, stocks with higher P/E ratios and those of companies losing money outperformed lower P/E stocks. Lastly, higher beta stocks beat lower beta stocks and lower ROE stocks did better than higher ROE stocks. This combination of factors, and the overall strength in the market, is a difficult environment for the Fund to outperform.

When we disaggregate performance between sector allocation and stock selection, we find that there was no material driver of underperformance from a sector selection perspective. Although the stock selection impact netted to a relatively small number, there were both large positives (Health Care and Materials) and large negatives (Consumer Discretionary and Technology) in the performance attribution. The Fund’s Health Care stocks performed best relative to their sector counterparts during the second quarter. This was mostly driven by the strong performance of the Ensign Group (discussed below), but the Fund’s other health care holding Chemed performed very well also. The Fund’s Materials holdings also did well due to the 42% gain in Mercer International.

In the negative column, Consumer Discretionary was the largest detractor, as four of the Fund’s eight holdings declined by double-digit percentages compared to an 8.4% gain for the sector in the benchmark. Two of the Fund’s three largest detractors came from the sector.

The Fund’s Technology holdings also lagged the sector. Declines by Diebold Nixdorf and Cypress Semiconductor more than offset a strong performance from Plantronics and accounted for most of the disappointment.

The top contributors in the quarter were:

Ensign Group (ENSG - $35.82 – NASDAQ) is a provider of healthcare services in the traditional skilled nursing, assisted & independent living, and home health and hospice markets.  This is the second quarter in a row that Ensign was among the top contributors to the Fund.  The company built upon its success from last quarter by posting another quarter with solid revenue growth, increased occupancy, and a shift to more favorable demographics.  The latter should support further increases in facility level occupancy.  Ensign continues to be active in the M&A market by buying underperforming properties and, as the turnaround unfolds, we expect that the benefits will accrue to occupancy, revenue growth, and earnings.

Mercer International (MERC - $17.50 - NASDAQ) is one of the leading producers of NBSK (Northern Bleached Softwood Kraft) pulp which is used in tissue paper and specialty paper. It also produces lumber through its wood products segment. The company reported a record quarter as revenues increased sharply on the back of strong pricing gains in NBSK as well as lumber.  Management noted that the pricing environment in NBSK pulp is very good with additional price increases recently implemented.  Industry trends continue to appear favorable in both segments.

Delek US Holdings (DK - $50.17– NYSE) operates four refineries in Texas, Oklahoma, and Louisiana. Declining crude and gasoline inventories create a positive environment for refiners, but the real kicker for Delek has been the widening differential between crude in Cushing, Oklahoma and Midland, Texas. With production of crude in the Permian basin pushing up against takeaway capacity, in-basin crude has become inexpensive. Delek operates one of the few refineries in the basin and therefore stands to benefit from reduced input costs.

The three largest detractors in the quarter were:

Virtu Financial (VIRT - $26.55 – NASDAQ) is one of the largest independent market-makers in stocks, bonds, and commodities. While Virtu was one of the leading detractors in the second quarter, it is still one of the largest contributors for the year-to-date period. We believe the second quarter decline was a combination of profit taking and a response to declining volumes and volatility in the financial markets.

Entercom Communications (ETM— $7.55 —NYSE) is one of the largest owners and operators of radio stations in the United States. In November 2017, Entercom merged with the spun-off CBS Radio unit to form the US’ second-largest radio broadcaster. In its first quarter earnings release, Entercom missed on both the top and bottom lines due to a weak advertising environment and an unexpected and now-resolved problem with a key partner that pressured revenues and earnings. Despite early choppiness, we believe that Entercom will execute better on its plan as 2018 progresses. Entercom should benefit from an improving ad market, particularly as the 2018 political advertising season heats up, while delivering planned merger efficiencies.

Marriott Vacations Worldwide (VAC - $112.96 – NYSE) is one of the largest developers, marketers, managers, and financers of vacation ownership resorts. It recently announced the acquisition of competitor ILG for cash and stock. The price was relatively full, but we think that there may be more cost synergies than what the company has thus far outlined. The deal seemed to create some disappointment and arbitrage pressure on the stock. In addition, Marriott reported slightly disappointing and confusing first quarter results which we believe further pressured the stock.

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 will perform better than its benchmark based upon its historical results 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 your investing alongside 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 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 KSDVX as of June 30, 2018 include Ensign Group, Inc. (2.30%), Chemed Corporation (2.19%), Wintrust Financial Corporation (2.17%), BancorpSouth Bank (2.13%), Cypress Semiconductor Corporation (2.06%), Mercer International Inc. (2.05%), Plantronics, Inc.(2.04%), Winnebago Industries, Inc. (1.98%), CenterState Bank Corporation (1.96%), Silvercrest Asset Management Group, Inc. Class A (1.96%).

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.