KEELEY Small-Mid Cap Value Fund

Investor Class (A) Shares: KSMVX

Institutional Class (I) Shares: KSMIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 2nd Quarter 2018

To Our Shareholders:

For the quarter ended June 30, 2018, the KEELEY Small-Mid Cap Value Fund’s net asset value (“NAV”) per Class A share increased 3.14% versus a gain of 5.80% for the Russell 2500 Value Index. For the year-to-date, the Fund is up 2.26% compared with 3.00% for the benchmark.

Commentary

After a choppy start to the year, stocks rebounded nicely in the second quarter with the major US indices rising 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 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. However, the potential slowing effect from a trade war and oil prices increasing to $70 per barrel, plus few signs of wage inflation, resulted in only a slight rise in the 10-Year Treasury yield leading some to ponder if the Fed would ease up on its rate hike path. The 10-year yield climbed from 2.43% to 2.74% in the first quarter, but only moved up to 2.85% 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 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 are just posturing tactics and that a deal will be made to avert these trade actions. After the first set of tariffs, several trading partners lowered tariffs for goods imported into their countries from the US as a sign of “cooler” heads working towards fairer trade. 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 continues to grow, albeit slowly. This long period of slow growth, however, has driven the unemployment rate to near-record low levels. We hear from companies that it is becoming 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 though China seems to be slowing and the outlook for Europe is softening as the EU and the UK deal with the uncertainty of Brexit

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 similar policies to their predecessors rather than change course. Also, 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 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. Although most of this increase was related to 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 the outcome on the trade front. Stock valuations look reasonable and the economic backdrop seems supportive of rising earnings. However, more trade barriers may cause an initial burst of inflation, then slow economic growth impacting corporate earnings and stock prices. 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.

Merger and acquisition activity remains very strong with over $2.1 trillion in announced deals so far, up 56% from this time last year. Private equity firms have been very successful raising funds and are sitting on over $1 trillion. Mitel Networks (MITL), a provider of unified communications services, recently agreed to be acquired by private equity firm, Searchlight Capital Partners. Bank consolidation also remains robust as State Bank Financial (STBZ) is being acquired by Cadence BanCorp.

In the second quarter of 2018, the Fund’s performance was driven by strong stock selection in the Technology, Real Estate, Utilities, Consumer Discretionary and Energy sectors. Although the Fund was overweight Technology, the best performing sector in the Russell 2500 Value Index, stock selection added the bulk of the relative outperformance due to CSRA’s (up 39%) takeover by General Dynamics, and strong fourth quarter results at Mitel (MITL, up 13%) and Broadridge (BR, up 22%). The Fund’s underweight position in Real Estate, the second worst performing sector in the index (down 8%), helped as did solid earnings results from Ryman Hospitality (RHP, up 14%) and Howard Hughes (HHC, up 6%). The transformation of NRG Energy (NRG, up 7%) was ahead of schedule leading to outperformance in Utilities while excellent execution at PVH (PVH, up 10%) and Denny’s (DENN, up 17%) led to stock selection outperformance in the Consumer Discretionary sector. Lastly, the Fund benefited from its underweight position in Energy (down 8%), the worst performing sector in the index. In addition to the Energy underweight, the Fund held Energen (EGN, up 9%), an Energy sector holding that provided stock selection outperformance after increasing its 2018 production goals.

On the negative side, the Fund’s underweight in Financials, the second best performing sector in the index, detracted. Stock selection performance, however, was in-line with the average financial stock. The Fund was also underweight the third best sector, Healthcare, and performance was impacted as Wright Medical (WMGI, down 11%) preannounced lower than expected results in its lower extremities business while undergoing a salesforce transformation.

The top contributors in the quarter were:

Del Taco Restaurants, Inc. (TACO - $14.18 - NASDAQ) engages in developing, franchising, owning, and operating Del Taco quick-service Mexican-American restaurants. The stock sold off last quarter on concerns regarding future margin headwinds stemming from both food and labor inflation. These concerns were proven correct as the company slightly missed fourth quarter 2017 earnings and lowered its 2018 guidance. In addition, the industry continues to fight for market share by pushing “value bundles” led by the larger brands such as McDonalds. We continue to believe the company is well positioned with its unique “fresh” menu offerings and has ample growth opportunities outside its core West Coast roots.

Sabra Healthcare REIT, Inc. (SBRA - $21.73 - NASDAQ) is a Healthcare real estate investment trust focused on Skilled Nursing facilities (SNF) and Assisted Living and Independent Living facilities.  Sabra got off to a rough start to the year after a few tenants ran into operating difficulties. The stock rebounded nicely this quarter as management continues to make progress on the portfolio repositioning of recently acquired Care Capital Properties (CCP) and divesting sites of struggling operator Genesis Healthcare (GEN). The worry about excessive rent cuts has passed, which benefitted the stock in the quarter.  The worry about excessive rent cuts appears to have passed, and the company should have ample liquidity with a solid investment pipeline.

Mitel Networks Corporation (MITL - $10.97 - NASDAQ) is a cloud-based telephony and communications provider. With over forty years of operations, the company has amassed a formidable installed base of premise-based, IP telephony customers via accretive acquisitions. We became involved with the stock following the company’s rocky transition into offering cloud-based telephony (a software solution which allows the telephony equipment to reside off-premise), marked by an aborted acquisition and another that later reversed into a divestiture. We believe that the conversion potential of the installed base into a high margin, recurring revenue stream offered significant upside in the stock. After repositioning itself to capitalize upon this long-awaited transition, the company announced a sale to private equity firm Searchlight Capital Partners, LP. As a laggard among its peers, owing to a heavily European install base that was slower to transition coupled with the offset of declines in its legacy business lines, it appears that going private will allow the company added latitude while navigating this conversion period.

The three largest detractors in the quarter were:

Spectrum Brands Holdings, Inc. (SPB - $81.66 - NYSE) is a diversified household consumer products company. During fiscal 2Q18 (March) the company experienced complications from two separate consolidation efforts which were the primary reason for quarterly results that were well below analyst expectations. In the Hardware & Home Improvement division, the integration of the East Coast distribution into the new Kansas facility caused bottlenecks and shipment delays despite an earlier successful integration of the West Coast facility. The added labor/overtime and expedited freight necessary to ensure customer satisfaction adversely impacted margins. Similarly, the consolidation of canister filling plants at Global Auto Care also led to bottlenecks requiring extra cost to meet end customers’ needs during their seasonal peak. We believe the issues to be transitory in nature and expect the company to be back on track by year end. Management intends to utilize the proceeds from the sale of its Rayovac battery business to Energizer in the second half of 2018 to further de-lever its balance sheet as well as buy back stock. The company is also in the process of selling its appliance business, and we believe that an announcement on that front would serve as a near term catalyst for the stock.

John Bean Technologies Corporation (JBT - $88.90 - NYSE) is a technology solutions provider to food, beverage and air transportation industries. Its largest division, FoodTech, designs, manufactures and services food processing systems for the preparation of meat, seafood and poultry products, ready-to-eat meals, packaged foods, juice, dairy, fruit and vegetable products. AeroTech supplies gate and ground equipment solutions to airlines, airports, the military and defense contractors. The company, which has been successfully consolidating the highly fragmented food prep industry, stumbled posting lower than expected Food Tech margins primarily from higher installation costs, weaker product mix and operational inefficiencies at some locations. The company has since addressed the installation issues and announced a new restructuring program to improve margins by 200 basis points by the end of 2019. As a major beneficiary of the rising global middle class demanding safer foods, we believe that JBT will rebound from its temporary execution missteps.

Voya Financial, Inc. (VOYA - $47.00 - NYSE) is a retirement, investment, and insurance company that was spun out of ING. The company announced the sale of its Closed Block Variable Annuity (CBVA) business in December. This type of transaction was a major part of our investment thesis of Voya adding value by simplifying its business. Although management was very detailed that the CBVA book had been completely hedged, removal of this uncertainty led to strong performance in the fourth quarter of 2017. However, it appears that the flattening yield curve impact on life companies plus investors waiting for the next catalyst led to some short-term weakness for Voya this quarter. Management is currently reviewing its Life Insurance business, with one option being a possible sale, and continues to return capital to shareholders as it is buying back $1.5 billion in stock using the proceeds from the CBVA sale. As the story becomes cleaner, we believe that it will further highlight the value of Voya’s deferred tax asset, which management estimates is worth $1.4 billion or $8 per share). This may ultimately attract a possible suitor for Voya in the future.

Conclusion

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

KEELEY Small-Mid Cap 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 1.39% for Class A Shares and 1.14% 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 KSMVX as of June 30, 2018 include NRG Energy, Inc. (3.42%), Voya Financial, Inc.(3.11%), Air Lease Corporation Class A (2.53%), Howard Hughes Corporation (2.41%), Energen Corporation (2.40%), BOK Financial Corporation (2.38%), ITT, Inc. (2.36%), UMB Financial Corporation (2.34%), Copart, Inc. (2.27%), and Hanmi Financial Corporation (2.27%).

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.