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 2019

To Our Shareholders:

For the quarter ended June 30, 2019, the KEELEY Small-Mid Cap Value Fund’s net asset value (“NAV”) per Class A share increased 1.74% versus a rise of 1.89% for the Russell 2500 Value Index. Year to date, the Fund has appreciated 19.01% versus 15.26% for the Russell 2500 Value Index.

Commentary

What appeared to be a flattish market environment for the second quarter, was anything but flat. The first quarter’s strength continued in April due to the Federal Reserve’s pause. The second quarter began on a stable economic note as the Purchasing Manager Index (PMI) marked a rebound in March for both the US (rising from 54.2 to 55.3) and China (from 49.3 to 50.5) after easing in prior months. Even the Eurozone and Germany, both already at contraction levels below a reading of 50, halted their declines.

However, the Russell 2500 Value Index dropped 7.5% in the month of May as trade war rhetoric spiked and GDP figures slowed. President Trump escalated trade tensions in the form of a Sunday morning “tweet” (May 5th) threatening a spike in tariffs to 25% on Chinese goods by the end of the week. May closed out with another “tweet” (May 30th) that threatened to upend the USMCA Agreement (NAFTA 2.0) by imposing an arbitrary 5% tariff that would accelerate to 25% unless illegal immigration was deemed solved. This injection of uncertainty caused a sustained decline in the market. Alongside investors, corporate leaders have also responded to uncertainty, reflected in durable goods orders (excluding aircraft) which have declined sequentially for three out of the last four months. At this pace, corporate capital spending is forecast to be essentially flat for the second quarter, not contributing to economic growth for the first time since the end of 2016. The “R” word resurfaced as investors grew concerned about accelerating the likelihood of a recession given where we are in the economic cycle.

As the trade disruption appeared to threaten the economic outlook, the Federal Reserve shifted to a conciliatory stance, signaling an end to a period of rate hikes. With the Fed’s official stance on future rate cuts predicated upon a lack of improvement in the economic outlook, the market interpreted this as a potential 50 basis point rate cut in July to allow Fed Chairman Powell to reverse the hike in December, which many have felt should not have occurred. In addition, easing comments from Mario Draghi at the ECB further reinforced the lower for longer mentality and the 10-Year Treasury yield dropped to 2%, nearly a half point percentage from the end of March. Low interest rates and potential easing actions gave support to the market which then bounced back 6.5% in June as further tariffs were delayed amidst continuing trade talks with China and an agreement with Mexico.

In the second quarter, the portfolio slightly underperformed the Index as positive stock selection was offset by modest negative sector allocation. Our greatest contribution came from the best performing sector in the Index, the Industrial sector, with strong positive stock selection and our overweight position. Seven of our eleven industrial positions were up double digits for the quarter led by John Bean Technologies (up 32% after rebounding from an operational misstep in 4Q18), Copart (up 23% on continued strong growth in the auto salvage market) and Esco Technologies (up 23% on solid prospects in its aerospace and utilities businesses). Despite being the worst performing sector in the Index, Energy was the second biggest relative contributor for the portfolio as our holding in Delek, a refiner, was up 12% versus the energy sector down 12%. Our holding in Howard Hughes Corporation led Real Estate to be the third largest contributor. The stock has been on a considerable slide since its peak in July 2017 led by fears of higher rates on housing related companies. Feeling their stock was being considerably mispriced given the quality of its assets (Hawaii, Las Vegas and Houston master plan communities plus New York City’s Seaport), management announced they would be exploring all options to maximize shareholder value leading to a 40% move on that one day.

On the negative side, our overweight and stock selection in Consumer Discretionary led this sector to be our worst relative contributor. PVH Corp (down 22%) and Visteon (down 13%) were both impacted by investors’ concern on trade war issues and China exposure while Houghton Mifflin (down 26%) suffered from concerns about an elongated K-12 textbook adoption cycle. Within Financials, our underweight to the second-best performing sector in the Index and negative stock selection in our bank holdings led to underperformance. Company specific concerns hurt our performance in Technology, Utilities and the Health Care sectors. GTY Technology was a neglected stock (down 22%) as the market waits for initiation of sell-side coverage and for the company to report its first earnings report post the closing of the software acquisitions into this special purpose acquisition vehicle. Extreme Networks (down 19%) and CDK Global (down 16%) both lowered guidance due to slower international demand. In Utilities, although NRG Energy posted good first quarter results, the stock was down 17% on concerns over a potentially weaker summer season from wet weather in Texas and a slower realization of cost saves. Lastly, within Healthcare, Invacare was down 27% as the company slightly lowered their 2020 EBITDA target as it addressed tariff and home medical equipment reimbursement headwinds while Wright Medical was down 5% as a small trial showed some pain related issues with its CARTIVA cartilage product questioning this recent acquisition.

The top contributors in the quarter were:

KBR, Inc. (KBR - $24.94 - NYSE) has transitioned the company from an engineering and construction business to a government service business under new CEO, Stuart Bradie, and was recently reclassified from the Industrial sector to the Technology sector. It is our belief that KBR should achieve a re-rating to a higher multiple in line with government services peers which trade a few turns higher than engineering and construction companies. In addition to reporting a strong 1Q19, the company also won a large contract in its Government Services segment as well as a high-profile LNG contract in its Hydrocarbon Services division showing continued growth opportunities in both segments.

John Bean Technologies Corporation (JBT - $121.13 - NYSE), a leading provider or food and beverage processing equipment as well as air transportation equipment, rebounded strongly after reporting a solid first quarter. The stock was punished in 1Q19 due to weak orders (mix), operational issues and trade war supply chain concerns in the fourth quarter. Further proving management’s confidence that operations were back on track, the company announced an acquisition in the food packaging space, Proseal. The Proseal acquisition (UK based) will grow the company’s total addressable market and fill a gap in their product lineup in a growing segment. This is the kind of acquisition that JBT historically does well, taking a strong, regional brand with good technology and leveraging JBT’s worldwide distribution and support network to grow the brand globally.

Copart, Inc. (CPRT - $74.74 - NASDAQ), a leader in salvage auto auctions, continues to hit on all cylinders posting strong double-digit growth with strong operating leverage. Benefitting from an increasing percentage of collision vehicles being deemed salvage due to higher miles driven, an aging car park and higher cost to repair (more technology in the cars), Copart has leveraged technology to broaden its auctions to a wider audience leading to higher price realization for its insurance customers. The company is also leading the charge to change the auto salvage industry in Europe, which is larger than the US market.

The three largest detractors in the quarter were:

PVH Corp. (PVH - $94.64 - NYSE), the leading apparel manufacturer with the Calvin Klein and Tommy Hilfiger brands, beat expectations in its first quarter report, but lowered second quarter guidance due to softness in US and China retail due to trade war issues. The company is in the process of moving its 25% exposure to Chinese manufacturing and undergoing other restructuring moves at Calvin Klein to reduce costs and position the company for growth. Despite holding full year guidance, the stock suffered and is now trading at its lowest valuation in ten years.

NRG Energy, Inc. (NRG - $35.12 - NYSE) , which is nearing the completion of its business simplification program, posted solid 1Q19 results beating Street estimates. However, the stock was weak post the earnings call on concerns that the company’s repurchase of $750mm of stock in the first quarter (7% of its market cap) should have supported the stock more and that the recent wet weather in Texas would lead to a lackluster El Nino summer. In addition, expected margin improvements have been slower to materialize, though the company remains on plan to save $200mm next year.

Invacare Corporation (IVC - $5.19 - NYSE), is a leading provider of mobility and seating solutions (wheelchairs) and home medical equipment for non-acute care settings. Investors remain concerned with the company’s ability to execute a massive turnaround despite management posting a strong 4Q18 and meeting expectations for 1Q19. Cost pressures from tariffs and reimbursement changes in its Home Medical Equipment business have been addressed and the company remains committed to hitting its $85-105mm run-rate EBITDA target by 4Q20.

Conclusion

Despite the volatility in December and the second quarter, the broad market is up around 10% over the past twelve months, as measured by the Dow and S&P 500 Index, and down 4% for the Russell 2500 Value Index. For this year, the S&P 500 Index gained 17%, it’s best first half performance since 1997, while the Russell small and small-mid cap benchmarks have lagged. Thus, the larger cap stocks are at new highs while the small-mid cap stocks have only recovered to their October 2018 levels. With the rebound, overall equity valuations are high, however, large caps are much more expensive compared to small caps. On a relative basis, the Russell 2000 Index (small caps) valuation versus the Russell 1000 Index (large caps) valuation is at its lowest level since 2008. In addition, the relative gap in valuations between small cap value (Russell 2000 Value Index – 13.9x forward earnings) versus small cap growth (Russell 2000 Growth Index – 23.5x forward earnings) is at its widest level since 2001. We view this environment as ripe with opportunity for finding small-mid cap value companies undergoing changes to improve their business.

In conclusion, thank you for your investment in the KEELEY Small Mid Cap Value Fund. We will continue to work hard to earn 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, 2020.

This summary represents the views of the portfolio managers as of 06/30/19. 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 KSMVX as of March 31, 2019 include Copart, Inc. (3.05%), ESCO Technologies Inc. (3.02%), John Bean Technologies Corporation (2.80%), KBR, Inc. (2.78%), Nexstar Media Group, Inc. Class A (2.68%), Air Lease Corporation Class A (2.63%), WEX Inc. (2.41%), Diamondback Energy, Inc. (2.36%), Howard Hughes Corporation (2.31%) and CareTrust REIT Inc (2.25%).

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.