KEELEY Small-Mid Cap Value Fund

Investor Class (A) Shares: KSMVX

Institutional Class (I) Shares: KSMIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 1st Quarter 2018

To Our Shareholders:

For the quarter ended March 31, 2018, the KEELEY Small-Mid Cap Value Fund’s net asset value (“NAV”) per Class A share declined 0.85% versus a loss of 2.65% for the Russell 2500 Value Index.

Commentary

The first quarter of the new year can be characterized as an eruption of market turbulence. Exiting the prior year on an ebullient note, the market rally continued into January, propelled by strong corporate earnings, corporate tax cuts, and a weakening dollar that supported exports. Following an extended period of rising markets, driven by global quantitative easing, the quarter saw a return of volatility, with sharp declines in February and March. Two threats to the story of synchronized global recovery caused volatility indexes to surge: trade wars and inflation. Another cause of market turbulence has been the shift of fund flows to computer driven passive investing. Exchange traded funds accounted for as much as forty percent (40%) of total stock trading on market decline days. Against this backdrop, we believe that stock pickers are entering an environment where they can demonstrate their ability to add value. This is evidenced by the primary driver of the Fund’s outperformance this quarter being stock selection.

As tariffs on a list of over 1,300 targeted goods was released for public review, China proposed to reciprocate in kind. The many twenty-five percent (25%) levies now bandied about threaten disruption to industrial production levels and the injection of inflation into the economic system. Markets tumbled and gyrated as investors attempted to gauge the potential negative impacts, forecasting which businesses were most at risk and wagering on the likelihood that coming negotiations could pacify the growing hostility over international trade. Small cap stocks, which generate approximately nineteen percent (19%) of their revenue from overseas, had their best January performance since 2013. This held steady in March, while larger multinationals, with approximately thirty-nine percent (39%) overseas exposure, stumbled given their greater sensitivity to trade and protectionism.

While consumers rode high in February, marking the highest consumer confidence levels in eighteen years and the lowest unemployment levels in seventeen years, the Federal Reserve’s ‘curious case of the missing inflation’ (2017) appeared to receive a new designation of ‘case closed.’ Wage growth accelerated in January to two point nine percent (2.9%), the strongest gain since mid-2009, and the Consumer Price Index (CPI) topped analyst estimates, holding to an above two percent (2%) trend. Incoming Federal Reserve chairman Jerome Powell concurred that “inflation is moving up to target.” Yields on the US two-year to ten-year treasury notes began a sharp, upward move as inflation fears and higher rates were both incorporated into market outlooks. Generally, economists expect four Federal Reserve interest-rate hikes in 2018 and four more in 2019. Recessions tend to occur when there is an over-tightening of monetary policy, which we do not envision in the near term. Broadly considered, the global economy continues to demonstrate the first synchronized economic expansion in many years, supported by stabilized commodity prices and steadily climbing industrial output. Much of the same is reflected domestically, yet with added drivers such as recently enacted corporate tax reform.

The current bull market marked its ninth anniversary in March. While some valuations appear stretched, many companies have been left behind, as value stocks have underperformed growth stocks for the past decade. Given the outlook for an improving economy, accompanied by near record low unemployment, we remain constructive on the outlook for continued market gains, as we seek to uncover the mispriced equities of companies selling at a discount to intrinsic value. At Keeley Teton, we focus on underfollowed and misunderstood companies that are implementing restructuring changes to close that discount. We employ fundamental research and bottom-up analysis to identify potential catalysts that could ultimately unlock this value.

For our portfolios, a major historical performance driver has been merger and acquisition activity. Global deal making year-to-date has crossed the $1 trillion mark, the fastest it has reached that level, as a wave of consolidation spreads across the U.S. and activity in the UK, China, Germany and Japan accelerates. Buoyed by quickening economic growth, tax cuts, and strong business confidence, boardrooms are reassessing the capital they can plough into acquisitions. Deal making is up more than fifty percent (50%) from a year ago and twelve percent (12%) from the same point in 2007, the high-water mark for mergers and acquisitions, according to Dealogic. Also, according to Thomson Reuters, a record $1 trillion of cash was pledged toward private equity funds last year in search of higher returns. In many cases, institutional investors are turning to active microcap equity as a proxy for private equity. Small and mid-cap companies are increasingly being acquired by larger corporations challenged by anemic organic top line growth. In the Fund, three such companies were acquired last year, and one in the first quarter of this year. The government information technology space continues to consolidate and recently spun-off CSRA (CSRA), was acquired by larger competitor, General Dynamics (GD), at a 38% premium.

In the first quarter of 2018, the Fund’s performance was driven by strong stock selection in Technology, Real Estate, Utilities, Consumer Discretionary and Energy. 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 it undergoes a salesforce transformation.

The top contributors in the quarter were:

CSRA, Inc. (CSRA) is a provider of information technology solutions and services to the Defense and Intelligence, and Civil agencies of the US Government. The company was the government services arm of Computer Sciences and was spun off in November 2015. As a pure play government IT contractor, the company eventually caught the attention of General Dynamics which acquired CSRA at a thirty-two percent (32%) premium.

Copart, Inc. (CPRT) is a leading on-line auctioneer and remarketer of salvaged vehicles. The company has been leveraging technology to increase the efficiency of salvaged vehicle sales for its auto insurance customers. The increased complexity of cars has led to higher repair costs and thus, more vehicles being deemed total losses. In addition, the number of natural disasters (hurricanes, floods) that have hit the US has added to vehicle volumes. With strong margins, cash flow and a solid balance sheet, the company is now embarking on transforming the salvaged vehicle business in Europe, where the market size is larger than that in the US.

NRG Energy, Inc. (NRG) is an independent producer of electricity with a portfolio of 44 Gigawatts (GW) of conventional generation and 4.8GW of renewable assets, wholly-owned and through its controlling ownership in NRG Yield (NYLD).  NRG was once again a main contributor to performance as the company was ahead of schedule executing its transformation plan, which included the sale of NRG Yield. With the announced asset sales, the company quickly focused on capital allocation and announced a $1billion stock repurchase plan.

The three largest detractors in the quarter were:

Patterson-UTI Energy, Inc. (PTEN) engages in the provision of onshore contract drilling services to major and independent oil and gas producers in the US and Canada. Although the company posted better than expected fourth quarter 2017 results in both its drilling and pressure pumping business, its first quarter 2018 guidance was weaker. Management pointed to difficult weather in West Texas leading to delays, but the uncertainty about pricing and margins weighed on the stock. We remain optimistic that pricing and margins will improve given limited capacity of drilling rigs and pressure pumping.

Air Lease Corporation (AL) is a leading aircraft leasing company that currently owns and manages a fleet of 253 aircraft. Industry-wide change is being driven by increasing air travel demand from the rising middle-class population in international markets. This has led Air Lease to more than double its owned fleet within five years. Despite continued strong operating performance, the stock was weak due to general fears regarding the impact of tariffs on aircraft demand. Although Boeing was listed as a US company subject to Chinese tariffs, the tariffs were specific to very few models, and even if the tariffs became broader, it would tilt more Chinese airlines to lease rather than purchase which would be beneficial to aircraft lessors like Air Lease. We continue to believe the stock is attractive trading at book value.

Del Taco Restaurants, Inc. (TACO) 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.

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 03/31/18. 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 March 31, 2018 include NRG Energy, Inc. (4.08%), Voya Financial, Inc.(3.54%), Air Lease Corporation (2.71%), BOK Financial Corporation (2.65%), John Bean Technologies Corporation (2.62%), Howard Hughes Corporation (2.58%), Hanmi Financial Corporation (2.51%), Spectrum Brands Holdings, Inc. (2.41%), UMB Financial Corporation (2.35%), and ITT, Inc. (2.34%).

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.