KEELEY Small-Mid Cap Value Fund

Investor Class (A) Shares: KSMVX

Institutional Class (I) Shares: KSMIX

Manager Commentary and Attribution [PDF]

Fund Commentary - 3rd Quarter 2019

To Our Shareholders:

For the quarter ended September 30, 2019, the KEELEY Small-Mid Cap Value Fund’s net asset value (“NAV”) per Class A share increased 0.90% versus a gain of 0.13% for the Russell 2500 Value Index. Year to date, the Fund is up 20.08% versus 15.41% for the Russell 2500 Value Index.


Similar to last quarter, what appeared to be a flattish market environment was anything but flat. The strong run-up in the market in June, with the Fed posturing it would cut rates for the first time since 2007, continued into July with the S&P 500 Index reaching all-time highs. However, flaring trade negotiation tensions with President Trump raising tariffs and accelerating the implementation of tariffs on all remaining goods coming from China precipitated the downdraft in the markets. Small caps and value were hit harder as the Russell 2000 Value and Russell 2500 Value Indices were down 5.58% and 4.87%, respectively, for August. Concerns about such a strong blow to the fragile global economy led to cooler heads with the delay in the tariff hikes, a return to trade talks, and increased confidence of another rate cut at the September Fed meeting. Small caps rebounded in September, up 5.13% and 4.58% for the Russell 2000 Value and Russell 2500 Value Indices, respectively, versus 1.87% for the S&P 500. As the market hit new highs, valuation factors began to matter again, and value started to outperform growth.

Positively, consumer confidence, as measured by the University of Michigan’s Consumer Sentiment Index, remained steady in July before dropping in August and then strengthening in September.  Gains in jobs and incomes helped to offset some of the uncertainty over trade issues.  Other positive signs for the U.S. economy included strong growth in housing starts and the labor force participation rate ticking up in August to 63.2% -- a level that matches recent highs posted in early 2019.  On the negative side, lackluster job gains in August, with nonfarm payroll growth well below expectations and the ISM U.S. manufacturing Purchasing Managers’ Index declining for a second straight month with the September reading of 47.8%, the lowest since June 2009. It is difficult to determine how the GM strike, Boeing 737MAX grounding and inventory reduction from accelerated foreign purchases prior to the tariffs are affecting the latest ISM reading, but the market has clearly become more cautious as we head into third quarter earnings.

Two other non-economic issues that had been simmering in the background have recently emerged – the push to impeach President Trump and the recent attack on a major Saudi oil production site. The whistler-blower complaint regarding communications with the Ukrainian President has ignited more controversy and momentum for a House led impeachment investigation.  Although approval from a Republican-led Senate would be necessary for a Presidential impeachment, it is anyone’s guess how such proceedings could impact U.S. equity markets. And even with the restoration of capacity at the Saudi facility faster than expected and no retaliatory response against Iran, we are reminded of the fragile relationship between Iran, its Middle Eastern neighbors and the U.S. For now, the market has looked past these two issues, but both add a new element of risk to the markets.

The equity market, as measured by the S&P 500 Index, was up 1.2% in the third quarter and is now up 18.7% through the year’s first nine months.   Larger cap stocks continue to outperform small caps, with the Russell 1000 Index gaining 1.4% while the Russell 2000 Index lost 2.4% and the Russell Midcap index landed in between with a 0.5% gain.  For the first time this year, Value outperformed Growth, although it did so only in small and mid-cap stocks.  Large cap growth stocks continue to beat Large cap value stocks and were the best performing style category.  As a result of the strong market performance for the year, valuations have moved up from below average levels to above average levels.  Valuations are not at dangerous levels, but the only segment where valuation is below its long-term average is Small-cap value.  Mid-cap value is only a little above its long-term average.  The rest of the market (large, small and mid-cap growth) looks well above historical averages.  We have been discussing the attractiveness of value relative to growth and small-cap relative to large for some time.  With performance and valuation gaps at extremes for both categories, we feel investing in small cap value is at a very attractive level.

Portfolio Review

In the third quarter, the portfolio outperformed the Index primarily from positive stock selection. Sector allocation also added to relative performance as we were underweight Health Care, the second worst performing sector in the Index. As we mentioned earlier, we did see a rotation back to value as investors searched for ideas that had lagged in the strong up market. This return to rational, fundamental investing led to buying demand of our neglected, restructuring stories whose stock prices were de-risked, already discounting worse case scenarios. Within Consumer Discretionary, Visteon (VC) jumped 41% in the quarter as auto sales and production rates held up better than expected plus investors are looking past this transition year for the company as a number of new projects ramp up in 2020. Similarly, Brunswick (BC) increased 14% as investors began to look past this year’s weak boat selling season (weather related) and focus on easier comps for next year while TriPointe Group (TPH) increased 26% as new home sales remain stronger than expected as a result of lower interest rates. In Materials, Valvoline (VVV) was up 18% as the company is in a better competitive position this year versus private-label do-it-yourself engine lubricants and in Healthcare, Invacare (IVC) was up 45% as management posted solid second quarter results building confidence in its turnaround efforts.

The largest detraction was in the Industrials sector where two of our positions missed earnings estimates and lowered guidance. Altra Industrial (AIMC) saw weakness in its Automation & Specialty business, which it recently acquired from Fortive, resulting in the stock being down 22%. nVent Electric (NVT) declined 10% as it also missed second quarter earnings and lowered guidance due to weakness in its energy and industrial end markets. Investor skittishness with the slowing economy and high valuations led to profit taking in John Bean Technologies (JBT) in Industrials as well as Verint (VRNT) in Technology. Both companies reported good quarters, but management gave cautious guidance for the remainder of the year leading to a decline of 18% for JBT and 20% for Verint.

Let’s Talk Stocks

The top contributors in the quarter were:

Visteon Corporation (VC - $82.54 - NASDAQ), is an auto supplier focused primarily on cockpit displays and digital clusters. After lowering guidance and investor concerns about slowing auto demand during its first quarter report, the company posted 2Q19 results that were ahead of expectations and overcame two company specific manufacturing issues that negatively impacted 1Q19 results. Revenue also outperformed regional light vehicle production in China, an area that had made investors nervous coming into the quarter. The stock has continued to rebound as auto demand has remained solid while investors begin to look at 2020 for Visteon when a number of new project wins begin to ramp.

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

Invacare Corporation (IVC - $7.50 - NYSE), is a leading provider of mobility and seating solutions (wheelchairs) and home medical equipment for non-acute care settings. The company reported solid 2Q19 results with strong cash flows giving investors confidence in the company’s ability to execute a massive turnaround. Cost pressures from tariffs and reimbursement changes in its Home Medical Equipment business have been addressed and a number of new product launches are slated for the second half of the year. Management remains committed to hitting its $85-105mm run-rate EBITDA target by 4Q20.

The three largest detractors in the quarter were:

John Bean Technologies Corporation (JBT - $99.43 - NYSE), a leading provider or food and beverage processing equipment as well as air transportation equipment. The stock was a strong performer for the first half of the year after showing improvement from weak orders (mix), operational issues and trade war supply chain concerns that impacted the stock in the fourth quarter. The company beat 2Q19 expectations as management continued to make good progress on it restructuring programs, but orders, which can be lumpy, declined 12% y/y. The strong performance and near-perfect valuation led investors to take profits. We believe the story remains solid given the continued demand for food safety and aviation by the growing global middle class.

Wright Medical Group, NV (WMGI - $20.63 - NASDAQ), is a medical device manufacturer specializing in lower extremity (foot, ankle), upper extremity (shoulder, elbow, wrist) and biologic products to mechanically repair tissue-to-tissue and tissue-to-bone injuries. The stock was down 31% as the company missed second quarter expectation and lowered guidance for the year. The miss resulted from the loss of sales people in Lower Extremities to competition and the loss of the distributor network for its recent acquired Cartiva product. The company is aggressively rebuilding its salesforce and will now handle all Cartiva product sales internally. Management feels it can rectify this within a short time and reiterated their 2021 target of mid 20s% EBITDA margins.

Diamondback Energy, Inc. (FANG - $89.91 - NASDAQ), is an oil and gas exploration and production company with acreage located in the Permian basin in west TX. We were originally holders of Energen, which sold its gas utility business in 2014 to become a pure play Permian Basin exploration and production company. The new, simplified Energen was then acquired by Diamondback in 2018. Despite 2Q19 results that showed good operational execution and intentions to return even more cash to shareholders, the stock declined 17% suffering from a buyer’s strike as investors remained nervous about oil demand going forward given trade concerns and a potential global recession. We see FANG as a superior operator with a strong balance sheet that will benefit once investors start to become more comfortable with the sector. 


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

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 09/30/19. Those views may change, and the Fund disclaims any obligation to advise investors of such changes. For the purpose of determining the Fund's holdings, securities of the same issuer are aggregated to determine the weight in the Fund. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities.

Risks: Smaller and medium-sized company stocks are more volatile and less liquid than larger, more established company securities. Additionally, dividend paying investments may not experience the same price appreciation as non-dividend paying investments. Portfolio companies may also choose not to pay a dividend or it may be less than anticipated.

Prior to investing, investors should carefully consider the Fund's investment objective, risks, charges and expenses as detailed in the prospectus and summary prospectus. To obtain a prospectus or a summary prospectus, call us at 800.533.5344 or visit 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. (3.23%), ESCO Technologies Inc. (2.86%), KBR, Inc. (2.70%), Nexstar Media Group, Inc. Class A (2.67%), Air Lease Corporation Class A (2.62%), Howard Hughes Corporation (2.38%), Sabra Health Care REIT, Inc. (2.37%), WEX Inc. (2.31%), NRG Energy, Inc. (2.27%) and John Bean Technologies Corporation (2.26%).

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