Keeley All Cap Value Fund 1Q15 CommentaryVW Staff
KEELEY All Cap Value Fund commentary for the first quarter ended March 31, 2015.
In the first quarter of 2015, the KEELEY All Cap Value Fund climbed 1.79 percent compared to a 0.51 percent decline for the Russell 3000 Value Index. Over the six month period ended March 31, 2015, the Fund rose 2.75 percent compared to a 4.77 percent increase for the Russell 3000 Value Index.
Over the past six months, the Fund trailed the Russell 3000 Value Index, and the large majority of the performance impact over this timeframe was the Fund’s position in energy. Although a slight overweight in the lagging energy sector detracted from the Fund’s performance, stock selection in the sector was the key driver of the Fund’s overall underperformance. After making a positive contribution for much of 2014, the Fund’s energy holdings succumbed to the pressure from the abrupt price decline in the price of oil, as energy sector holdings cost the Fund over 300 basis points in performance. In response, we sold many of the more volatile, smaller cap names, and the Fund’s energy exposure is now focused primarily on what we believe are more “stable” larger-cap names such as Occidental Petroleum (OXY) and Anadarko Petroleum (ADC). Lastly, strong stock selection in consumer discretionary, as well as overweight positions in consumer discretionary and health care stocks, made a positive impact on the Fund over the past six months, leading to the Fund’s outperformance relative to its benchmark index for the first quarter of 2015.
Keeley All Cap Value Fund’s Healthcare Stocks
First quarter 2015 earnings were largely as advertised…just ok. By all accounts, it appears the U.S. economy has hit a soft patch. Recent economic news has been less than stellar, with GDP barely positive, labor force participation rates at levels last seen when President Carter was having his fireside chats, and homeownership rates at levels last seen in 1990 when 30 year mortgage rates were approximately 12 percent. Given the above, the Fund’s position through the first quarter of the year changed little. The Keeley All Cap Value Fund remains defensively positioned and has, if anything, tilted a tad more defensively of late, while remaining focused on investment opportunities within the plethora of restructuring activity currently taking place in the market. Healthcare remains a bright spot with generally solid earnings and significant takeover and restructuring activity. The Fund remains significantly overweight the sector. The Fund has owned both Teva (TEVA) and Perrigo (PRGO) for some time, and we remain very enthusiastic about both companies’ prospects. We were, however, surprised when Mylan (MYL) offered to buy Perrigo, as Perrigo trades at a significant valuation premium to Mylan. Then, shortly thereafter, Teva announced a bid for Mylan, a stock we were reviewing because we thought it might be undervalued. As of now, the Fund owns all three of these companies, and we expect it will own two of them when any merger is complete. We will continue to monitor the situation but feel very good about the Fund’s current positions in these companies.
Keeley All Cap Value Fund Overweight In Consumer Discretionary
While there is skepticism about the strength of the economy, we have increased the Fund’s overweight in consumer discretionary. Although this may seem counter intuitive, nearly 40 percent of the Fund’s weighting in this sector is in local broadcast media. We are bullish on this area because local television broadcasters are reaping the rewards associated with retransmission pricing as distribution contracts with content providers come up for renegotiation. Local TV broadcasters are finally benefitting from years of under-charging content originators for distribution. This is leading to enhanced earnings power due to very high levels of incremental profitability on retransmission revenues. In addition, 2016 is shaping up to be a massive political advertising spend year, with 16 Republicans battling in the Republican primary and former Secretary of State Hillary Clinton suggesting she plans to spend several billion dollars in the run up to the Presidential election. By way of example, in 2012, President Obama and Governor Romney spent
approximately the same amount in total that Secretary Clinton plans to spend. Bottom line, we are not sure who is going to win the election, but we are confident that E.W. Scripps (SSP) and Tribune (TRCO) own a number of local television and radio stations in what will very likely be contested markets. These companies should reap the benefit from ad spending. Lastly, later this year, Uncle Sam will be looking for additional spectrum and will conduct a spectrum auction. As a result, we may be inclined to sell some of the Fund’s broadcast company holdings if the price is right. In short, we believe that local broadcast media will remain a bright spot in the discretionary sector.
Positively, though maybe not if you purchase gas for your automobile, oil has moved up somewhat faster than we expected, and while this has had a slightly positive impact on energy stocks, we have been reticent to add the Fund’s energy exposure, as not all energy stocks are created equal. In the oilfield service space, rig counts continue to fall and are now off over 50 percent from their peak. And, not only is rig utilization off, but operators are also offering rigs at fire sale pricing levels because inventory levels remain high. So for now, the energy service subsector remains very stressed. Although exploration and production companies continue to drill, given commodity prices and inventory, we anticipate that they are only drilling their most profitable wells (known as hygrading). As such, the Fund remains underweight energy and its sister sector, industrials.
Keeley All Cap Value Fund Economic Activity Remains Unimpressive
Lastly, considering that economic activity remains unimpressive, the Fund remains slightly underweight financials. While the economy seems to be sputtering along with anemic income and job growth, there is doubt that the Fed will increase interest rates anytime soon. However, it may raise short term rates 25-50 basis points in an attempt to throw the industry a bone. To potentially take advantage of such a move, the Fund’s positioning remains with banks and insurance companies that have excellent credit profiles but are highly asset sensitive. We believe that we have long since passed the credit leverage part of the recovery, and as pricing and terms for loans now enters a highly competitive time, we believe it is necessary to own differentiated franchises, with managers who have been through numerous cycles and are willing to stay the course on credit quality while forgoing market share. At this point, we do not envision a near term scenario that would have the Fund overweight financials.
John L. Keeley,
Lead Portfolio Manager
Jr. Brian R. Keeley
Edwin C. Ciskowski
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change.