John Keeley Alternative Value Fund Q4 2014 Commentary

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John Keeley Alternative Value Fund commentary for the fourth quarter 2014.

In the fourth calendar quarter of 2014, the KEELEY Alternative Value Fund (KALVX) fell 2.71 percent compared to a 6.09 percent increase for the Russell 2500 Value Index and a 4.93 percent rise in the S&P 500 Index. For the year ending December 31st, 2014 the Fund declined 8.15 percent compared to a 13.69 percent increase by the S&P 500 Index and a 7.11 percent rise by the Russell 2500 Value Index. Although equities rebounded from a challenging third quarter, a number of the issues that facilitated much of the recent volatility continue to exist. The volatility in the price of oil garnered the majority of the attention here in the U.S. although growing concerns about the efficacy of global growth deepened toward the end of the year. Global deflationary pressures have become the heart of these concerns and although the European Central Bank (ECB) has communicated their desire to consider Quantitative Easing (QE), it is difficult to project its effectiveness given the structural reforms needed at a local level. Despite the strong bounce in equities during the quarter, and especially in small caps which lagged for much of the year, broadly speaking, investors continued to rotate toward more defensive sectors. In the fourth quarter, the top performing sectors in the Russell 2500 Value Index were traditional safe havens such as utilities, health care, and consumer staples. The Fund trailed the Russell 2500 Value Index during the quarter due in large part to an overweight position in the lagging energy sector and poor stock selection in the financial sector by the long side of the portfolio. Holdings in the financial sector were negatively impacted by our lack of interest rate sensitive positions, as REITs did exceptionally well during the quarter. Our lack of REIT exposure is a consistent part of our process as we believe those types of companies do not possess the catalyst / corporate restructuring characteristics that we seek within our investment philosophy. As we mentioned earlier, our overweight position in energy had a negative impact on the portfolio. After making a positive contribution for much of 2014, our holdings succumbed to the pressure from the abrupt price decline in the commodity. Sub-advisor Broadmark Asset Management had difficulty hedging the portfolio in such a volatile environment with the market never really finding a consistent direction. Some of their hedges were ill-timed, and the subsequent removal of those hedges were also poorly timed which collectively detracted from the portfolio’s results during the quarter.

During the fall pullback, Broadmark was able to hedge some of that decline, but the rise in volatility in December was a challenge to performance as their risk-averse approach can at times inhibit performance.

Keeley Alternative Value Fund: Investment process

A brief look at the four pillars of our investment process show that while valuations may appear high when looking at median price-earnings multiples, but when adjusted for interest rates and inflation, they remain average. Global monetary factors are mixed. While rates remain low and policy is easy, credit spreads have widened due to the collapse in energy prices.

The short-, intermediate- and long-term sentiment models are all negative and have reached levels coincident with a pullback. Momentum is solidly negative on a short- and intermediate term basis, but the long-term models are still holding to the positive side. Typically when the intermediate-term model turns negative, there is potential for a 5%-10% correction. However, Broadmark believes the market is not in an oversold condition currently to indicate the end of the early January correction.

Currently they believe the collapse in oil is similar to what happened in the 1980s when oil went from $40 per barrel to $8 per barrel. Equity prices continued to move higher as the decline improved the economy. They believe the move in energy can be a positive for the U.S. economy and especially boost returns in consumer discretionary and retail stocks. However, concerns remain that excessive leverage could lead to a global margin call. Tactically Broadmark is watching credit conditions to adjust exposure. Every major market reaction in the past 50 years has been proceeded by widening credit spreads.

On the long-side of the Fund, going forward, we continue to expect volatility in equities until there is some stability in energy prices allowing investors to focus their attention on corporate fundamentals, where we remain optimistic. We are also enthusiastic with respect to one of our core investment themes, corporate spin-offs, which has been very fruitful of late and generated one of the most productive years ever with 60 spin-offs in 2014. This investment theme commonly produces a great amount of pricing inefciency and has historically been one of our best sources of alpha generation. We anticipate such a high level of productivity will create a strong group of investment candidates for our portfolios in 2015.

Thank you for your support of the Alternative Value Fund.

Keeley Alternative Value Fund: Performance attribution

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 Asset Management Corp. (“KAMCO”) 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 KAMCO 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 KAMCO. (3) For the purpose of assigning portfolio security holdings to a particular sector and/or industry, KAMCO 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 KAMCO 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, KAMCO 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.

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 KAMCO. 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.

Keeley Alternative Value Fund: Performance contributors and detractors

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 Mid Cap Value Index is an unmanaged index that measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth rates. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. The Russell 2000 Value Index measures the performance of 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 MSCI ACWI ex USA Small Cap Index captures small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. 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 Mid Cap Value Fund, KEELEY Small-Mid Cap Value Fund, KEELEY Small Cap Value Fund, KEELEY Small Cap Dividend Value Fund, KEELEY Mid Cap Dividend Value Fund, and KEELEY Alternative Value Fund are distributed by Keeley Investment Corp.

The top ten holdings of KALVX as of December 31, 2014 include Iron Mountain, Inc. (1.93%), Jarden Corp. (1.92%), Ryman Hospitality Properties, Inc. (1.77%), Ryder Systems (1.75%), American Water Works Company, Inc. (1.72%), SLM Corp. (1.70%), Wyndham Worldwide Corp. (1.70%), Corrections Corporation of America (1.66%), Mitel Networks Corp. (1.66%), EnPro Industries, Inc. (1.63%).

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