Morningstar Advisor - Winter 2008 - 68

Undiscovered Managers It is so hard to know when it is time to let go, which is why our funds fall into the blend category. John Keeley a business trip to Memphis with a side trip to Graceland, where a plaque to Sun Records caught his attention. Sun was “a storefront with a recording studio in the back run by a guy named Sam Phillips,” Keeley says. “He sold Elvis Presley to RCA for the equivalent of a Buick Roadmaster. Did this guy even know what he had?” Hence KAMCO’s continued position in Foster Wheeler, though Keeley isn’t adding to it. “It is so hard to know when it is time to let go, which is why our funds fall into the blend category.” A similar question confronts investors in Small Cap Value: Is the fund’s growing assets making it too unwieldy to continue on its current streak? Keeley says he still has more ideas than assets, and Stone and Shanley trust KAMCO to close the fund before that is no longer the case. Morningstar analyst Andrew Gogerty, who covers the Keeley Funds and also owns shares of Small Cap Value in a retirement account, believes that “John Keeley is about winning, and I don’t think he’ll let assets affect his record.” He notes that the portfolio is not heavily skewed toward its largest holdings (none exceeds 2%), which mitigates the impact of asset flows. Financial planner Michael Murray of New Albany, Ind., who has invested in Keeley Small Cap Value since its 1993 inception, says he is more concerned about American Funds behemoth Growth Fund of America AGTHX, with $200 billion in assets, than he is about Small Cap Value with $6 billion: “Capital Research and Management has 20% of the outstanding float in Lowes LOW. Small Cap Value’s percentage of the float in Foster Wheeler is under 100 basis points.” Looking Ahead All the same, the brand-new Small-Mid Cap Value—affectionately dubbed “the SMID” by KAMCO and advisors—may be the more intriguing option for investors directing new money to Keeley. Advisor Shanley is moving in that direction. “It is a wonderful opportunity for a manager who has shown he can maneuver the smaller cap area, to have increased market-cap latitude and a smaller asset base. We really, really like the SMID.” Perhaps the more serious concern about asset growth is whether the newcomers will stick with KAMCO when returns are not tops. Gogerty says, “This is a unique slant on small-cap investing, but some advisors are likely screening primarily on returns, considering that the money has poured in recently.” Given their dramatic sector tilts, the funds are bound to lag at times. Keeley eschews tech stocks, for example, because of their short product life cycles, and this held the fund back relative to peers in 2003. Conversely, the funds’ biases toward industrial materials and energy make it particularly sensitive to the economy and energy prices. KAMCO has aimed to attract steady money by focusing on advisors and the retirement market, rather than marketing to individual investors. (The firm is launching I shares of its funds to draw fee-only planners.) Another issue tugs in the background: Would Keeley Asset Management be the same without John Keeley at the helm? At 67, he has no plans to retire, ever. He is supported by an investment team and says that while he has final say, “more often than not, a consensus is built.” Mark Zahorik has been with KAMCO for more than 20 years, and director of research Bob Becker came on in 2000. The team has grown further along with assets, with four more analysts joining the firm since 2004. Dave Woodyatt, previously at Harris Bank, brought over an expertise in health-care stocks that allows KAMCO to venture further into a sector it has generally avoided (although it will continue to steer clear of biotech and pharmaceuticals with short product life cycles). When Tyco International TYC split into four pieces in mid-2007, All Cap Value took a position in the health-care portion, Covidien COV. Although large-cap Covidien is almost a conglomerate in its own right, Woodyatt says this is a classic spin-off story, in which a neglected division is now free to succeed. He expects that the stock will be driven over the next year by cost cutting and further restructurings, including the sale of its own less profitable divisions. (KAMCO also invests in the company that kept the Tyco name, which now rests on the bedrock of alarm provider ADT, a steady source of cash flow.) “This is, by all accounts, John Keeley’s shop and show, but given the diversity of industries they invest in, the analysts are definitely providing support,” Gogarty says. That said, financial planner Murray observes that Keeley has a stock-picking ability that might prove hard to teach: “Peter Lynch groomed new managers, but they couldn’t really do what he did.” Of course, that risk inevitably accompanies the fun of investing with an opinionated, individualistic stock-picker. The silver sombrero and bronze bronco on the shelves behind Keeley’s desk serve as a reminder. K Laura Lallos is a former Morningstar analyst and editor. She also was a senior writer for Money magazine. She profiled fund manager Scott Brayman in the Spring 2007 issue of Morningstar Advisor. 68 Morningstar Advisor Winter 2008

Morningstar Advisor - Winter 2008

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