Morningstar Advisor - Winter 2008 - 67

Investment Management in Southfield, Mich., says, “We had to turn over a lot of stones to find Keeley.” Advisor Rick Shanley, of Horizon Wealth Management in La Grange, Ill., was first directed to Keeley by a client who had a personal relationship with the firm. The word has spread since, though: The asset base of the company’s flagship fund, Keeley Small Cap Value KSCVX, has ballooned from less than $100 million in 2003 to about $6 billion today. This growth has prompted a slate of Keeley funds in larger sizes: Mid Cap Value KMCVX, All Cap Value KACVX, and, as of August, Small-Mid Cap Value KSMVX. Away from the Pack expanding in California, with little threat from new competition in an industry where environmental regulations and red tape create a barrier to entry. Meanwhile, former Texas Industries division Chaparrel Steel CHAP illustrates the upside potential of spin-offs for investors unafraid to get in early. Keeley is not daunted by the fact 30000 spin-offs are often saddled with debt from that the 25000 parent company. Even if there are some weak quarters ahead, these underfollowed 20000 new companies can be great deals for those 15000 willing to wade right in. Chaparrel was attractive despite the debt, given that it had 10000 healthy cash flow and was priced at half book value—and, as Keeley jokes, “All the steel analysts are dead!” After a lucrative two-year run, Chaparrel was recently taken over by Gerdau AmeriSteel GNA. Mergers and acquisitions are inevitable in portfolios of this nature, and they often come at a nice premium for shareholders of KAMCO’s offerings. The Small Cap Value fund had 10 in 2007. To further profit from a trend of privateequity acquisitions, Keeley initiated positions in Cowen Group COWN and Thomas Weisel TWPG, which he expects to enjoy increased advisory business. “It hasn’t worked yet; they’re under water,” he concedes, “but we have patience and should see results within a three- to four-year period.” Although Keeley is generally wary of financials because of rising rates and steep valuations, “we’ve been doing community banks, such as MB Financial MBFI, Wintrust WTFC, and PrivateBancorp PVTB. This theme works so well, though it can take a long time. A number of names like these have been taken over.” While financials are currently less than 6% of assets, KAMCO had more than a 40% stake in 2003—again, stock-picking takes precedence, so index huggers beware. One controversial financial name Keeley has wrestled with is Janus Capital Group JNS, ever since longtime KAMCO holding Kansas City Southern KSU spun off Janus as part of Stilwell Financial. “I saw Eliot Spitzer on TV and sold John Keeley Keeley Small Cap Value KSCVX $30K 25 20 S&P 500 03 04 05 06 07 There’s no doubt that several years of chart-topping returns in the small-cap blend category have lured investors to Small Cap Value, but John Keeley’s distinctive strategy may be the hook. “If you want a manager to hug indexes, this is not the guy for you,” Shanley says. “We aren’t concerned about style purity in the small-cap area. It is less efficient and there is more room to find inherent value.” Stone agrees: “I like stock-pickers. If a fund starts in value and ends up in growth, then good for them, me, and my clients. They’ve had successful picks and haven’t sold so we don’t need to pay capital gains taxes. We are looking for absolute returns.” That said, Keeley himself warns that because he’s pays no attention to an index, “we’ll be awfully right or awfully wrong.” They’ve been awfully right lately. The blunt-spoken Keeley waxes enthusiastic about the infrastructure play that dominates the portfolio and has driven returns. “These are terrific holdings. There is a great need for new roads, bridges, and electric grids, both here and overseas.” Small Cap Value top holding Foster Wheeler FWLT, up 181% in 2007, exemplifies the theme and Keeley’s long-term approach: The global engineering and construction firm that once verged on bankruptcy has worked off asbestos liabilities and continues to generate substantial cash flow. Cement manufacturer Texas Industries TXI dominates in Texas and is Category Small Blend 6 Morningstar Rating QQQQQ Minimum Investment $2,500 Expense Ratio (%) 1.33 5-Yr Anl Total Rtn (%) 20.84 5-Yr Anl Investor Rtn (%)* 10.89 Investor Rtn Rank Category 73 Stewardship Grade — *Dollar-weighted return that measures how the typical investor in the fund fared. Data as of Nov. 30, 2007. Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Feb-03 Oct-03 Jun-04 Apr-05Dec-05Aug-06Apr-07 Mar-03 Feb-04 Apr-03 Mar-04 May-03 Apr-04 Jun-03 May-04 May-05 Feb-06 Oct-06 Jun-07 Jul-03 Aug-03 Jul-04 Sep-03 Aug-04 Jun-05 Mar-06Nov-06 Jul-07 Sep-04 Jul-05 Apr-06Dec-06Aug-07 Aug-05 May-06 Feb-07 Oct-07 Sep-05 Jun-06 Mar-07Nov-07 Oct-05 Jul-06 May-07 Nov-05 Sep-06 Sep-07 that day at $25,” remembers Keeley, referring Nov-03 Oct-04 Dec-03 Nov-04 Dec-04 Feb-05 Mar-05 to the 2003 charges that Janus permitted hedge fund clients to market time to the detriment of ordinary shareholders. But Keeley was back when Janus hit a low of $12 a share. “It was beaten up,” he says, “but it moves along with the market and was a great value, and they’ve turned the place around.” Keeley is undeterred by the recent departures of top managers Scott Schoelzel, David Corkins, and Minyoung Sohn because he believes that the success of Janus’ quant shop subsidiary, Intech, will outweigh the current upheaval. The Mid Cap Value and Small-Mid Cap Value portfolios currently hold Janus. When to Sell Much as Keeley will wait out a rough patch, he also hesitates to sell on an upswing. He tells of MorningstarAdvisor.com 67
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Morningstar Advisor - Winter 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Winter 2008

Morningstar Advisor - Winter 2008
Contents
Letter from the Editor
Inbox
How Do You Use the Morningstar Style Box?
Real Estate Investing Goes Global
The Golden Touch
Investment Briefs
Learning to Fly with Equity Options
Another Block in Building a Portfolio
In a League of Their Own
Unlock the Box
Fashion Change
The View from the Investment Side
Unpredictable Style
Weighting the Fundamentals
Wire-to-Wire Consistency
The Secret's Out
Focus on Financials
Strongest Homebuilders Will Withstand the Wrecking Ball
Breaking Style Conventions
Playing It Safe with Financials
Back to Bond School
Mutual Fund Analyst Picks
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
The Style Counsel
Morningstar Advisor - Winter 2008 - Intro
Morningstar Advisor - Winter 2008 - Morningstar Advisor - Winter 2008
Morningstar Advisor - Winter 2008 - Cover2
Morningstar Advisor - Winter 2008 - 1
Morningstar Advisor - Winter 2008 - 2
Morningstar Advisor - Winter 2008 - Contents
Morningstar Advisor - Winter 2008 - 4
Morningstar Advisor - Winter 2008 - 5
Morningstar Advisor - Winter 2008 - 6
Morningstar Advisor - Winter 2008 - Letter from the Editor
Morningstar Advisor - Winter 2008 - 8
Morningstar Advisor - Winter 2008 - Inbox
Morningstar Advisor - Winter 2008 - How Do You Use the Morningstar Style Box?
Morningstar Advisor - Winter 2008 - 11
Morningstar Advisor - Winter 2008 - Real Estate Investing Goes Global
Morningstar Advisor - Winter 2008 - 13
Morningstar Advisor - Winter 2008 - 14
Morningstar Advisor - Winter 2008 - The Golden Touch
Morningstar Advisor - Winter 2008 - 16
Morningstar Advisor - Winter 2008 - 17
Morningstar Advisor - Winter 2008 - Investment Briefs
Morningstar Advisor - Winter 2008 - 19
Morningstar Advisor - Winter 2008 - 20
Morningstar Advisor - Winter 2008 - 21
Morningstar Advisor - Winter 2008 - Learning to Fly with Equity Options
Morningstar Advisor - Winter 2008 - 23
Morningstar Advisor - Winter 2008 - 24
Morningstar Advisor - Winter 2008 - 25
Morningstar Advisor - Winter 2008 - Another Block in Building a Portfolio
Morningstar Advisor - Winter 2008 - 27
Morningstar Advisor - Winter 2008 - 28
Morningstar Advisor - Winter 2008 - 29
Morningstar Advisor - Winter 2008 - In a League of Their Own
Morningstar Advisor - Winter 2008 - 31
Morningstar Advisor - Winter 2008 - 32
Morningstar Advisor - Winter 2008 - 33
Morningstar Advisor - Winter 2008 - 34
Morningstar Advisor - Winter 2008 - 35
Morningstar Advisor - Winter 2008 - Unlock the Box
Morningstar Advisor - Winter 2008 - 37
Morningstar Advisor - Winter 2008 - 38
Morningstar Advisor - Winter 2008 - 39
Morningstar Advisor - Winter 2008 - Fashion Change
Morningstar Advisor - Winter 2008 - 41
Morningstar Advisor - Winter 2008 - 42
Morningstar Advisor - Winter 2008 - 43
Morningstar Advisor - Winter 2008 - The View from the Investment Side
Morningstar Advisor - Winter 2008 - 45
Morningstar Advisor - Winter 2008 - 46
Morningstar Advisor - Winter 2008 - 47
Morningstar Advisor - Winter 2008 - 48
Morningstar Advisor - Winter 2008 - 49
Morningstar Advisor - Winter 2008 - 50
Morningstar Advisor - Winter 2008 - 51
Morningstar Advisor - Winter 2008 - Unpredictable Style
Morningstar Advisor - Winter 2008 - 53
Morningstar Advisor - Winter 2008 - Weighting the Fundamentals
Morningstar Advisor - Winter 2008 - 55
Morningstar Advisor - Winter 2008 - 56
Morningstar Advisor - Winter 2008 - 57
Morningstar Advisor - Winter 2008 - 58
Morningstar Advisor - Winter 2008 - 59
Morningstar Advisor - Winter 2008 - 60
Morningstar Advisor - Winter 2008 - 61
Morningstar Advisor - Winter 2008 - Wire-to-Wire Consistency
Morningstar Advisor - Winter 2008 - 63
Morningstar Advisor - Winter 2008 - 64
Morningstar Advisor - Winter 2008 - 65
Morningstar Advisor - Winter 2008 - The Secret's Out
Morningstar Advisor - Winter 2008 - 67
Morningstar Advisor - Winter 2008 - 68
Morningstar Advisor - Winter 2008 - 69
Morningstar Advisor - Winter 2008 - Focus on Financials
Morningstar Advisor - Winter 2008 - 71
Morningstar Advisor - Winter 2008 - 72
Morningstar Advisor - Winter 2008 - 73
Morningstar Advisor - Winter 2008 - Strongest Homebuilders Will Withstand the Wrecking Ball
Morningstar Advisor - Winter 2008 - 75
Morningstar Advisor - Winter 2008 - Breaking Style Conventions
Morningstar Advisor - Winter 2008 - 77
Morningstar Advisor - Winter 2008 - Playing It Safe with Financials
Morningstar Advisor - Winter 2008 - 79
Morningstar Advisor - Winter 2008 - 80
Morningstar Advisor - Winter 2008 - Back to Bond School
Morningstar Advisor - Winter 2008 - 82
Morningstar Advisor - Winter 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Winter 2008 - 84
Morningstar Advisor - Winter 2008 - 85
Morningstar Advisor - Winter 2008 - 86
Morningstar Advisor - Winter 2008 - 87
Morningstar Advisor - Winter 2008 - Undervalued Stocks
Morningstar Advisor - Winter 2008 - 89
Morningstar Advisor - Winter 2008 - 90
Morningstar Advisor - Winter 2008 - 91
Morningstar Advisor - Winter 2008 - Most Popular Variable Annuities
Morningstar Advisor - Winter 2008 - 93
Morningstar Advisor - Winter 2008 - New at Morningstar
Morningstar Advisor - Winter 2008 - 95
Morningstar Advisor - Winter 2008 - The Style Counsel
Morningstar Advisor - Winter 2008 - Cover3
Morningstar Advisor - Winter 2008 - Cover4
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