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Keeley Fund Digs Deep for Winners

It has been a tough year for fund managers trying to drill for undervalued companies -- beyond the oil patch, anyway.

One fund, however, has a long history of unearthing winners where others fear to dig. It's the (KSCVX) Keeley Small-Cap Value fund. The fund has amassed an impressive annualized 10-year return of 15.14% through its strategy of investing in corporate spinoffs, companies emerging from bankruptcy, bank conversions and other niches traditionally shunned by Wall Street.

This year the fund is up 14.23%, which is over 11 percentage points better than the S&P 500. sat down with the fund's vice president, Mark Keeley, to learn how the fund's managers make their choices -- and to find out where the fund is headed next.

TSC: Your fund has reacted well in what has been a very confusing year for fund managers, mostly over the strength of the economy. How does the slowing economy affect your fund's unique strategy?

Keeley: It gives us more names to look at, actually. Take corporate spinoffs, for example, which is our largest area. When revenues slow down, bigger companies are forced to unlock shareholder value in other ways. One potential method is through the divestiture of divisions that have the potential to do well on their own.

It's not that recent, but a great example for us was Procter & Gamble's (PG) spinoff of J.M. Smucker (SJM). After Smucker was spun off, they turned around and cleverly purchased two of P&G's well-known brands, Crisco cooking oil and Jif peanut butter. So, analytical geniuses that we are, we saw real synergies in a company that produces both peanut butter and jelly. Makes sense, right?

In truth, the company has done a great job developing its brands, and that's been reflected in the stock price. The company was originally spun off in 2000 at around $20 and is now trading in the mid-$40s.

That's a high-profile example, though. We generally look at smaller companies. One of our favorites now is the homebuilder Levitt (LEV), which had a long history building homes in the Northeast until it was acquired and then spun off from BankAtlantic (BBX).

Most fund managers avoid companies emerging from bankruptcy, but your fund seeks them out. How do you make sure the company won't go down for a second time?

We don't buy stocks on the way down with the hopes they won't file. We only invest in the new equity of companies that have recently emerged from bankruptcy. We look to see if the brand is intact and if there is a new management team. We also look for a big tax loss carry-forward, which is an advantage that is often overlooked.

Do you invest in airlines? There have been plenty of airlines flying in and out of bankruptcy lately.

Airlines are much bigger than what we normally look at and they have too many moving parts. We like to keep it small so we can understand the accounting and industry-specific issues. A lot of these are not very exciting companies, but they are good opportunities.

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