John Keeley, manager of the $155 million Keeley Small Cap Value Fund, is generating above-average returns by buying shares of U.S. companies that are emerging from bankruptcy or being restructured.

"They haven't been exploited yet by the marketplace," Keeley, 64, said in a telephone interview from his office in Chicago, where he oversees $1.1 billion for clients.

Keeley held 79,000 shares of Conseco Inc., a formerly bankrupt life insurer, on June 30. He bought 67,000 shares of Levitt Corp., the builder of suburban communities, after it was spun off from BankAtlantic Bancorp Inc. in December.

His fund is up 8.5 percent this year, ranking it second of 146 small-cap value funds tracked by Bloomberg. Only the FBR Small Cap Value Fund recorded a bigger gain.

Keeley, who opened his fund in 1993, holds shares of more than 110 companies and devotes no more than 2 percent of assets to any one stock. Not all of Keeley's stock picks work out.

He sold his holding in Hanger Orthopedic Group Inc., a Bethesda provider of orthopedic and prosthetic services, in the past two months. Hanger Orthopedic said in June it was investigating billing irregularities alleged by an employee. The company's stock, which closed Friday at $5.50 per share, is down 66 percent this year.

"That was a disaster, though not necessarily for us," Keeley said.

Keeley's fund was started to allow Keeley's family and friends, who couldn't afford the $1 million minimum for separate accounts, to invest with his company. His family is the fund's largest shareholder, with about an 11 percent stake on June 30, including money invested for the college educations of Keeley's grandchildren.

The fund rose at an annual rate of 12 percent during the past three years, compared with the 7 percent drop of the Standard & Poor's 500-stock index. The returns are attracting investors, with the fund's assets more than doubling in the past year.

Keeley's fund has gained by mostly buying companies with market values of less than $1.5 billion, including several that have been spun off from other companies, such as Levitt and EnPro Industries Inc., an industrial-products supplier to manufacturers.

Levitt, based in Fort Lauderdale, Fla., is best known for developing some of the first planned communities in the United States, including Levittown, N.Y., and Levittown, Pa. "People have said that housing is dead, but Levitt's earnings have come through," said Keeley, whose interest in old buildings prompted him to buy and restore a more than 100-year-old train station in Michigan once visited by President William McKinley.

Levitt reported second-quarter profits that more than doubled. Keeley said the homebuilder has "gigantic backlogs" of houses that have been ordered and may earn more than $3 a share in 2005. The company's shares, which closed Friday at $22.30 each, have risen 15 percent this year.

Goodrich Corp., which makes airplane landing gear, spun off EnPro more than two years ago after the money-losing unit became the target of asbestos-related claims. Keeley, who bought the shares last year for about $9 each, said the claims will be covered largely by insurance. The stock has since more than doubled, ending last week at $20.80.

In addition to spinoffs, Keeley's fund favors companies that have restructured through bankruptcy, including Conseco and mining equipment maker Joy Global Inc.

Conseco emerged from bankruptcy in September and raised $1.6 billion in May to pay off debt and boost capital. While the stock, which closed Friday at $17, is down 24 percent this year and Conseco chief executive William J. Shea resigned two weeks ago, Keeley remains bullish on the company, based in Carmel, Ind.

Joy Global, formerly known as Harnischfeger Industries Inc., came out of bankruptcy in July 2001. It reported earnings that climbed almost eightfold during the three months ended May 1 as higher coal demand stoked its mining machinery sales. The Milwaukee company's stock more than doubled in the past year, ending last week at $29.99.

The fund has benefited from this year's 39 percent advance in oil prices. The fund's three biggest holdings as of June 30 -- EnPro, Harvest Natural Resources Inc. and Reliant Energy Inc. -- serve or operate in the oil industry. Shares of Harvest Natural Resources and Reliant Energy have more than doubled in the past year, and EnPro has almost doubled.

Keeley usually plans to own shares of companies for about three years. He'll sell in less time when he believes a company has gone astray.

The fund sold its stake in oil explorer Evergreen Resources Inc. after the May announcement that oil producer Pioneer Natural Resources Co. would acquire it for $1.7 billion. Keeley called the price a "low-ball" offer.

Keeley also recently sold the fund's position in Chesterfield Financial Corp. Last month, the Chicago-based savings and loan reported a 32 percent drop in quarterly net income from a year ago. As recently as Tuesday, the stock traded at $31, which Keeley called its apex. "Like the Looney Tunes, that's all, folks," he said. "It doesn't get any better than that."

Keeley avoided the technology boom of the late 1990s, a time he characterized as "greed coming back to roost."

"We did not get caught up in the euphoria, and we felt kind of foolish for a while," said Keeley, who graduated in 1962 from the University of Notre Dame in South Bend, Ind. He later earned a master's of business administration degree from the University of Chicago, taking classes at night while working as a bank examiner for the Federal Deposit Insurance Corp. by day. "But the greatest education you can get is to get through a bear market," Keeley said.