Madison Mid Cap Fund Q2 2024 Investment Strategy Letter

The Madison Mid Cap Fund (Class Y) decreased 4.30% in the second quarter of 2024, compared to the 3.35% decrease in the Russell Midcap Index. In the year-to-date six-month period, the Fund returned 4.91%, compared to the Russell Midcap’s return of 4.96%.

Portfolio Performance

The top five contributors for the quarter were Arch Capital Group (ACGL), Amphenol (APH), Arista Networks (ANET), Carlisle Companies (CSL), and Liberty Media-Formula One. Arch Capital continues to produce top notch results. Unlike peers, Arch isn’t seeing adverse trends from older accident years. Further, pricing continues to outpace loss cost trends, and recent capital allocation decisions should prove to be value-additive. Amphenol and Arista Networks each have exposure to growing AI infrastructure spending, which is benefitting both their businesses and investor sentiment on their stock prices.

Better than expected commercial roofing demand and, more importantly, sticky pricing power, has benefited Carlislie Companies results and stock price. Liberty Media-Formula One continues to benefit from the increasing popularity of the sport, which should prove beneficial in upcoming media rights renewals.

The bottom five detractors for the quarter were Dollar Tree (DLTR), Floor & Décor (FND), PACCAR (PCAR), CarMax (KMX), and Waters Corporation (WAT). Dollar Tree underperformed following a plethora of concerns: weakness surrounding the low-end consumer, pricing actions by peers, and disappointing sales at the core Dollar Tree banner. In addition, the significant news that management has placed the struggling Family Dollar banner under strategic review was received skeptically by investors. Despite the concerns, we are encouraged by the long-term prospects of the multi-price initiatives at the Dollar Tree banner and are entirely supportive of management’s effort to enhance value by evaluating alternatives for Family Dollar. We also see a comfortable margin of safety in the shares at the current price. Floor & Décor shares lagged in the quarter as industry demand continued to be weak, a concern that was exacerbated by other bigger-ticket, home-related businesses warning of slowing sales, late in the quarter.

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PACCAR shares traded off from all-time highs as investors have grown concerned about North American Class 8 truck sales, given increased inventories, decelerating orders, and weakening results from PACCAR’s trucking customers. CarMax continues to battle with a difficult used car market, characterized by still elevated used car prices and high interest rates combining to stifle affordability. Headwinds to life science companies’ spending on instruments has weighed on Waters’ revenue growth, driving underperformance in its shares.

Portfolio Activity

During the quarter, we added one new holding, Teledyne Technologies (TDY). Teledyne is a very well managed sensor and instrumentation manufacturer. It is especially strong in digital imaging technology, across various light spectrums. Its products are used in a wide variety of applications, including aerospace and defense, environmental monitoring, telecommunications, and energy markets. We believe the company derives a competitive advantage from its technical know-how and deep customer relationships. Further, the segments that it participates in tend to be oligopolistic in nature. It has a unique management culture developed over decades, with an emphasis on rational, shareholder-oriented decision-making. Its stock price has been weak for a few years due to what we believe will prove to be a temporary slowdown in sales.

We also made two adds and two trims during the quarter. We added to Brown-Forman and Thor Industries. Brown-Forman is facing a slight decline in sales, which has elevated investor concern over risks to demand from increased competition and changes in consumer tastes. We believe the long-term outlook for the category and the Jack Daniel’s brand remains solid. A high interest rate environment has taken its toll on RV sales and the industry leader, Thor Industries. We are confident that management is making the right decisions to weather this storm and emerge in a stronger position.

We trimmed our positions in Arista Networks and Carlisle Companies. Both of these companies have witnessed strong multi-year growth in their stock prices, which have resulted in elevated valuations. While we remain confident in the long-term prospects of both of these businesses, we trimmed our holdings to more appropriate position sizes given the risk/reward offered.

Respectfully,

Rich Eisinger | Haruki Toyama | Andy Romanowich

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