PCAR - Madison Investors Fund Q2 2023 Investment Strategy Letter
2023-07-20 01:00:00 ET
Summary
- In the second quarter, the top five contributors to performance were Alphabet, Copart, Alcon, Parker-Hannifin, and PACCAR.
- Analog Devices and Danaher are both seeing end market demand moderate compared to the artificially high levels they experienced for two years due to the post-Covid chaos in supply chains.
- Overall portfolio activity remained low in the quarter. We purchased Elevance Health and trimmed Marsh & McLennan and Arch Capital.
The Madison Investors Fund (Class Y) increased 8.5% during the second quarter, compared to the S&P 500 Index’s return of 8.7%.
Portfolio Performance
In the second quarter, the top five contributors to performance were Alphabet ( GOOG )( GOOGL ), Copart ( CPRT ), Alcon ( ALC ), Parker-Hannifin ( PH ), and PACCAR ( PCAR ). Last quarter, we discussed our view on Alphabet and how they are positioned against the competitive threat from artificial intelligence technology.
During the quarter, Alphabet made a series of announcements demonstrating how they are incorporating AI into their existing services as well as new products. While the market seems to be coming around to our point of view, we remain on the lookout for any incremental technological developments.
Copart is a salvage vehicle auction provider led by an excellent management team. Performance has remained strong despite higher operating costs and lower average selling prices for vehicles. In the intermediate term, we believe considerable internal investments will enable market share gains from their largest competitor. Longer term, we are optimistic on several trends which support more vehicles being sent to Copart’s auctions. The most notable of these trends is greater technology being incorporated into automobiles which substantially increases the cost to repair after an accident, thereby increasing the number of vehicles sent to auction.
Alcon continues to deliver above-market growth, driven by new product launches in contact lenses and a strong line-up in surgical products. Alcon’s superior innovation is really shining through, as are the operational and governance benefits of separating from Novartis. In addition, the eye surgery end market is steadily recovering from the Covid-triggered pauses in procedures.
Parker-Hannifin is a leading diversified industrial manufacturer. Despite the slowing economic backdrop across much of the world, Parker-Hannifin’s performance has remained relatively resilient, and management is executing well on integrating the recent Meggitt acquisition. At truck manufacturer PACCAR, operating margins remain strong, supported by new truck models, improved manufacturing efficiency, and a growing aftermarket parts division.
The bottom five individual contributors for the quarter were U.S. Bancorp ( USB ), Progressive ( PGR ), Analog Devices ( ADI ), Dollar Tree ( DLTR ), and Danaher ( DHR ). U.S. Bancorp continues to be ensnared in the bank-run panic, the dynamics of which we discussed in detail last quarter. We have observed deposit trends stabilizing across the banking industry and believe the risk of industry wide contagion remains low.
At automotive insurer Progressive, profitability has taken a step back as the cost to repair vehicles continues to increase. However, we are encouraged by strong growth in policies and believe Progressive remains well ahead of peers in repricing their book of business, which should set them up nicely to continue gaining market share.
Analog Devices and Danaher are both seeing end market demand moderate (in semiconductor and medical research, respectively) compared to the artificially high levels they experienced for two years due to the post-Covid chaos in supply chains. Despite these near-term dynamics, we think the longer-term outlooks remain excellent in both cases. Off-price retailer Dollar Tree’s margins disappointed this past quarter. Like much of the retail industry, they are contending with higher costs related to shrink as well as the mix of sales shifting away from higher margin areas towards lower margin categories like grocery. Despite the near-term disappointment, we remain optimistic that the company can improve its profit performance. New Chairman and CEO Richard Dreiling has completely overhauled the management team with an impressive roster of retail executives, and they are spearheading a great number of initiatives that should bear fruit over the coming years.
Portfolio Activity
Overall portfolio activity remained low in the quarter. We purchased Elevance Health ( ELV ) and trimmed Marsh & McLennan ( MMC ) and Arch Capital ( ACGL ). The two trims were for portfolio risk management reasons; we remain delighted with corporate performance at both companies and maintain sizeable investments in each. There were no portfolio eliminations.
Elevance is the largest for-profit Blue Cross Blue Shield plan in the country, supporting the largest domestic membership base across the managed care industry. While national scale is important, local scale is critical as well, given the localized nature of healthcare delivery. Elevance scores well on both fronts, giving it strong bargaining power with providers, lower customer acquisition costs, deep population health data and analytics, and the ability to offer attractive health benefit packages. All this combines to create a formidable moat for its business.
We also believe the management team is top-notch. Since joining Elevance from a senior leadership position at peer UnitedHealth Group ( UNH ), CEO Gail Boudreaux has further leveraged the company’s scale advantage by expanding its internal healthcare services capabilities through a newly formed business unit called Carelon. As the industry transitions to a reimbursement system that emphasizes patient outcomes over procedure or testing volume, data analytics will be a crucial tool in managing patient care. Carelon has become the repository for many of these data analytics and healthcare service capabilities, and it should be an attractive growth platform for many years to come. Concerns around a possible slowdown in government-sponsored programs in Medicare Advantage and managed Medicaid gave us an opportunity to invest at a good price.
Performance data shown represents past performance. Investment returns and principal value will fluctuate, so that fund shares, when redeemed, may be worth more or less than the original cost. Past performance does not guarantee future results and current performance may be lower or higher than the performance data shown. Visit madisonfunds.com or call 800.877.6089 to obtain performance data current to the most recent month-end.
Disclosures
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
The S&P 500® Index is a large-cap market index which measures the performance of a representative sample of 500 leading companies in leading industries in the U.S.
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767- 0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any
security.
Consider the investment objectives, risks, and charges and expenses of Madison Funds carefully before investing. Each fund’s prospectus contains this and other information about the fund. Call 800.877.6089 or visit madisonfunds.com to obtain a prospectus and read it carefully before investing.
Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the authors’ judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Madison Asset Management, LLC does not provide investment advice directly to shareholders of the Madison Funds. Opinions stated are informational only and should not be taken as investment recommendation or advice of any kind whatsoever (whether impartial or otherwise). Madison Funds are distributed by MFD Distributor, LLC, member FINRA.
Fund Features
- Fund seeks long-term capital appreciation
- High conviction; 25-40 holdings
- Pursues high-quality growth companies, growth at a reasonable price style (GARP)
- Focus on risk management
- Growth of $10,000 is calculated at NAV and assumes all dividends and capital gain distributions were reinvested. It does not take into account sales charges (if applicable) or the effect of taxes.
- Average annual total returns and calendar year returns assume all distributions are reinvested and reflect applicable fees and expenses. Class A share returns without sales charge would be lower if sales charge were included. Class A share returns with sales charge reflect the deduction of the maximum applicable sales charge of 5.75%. Class Y and R6 shares do not impose an up-front sales charge or a CDSC. Indices are unmanaged. An investor cannot invest directly in an in- dex. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
From February 6, 2009 through February 28, 2016 the investment adviser waived between 0.11% to 0.15% of its management and/or services fees annually for Class Y shares, 0.15% for Class A shares from September 23, 2013 to February 28, 2016; and 0.10% for Class R6 from September 23, 2013 until May 1, 2014. Investment returns reflect these fee waivers, without which returns would have been lower.
This material is authorized for use only when preceded or accompanied by the current prospectus. Before investing, please fully consider the investment objectives, risks, charges and expenses of the fund. This and other important information is contained in the current prospectus, which you should carefully read before invest- ing or sending money. For more complete information about Madison Funds® obtain a prospectus from your financial adviser, by calling 800.877.6089 or by visiting https://www.madisonfunds.com/individual/prospectus-and-reports to view or download a copy.
Madison Asset Management, LLC does not provide investment advice directly to shareholders of the Madison Funds. Materials on this document are infor- mational only and should not be taken as investment recommendation or advice of any kind whatsoever (whether impartial or otherwise).
Downside Capture Ratio: a fund’s performance in down markets relative to its benchmark. The security’s downside capture return is divided it by the bench- mark’s downside capture return over the time period. Upside Capture Ratio: a fund’s performance in up markets relative to its benchmark. The security’s upside capture return is divided by the benchmark’s upside capture return over the time period. Active Share: the percentage of a portfolio that differs from its benchmark index. Active Share can range from 0% for an index fund that perfectly mirrors its benchmark to 100% for a portfolio with no overlap with an index. Portfolio Turnover: a measure of the trading activity in an investment portfolio—how often securities are bought and sold by a portfolio. It is calculated at the fund level and represents the entire fiscal year ending 10/31/2022. Avg. Market Cap: the size of the companies in which the fund invests. Market capitalization is calculated by number of a company’s shares outstanding times its price per share. Beta: a measure of the fund’s sensitivity to market movements. A portfolio with a beta greater than 1 is more volatile than the market, and a portfolio with a beta less than 1 is less volatile than the market.
The S&P 500® Index is a large-cap market index which measures the performance of a representative sample of 500 leading companies in leading industries in the U.S.
An investment in the fund is subject to risk and there can be no assurance the fund will achieve its investment objective. The risks associated with an invest- ment in the fund can increase during times of significant market volatility. The principal risks of investing in the fund include: equity risk, growth and value investing risk, capital gain realization risks to taxpaying shareholders, foreign security and emerging market risk. More detailed information regarding these risks can be found in the fund’s prospectus.
Madison Funds are distributed by MFD Distributor, LLC, member of FINRA and may be purchased directly from the fund or through your investment professional. Portfolio data is as of the date of this piece unless otherwise noted and holdings are subject to change.
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Madison Investors Fund Q2 2023 Investment Strategy Letter