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The Madison Investors Fund (Class Y) increased 9.63% in the first quarter of 2024, compared to the 10.56% increase in the S&P 500 index.
Portfolio Performance
In the first quarter, the top five individual contributors to performance relative to the benchmark were PACCAR (PCAR), Arch Capital (ACGL), Progressive (PGR), Fiserv (FI), and Parker-Hannifin (PH).
Shares in PACCAR, a truck manufacturer, appreciated nicely as investors rewarded continued strong performance. Operating margins remain a particular bright spot, supported by new truck models, improved manufacturing efficiency and a growing aftermarket parts division. On this last point, PACCAR has done an excellent job growing the aftermarket parts business by increasingly manufacturing its own parts and opening new distribution centers to expand its geographic reach and improve in-stock levels and fill rates. All told, this division’s operating profits have more than doubled over the last five years and provides a nice ballast to help offset some of the inherit cyclicality that comes with manufacturing commercial trucks.
Two of our insurers, Arch Capital and Progressive, were also large contributors during the quarter. While they participate in different areas of the insurance market, with Arch generally focused on commercial lines and Progressive on personal lines, they both are benefiting from attractive market conditions, which has boosted underwriting profits. Also, investment income should continue to rise as they roll over the fixed income portfolios at more favorable coupon rates.
At payment processor Fiserv, revenue and profits continue to steadily compound. In fact, 2023 marked the 38th consecutive year of double-digit earnings growth for the company, a remarkable accomplishment considering the wide range of economic environments experienced during that long period. It goes without saying that success over such a prolonged timeframe requires a combination of strong competitive advantages, dependable stewardship, and continuous investment in new products and services. In more recent years, Fiserv has rolled out the Clover payment platform for small-and-medium sized businesses. Clover has been very successful in large part, not only due to its superior functionality relative to legacy point-of-sale payment platforms, but also Fiserv’s distribution scale across financial institutions and independent sales organizations, an advantage that is difficult to replicate by upstart fintech competitors. Investments like Clover give us confidence that Fiserv will continue to build upon its impressive long-term track record.
Rounding out the top five contributors is Parker-Hannifin, a diversified industrial company that is executing extremely well integrating a recent acquisition.
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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 Madison Funds or call 800.877.6089 to obtain performance data current to the most recent month-end. |
The bottom five individual detractors were Liberty Broadband (LBRDA)(LBRDK), Dollar Tree (DLTR), Analog Devices (ADI), Accenture (ACN), and Becton Dickinson (BDX).
Shares in Liberty Broadband, a holding company with a large investment in cable operator Charter Communications, took another leg down this quarter as internet subscriber growth turned negative. However, there were also signs in the quarter that competition from fixed wireless internet providers was set to slow; this fact, combined with historically low valuation multiples, keep us optimistic regarding our investment. Dollar Tree underperformed in the quarter following a messy earnings report that showed inconsistent results at Family Dollar. Given it is still early in Family Dollar’s turnaround effort, we had been expecting the potential for choppy performance, and weren’t that surprised by the result. What we found more notable were the strong results from the Dollar Tree stores, as they are the primary value driver for the overall company.
At semiconductor manufacturer Analog Devices, end-market demand continues to decline as customers and distributors reduce inventory after building it up during the supply chain induced shortages a few years back. Despite these near-term trends, we remain confident that large parts of the global economy will continue to digitize over the long term, thereby driving strong demand for analog semiconductor chips.
Revenue growth remains challenged at Accenture, a technology consulting firm, after seeing elevated levels of demand a few years back when customers were accelerating their digital transformation efforts. While the environment remains subdued, we see some signs that the company will return to its historical growth cadence, including booking over $600 million of business related to generative AI during the most recent quarter. At Becton Dickinson, fundamentals continue to be subdued as demand in China remains weak while they also contend with headwinds to margins from persistent inflationary pressure and lower manufacturing utilization required to reduce inventory.
Portfolio Activity
There were no new buys or sells during the quarter. While market performance has been strong over the last year and valuations have generally returned to prior highs, we remain committed to our 20-plus year strategy of investing in durable, competitively advantaged, growing companies at attractive valuations and are optimistic about our portfolio of such stocks.
We thank you for your trust and remain invested alongside you for the long term.
Respectfully,
Rich Eisinger | Haruki Toyama | Joe Maginot
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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 Madison Funds 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. |