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Market Environment And Performance
Equity markets had a solid start to the year, with the S&P 500 up 10.6%. The Madison Sustainable Equity Fund lagged the S&P 500 for the first quarter. Although growth stocks continued to lead the market, we did see broader participation in the first quarter rally. Equity markets were encouraged by solid economic growth and the expectation that the Federal Reserve (Fed) would begin to lower interest rates later this year. We have seen a modest tick up in GDP growth with a stronger 4Q than expected and GDP growth trending higher for 2024. As we exited the quarter, however, sticky inflation began to put into question the timing and number of rate cuts for 2024. Bond yields have moved up again after the downward shift in the fourth quarter, which was anticipated as we felt it had gone a bit too far, but has not yet had an impact on equity markets or valuations. The job market has remained resilient as has the U.S. consumer.
More Specific Performance Attribution And Activity
Communications Services, Energy, Technology, Financials and Industrials all posted double-digit returns. Real Estate was the only sector with a negative return during the quarter. Sustainable Equity performance lagged the S&P 500 during the quarter. Both Sector Allocation and Stock Selection were negative contributors in the quarter. Underweights to Real Estate and Consumer Discretionary contributed to relative performance, along with an overweight to Financials. Our underweight to Communication Services and Energy detracted from performance, as did our overweights to Consumer Staples and Healthcare. Stock selection was positive in Consumer Staples, Healthcare, and Materials, but offset by stock selection in Technology, Communications Services, and Consumer Discretionary.
The top contributors in the quarter were Eli Lilly (LLY), Apple (AAPL), Target Corporation (TGT), Progressive (PGR), and Oracle Corporation (ORCL). Nike Inc. (NKE), UnitedHealth Group (UNH), Amazon (AMZN), Nestle (OTCPK:NSRGY)(OTCPK:NSRGF) and Becton, Dickinson (BDX) were the largest detractors.
Eli Lilly continues to move higher as GLP-1 therapies are in strong demand and availability remains limited as capacity increases will be skewed towards year-end. Zepbound for Obesity was approved in the fourth quarter of 2023 and has seen very strong initial demand, but again is limited by capacity constraints. Our underweight to Apple was a positive contributor as Apple was down during the first quarter. Target has performed well following better than expected earnings driven by improving margins and slightly better comparable store sales. Progressive has also remained strong with a solid insurance market with strong operating margins driven by lower losses in personal auto and property. Oracle (ORCL) reported a solid fiscal third quarter with strong cloud and infrastructure demand.
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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. |
Nike’s third quarter report was better than Street expectations, however, management commentary and strategy changes disappointed investors as a return to positive sales growth gets pushed out to 2025. Although
UnitedHealth Group fundamentals have been in line with expectations and earnings per share growth continues in the mid-teens, other headwinds have created stock weakness, including a DOJ investigation and a disappointing final rate for Medicare Advantage plan providers. Our underweight to Amazon was also a detractor. We initiated a position as we believe that profitability in its retail business has reached an inflection point. They should also be generating more free cash flow as a large investment program is winding down which should continue to drive the stock higher. We are looking to add to our position at a more attractive price point. Nestle has been weak due to mixed results. Fourth quarter showed little growth and 2024 is now expected to be back-end loaded. Longer term, we continue to like Nestle’s category exposure and growth profile. Becton, Dickinson was also a negative contributor. We eliminated the position during the quarter as we have lost confidence in their ability to return to mid-single digit revenue growth and double-digit earnings growth.
In addition to our purchase of Amazon and our sale of Becton, Dickinson, we also sold Cisco Systems (CSCO). Cisco’s product portfolio is expected to generate low single digit growth, we are looking for companies with more interesting growth opportunities.
Sustainable Notes
▶ During its recent Investor Day, UPS announced that it has reduced its greenhouse gas emissions by 14% since 2021 and it continues to make progress towards its 2025 and 2035 sustainability goals.
▶ During its March Copilot event focused on hardware devices, Microsoft reiterated its long-term goals of being carbon negative, water positive, and achieving zero waste by 2030. Its new Surface devices have more recycled materials in them, which provides waste reduction benefits.
▶ Agilent was recognized as a Top 5 in this year’s annual Barron’s 100 Most Sustainable Companies list. Agilent has been in the Dow Jones Sustainability Index for nine years in a row.
▶ During this year’s CAGNY presentation, Pepsi (PEP) reiterated making sustainability a centerpiece of its strategy. This includes working with its suppliers on regenerative and sustainable farming practices, reducing total water usage, eliminating emissions in its supply chain, and moving the portfolio to positive choices.
▶ Linde reiterated its target to invest $3 billion in retrofitting and repurposing existing assets with carbon capture facilities to capture CO2. This effort will help its customers reach their decarbonization targets.
▶ During its fiscal first quarter earnings call, Apple discussed recent progress on its environmental work. Although not quantified, a key effort has been to help its production partner bring more clean energy online for production of Apple products. Management also stated that it is using more recycled materials than ever before and more energy-efficient transportation. It also reiterated its target of becoming 100% carbon-neutral across all of its products by 2030.
▶ Microsoft (MSFT), Google (GOOG)(GOOGL), and Nucor (NUE) announced that they will work together to aggregate their demand for advanced clean electricity technologies including advanced nuclear, next-gen geothermal, clean hydrogen, and long-duration energy storage.
Our Outlook And Positioning
The markets started the year on a strong note, buoyed by solid economic growth, a resilient job market and a consumer that continues to spend. Interest rates have bounced after the shift lower during the fourth quarter. Following solid economic growth during the third and fourth quarters, the first quarter and full year expected GDP growth have moved modestly higher. We have been surprised by the resilience of the consumer despite declining savings and higher credit card balances.
With the changes in expected growth, the markets are now expecting less than three interest rate cuts this year. Recent data has shown that inflation is a bit sticky in a few categories, particularly services. We expect the next several inflation data points will be the key determinants of the timing and magnitude of rate cuts. With a stable U.S. economy and low unemployment, we believe the Fed has flexibility on when it begins to lower interest rates.
We are approaching stock selection cautiously as valuations are above historical averages. Earnings estimates have remained in the range of 12% growth for 2024 and 2025 while the market has moved higher, driving the forward earnings multiple to 21x. We continue to invest in high quality companies with strong growth prospects that are integrating sustainability into their operations and strategies. We will use volatility to add to companies in our portfolio that have become more attractively valued.
Sincerely,
Maya Bittar | Dave Geisler
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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. Madison’s criteria for selecting sustainable investments will vary by industry and company. Madison uses a proprietary scoring system to assign an “above average,” “average,” or “below average” rating to each company, and monitors these ratings across the portfolio. Madison will only invest in securities it determines are “average” or “above average.” |
