Morningstar Magazine - August/September 2017 - 65

on the company and the industry, and goes
beyond reported numbers, adjusting for cyclicality,
for example, or unsustainable profitability.
An example of the legwork that Madison puts
into its fundamental research can be seen through
its stake in Copart CPRT, a stock the fund has
owned since 2008. Copart is in the business of
auctioning off damaged or wrecked cars on behalf
of insurance companies. It's an industry that
is essentially a duopoly, Toyama says, with Copart
and another company each having about 35%
market share.
As part of the initial research, Madison had visited
a number of the auction sites, talked to the firm's
primary competitor and vendors. Then
in late 2014, shares took a hit on a weak earnings
report, which the company in part blamed
on high tow-truck prices. "I wondered if that was
true, so we talked to a bunch of tow-truck
companies," Toyama says.
It turned out that the towing industry had
just gone through a wave of consolidation that
resulted in a sudden jump in towing prices.
"We got comfortable that the effect was short-term,
and we bought more," he says. Overall, Copart
shares have more than quadrupled since Madison
took a stake.
Top holding Markel MKL also exemplifies
Madison's strategy. In the portfolio since 2000,
Markel is a specialty insurer that focuses
on niche markets, such as insuring summer camps.
"A lot of companies won't [take on that
business], but that means there is less competition
and more pricing strength," Toyama says.
A second attribute Madison likes about Markel
is management's focus on maintaining profit
margins, Toyama says. "There's a lot of term
mentality in insurance," he says. Markel, however,
"will pass on business if the price isn't good
even if means volume drops." The firm has beaten
industry profit margin averages for the past
23 years, he says.
And third, at the management level, the family that
founded Markel is still actively involved, Toyama
says, and compensation is tied to long-term

targets. Since Madison bought the stock in late
2000, it has risen from around $150 to $990.
This all comes together in a portfolio of 25
to 40 stocks that the firm aims to hold
for five to 10 years. At last count, the fund's annual
turnover was 27%. That's relatively low for a
growth-oriented strategy; the mid-cap growth
category averaged 67%.
Index-Agnostic

Based on its overall portfolio profile, Morningstar
classifies the fund as mid-cap growth and
benchmarks that category against the Russell Mid
Cap Growth Index. The fund's prospectus
benchmark is the Russell Mid Cap Index.
By either measure, the fund's sector exposure
is distinctive; its technology exposure, for example,
is low relative to both, and its financials stake
is relatively high. Toyama and the team have found
consumer discretionary stocks (such as Liberty
Broadband LBRDA) to be fertile ground, and
the fund had 23% of equity assets in the sector at
the end of May, on the high side for both mid-cap
blend and growth funds.

as "participate and protect," and he says that
"their emphasis on capital preservation
and good balance sheets are the things that give
you comfort in uncomfortable markets."
Over the long term, the fund has earned a
decent return in up markets, while holding up
relatively well in down markets: Over the past five
years, Madison Mid Cap has captured 86%
of the Russell Midcap Growth's upside but only
81% of its downside.
Toyama says that kind of performance is more
than just a reflection of the fund strategy,
it's a reflection of Madison Investment in general.
"A lot is probably rooted in the culture of fixed
income, where we care more about protecting
against downside first," he says. "And we're
very grounded, almost Midwestern in some ways
in terms of our temperament. We work really
hard to understand the companies and not get too
caught up in the latest fad." K
Tom Lauricella is the editor of Morningstar Direct.

Over the long term, Toyama says, cash levels tend
to be in the mid-single-digit percentage range.
When they believe stocks with attractive
valuations are rare, Madison's managers will hold
more cash. That is the case today.
At the end of May, the fund had nearly 10% in cash,
while its average mid-cap growth peer had less
than 3% in cash. That stake has contributed to the
fund's lagging performance so far in 2017: The
fund's 5.7% return through June was less than half
the category average. Over the trailing three years
through June, however, it ranked in the 26th
percentile of the category, owing to relatively
strong performance in both 2015's tough market
and 2016's rebound. While outperformance in
rallies hasn't been the norm for the fund, its low
risk profile has been a constant.
Madison Mid Cap is "truly index-agnostic,"
says Julius Ridgway, a financial advisor
at Medley & Brown in Jackson, Miss., which
has placed clients in Madison Mid Cap for
about 15 years. Ridgway describes the strategy

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