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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Madison Small Cap Fund's quality-focused approach clashed with Q3's speculative market, declining 1.3% versus Russell 2000's 12% gain. Fund avoids unprofitable meme stocks and AI speculation driving returns, instead holding profitable businesses facing temporary headwinds."
Madison Small Cap Fund significantly underperformed in Q3 2025, declining 1.3% while Russell 2000 gained 12%. The underperformance stemmed from the fund's quality-focused approach in a speculative market favoring unprofitable companies, meme stocks, and AI-related names. The managers don't own low-quality, unprofitable companies driving market returns, instead focusing on profitable businesses with strong fundamentals. Key detractors included consumer names like Shake Shack and Simply Good Foods, industrial holdings like Carlisle Companies and WillScott, and software investments facing AI disruption fears. The team initiated three new positions: Hexcel Corp in aerospace composites, Eagle Materials in construction materials, and Charles River Laboratories in drug development services. Despite challenging performance, the managers maintain conviction in their quality-focused discipline, believing current market conditions represent a perfect storm of AI-driven momentum and speculative mania that doesn't reflect underlying business fundamentals.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
Manager demonstrates high conviction through detailed intrinsic value analysis for new positions (Hexcel $85, Eagle Materials $269, CRL $228), specific earnings targets (CSL $40 by 2030), and willingness to hold through volatility despite significant underperformance.
Growth Outlook
Manager explicitly states market valuation is very stretched with no particularly attractive setup for broad-based returns, describing a speculative environment driven by AI momentum and meme stock mania.
Risk Appetite
Despite challenging environment, manager initiated three new positions and maintained existing holdings based on intrinsic value analysis, showing selective risk-taking while avoiding speculative areas.
Capital Deployment
Manager initiated three new positions while exiting two, representing modest net deployment activity. No cash level changes mentioned, suggesting rotation rather than significant new capital deployment.
Forward Guidance
Manager plans to continue searching for attractive investments and challenging underperforming theses, but acknowledges markets can move against fundamentals longer than expected, showing balanced approach.
Language Signal
Language emphasizes risks, challenging environment, speculative mania, and stretched valuations, though balanced with conviction in long-term investment approach and specific new positions.
Perceived Risk
Manager identifies multiple specific risks including stretched market valuations, speculative mania, construction market headwinds, job market concerns, and commercial roofing risks, with detailed discussion of challenging environment.
Opportunity Density
Manager found three new attractive investments but describes a challenging environment where quality companies are out of favor. Selective opportunities exist but require patience in current speculative market.
Time Horizon
Manager demonstrates multi-year horizon with specific 2030 earnings targets for CSL, 2028 projections for CRL, and willingness to be patient for construction cycle recovery and aerospace headwinds to resolve.
