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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Madison Small Cap Fund 2024 Q2 Investor Letter | Buyside Digest

Back to Fund Profile (Madison Small Cap Fund)

Primary Source Intelligence • Q2 2024 Letter Analysis

Madison Small Cap Fund Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Madison Small Cap Fund. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

Annualized+11.94%

Digest Analysis

Quick Take

"Madison Small Cap Fund outperformed in Q2 despite small cap weakness, benefiting from AI-driven semiconductor demand and two takeovers. Small caps trade at historic discounts to large caps, creating attractive long-term value opportunities."

Executive Summary

Madison Small Cap Fund outperformed benchmarks in Q2 2024, declining 1.06% versus Russell 2000's -3.28% decline, driven by strong stock selection particularly in technology and consumer sectors. The fund benefited from AI-related demand at Form Factor, a semiconductor test equipment company with dominant market share in High Bandwidth Memory testing. Small caps continue lagging large caps significantly, with Russell 2000 barely positive year-to-date while S&P 500 reaches all-time highs, creating historically unprecedented valuation discounts. The managers see concerning weakness in industrials from macroeconomic headwinds but identify opportunities in software as investors rotate toward AI hardware. Portfolio activity was minimal, with new positions in Inspire Medical Systems and Option Care Health, plus two profitable takeovers. The managers maintain their bottoms-up approach, seeking high-quality businesses that can grow through cycles but only at deep discounts to intrinsic value, believing current small cap valuations offer superior long-term risk-reward versus large caps.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

68%

CautiousHigh

Moderate (68%)

The managers demonstrate moderate-high conviction through concentrated portfolio (46 holdings), detailed individual position analysis with specific price targets ($17/share for INSP, $42/share for OPCH), and willingness to add to positions like Summit Materials. Clear thesis articulation for holdings and specific catalyst identification support this level.

Growth Outlook

25%

BearishBullish

Bearish (25%)

The managers express cautious optimism about small cap valuations and long-term opportunities, noting historic discounts and favorable risk-reward. However, they acknowledge concerning industrial weakness and macroeconomic headwinds, creating a mildly positive but measured outlook.

Risk Appetite

15%

DefensiveAggressive

Defensive (15%)

Portfolio activity was minimal with only two new positions initiated. The managers are being selective and cautious, monitoring risks carefully in industrials while maintaining existing positions. Risk appetite is measured rather than aggressive.

Capital Deployment

10%

De-riskingDeploying

De-risking (10%)

Portfolio activity was described as 'de minimis' with only two new positions initiated and proceeds from takeovers used to fund existing position additions. This represents modest rotation rather than net new capital deployment, scoring slightly positive due to selective adding.

Forward Guidance

30%

CautiousExpansionary

Cautious (30%)

The managers express appetite for new software investments and plan to hunt for quality businesses at discounts. They see opportunities emerging from AI rotation and maintain constructive deployment bias, though with disciplined valuation requirements.

Language Signal

20%

BearishBullish

Bearish (20%)

Language is balanced with opportunity-focused terms like 'attractive value,' 'favorable risk-reward,' and 'rich opportunity set' offset by risk language including 'concerning weakness,' 'disappointing results,' and 'carefully monitoring risks.' Slightly more constructive than cautious overall.

Perceived Risk

65%

Low RiskElevated

Elevated Risk (65%)

The managers identify multiple specific risks including industrial weakness, macroeconomic headwinds, capital spending slowdown, and potential AI budget displacement effects. They are 'carefully monitoring risks' and express concern about bellwether industrial results, indicating meaningful risk awareness.

Opportunity Density

70%

ScarceAbundant

Abundant (70%)

The managers see a 'rich opportunity set' in software, describe small caps as offering 'significantly better value,' and identify specific opportunities from AI rotation and historic valuation discounts. Multiple sectors and themes provide selective opportunities despite overall market concentration.

Time Horizon

75%

Short-TermLong-Term

Decade+ (75%)

The managers emphasize 'long-term risk reward' for small caps, discuss multi-year opportunities like infrastructure projects and M&A synergies, and forecast earnings power to 2030 for INSP. Their focus on enduring businesses that can 'grow through a cycle' indicates a multi-year investment horizon.