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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Madison Small Cap Fund 2026 Q3 Investor Letter | Buyside Digest

Back to Fund Profile (Madison Small Cap Fund)

Primary Source Intelligence • Q3 2026 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

QTD-5.93%

YTD+6.17%

Annualized+11.94%

Positioning StanceCONSTRUCTIVE

Market CapSmallCap

GeographyUS

Digest Analysis

Quick Take

"Outperforming the Russell 2000's 7.2% decline through strong stock selection in enterprise software and healthcare, while initiating positions in Alphatec and Bentley Systems and exiting fully valued semiconductor and cyclical holdings."

Executive Summary

During the third quarter of 2026, the Madison Small Cap Fund declined 5.8% net of fees (with Class Y returning -5.93% net), outperforming the Russell 2000 and Russell 2500 benchmarks, which declined 7.2% and 6.4%, respectively. Year-to-date, the fund's Class Y shares have returned 6.17% net of fees, lagging its primary benchmark. Outperformance for the quarter was driven entirely by favorable stock selection, notably within Technology, Healthcare, and Consumer Discretionary, whereas sector allocation proved to be a detractor. The portfolio maintained a cash allocation of 5.40% across 49 total equity holdings, carrying an active share of 97.71% versus the Russell 2000. The macroeconomic environment remains characterized by persistent inflation spurred by higher energy prices, tight labor markets, and substantial AI capital expenditure, keeping benchmark bond yields elevated. Market breadth has stayed remarkably narrow, with small-cap leadership heavily skewed toward speculative, non-earning companies, AI supply chain beneficiaries, and biotech equities. While the manager eschews unprofitable businesses and speculative hype, they note the initial unwinding of AI exuberance, which catalyzed a sharp rotation back into beaten-down, high-quality enterprise software franchises and opened compelling opportunities across cyclical building products. Portfolio activity was marked by capital reallocation from rich valuations and headwinds into high-quality franchises. The fund initiated new positions in spinal surgery innovator Alphatec and civil engineering software leader Bentley Systems, while capitalizing on software rebounds in GitLab and Workiva. To fund these additions, the manager fully exited Baldwin Insurance Group following its private takeover offer, harvested gains in semiconductor test maker FormFactor on valuation grounds, and eliminated cyclical positions in WillScot Holdings and Olin Corporation due to prolonged end-market slumps.

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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 portfolio holds 49 positions with an active share exceeding 96% and explicit top-holding sizing (top position Encompass Health at 5.22%). Management demonstrates decisive willingness to eliminate names trading above intrinsic value (FormFactor) or facing secular headwinds (WillScot, Olin), while initiating targeted franchise holdings like Alphatec and Bentley Systems. However, portfolio breadth across nearly 50 names and measured language around construction risks temper conviction below concentrated tier levels.

Growth Outlook

42%

BearishBullish

Neutral (42%)

The manager expresses caution regarding narrow market breadth, persistent inflation, elevated bond yields, and excessive speculative runs in unprofitable equities. They explicitly warn that speculative markets experience spectacular crashes and that interest rates will likely remain elevated. Balanced against this is their enthusiasm for selected dislocations in beaten-down enterprise software and building products.

Risk Appetite

52%

DefensiveAggressive

Balanced (52%)

Positioning remains net long but disciplined, maintaining 5.40% in cash and shedding interest-rate-sensitive and cyclical exposure such as WillScot and Olin. Rather than pursuing speculative AI beta, risk appetite is directed toward high-quality compounders with resilient cash flows and defensible competitive moats.

Capital Deployment

58%

De-riskingDeploying

Net Neutral (58%)

The fund engaged in active recycling of capital, deploying funds into new buys Alphatec and Bentley Systems funded by complete sales of Baldwin Insurance, WillScot, FormFactor, and Olin. Cash stands at a balanced 5.40%, indicating measured net deployment.

Forward Guidance

65%

CautiousExpansionary

Expansionary (65%)

Management signals an active posture to deploy capital opportunistically as market dislocations emerge, specifically waiting patiently to add back construction-exposed franchises on rate relief. They actively rotated harvested capital from semiconductor sales into undervalued enterprise software franchises like Bentley Systems.

Language Signal

54%

BearishBullish

Balanced (54%)

Directional language balances warnings of 'speculative excess,' 'persistent inflation,' and 'spectacular crashes' against opportunities in 'high-quality franchises trading at discounts to intrinsic value,' 'superior return on invested capital,' and 'margin expansion levers.'

Perceived Risk

72%

Low RiskElevated

Elevated Risk (72%)

The manager articulates substantial macro risks including the inflationary impacts of war in Iran, protectionist trade policies, power and compute demands keeping bond yields elevated, and fragile market breadth where non-earning stocks dominate index performance.

Opportunity Density

62%

ScarceAbundant

Selective (62%)

The manager identifies fertile hunting grounds across two specific displaced cohorts: beaten-down enterprise software and cyclically depressed building products franchises. However, opportunities across the broader small-cap index remain constrained by expensive valuations and low quality among non-earning stocks.

Time Horizon

75%

Short-TermLong-Term

Decade+ (75%)

The fund emphasizes looking beyond the current interest rate cycle and short-term quarterly noise, noting that their best historical investments occur when near-term end markets appear most challenging. Their investment thesis for compounders is anchored on multi-year cash flow generation and margin realization.