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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21713
Madison Strategic Sector Premium Fund
(Exact name of registrant as specified in charter)
550 Science Drive, Madison, WI 53711
(Address of principal executive offices)(Zip code)
W. Richard Mason
Madison/Mosaic Legal and Compliance Department
8777 N. Gainey Center Drive, Suite 220
Scottsdale, AZ 85258
(Name and address of agent for service)
Registrant's telephone number, including area code: 608-274-0300
Date of fiscal year end: December 31
Date of reporting period: December 31, 2005
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspoection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. s 3507.
Item 1
Annual Report
December 31, 2005
Madison Strategic Sector
Premium Fund (MSP)Active Equity Management combined with a
Covered Call Option Strategy
Madison Investment Advisors, Inc.
www.madisonfunds.com
Table of Contents
Management's Discussion of Fund Performance
Madison Asset Management, LLC1 is pleased to present its Annual Report for the Madison Strategic Sector Premium Fund ("MSP") for the fiscal year ended December 31, 2005. Since the Fund's inception on April 27, 2005, we have remained diligent in pursuing our investment objective of seeking a high level of current income and capital gains, with a secondary objective of obtaining capital appreciation. We continue to strategically focus on sectors within the large and mid-cap universe that we believe provide the best opportunities for our "Growth-at-a-Reasonable-Price" style of investing. We continue to write options on high-quality growth stocks and, by doing so, the Fund has been able to provide a steady income return in the form of monthly dividend distributions throughout the year. While we are pleased about our consistent monthly dividend, we are equally as happy with the Fund's market price stability and NAV (net asset value) growth.
The Fund's market price has remained in a consistent trading range during the year commencing operations at $20.00 per share and ending the year at $20.28, a 2.06% premium to NAV. This compared very favorably to an average 7.8% discount for other leading closed-end funds with similar strategies. Its NAV has grown from $19.10 per share at inception to $19.87 on December 31, 2005.2 Its 8.83% total return based on NAV, including dividends and changes in NAV, compares favorably to the 4.89% increase of the BXM (CBOE's Buy/Write Index) over the same period of time. Our ability to outperform the BXM Index during the reporting period was, in part, attributable to our decision to sell primarily out-of-the money calls. With the Fund typically having more than 80% of stock holdings covered by out-of-the-money calls, the Fund was able to participate in some stock appreciation as well as enjoy meaningful income generated from call option premiums.
As of December 31, 2005, the Fund held 48 common stocks, comprising approximately 93% of total net assets. We have option premiums on the books of $5,990,194 as of December 31, 2005, generally with expiration dates of 4-months to 1-year into the future.
Calendar year 2005 represented a period of transition for the stock market, generally moving sideways while consolidating the post-bear market rally that drove stocks higher in the prior two years. After a meaningful pause early in the year, stocks moved solidly ahead, gaining almost 10% since the April lows through year-end. Bolstered by a strong economy, the market advance enjoyed solid underpinnings, and should continue to be firm into 2006. Following the recent rally, many stocks in our research universe, including some of the Fund's larger stock holdings, appear rather fully priced. Finding new, attractive stocks had become more difficult as we approached year-end, which suggests that a modest correction is possible in the spring. In fact, any such short term correction would be a welcome event, as it would restore better value and afford us decent opportunities to replace the stocks expected to be called away in January and February.
The Fund's 8.83% return slightly trailed the 9.37% return of the Standard & Poor's 500 Index over the same time period. Attributing to this lag was our lack of exposure to cyclical stocks such as those in the Energy sector. Since inception, MSP has concentrated in four primary sectors: Consumer Discretionary and Retail, Technology, Medical Health and Pharmaceutical and Financial. Although the Energy sector showed strong gains in 2005, we refrained from adding any energy stocks to our portfolio. In general, stocks in that industry rarely meet our "growth-at-a-reasonable-price" discipline. Only energy stocks that we believe to have solid long-term growth patterns, strong fundamentals and those which we have a high degree of earnings confidence will be considered for the Fund.
The Fund's stock investment strategy focuses on selecting high quality companies that we believe have strong, consistent earnings growth patterns with attractive valuations. The Adviser believes that the best opportunities in the Fund arise when there are attractive PEG ratios (a company's price-to-earnings ratio divided by its perceived earnings growth rate). In addition to favorable PEG ratios, we focus on companies that tend to have sustainable competitive advantages, high-quality management teams and predictable cash flows.
The Fund's option investment strategy employs an option writing program that involves writing primarily out-of-the-money calls, meaning that the strike price is higher than the common stock price when the call is written. This allows the Fund to participate in some stock appreciation before the stock is subject to being called away. Option premiums have held at reasonable levels throughout 2005, allowing MSP to continue its strategy of selling covered calls on the majority of the portfolio. By focusing on growth names within four specific sectors we have been able to provide opportunities for larger premiums than those that would come from index options.
It is management's objective that all dividends paid fully represent net dividend and interest income and capital gains. None of the dividends for 2006, similar to 2005, are expected to include any return of capital for tax purposes.3 In addition, we do not anticipate declaring any special or year-end dividends or capital gains distributions in 2006. At the end of 2005, the Madison Strategic Sector Premium Fund will have been in existence for eight months. With the appreciated portion of our stock holdings, we anticipate a growing potential to generate long-term capital gains when the stocks are sold, or more particularly are called away or "assigned" by the exercise of call options. Because the call options, even those of short duration, reduce the cost basis of the stock upon exercise, such call premiums may be effectively transformed into long-term capital gains for tax purposes. Therefore, the Fund's management will soon enter a time when a portion of shareholders' annual dividends might be taxable as long-term capital gains rather than as ordinary income. The manager's challenge for 2006: to obtain the most advantageous tax result for its shareholders while securing the highest possible total investment return.
We expect continued moderate growth in the stock market over the months ahead. Economic momentum has been building, with consumer demand remaining steady. All this against a backdrop of fairly modest interest rates despite the Federal Reserve's multiple hikes in the Federal Funds rate over the last 18 months. Stocks appear to be fairly valued entering 2006, and thus prices should expand in relative lockstep with rising earnings.
We remain quite pleased with the Fund's success, especially compared to the BXM index and other publicly-traded option writing funds. Our objective is to continue to achieve favorable long-term results, and to maintain and grow the NAV after the payment of dividends.
We appreciate the confidence of the shareholders of the Madison Strategic Sector Premium Fund and would like to extend our appreciation to all shareholders for their continued investment in our Fund.
1 Madison Asset Management, LLC, (MAM) a wholly-owned subsidiary of Madison Investment Advisors, Inc., which manages, with its affiliates, over $11 billion in individual, corporate, pension, insurance, endowment and mutual fund assets as of December 31, 2005.
2 See chart comparing share price and NAV performance at the end of Management's Discussion of Fund Performance.
3 As a result, shareholders are not expected to report return of capital for tax purposes. However, for so-called "book accounting" purposes, a portion of the Fund's monthly distributions may be considered "return of capital" until the end of the year when these amounts are recharacterized for tax purposes.
TOP TEN STOCK HOLDINGS AS OF
DECEMBER 31, 2005 FOR
MADISON STRATEGIC SECTOR PREMIUM FUND
% of net assets | |
Amgen Inc. | 4.26% |
Morgan Stanley | 3.83% |
Biogen Idec Inc. | 3.67% |
Lowe's Cos Inc. | 3.60% |
Nasdaq-100 Index Trc | 3.27% |
Bed Bath & Beyond Inc. | 3.25% |
Intel Corp. | 3.14% |
Home Depot Inc. | 3.06% |
Merrill Lynch & Co. | 3.05% |
Countrywide Financial | 2.77% |
Report of Independent Registered Public Accounting Firm
December 31, 2005
To the Board of Trustees and Shareholders of Madison Strategic Sector Premium Fund
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments of the Madison Strategic Sector Premium Fund (the "Fund"), as of December 31, 2005 and the related statement of operations, statement of changes in net assets and the financial highlights for the period from April 27, 2005 (commencement of operations) through December 31, 2005. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2005 by correspondence with the Fund's custodian and brokers. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of December 31, 2005, and the results of its operations, the changes in its net assets and financial highlights for the period from April 27, 2005 (commencement of operations) through December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
Grant Thornton LLP
(signature)
Chicago, Illinois
February 9, 2006
December 31, 2005
Number of Shares | Value | |
Common Stocks - 93.3% | ||
Business Services - 3.7% | ||
17,600 | Cintas Corp. | $724,768 |
65,000 | First Data Corp. | 2,795,650 |
20,000 | Hewitt Associates* | 560,200 |
4,080,618 | ||
Consumer Discretionary - 23.2% | ||
60,000 | American Eagle Outfitters, Inc | 1,378,800 |
100,000 | Bed Bath & Beyond Inc.* | 3,615,000 |
50,000 | Best Buy Co., Inc. | 2,174,000 |
35,000 | Harley-Davidson Inc. | 1,802,150 |
84,000 | Home Depot Inc. | 3,400,320 |
30,000 | International Game Technology | 923,400 |
55,000 | Kohl's Corp.* | 2,673,000 |
60,000 | Lowe's Cos, Inc. | 3,999,600 |
60,000 | Ross Stores, Inc. | 1,734,000 |
40,000 | Target Corporation | 2,198,800 |
51,000 | Tiffany & Co. | 1,952,790 |
25,851,860 | ||
Exchange-Traded Funds - 3.2% | ||
90,000 | Nasdaq-100 Index Tracking Stock | 3,637,800 |
Financials - 12.9% | ||
21,100 | Affiliated Managers Group, Inc.* | 1,693,275 |
40,000 | Citigroup, Inc. | 1,941,200 |
90,000 | Countrywide Financial Corp. | 3,077,100 |
50,000 | Merrill Lynch & Co., Inc. | 3,386,500 |
75,000 | Morgan Stanley | 4,255,500 |
14,353,575 | ||
Health Care - 20.9% | ||
60,000 | Amgen, Inc.* | 4,731,600 |
90,000 | Biogen Idec Inc.* | 4,079,700 |
65,000 | Biomet Inc. | 2,377,050 |
80,000 | Boston Scientific Co.* | 1,959,200 |
100,000 | Health Management Associates, Inc. | 2,196,000 |
40,000 | Laboratory Corp. of America Holdings* | 2,154,000 |
60,000 | Stryker Corporation | 2,665,800 |
20,000 | Waters Corporation* | 756,000 |
35,000 | Zimmer Holdings Inc.* | 2,360,400 |
23,279,750 | ||
Industrial - 5.6% | ||
45,000 | Dover Corp. | 1,822,050 |
25,000 | Fed Ex Corp. | 2,584,750 |
25,000 | United Parcel Service - Class B | 1,878,750 |
6,285,550 | ||
Insurance - 2.7% | ||
10,000 | American International Group, Inc. | $682,300 |
35,000 | MGIC Investment Corp. | 2,303,700 |
2,986,000 | ||
Software - 3.4% | ||
110,000 | Check Point Software Technologies Ltd.* | 2,211,000 |
90,000 | Symantec Corp.* | 1,575,000 |
3,786,000 | ||
Technology - 17.7% | ||
6,000 | Apple Computer Inc.* | 431,340 |
70,000 | Applied Materials, Inc. | 1,255,800 |
120,000 | Cisco Systems, Inc.* | 2,054,400 |
60,000 | EBAY Inc.* | 2,595,000 |
170,000 | Flextronics International Ltd.* | 1,774,800 |
70,000 | Hewlett-Packard Co. | 2,004,100 |
140,000 | Intel Corp. | 3,494,400 |
30,000 | Linear Technology Co. | 1,082,100 |
38,000 | Mercury Interactive Corp.* | 1,056,020 |
120,000 | Oracle Corp.* | 1,465,200 |
60,000 | Qlogic Corp.* | 1,950,600 |
20,000 | Texas Instruments, Inc. | 641,400 |
19,805,160 | ||
Total Long-Term Investments | ||
(Cost $100,741,403) | 104,066,313 | |
Contracts** | Put Options* - 0.6% | |
350 | S&P 500 Index, Expiring March 2006, Strike price of $1,230 (Cost $617,003) | 640,500 |
Short-Term Investments - 31.3% | ||
Repurchase Agreement - | ||
Morgan Stanley issued 12-30-05 at 2.90%, due 1/3/06, collateralized by $35,571,532 in United States Treasury Notes due 2/28/07. Proceeds at maturity are $34,881,236 (Cost $34,870,000). | 34,870,000 | |
Total Investments - 125.2% | ||
(Cost $136,228,406) | 139,576,813 | |
Liabilities less cash and other assets - (19.5%) | (21,677,279) | |
Total Call Options Written - (5.7%) | (6,392,560) | |
Net Assets - 100% | $111,506,974 |
*Non-income producing.
**100 shares per contract
Contracts (100 shares per contract) | Call Options Written | Expiration Date | Exercise Price | Market Value |
100 | Affiliated Managers Group, Inc. | June 2006 | $80.00 | $54,000 |
200 | American Eagle Outfitters, Inc. | January 2006 | 27.50 | 1,000 |
135 | American Eagle Outfitters, Inc. | May 2006 | 25.00 | 22,275 |
100 | American Eagle Outfitters, Inc. | May 2006 | 30.00 | 5,000 |
100 | American Insurance Group | May 2006 | 65.00 | 57,000 |
350 | Amgen, Inc. | January 2006 | 60.00 | 659,750 |
250 | Amgen, Inc. | July 2006 | 85.00 | 87,500 |
60 | Apple Computers | January 2006 | 37.50 | 206,700 |
700 | Applied Materials | April 2006 | 17.00 | 119,000 |
200 | Bed Bath & Beyond, Inc. | January 2006 | 42.50 | 1,000 |
170 | Bed Bath & Beyond, Inc. | February 2006 | 42.50 | 1,275 |
400 | Bed Bath & Beyond, Inc. | May 2006 | 37.50 | 80,000 |
230 | Bed Bath & Beyond, Inc. | May 2006 | 45.00 | 6,900 |
500 | Best Buy Co., Inc. | June 2006 | 45.00 | 180,000 |
50 | Biogen Idec Inc. | January 2006 | 35.00 | 51,750 |
850 | Biogen Idec Inc. | January 2006 | 40.00 | 459,000 |
650 | Biomet | January 2006 | 40.00 | 4,875 |
600 | Boston Scientific Corp. | January 2006 | 30.00 | 3,000 |
200 | Boston Scientific Corp. | February 2006 | 30.00 | 4,500 |
200 | Check Point Software Technologies Ltd. | January 2006 | 25.00 | 1,000 |
900 | Check Point Software Technologies Ltd. | April 2006 | 22.50 | 56,250 |
300 | Cisco Systems, Inc. | April 2006 | 17.50 | 23,250 |
300 | Cisco Systems, Inc. | January 2006 | 17.50 | 5,250 |
300 | Cisco Systems, Inc. | January 2006 | 20.00 | 1,500 |
500 | Countrywide Financial Corp. | January 2006 | 37.50 | 5,000 |
400 | Countrywide Financial Corp. | April 2006 | 35.00 | 87,000 |
450 | Dover | March 2006 | 40.00 | 81,000 |
200 | EBAY Inc. | January 2006 | 32.50 | 217,000 |
400 | EBAY Inc. | January 2006 | 35.00 | 336,000 |
250 | Fed Ex Corp. | January 2006 | 85.00 | 462,500 |
400 | First Data Corp. | January 2006 | 42.50 | 47,000 |
250 | First Data Corp. | May 2006 | 45.00 | 45,625 |
850 | Flextronics International Ltd. | January 2006 | 12.50 | 4,250 |
450 | Flextronics International Ltd. | January 2007 | 10.00 | 88,875 |
110 | Harley-Davidson Inc. | January 2006 | 50.00 | 28,600 |
240 | Harley-Davidson Inc. | May 2006 | 55.00 | 55,800 |
150 | Hewitt Associates | June 2006 | 25.00 | 60,000 |
100 | Hewlett Packard | January 2006 | 25.00 | 37,000 |
600 | Hewlett Packard | May 2006 | 30.00 | 91,500 |
130 | Home Depot | February 2006 | 42.50 | 5,850 |
200 | Home Depot | May 2006 | 42.50 | 29,000 |
1,400 | Intel | April 2006 | 25.00 | 199,500 |
300 | International Game | January 2006 | 27.50 | 102,000 |
300 | Kohl's Corp. | January 2006 | 50.00 | 22,500 |
250 | Kohl's Corp. | April 2006 | 50.00 | 69,375 |
250 | Laboratory Corp. | May 2006 | 55.00 | 52,500 |
300 | Linear Technology | May 2006 | 37.50 | 47,250 |
200 | Lowe's Cos, Inc. | January 2006 | 60.00 | 135,000 |
200 | Lowe's Cos, Inc. | April 2006 | 65.00 | 94,000 |
200 | Lowe's Cos, Inc. | July 2006 | 70.00 | 76,000 |
243 | Mercury Interactive Corp. | January 2006 | 45.00 | 1,215 |
137 | Mercury Interactive Corp. | April 2006 | 27.50 | 43,155 |
40 | Merrill Lynch & Co., Inc. | January 2006 | 55.00 | 51,400 |
460 | Merrill Lynch & Co., Inc. | July 2006 | 70.00 | 161,000 |
200 | Morgan Stanley | January 2006 | 55.00 | 40,000 |
600 | Nasdaq-100 Index Tracking Stock | January 2006 | 38.63 | 115,500 |
300 | Nasdaq-100 Index Tracking Stock | March 2006 | 41.00 | 27,750 |
500 | Oracle | June 2006 | 13.00 | 28,750 |
100 | QLogic Corp. | January 2006 | 32.50 | 10,500 |
300 | QLogic Corp. | January 2006 | 35.00 | 8,250 |
200 | QLogic Corp. | April 2006 | 32.50 | 54,000 |
600 | Ross Stores | May 2006 | 27.50 | 178,500 |
400 | Stryker Corp. | June 2006 | 45.00 | 136,000 |
600 | Symantec Corp. | January 2006 | 20.00 | 4,500 |
100 | Symantec Corp. | April 2006 | 20.00 | 5,500 |
350 | Target | July 2006 | 57.50 | 120,750 |
200 | Texas Instruments, Inc. | January 2006 | 25.00 | 142,000 |
510 | Tiffany & Co. | January 2006 | 30.00 | 425,850 |
71 | United Parcel Service - Class B | July 2006 | 75.00 | 34,790 |
200 | Waters Corp. | May 2006 | 40.00 | 37,500 |
150 | Zimmer Holdings | June 2006 | 65.00 | 105,750 |
200 | Zimmer Holdings | June 2006 | 70.00 | 88,000 |
Total Call Options Written | ||||
| (Premiums Received $5,990,194) | $6,392,560 |
Statement of Assets and Liabilities
December 31, 2005
ASSETS | |
Investments, at value (Note 2) | |
Investment securites | $104,066,313 |
Repurchase agreements | 34,870,000 |
Options | 640,500 |
Total investments (cost $136,228,406) | 139,576,813 |
Cash | 20,879 |
Receivables | |
Investment securities sold | 1,313,170 |
Dividends and interest | 36,154 |
Capital shares reinvested | 320,781 |
Total assets | 141,267,797 |
LIABILITIES | |
Options written, at value (premiums received of $5,990,194) | 6,392,560 |
Payables | |
Investment securities purchased | 23,332,705 |
Independent trustee and auditor fees | 32,451 |
Other expenses | 3,107 |
Total liabilities | 29,760,823 |
NET ASSETS | $111,506,974 |
Net assets consists of: | |
Paid in capital | 107,011,692 |
Undistributed net investment income (loss) | -- |
Accumulated net realized gain on investments and options transactions | 1,549,241 |
Net unrealized appreciation on investments and options transactions | 2,946,041 |
Net Assets | $111,506,974 |
CAPITAL SHARES ISSUED AND OUTSTANDING | |
An unlimited number of capital shares authorized, $.01 par value per share (Note 7) | 5,610,766 |
NET ASSETS VALUE PER SHARE | $19.87 |
For the period April 27, 2005* through December 31, 2005
INVESTMENT INCOME (Note 2) | |
Interest income | $509,028 |
Dividend income | 408,357 |
Total investment income | 917,385 |
EXPENSES (Note 3) | |
Investment advisory | 597,046 |
Administration | 18,658 |
Fund Accounting | 17,926 |
Independent trustee and auditor | 47,001 |
Other | 51,868 |
Total expenses | 732,499 |
NET INVESTMENT INCOME | 184,886 |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | |
Net realized gain on: | |
Investments | 4,978,269 |
Options | 1,382,076 |
Net unrealized appreciation (depreciation) on: | |
Investments | 3,324,910 |
Options | (378,869) |
NET GAIN ON INVESTMENTS AND OPTIONS TRANSACTIONS | 9,306,386 |
TOTAL INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $9,491,272 |
* Commencement of operations.
Statement of Changes in Net Assets
For the period April 27, 2005* through December 31, 2005
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | |
Net investment income | $184,886 |
Net realized gain on investments and options transactions | 6,360,345 |
Net unrealized appreciation on investments and options transactions | 2,946,041 |
Total increase in net assets resulting from operations | 9,491,272 |
DISTRIBUTION TO SHAREHOLDERS | |
From net investment income | (184,886) |
From net capital gains | (4,811,104) |
Total distributions | (4,995,990) |
CAPITAL SHARE TRANSACTIONS | |
Proceeds from issuance of common shares | 105,050,000 |
Reinvestment of dividends | 1,831,589 |
Common share offering costs charged to paid-in-capital | (220,000) |
Total increase in net assets resulting from capital share transactions | 106,661,589 |
TOTAL INCREASE IN NET ASSETS | 111,156,871 |
NET ASSETS | |
Beginning of period | $350,103 |
End of period | $111,506,974 |
* Commencement of operations.
For the period April 27, 2005* through December 31, 2005
Per Share Operating Performance for One Share Outstanding Throughout the Period
Net Asset Value, Beginning of Period1 | $19.10 |
Investment Operations | |
Net Investment Income | 0.03 |
Net realized and unrealized gain on investments and options transactions | 1.68 |
Total from investment operations | 1.71 |
Less distributions from: | |
Net investment income | (0.03) |
Capital gains | (0.87) |
Total distributions | (0.90) |
Offering Costs Charged to Paid-in-Capital | (0.04) |
Net Asset Value, End of Period | $19.87 |
Market Value, End of Period | $20.28 |
Total Investment Return | |
Net asset value (%) | 8.83 |
Market value (%) | 5.29 |
Ratios and Supplemental Data | |
Net assets, end of period (thousands) | $111,507 |
Ratio of expenses to average net assets (%)2 | 0.97 |
Ratio of net investment Income to average net assets (%)2 | 0.25 |
Portfolio turnover (%) | 49 |
* Commencement of operations.
1 Before deduction of offering costs charged to capital.
2 Annualized.
Notes to Financial Statements -- December 31, 2005
Note 1 -- Organization:
Madison Strategic Sector Premium Fund (the "Fund") was organized as a Delaware statutory trust on February 4, 2005. The Fund is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended. The Fund commenced operations on April 27, 2005. The Fund's primary investment objective is to provide a high level of current income and current gains, with a secondary objective of long-term capital appreciation.
The Fund will pursue its investment objectives by investing in a portfolio consisting primarily of common stocks of large and mid-capitalization issuers that are, in the view of the Fund's Investment Advisor, selling at a reasonable price in relation to their long-term earnings growth rates. Under normal market conditions, the Fund will seek to generate current earnings from option premiums by writing (selling) covered call options on a substantial portion of its portfolio securities. There can be no assurance that the Fund will achieve its investment objectives. The Fund's investment objectives are considered fundamental and may not be changed without shareholder approval.
Note 2 -- Significant Accounting Policies:
(a) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Such estimates affect the reported amounts of assets and liabilities and reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
(b) Valuation of Investments
Readily marketable portfolio securities listed on an exchange or traded in the over-the counter market are generally valued at their last reported sale price. If no sales are reported, the securities are valued at the mean of the closing bid and asked prices on such day. If no bid or asked prices are quoted on such day, then the security is valued by such method as the Fund's Board of Trustees shall determine in good faith to reflect its fair value. Portfolio securities traded on more than one securities exchange are valued at the last sale price at the close of the exchange representing the principal market for such securities. Debt securities are valued at the last available bid price for such securities or, if such prices are not available, at the mean between the last bid and asked price. Exchange-traded options are valued at the mean of the best bid and best asked prices across all option exchanges.
Short-term debt securities having a remaining maturity of sixty days or less are valued at amortized cost, which approximates market value.
(c) Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date and interest income is recorded on an accrual basis.
(d) Repurchase Agreement
The Fund may invest in repurchase agreements, which are short-term investments in which the Fund acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. Repurchase agreements are fully collateralized by the underlying debt security. The Fund will make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Fund.
Note 3 -- Investment Advisory Agreement and Other Transactions with Affiliates:
Pursuant to an Investment Advisory Agreement between the Fund and Madison Asset Management, LLC, a wholly-owned subsidiary of Madison Investment Advisors, Inc. (collectively "the Advisor"), the Advisor, under the supervision of the Fund's Board of Trustees, will provide a continuous investment program for the Fund's portfolio; provide investment research and make and execute recommendations for the purchase and sale of securities; and provide certain facilities and personnel, including officers required for the Fund's administrative management and compensation of all officers and trustees of the Fund who are its affiliate. For these services, the Fund will pay the Investment Advisor a fee, payable monthly, in an amount equal to 0.80% of the Fund's average daily net assets.
Under a separate Services Agreement, effective April 26, 2005, the Advisor provides fund administration services, fund accounting services, and arranges to have all other necessary operational and support services, for a fee, to the Fund. Such services include Transfer Agent, Custodian, Legal, and other operational expenses. These fees are accrued daily and shall not exceed 0.18% of the Fund's average daily net assets. The Advisor assumes responsibility for payment of all expenses greater than 0.18% of average net assets.
Note 4 -- Federal Income Taxes:
The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing substantially all of its ordinary income and long-term capital gains, if any, during each calendar year, the Fund intends not to be subject to U.S. federal excise tax.
Information on the tax components of capital, excluding option contracts, as of December 31, 2005 is as follows:
Aggregate Cost | $135,611,403 |
Gross unrealized appreciation | 5,926,556 |
Gross unrealized depreciation | (2,601,646) |
Net unrealized appreciation (depreciation) | $3,324,910 |
Net realized gains or losses may differ for financial reporting and tax purposes primarily as a result of the deferral of losses relating to wash sale transactions.
Due to inherent differences in the recognition of income, expenses, and realized gains/losses under U.S. generally accepted accounting principles and federal income tax purposes, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. A permanent book and tax difference relating to short-term capital gains in the amount of $4,811,104 was reclassified from accumulated net realized gain to accumulated undistributed net investment income.
For the period ended December 31, 2005, the tax character of distributions paid to shareholders was $4,995,990 of ordinary income. The Fund designates 6.21% of dividends declared from net investment income and short-term capital gains during the period ended December 31, 2005 as qualified income under the Jobs and Growth Tax Relief Reconstruction Act of 2003.
Note 5 -- Investment Transactions:
During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments were $145,538,154 and $46,910,233, respectively. No U.S. Government securities were purchased or sold during the period.
Note 6 -- Covered Call Options:
The Fund will pursue its primary objective by employing an option strategy of writing (selling) covered call options on common stocks. The number of call options the Fund can write (sell) is limited by the amount of equity securities the Fund holds in its portfolio. The Fund will not write (sell) "naked" or uncovered call options. The Fund seeks to produce a high level of current income and gains generated from option writing premiums and, to a lesser extent, from dividends.
An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or "strike" price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price (in the case of a call) or to pay the exercise price upon delivery of the underlying security (in the case of a put).
There are several risks associated with transactions in options on securities. As the writer of a covered call option, the Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call but has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price.
Transactions in option contracts during the period ended December 31, 2005 were as follows:
Number of Contracts | Premiums Received | |
Options written | 45,123 | $10,438,478 |
Options expired | (7,331) | (1,282,001) |
Options closed | (1,537) | (301,496) |
Options assigned | (12,869) | (2,864,787) |
Options outstanding at December 31, 2005 | 23,386 | $5,990,194 |
Note 7 -- Capital:
Common Shares
In connection with its organizational process, the Fund sold 5,240 and 13,090 common shares of beneficial interest to the Advisor and Frank Burgess, founder of the Advisor and Trustee of the Fund, for consideration of $100,084 and $250,019, respectively. The Fund has an unlimited amount of common shares, $0.01 par value, authorized and issued 5,500,000 shares of common stock in its initial public offering. These shares were all issued at $19.10 per share for total consideration of $105,050,000 after deducting the sales load but before a reimbursement of expenses to the underwriters of $0.005 per share.
Offering costs of $220,000 or $0.04 per share, in connection with the issuance of the common shares have been borne by the Fund and were charged to paid-in-capital. The Advisor has agreed to pay the Fund's organizational expenses and all offering costs in excess of $220,000.
In connection with the Fund's dividend reinvestment plan, the Fund issued 92,436 shares for a total reinvestment of $1,831,589 during the period.
Note 8 -- Indemnifications
In the normal course of business, the Fund enters into contracts that provide general indemnifications. The Fund's maximum exposure under these arrangements is dependent upon claims that may be made against the Fund in the future and, therefore cannot be estimated; however, the risk of material loss from such claims is considered remote.
Additional Information. Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that from time to time the Fund may purchase shares of its common stock in the open market at prevailing market prices.
This report is sent to shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or any securities mentioned in the report.
Management Information -- December 31, 2005
Independent Trustees
Name, Address and Age | Position(s) Held with Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen | Other Directorships Held |
Philip E. Blake 550 Science Drive Madison, WI 53711 Born 1944 | Trustee | Indefinite Term since April 2005 | Private investor; retired President and CEO of Madison Newspapers, Inc.; and Vice President, Lee Enterprises, Incorporated.; managing partner of Forecastle, Inc. (2000-present). | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | Madison Newspapers, Inc., of Madison, WI; Nerites Corp.; Trustee of the Madison Claymore Covered Call Fund. |
James R. Imhoff, Jr. 550 Science Drive Madison, WI 53711 Born 1944 | Trustee | Indefinite Term since April 2005 | Chairman and CEO of First Weber Group, Inc. (real estate brokers) of Madison, WI. | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | Park Bank; Trustee of the Madison Claymore Covered Call Fund. |
Lorence D. Wheeler 550 Science Drive Madison, WI 53711 Born 1938 | Trustee | Indefinite Term since April 2005 | Retired investor; formerly Pension Specialist for CUNA Mutual Group (insurance) and President of Credit Union Benefits Services, Inc. (a provider of retirement plans and related services for credit union employees nationwide). | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | Grand Mountain Bank, FSB; Trustee of the Madison Claymore Covered Call Fund. |
Interested Trustee*
Frank E. Burgess 550 Science Drive Madison, WI 53711 Born 1942 | Trustee and Senior Vice President | Indefinite Terms since April 2005 | Founder, President and Director of Madison Investment Advisors, Inc. | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | Capitol Bank, FSB; Trustee of the Madison Claymore Covered Call Fund. |
Officers*
Katherine L. Frank 550 Science Drive Madison, WI 53711 Born 1960 | President | Indefinite Term since April 2005 | Principal and Vice President of Madison Investment Advisors, Inc. and President of Madison Mosaic, LLC | President of all 12 Mosaic Funds, Trustee of all Mosaic Funds except Mosaic Equity Trust; President of the Mosaic Strategic Sector Premium Fund. | None |
Jay R. Sekelsky 550 Science Drive Madison, WI 53711 Born 1959 | Vice President | Indefinite Term since April 2005 | Principal and Vice President of Madison Investment Advisors, Inc. and Vice President of Madison Mosaic, LLC | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Ray DiBernardo 550 Science Drive Madison, WI 53711 Born 1959 | Vice President | Indefinite Term since April 2005 | Vice President of Madison Investment Advisors, Inc. | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
W. Richard Mason 8777 N. Gainey Center Drive, #220 Scottsdale, AZ 85258 Born 5/13/1960 | Secretary, General Counsel and Chief Compliance Officer | Indefinite Terms since April 2005 | Principal of Mosaic Funds Distributor, LLC; General Counsel and Chief Compliance Officer for Madison Investment Advisors, Madison Scottsdale, LC and Madison Mosaic, LLC; General Counsel for Concord Asset Management, LLC | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Greg Hoppe 550 Science Drive Madison, WI 53711 Born 4/28/1969 | Chief Financial Officer & Treasurer | Indefinite Term since April 2005 | Vice President of Madison Mosaic, LLC; Chief Financial Officer of all 12 Mosaic Funds | All 12 Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
*All interested Trustees and Officers of the Trust are employees and/or owners of Madison Investment Advisors, Inc. Since Madison Investment Advisors, Inc. serves as the investment advisor to the Trust, each of these individuals is considered an "interested person" of the Trust as the term is defined in the Investment Company Act of 1940.
The Statement of Additional Information contains more information about the Trustees and is available upon request. To request a free copy, call Mosaic Funds at 1-800-368-3195.
Forward-Looking Statement Disclosure.
One of our most important responsibilities as investment company managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements." Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "estimate," "may," "will," "expect," "believe," "plan" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise.
Proxy Voting Information.
The Fund adopted policies that provide guidance and set forth parameters for the voting of proxies relating to securities held in the Fund's portfolios. Additionally, information regarding how the Fund voted proxies related to portfolio securities, if applicable, during the period ended December 31, 2005 is available to you upon request and free of charge, by writing to Madison Strategic Sector Premium Fund, 550 Science Drive, Madison, WI 53711 or by calling toll-free at 1-800-368-3195. The Fund's proxy voting policies and voting information may also be obtained by visiting the Securities and Exchange Commission web site at www.sec.gov. The Fund will respond to shareholder requests for copies of our policies and voting information within two business days of request by first-class mail or other means designed to ensure prompt delivery.
N-Q Disclosure.
The Fund files its complete schedule of portfolio holdings with the U.S. Securities and Exchange Commission (the "Commission") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the Commission's website. The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090. Form N-Q and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov. Copies of this information may also be obtained, upon payment of a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, DC 20549-0102. Finally, you may call the Fund at 800-368-3195 if you would like a copy of Form N-Q and we will mail one to you at no charge.
Dividend Reinvestment Plan -- December 31, 2005
Unless the registered owner of common shares elects to receive cash by contacting the Plan Administrator, all dividends declared on common shares of the Fund will be automatically reinvested by Computershare Trust Company, Inc. (the "Plan Administrator"), Administrator for shareholders in the Fund's Dividend Reinvestment Plan (the "Plan"), in additional common shares of the Fund. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Some brokers may automatically elect to receive cash on your behalf and may re-invest that cash in additional common shares of the Fund for you. If you wish for all dividends declared on your common shares of the Fund to be automatically reinvested pursuant to the Plan, please contact your broker.
The Plan Administrator will open an account for each common shareholder under the Plan in the same name in which such common shareholder's common shares are registered. Whenever the Fund declares a dividend or other distribution (together, a "Dividend") payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in common shares. The common shares will be acquired by the Plan Administrator for the participants' accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized common shares from the Fund ("Newly Issued Common Shares") or (ii) by purchase of outstanding common shares on the open market ("Open-Market Purchases") on the New York Stock Exchange or elsewhere. If, on the payment date for any Dividend, the closing market price plus estimated brokerage commission per common share is equal to or greater than the net asset value per common share, the Plan Administrator will invest the Dividend amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to each participant's account will be determined by dividing the dollar amount of the Dividend by the net asset value per common share on the payment date; provided that, if the net asset value is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend will be divided by 95% of the closing market price per common share on the payment date. If, on the payment date for any Dividend, the net asset value per common share is greater than the closing market value plus estimated brokerage commission, the Plan Administrator will invest the Dividend amount in common shares acquired on behalf of the participants in Open-Market Purchases.
If, before the Plan Administrator has completed its Open-Market Purchases, the market price per common share exceeds the net asset value per common share, the average per common share purchase price paid by the Plan Administrator may exceed the net asset value of the common shares, resulting in the acquisition of fewer common shares than if the Dividend had been paid in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease making Open-Market Purchases and may invest the uninvested portion of the Dividend amount in Newly Issued Common Shares at net asset value per common share at the close of business on the Last Purchase Date provided that, if the net asset value is less than or equal to 95% of the then current market price per common share; the dollar amount of the Dividend will be divided by 95% of the market price on the payment date.
The Plan Administrator maintains all shareholders' accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instruction of the participants.
There will be no brokerage charges with respect to common shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commission incurred in connection with Open-Market Purchases. The automatic reinvestment of Dividends will not relieve participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such Dividends.
The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants.
All correspondence or questions concerning the Plan should be directed to the Plan Administrator, Computershare Trust Company, Inc., 2 North LaSalle Street, Chicago, IL, 60602, Phone Number: (800) 727-0196 or (312) 360-5486.
Board of Trustees
Philip E. Blake
Frank Burgess
James Imhoff, Jr.
Lorence Wheeler
Officers
Katherine L. Frank
President
Frank Burgess
Senior Vice President
Ray DiBernardo
Vice President
Jay Sekelsky
Vice President
Greg Hoppe
Chief Financial Officer
& Treasurer
W. Richard Mason
Secretary, General Counsel &
Chief Compliance Officer
Investment Advisor
Madison Asset Management, LLC
550 Science Drive
Madison, WI 53711
Administrator
Madison Investment Advisors, Inc.
550 Science Drive
Madison, WI 53711
Custodian
US Bank NA
Cincinnati, Ohio
Transfer Agent
Computershare Investor Services, LLC
Chicago, Illinois
Legal Counsel
Skadden, Arps, Slate, Meagher &
Flom, LLP
Chicago, Illinois
Independent Registered
Public Accounting Firm
Grant Thornton LLP
Chicago, Illinois
Privacy Principles of Madison Strategic Sector Premium Fund for Shareholders
The Fund is committeed to maintaining the privacy of shareholders and to safeguarding its non-public information. The following information is provided to help you understand what personal information the Fund collects, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, the Fund does not receive any nonpublic personal information relating to its shareholders, alther certainnonpublic personal information of its shareholders may become available to the Fund. The Fund does not disclose any nonpublic personal informatin about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts (for example, to a transfer agent or third party administrator).
The Fund restricts access to nonpublic personal information about the shareholders to Madison Asset Management, LLC and Madison Investment Advisors, Inc. employees with a legitimate business need for the information. The Fund maintains physical, electronic and procedural safeguards designed to protect the nonbpublic personal information of its shareholders.
Question concerning your shares of Madison Strategic Sector Premium Fund?
If your shares are held in a Brokerage Account, contact your broker
If you have physical possession of your shares in certificate form, contact the Fund's Transfer Agent:
Computershare Investor Services, LLC, 2 North LaSalle Street, Chicago, Illinois 60602 1-800-727-0196
This report is sent to shareholders of Madison Strategic Sector Premium Fund for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.
Madison Investment Advisors, Inc.
550 SCIENCE DRIVE
MADISON, WISCONSIN 53711
1-800-767-0300
www.madisonfunds.com
Item 2. Code of Ethics.
(a) The Trust has adopted a code of ethics that applies to the Trust’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, regardless of whether these individuals are employed by the Trust or a third party. The code was first adopted during the fiscal year ended December 31, 2005.
(c) The code has not been amended since it was initially adopted.
(d) The Trust granted no waivers from the code during the period covered by this report.
(f) Any person may obtain a complete copy of the code without charge by calling the Trust at 800-767-0300 and requesting a copy of the "Madison Strategic Sector Premium Fund Sarbanes Oxley Code of Ethics."
Item 3. Audit Committee Financial Expert.
At a meeting held during the period covered by this report, the Trust’s Board of Trustees elected James Imhoff, an “independent” Trustee and a member of the Trust’s audit committee, to serve as the Trust’s audit committee financial expert among the three Trust independent Trustees who so qualify to serve in that capacity.
Item 4. Principal Accountant Fees and Services.
(a) Total audit fees paid to the registrant's principal accountant for the fiscal year ended December 31, 2005 were approved not to exceed $28,000 (plus typical expenses in connection with the audit such as postage, photocopying, etc.).
(b) Audit-Related Fees. None.
(c) Tax-Fees. None incurred during the period covered by this report. Such fees are expected to be incurred in 2006 connection with the preparation of the registrant's initial tax return for the tax year ended December 31, 2006.
(d) All Other Fees. None.
(e) (1) Before any accountant is engaged by the registrant to render audit or non-audit services, the engagement must be approved by the audit committee as contemplated by paragraph (c)(7)(i)(A) of Rule 2-01of Regulation S-X.
(2) Not applicable.
(f) Not applicable.
(g) Not applicable.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants.
(a) The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)). The members of the committee include all the disinterested Trustees of the registrant, namely, Philip Blake, James Imhoff and Lorence Wheeler.
(b) Not applicable.
Item 6. Schedule of Investments
Included in report to shareholders (Item 1) above.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
The following discloses our current policies and procedures that we use to determine how to vote proxies relating to portfolio securities. Because we manage portfolios for clients in addition to the registrant, the policies and procedures are not specific to the registrant except as indicated.
Proxy Voting Policies
Our policies regarding voting the proxies of securities held in client accounts depend on the nature of our relationship to the client. When we are an ERISA fiduciary of an account, there are additional considerations and procedures than for all other (regular) accounts. In all cases, when we vote client proxies, we must do so in the client's best interests as described below by these policies.
Regular Accounts
We do not assume the role of an active shareholder when managing client accounts. If we are dissatisfied with the performance of a particular company, we will generally reduce or terminate our position in the company rather than attempt to force management changes through shareholder activism.
Making the Initial Decision on How to Vote the Proxy
As stated above, our goal and intent is to vote all proxies in the client's best interests. For practical purposes, unless we make an affirmative decision to the contrary, when we vote a proxy as the Board of Directors of a company recommends, it means we agree with the Board that voting in such manner is in the interests of our clients as shareholders of the company for the reasons stated by the Board. However, if we believe that voting as the Board of Directors recommends would not be in a client's best interests, then we must vote against the Board's recommendation.
As a matter of standard operating procedure, all proxies received shall be voted (by telephone or Internet or through a proxy voting service), unless we are not authorized to vote proxies. When the client has reserved the right to vote proxies in his/her/its account, we must make arrangements for proxies to be delivered directly to such client from its custodian and, to the extent any such proxies are received by us inadvertently, promptly forward them to the client.
Documenting our Decisions
In cases where a proxy will NOT be voted or, as described below, voted against the Board of Directors recommendation, our policy is to make a notation to the file containing the records for such security (e.g., Corporation X research file, since we may receive numerous proxies for the same company and it is impractical to keep such records in the file of each individual client) explaining our action or inaction, as the case may be. Alternatively, or in addition to such notation, we may include a copy of the rationale for such decision in the appropriate equity correspondence file.
Why would voting as the Board recommends NOT be in the client's best interests?
Portfolio management must, at a minimum, consider the following questions before voting any proxy:
1. Is the Board of Directors recommending an action that could dilute or otherwise diminish the value of our position? (This question is more complex than it looks: We must consider the time frames involved for both the client and the issuer. For example, if the Board of Directors is recommending an action that might initially cause the position to lose value but will increase the value of the position in the long-term, we would vote as the Board recommended for if we are holding the security for clients as a long-term investment. However, if the investment is close to our valuation limits and we are anticipating eliminating the position in the short-term, then it would be in our clients' best interests to vote against management's recommendation.)
2. If so, would we be unable to liquidate the affected securities without incurring a loss that would not otherwise have been recognized absent management's proposal?
3. Is the Board of Directors recommending an action that could cause the securities held to lose value, rights or privileges and there are no comparable replacement investments readily available on the market? (For example, a company can be uniquely positioned in the market because of its valuation compared with otherwise comparable securities such that it would not be readily replaceable if we were to liquidate the position. In such a situation, we might vote against management's recommendation if we believe a "No" vote could help prevent future share price depreciation resulting from management's proposal or if we believe the value of the investment will appreciate if management's proposal fails. A typical recent example of this type of decision is the case of a Board recommendation not to expense stock options, where we would vote against management's recommendation because we believe expensing such options will do more to enhance shareholder value going forward.)
4. Would accepting the Board of Directors recommendation cause us to violate our client's investment guidelines? (For example, a Board may recommend merging the company into one that is not permitted by client investment guidelines, e.g. a tobacco product company, a foreign security that is not traded on any US exchange or in US dollars, etc., restrictions often found in client investment guidelines. This would be an unusual situation and it is possible we would, nevertheless, vote in favor of a Board's recommendation in anticipation of selling the investment prior to the date any vote would effectively change the nature of the investment as described. Moreover, this does not mean we will consider any client-provided proxy voting guidelines. Our policy is that client investment guidelines may not include proxy voting guidelines if our firm will vote account proxies. Rather, we will only vote client proxies in accordance with these guidelines. Clients who wish their account proxies to be voted in accordance with their own proxy voting guidelines must retain proxy voting authority for themselves.)
Essentially, we must "second guess" the Board of Directors to determine if their recommendation is in the best interests of our clients, regardless of whether the Board thinks their recommendation is in the best interests of shareholders in general. The above questions should apply no matter the type of action subject to the proxy. For example, changes in corporate governance structures, adoption or amendments to compensation plans (including stock options) and matters involving social issues or corporate responsibility should all be reviewed in the context of how it will affect our clients' investment.
In making our decisions, to the extent we rely on any analysis outside of the information contained in the proxy statements, we must retain a record of such information in the same manner as other books and records (2 years in the office, 5 years in an easily accessible place). Also, if a proxy statement is NOT available on the SEC's EDGAR database, we must keep a copy of the proxy statement.
Addressing Conflicts of Interest
Although it is not likely, in the event there is a conflict of interest between us and our client in connection with a material proxy vote (for example, (1) the issuer or an affiliate of the issuer is also a client or is actively being sought as a client or (2) we have a significant business relationship with the issuer such that voting in a particular manner could jeopardize this client and/or business relationship), our policy is to alert affected client(s) of the conflict before voting and indicate the manner in which we will vote. In such circumstances, our client(s) may instruct us to vote in a different manner. In any case, we must obtain client consent to vote the proxy when faced with a conflict of interest. If the conflict involves a security held by a mutual fund we manage, then we must present the material conflict to the Board of the applicable fund for consent or direction to vote the proxies. If the conflict involves a security held by wrap accounts, then we may present the conflict to the wrap sponsor, as our agent, to obtain wrap client consent or direction to vote the proxies. Note that no conflict generally exists for routine proxy matters such as approval of the independent auditor (unless, of course, the auditor in question is a client, we are seeking the auditor as a client or we have a significant business relationship with the auditor), electing an uncontested Board of Directors, etc.
In the event it is impractical to obtain client consent to vote a proxy when faced with a conflict of interest, or at the request of the applicable fund Board, the firm will employ the services of an independent third party "proxy services firm" to make the proxy voting decision in accordance with Rule 206(4)-6 under the Investment Advisors Act of 1940, as amended. The firm has retained the firm of Glass Lewis & Co. to serve in this capacity. All investment company Boards for which we provide investment management services have requested we utilize the recommendations of Glass Lewis & Co. in cases of conflicts of interest.
Once any member of the relevant portfolio management team determines that it would be in our clients' best interests to vote AGAINST management recommendations (or, for Madison Scottsdale and Concord Asset Management, any particular portfolio manager makes such determination), then the decision should be brought to the attention of the Investment Committee, or any subcommittee appointed by the Investment Committee from among its members (such subcommittee may be a single person), to ratify the decision to stray from our general policy of voting with management. Such ratification need not be in writing.
The Investment Committee or any subcommittee appointed by the Investment Committee from among its members (such subcommittee may be a single person) shall monitor potential conflicts of interest between our firm and clients that would affect the manner by which we vote a proxy. We maintain a "conflicted list" for proxy voting purposes.
As of January 1, 2004, Jay Sekelsky represents the Investment Committee subcommittee described above.
ERISA Fiduciary Accounts
As a general rule, an ERISA plan Trustee is required to vote proxies. However, the fiduciary act of managing plan assets includes the responsibility to vote proxies on plan-owned stock when the named fiduciary has delegated management responsibility to an investment manager. Therefore, unless another named fiduciary (Trustee, another investment manager, consultant, plan administrator, employer, etc.) for any ERISA client expressly reserves the right to vote proxies, we are required to do so. In most cases, the plan document will specify who is required to vote proxies.
It is important that our investment management agreement (or the ERISA client's plan document) (collectively, the "Contracts") address the issue of who is responsible for voting proxies.
1. If the Contracts expressly preclude us from voting proxies, then the Trustee must vote proxies attributable to our ERISA client's accounts.
2. On the other hand, if the Contracts are silent or simply state that we "may" vote proxies, then it is our fiduciary duty to affirmatively vote under ERISA.
ERISA requires us, when we are responsible for voting proxies:
1. To maintain voting records for review by the named fiduciary of the plan; and
2. Ensure that the custodian (or plan Trustee, as the case may be) forward to us all proxies received so that we may vote them in a timely manner.
Our general policy is to vote all ERISA plan proxies received in the same manner as we vote non-ERISA plan proxies described above. Again, as a matter of standard operating procedure, all proxies received shall be voted (by telephone or Internet).
Additional Recordkeeping Rules Related to Proxy Voting
We must keep any written documents (including email) we prepared that were material to making a decision on how to vote a proxy (or that memorialized the basis for our decision). As noted above, we need not keep a copy of the actual proxy statements we received if they are available on the SEC's EDGAR database.
We must keep in the applicable client file records of written client requests for proxy voting information. We must, of course, also keep a copy in the client file of any of our written responses to clients who asked for such information either in writing or orally.
We retained the services of ProxyEdge to maintain the records of the proxy votes we cast on behalf of clients. To the extent we vote any proxies outside of this service (for example, for logistical purposes, certain Madison Scottsdale proxies may not be maintained by this service), then copies of the voted proxy must be maintained in the applicable client or research file, as the case may be.
Unless an investment company invests exclusively in non-voting securities, it shall file Form N-PX annually with the U.S. Securities and Exchange Commission no later than August 31 for the period covering the previous July 1 through June 30.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a) (1) Frank E. Burgess, the President and founder of Madison Investment Advisors, Inc., is responsible for the day-to-day management of the registrant. The Advisor to the registrant, Madison Asset Management, LLC, is a wholly owned subsidiary of Madison Investment Advisors, Inc., founded by Mr. Burgess in 1974.
(a) (2) Other portfolios managed.
As of the end of the registrant's most recent fiscal year, Mr. Burgess was involved in the management of the following accounts:
Name of manager | Category of other accounts managed | Number managed in category | Total assets in category | Material conflicts of interest that may arise in connection with the manager's management of the Trust's investments and the investments of the other accounts |
Frank Burgess | Registered investment companies | 4* | $285,400,000 | None identified |
Other pooled investment vehicles | 1 | $2.0 million | As of the end of the Trust's most recent fiscal year, the manager also managed a private partnership that pays no fees. Furthermore, the Mosaic Board of Trustees has adopted procedures to address potential conflicts of interest by requiring that such account be treated as an "Access Person" of the Trust, subject to the Trust's Code of Ethics as if it were an employee. | |
Other accounts | None | Not applicable | None identified |
*The advisory fee was not based on the performance of any of these accounts.
(a) (3) Compensation.
All compensation is measured and paid on an annual, calendar year basis. The portfolio manager is a majority owner of the registrant's investment advisor and does not receive "incentive" compensation.
Name of manager | Structure of compensation for managing Mosaic Equity Trust portfolios | Specific criteria | Difference in methodology of compensation with other accounts managed (relates to the "Other Accounts" mentioned in the chart above) |
Frank Burgess | We believe investment professionals should receive compensation for the performance of our client's accounts, their individual effort, and the overall profitability of the firm. As such, our investment professionals receive a base salary, as well as a merit bonus based on effort expended. In addition, an incentive bonus is paid based on the attainment of certain goals and objectives in the portfolio management process. The manager is a controlling shareholder of Madison Investment Advisors, Inc. and participate in the overall profitability of the firm through his individual ownership in the firm. Madison Investment Advisors, Inc. also offers an Employee Stock Ownership Plan (ESOP) in which all employees are eligible to participate in after one year of employment. All the members of our portfolio management teams have significant investments in either the firm or the Mosaic Fund accounts we manage with the same general style and philosophy as our individual client accounts. We believe our portfolio managers' goals are aligned with those of long-term investors, recognizing client goals to outperform over the long-term, rather than focused on short-term performance contests. | Not applicable. | None. Compensation is based on the entire employment relationship, not based on the performance of any single account or type of account. |
(a) (4) Ownership of Securities.
As of December 31, 2005, the portfolio manager beneficially owned the following amounts of the registrant:
Name of Manager | Name of Registrant | Range of Ownership Interest |
Frank Burgess | Madison Strategic Sector Premium Fund | $100,001 - $500,000 |
(b) Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
(a) During the period covered by this report, a total of 23,554 shares in the amount of $473,065.60 were purchased by on or behalf of the registrant or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act of shares or other units of any class of the registrant's equity securities that is registered by the registrant pursuant to Section 12 of the Exchange Act.
(b)
REGISTRANT PURCHASES OF EQUITY SECURITIES
Period | (a) Total Number of Shares (or Units) Purchased | (b)Average Price Paid per Share (or Unit) | (c)Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d)Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
Month #1 (July 1 to July 30, 2005) | 23,554* | $20.0843* | 23,554* | Unlimited for dividend reinvestment plan (see footnote below) |
Month #2 (August 1 to August 30, 2005) | 0 | 0 | 0 | 0 |
Month #3 (September 1 to September 30, 2005) | 0 | 0 | 0 | 0 |
Month #4 (October 1 to October 31, 2005) | 0 | 0 | 0 | 0 |
Month #5 (November 1 to November 30, 2005) | 0 | 0 | 0 | 0 |
Month #6 (December 1 to December 31, 2005) | 0 | 0 | 0 | 0 |
Total | 0 | 0 | 0 | 0 |
Note to Item 9: As announced and disclosed in the registrant's prospectus, the registrant maintains a Dividend Reinvestment Plan. The plan has no expiration date and no limits on the dollar amount of securities that may be purchased by the registrant to satisfy the plan's dividend reinvestment requirements. All shares purchased during Month #1 were purchased on the open market for shareholder benefit in the Dividend Reinvestment Plan.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The Trust’s principal executive officer and principal financial officer determined that the registrant’s disclosure controls and procedures are effective, based on their evaluation of these controls and procedures within 90 days of the date of this report. There were no significant changes in the registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. The officers identified no significant deficiencies or material weaknesses.
(b) There have been no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. (Note that the registrant's initial public offering was April 27, 2005.)
Item 12. Exhibits.
(a)(1) Code of ethics referred to in Item 2.
(a)(2) Certifications of principal executive and principal financial officers as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(a)(3) None.
(b) Certification of principal executive and principal financial officers as required by Rule 30a-2(b) under the Investment Company Act of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Madison Strategic Sector Premium Fund
By: (signature)
W. Richard Mason, Secretary
Date: February 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: (signature)
Katherine L. Frank, Chief Executive Officer
Date: February 15, 2006
By: (signature)
Greg Hoppe, Chief Financial Officer
Date: February 15, 2006