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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 811-3615
Madison Mosaic Equity Trust
(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, 2008
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, 100 F Street, NE, 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. Report to Shareholders.
ANNUAL REPORT
December 31, 2008
Madison Mosaic Equity Trust
- Investors Fund
- Balanced Fund
- Disciplined Equity Fund
- Mid-Cap Fund
[Madison Mosaic Logo]www.mosaicfunds.com
Contents
Management’s Discussion of Fund Performance | |
Review of Period | 1 |
Market in Review | 1 |
Outlook | 1 |
Interview with lead equity manager Jay Sekelsky | 2 |
Investors Fund | 2 |
Balanced Fund | 4 |
Disciplined Equity Fund | 6 |
Mid-Cap Fund | 8 |
Report of Independent Registered Public Accounting Firm | 10 |
Portfolio of Investments | |
Investors Fund | 11 |
Balanced Fund | 12 |
Disciplined Equity Fund | 14 |
Mid-Cap Fund | 16 |
Statements of Assets and Liabilities | 17 |
Statements of Operations | 18 |
Statements of Changes in Net Assets | 19 |
Financial Highlights | 21 |
Notes to Financial Statements | 23 |
Management Information | 29 |
Madison Mosaic Equity Trust December 31, 2008
Management’s Discussion of Fund Performance
Review of Period
This twelve-month period has already been memorialized as one of the worst calendar years for stocks in history, with the S&P 500 dropping -37.0%, its second worst loss in its history. Unlike some previous market drops, such as the “dot.com” crash of 2000-2002, this decline was broad and relatively indiscriminate, affecting all market sectors and capitalization ranges. For the one-year period, Madison Mosaic Investors Fund lost -33.40%, Mid-Cap was down -36.61%, Disciplined Equity fell -34.20%, and Balanced -19.92%. Yet despite these significant negatives, all the funds in Equity Trust held up better than their benchmark indices and Lipper peer groups. The reasons for each fund’s outperformance during the year are in the fund-specific discussions which follow.
Market in Review
Virtually all risk assets were hammered in 2008 in the wake of broad economic problems, while a flight to safety concentrated positive returns among the most secure assets, primarily U.S. government issued Treasury securities. The stock market hit its annual high as trading opened in January, but it was far from clear that 2008 was going to be as bad as it turned out. At first, it appeared the credit problems that were sparked by the subprime loan crisis might be contained. On May 19, the market was nipping at new annual highs in the wake of a bailout plan for investment bank Bear Stearns. However, as the year progressed the problems that began in the subprime mortgage area bloomed into a full fledged credit crisis, with the signature event being the collapse of Lehman Brothers investment bank in September. The credit crisis sent unexpected shock waves into virtually all areas of the global economy, sparking a worldwide economic slowdown and recession. As credit froze, highly leveraged firms began to spiral downward and many financial and industrial firms with household names found themselves on the brink—or over the brink—of insolvency.
Countering the crisis in the financial sector was a series of significant, even historically unprecedented, federal interventions. Beginning in January the Federal Reserve made the first of a series of rate cuts, which by the December cut lowered the target federal funds rate to a range of 0% to 0.25%, the lowest in modern history. In addition to rate cuts, the Federal government injected massive stimulus into the financial system in order to provide a solid base from which to repair balance sheets and normalize credit markets. These federal interventions were headlines throughout the year, including: the bailout of Bear Stearns; what amounted to a federal acquisition of mortgage companies Fannie Mae and Freddie Mac; and the Congressional creation of the $700 billion TARP program. An additional large stimulus package is expected under the new presidential administration.
The S&P 500 hit its 2008 low on November 20 and rallied into the New Year with a 20% rise off the bottom, but still closed the year 37% lower than it opened. All in all, it was one of the most tumultuous years ever for the U.S. financial system and markets and the result was widespread fear among investors and considerable uncertainty about the direction of the U.S. economy.
Outlook
As we enter 2009, the U.S. economy, and most of the world, is mired in a severe recession. It is increasingly difficult to find reason for optimism in upcoming economic data. U.S. consumer confidence has fallen to generational lows. Manufacturers are paring back production and employment in anticipation of a prolonged recession. Unemployment rates are rising and likely to rise further. Credit remains tight and is only available to the most worthy of borrowers.
Madison Mosaic Equity Trust 1
Management's Discussion of Fund Performance (continued)
The process of de-leveraging, begun in 2007, will likely continue into 2009 and beyond. The financial sector de-leveraging, while well-advanced, has more room to run. Private sector corporate de-leveraging will likely be a less troublesome issue, as non-financial corporate balance sheets remain in good shape. The process of consumer de-leveraging, we fear, is still in its early stages and should only be magnified as the unemployment rate rises and the recession deepens.
Despite this, there are bright spots. The monetary and fiscal stimulus brought to bear so far is staggering and should eventually have its intended effect. Estimates of U.S. Government infusions into the banking industry alone are in the $1-$2 trillion range. And the $100 decline in the price of a barrel of crude could put up to $260 billion back in consumers’ pockets—a large stimulus in and of itself. After a gloomy first half, we expect the economy to begin to show signs of life in the second half of 2009.
Interview with lead equity manager Jay Sekelsky
(photo of Jay Sekelsky)
Can you summarize the performance of the funds in Equity Trust in 2008?
It was a devastating year for equity investors, worse than any period anyone who is actively managing money has seen before. You have to go back to the early years of the Great Depression to find the one year in the history of the S&P 500 that was worse. It was a very tough year for us as managers, since our risk-conscious approach had been successful in protecting our investors in bear markets like we lived through in 2000-2002. This time, there was no shelter from the storm, and although we outperformed our benchmarks and peers, we are not happy to report losses that range from -36.61% for Madison Mosaic Mid-Cap to -19.92% for Balanced.
MADISON MOSAIC INVESTORS
How did the fund perform in 2008?
The Investors Fund ended the year with a loss of -33.40%, which is extremely disappointing in terms of real return, even though we were ahead of our S&P 500 benchmark and our peers. The S&P 500 dropped -37.0% while the Lipper Large-Cap Core Index fell -37.07%. Our advantage over our benchmarks can be traced to relatively strong stock selection and, for the first time in a number of years, we also had sector allocation benefits, as cyclical stocks fell more than the overall market. As always, we stuck to our discipline and didn’t chase the hot stocks or sectors of the past few years. We began the year relatively light in Financials, and quite purposefully trimmed the names most exposed to the credit problems, believing that investments in profitable, well-managed and low-debt companies would provide shelter from the credit crisis. As always, we follow valuation opportunities and this led us to be relatively heavily weighted in the Health Care Sector, which was a decided positive, since it was one of the better performing areas of the market.
What significant changes did you make to the portfolio during the year?
Late last year we made several changes with the intent of minimizing our direct exposure to companies involved in the credit cycle and to increase our exposure to more defensive areas, such
2 Annual Report • December 31, 2008
Management's Discussion of Fund Performance (continued)
as Health Care. We had decreased our Financial holdings, from a high of some 26% in June of 2007 to as low as 13% in 2008, the lowest weighting we’ve had in Financials in some time. These proved to be propitious moves as, by the end of the period, Health Care was a leading sector, while the worst proved to be the Financial Sector.
Turnover in 2008 was a bit higher than our target, which is typical of periods with high volatility. When we have a period in which fear dominates the market, we expect to find opportunities, as the best companies are driven down along with the rest. We were quite active in seeking to own these companies at valuations that have not been available to us for years. This is part of the opportunistic strategy that is a key to our process—buying high-quality stocks that might be temporarily out of favor.
What factors were the strongest contributors to fund performance?
On an individual basis, some of the strongest contributors came from areas of the market where you wouldn’t necessarily expect it. The holding with the greatest positive contribution was Wells Fargo, in the midst of a Financial Sector that had a return of -57.0% for the year. Wells Fargo had a return of 1.88% for the year, as the company’s strong balance sheet and conservative lending practices made it one of the stronger banks in the country which, in turn, powered its acquisition of struggling Wachovia Bank at what appeared to be an attractive valuation. Another strong performer in financials was Warren Buffett’s Berkshire Hathaway. In the end, we had strong relative results across the Financial Sector, even though the average return of our holdings reflected the downward march of stocks over the year. We also had relatively good performance from Comcast, which acts more like a defensive Consumer Staples company despite being classified as a Consumer Discretionary company. In the fourth quarter, when the market was hitting the lowest level of the year, we made some opportunistic purchases, such as Jacobs Engineering Group, which provided a lift as the market rallied in December. Anytime there is a major market loss, cash holdings are a plus, and this was true for us during 2008.
TOP TEN STOCK HOLDINGS AS OF DECEMBER 31, 2008
FOR MADISON MOSAIC INVESTORS
% of net assets | |
Cisco Systems, Inc. | 4.55% |
Microsoft Corp. | 4.33% |
Berkshire Hathaway Inc.-CL B | 4.20% |
Google Inc.-CL A | 3.98% |
Walgreen Co. | 3.78% |
Novartis AG - ADR | 3.66% |
Coca-Cola Co | 3.54% |
Charles River Laboratories, Inc. | 3.40% |
Comcast Corp.-Special-CL A | 3.25% |
Quest Diagnostics Inc. | 3.21% |
What factors were the largest constraints on performance?
The top performing sector in 2008 was Consumer Staples, an area which is typically less sensitive to economic fluctuations. The S&P 500 Consumer Staples Sector was down about half the overall market’s loss,
Madison Mosaic Equity Trust 3
Management's Discussion of Fund Performance (continued)
and our underweighting in this sector was a negative. Within this sector, one of our top holdings, Walgreen Company, fell considerably more than the overall sector, with a loss of -34.4% for the year.
In terms of individual holdings, the largest contributor to our losses in 2008 was Charles Rivers Laboratories, a company we like and actually added to late in the year. We also had disappointing returns from UnitedHealth Group, which we sold mid-way through the year.
MADISON MOSAIC BALANCED
How did the Balanced Fund perform for the year?
The Balanced Fund fell -19.92% for the year, with positive results from our bond holdings providing some defense against the deep losses in stocks. As with our Investors Fund, we outperformed the overall market on the stock side, thanks to strong stock selection and some sector advantages as energy and other cyclicals reversed their market-leading ways of the past few years. The Lipper Mixed Asset Allocation Growth Index showed a -29.06% return for the year, a result which suggests that other members of this index may have had greater weightings in the most troubled financial stocks or foreign stocks in a year in which most international markets underperformed the domestic market. Our superior bond results in 2008 were also a plus, as many bond managers showed net losses for the year.
What significant changes did you make to the portfolio during the year?
The stock holdings of Balanced mirror the holdings of Mosaic Investors, as discussed above. These holdings continue to focus on solid, well-established domestic companies that have proven their earning ability through difficult times. One of the factors in our management of Balanced is the mix of stocks and bonds, with 70% being the highest allowable percentage of stocks. We began the period holding 60.7% stocks and finished the period with 60.0% in stocks, as we actively added equity exposure over the latter part of the period to maintain our targeted allocation. On the bond side, we increased the percentage of corporate
4 Annual Report • December 31, 2008
Management's Discussion of Fund Performance (continued)
bonds, where we began to see exceptional value as the year progressed, and decreased the weighting in Treasury bonds, based on our assessment of relative values. This yield advantage was a boost to our bond portfolio’s performance, even though a flight to quality in the second half of 2008 favored government issuance. We ended the year with the duration of the bonds at 3.44 years, close to the 3.31 years at the period’s start.
How did the stock holdings in Balanced contribute to overall performance?
The performance of the stock holdings in Balanced were deeply negative for the year, although we achieved better results than the market in general. The holdings mirror the stocks held in Mosaic Investors, discussed at some length above.
How did the bond holdings in Balanced contribute to overall performance?
Bond management produced widely divergent results in 2008, with a number of funds showing double-digit losses. We were near the top of the class with our bond returns, as we benefited from Treasury exposure early in the year, our traditional avoidance of high-risk assets such as bonds backed by subprime loans, and our avoidance of bonds issued by any of financial firms which collapsed during the course of the year.
TOP FIVE STOCK AND FIXED INCOME HOLDINGS AS OF
DECEMBER 31, 2008 FOR MADISON MOSAIC BALANCED
% of net assets | |
Top Five Stock Holdings | |
Cisco Systems, Inc. | 2.78% |
Berkshire Hathaway Inc.-CL B | 2.69% |
Microsoft Corp. | 2.67% |
Google Inc.-CL A | 2.53% |
Walgreen Co. | 2.43% |
% of net assets | |
Top Five Fixed Income Holdings | |
US Treasury Note, 5.125%, 6/30/11 | 3.28% |
Fannie Mae, 6.625%, 11/15/10 | 2.17% |
Fed Home Loan Bank, 4.375%, 9/17/10 | 2.08% |
Fed Home Loan Bank, 5.5%, 8/13/14 | 1.71% |
Freddie Mac, 4.875%, 11/15/13 | 1.65% |
Madison Mosaic Equity Trust 5
Management's Discussion of Fund Performance (continued)
MADISON MOSAIC DISCIPLINED EQUITY
How would you characterize the performance of the Disciplined Equity Fund for the period?
Against our benchmark S&P 500 return of -37.0, Disciplined Equity had a decline of -34.2%. This was also ahead of our Lipper peer group, as the Lipper Large Cap Core Index declined -37.1%. With our portfolio currently allocated across S&P 500 sectors, the positive results against the S&P 500 and the Lipper Index were largely a function of our stock selection, as we were able to concentrate the fund in stocks which showed relative strength above their broader sector.
What significant changes did you make to the portfolio during the year?
As in the past, our equity positions are concentrated in large-cap companies which retain a leadership position in their industries and have shown the ability to produce predictable earnings over time.
Although the management team’s objective is to maintain relative sector neutrality against the S&P 500, we are dedicated to actively managing a select group of stocks within each of these sectors. At the beginning of the period the portfolio had 54 holdings and at the end of the period it held 59. Our goal is to own the highest quality companies we can in each sector of the market, a judgment made on an array of business metrics that boil down to a combination of attractive valuation and the ability to produce consistent, predictable earnings going forward. In many cases, this means selling a stock and replacing it with another we feel has greater potential. This is what we did in the Financial Sector as we sold companies that were linked closely to the unfolding credit crisis, including Capital One and Citigroup, and added investment manager Franklin Resources and increased our exposure to Berkshire Hathaway. The broad market decline also allowed us to purchase some highly admired firms at valuations that have not been available to us in the past few years, including Brown–Forman Corporation and Jacobs Engineering.
What factors had the largest impact on this period’s performance?
The two S&P 500 sectors which held up better than the overall market were Consumer Staples and Health Care. We found some protection from the major market losses in these, although we had slight
6 Annual Report • December 31, 2008
Management's Discussion of Fund Performance (continued)
underperformances in both. We made up most of our ground against the index in our Materials, Industrials, Technology and most of all, Financial stocks. As always in a market decline, cash is a positive, and we also benefited there.
In terms of individual stocks, our best relative performance came from Berkshire Hathaway, Wells Fargo and our fourth-quarter purchase of Jacobs Engineering. We took profits in the first quarter on Yahoo!, which proved to be well-timed, as the stock fell from its February highs to end the year down -47.5% from its opening price.
What factors were constraints on performance?
Every sector of the S&P 500 has double-digit losses in 2008, ranging from Consumer Staples -17.6% to Financial’s -56.9%. Since Disciplined Equity has, by design, an exposure to all sectors, its performance was relatively parallel to the overall market’s sector performance. We did have variances of less than 1% from the index in a number of sectors, and the ones that trailed the market were Health Care, Energy, Consumer Staples, Telecommunication Services and Utilities. The stocks that hurt performance most were Transocean Ltd., United Healthcare (which we sold in July), and Constellation Energy (bought and sold within the year).
TOP TEN STOCK HOLDINGS AS OF DECEMBER 31, 2008
FOR MADISON MOSAIC DISCIPLINED EQUITY
% of net assets | |
Cisco Systems, Inc | 4.06% |
Microsoft Corp | 3.77% |
Novartis AG - ADR | 3.04% |
ConocoPhillips Inc. | 2.40% |
Google Inc.-CL A | 2.34% |
Apache Corp. | 2.31% |
Procter & Gamble | 2.21% |
Charles River Laboratories, Inc. | 2.20% |
Berkshire Hathaway Inc.-CL B | 2.20% |
Jacobs Engineering Group | 2.18% |
Madison Mosaic Equity Trust 7
Management's Discussion of Fund Performance (continued)
MADISON MOSAIC MID-CAP
An interview with Rich Eisinger, co-manager of Madison Mosaic Mid-Cap.
(photo of Rich Eisinger)
How would you characterize the performance of Madison Mosaic Mid-Cap in 2008?
This was the most challenging period we’ve faced since we began managing the fund in its current mid-cap strategy back in 1997. While the bear market of 2000-2002 was just as precipitous for Technology stocks, we actually had positive performance through that rough market due to our avoidance of speculative holdings. As a result, 2008 was something of a shock as there was virtually nowhere to hide. In terms of absolute returns, we all feel great disappointment, a feeling that is scarcely improved by knowing that we did better than our index and peers. The fund dropped -36.61% for the year, while our benchmark, the Russell Midcap Index (R) fell -41.46%, the worse single year since the Index's inception. The Lipper Mid-Cap Core Index fell -38.53% for the year, outperforming both the Growth and Value mid-cap indices.
What significant changes did you make to the portfolio during the year?
Our latest turnover calculation shows more active trading than is typical, which is indicative of the tremendous market volatility. Sector weightings have not shifted that much, but we’ve been using this massive sell off to purchase some of the highest quality businesses we know. Some of these are companies we’ve admired for a long time, but just never had a chance to purchase due to valuation constraints. We are attracted to companies with strong balance sheets and excellent management teams, which we think provide a competitive advantage in the tough economic environment we’ve entered. One example is Yum! Brands, which owns the KFC, Taco Bell and Pizza Hut brands. In addition to the inherent value in these popular name brands, Yum! has the additional attraction of bringing in close to a third of its operating revenue from China, providing unique exposure to the long-term growth of the Chinese economy. Ecolab, which sells cleaning and sanitizing products to the health care, food and hospitality industries, is another company with a tremendous track record, high returns-on-equity, and a very solid balance sheet.
What factors were the strongest contributors to fund performance?
Relative to the market our Industrial stocks did very well. We owned less cyclical, more predictable “free cash flow” type Industrials, like Waste Management, Expeditors International and Iron Mountain. In the Financial Sector, we benefited from having very little credit exposure, while our insurance holdings such as Odyssey Re, Markel and Brown & Brown were all relatively strong in a period in which the overall Financial Sector was losing more than half its value. In terms of sector weighting, our lack of exposure to Energy was a plus after several years of the opposite.
In terms of other individual holdings we had relatively strong performance from Martin Marietta and a couple of our Consumer Staples holdings: Brown-Forman Corporation and Clorox Company.
What factors were the largest constraints on performance?
We had a particularly rocky time with our Consumer Discretionary names, as the economic
8 Annual Report • December 31, 2008
Management's Discussion of Fund Performance (concluded)
downturn began to show a major drop in consumer sentiment and overall spending. Particularly hard-hit were gaming stocks. We exited two positions over the course of the year at a loss: International Gaming Technology and Wynn Resorts. Although we were less exposed to Energy than the index, we owned ATP Oil & Gas Company at the beginning of the year and exited at a loss in April when the stock was trading around $28 as our concern grew over ATP’s leveraged balance sheet. Oil prices continued to fall through the end of the year and the stock finished the year trading at less than six dollars a share, so this was a case where our sell discipline helped save us from additional losses.
TOP TEN STOCK HOLDINGS AS OF DECEMBER 31, 2008 FOR MADISON MOSAIC MID-CAP
% of net assets | |
Markel Corp. | 4.88% |
Odyssey Re Holdings Corp. | 3.94% |
Iron Mountain | 3.63% |
Brown-Forman Corp.-CL B | 3.44% |
Mohawk Industries Inc. | 3.43% |
Fiserv Inc. | 3.28% |
Brown & Brown, Inc. | 3.20% |
Dun & Bradstreet Corp. | 3.08% |
Waste Management, Inc. | 3.07% |
Covanta Holding Corp. | 2.96% |
Madison Mosaic Equity Trust 9
Madison Mosaic Equity Trust December 31, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Madison Mosaic Equity Trust
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments of the Madison Mosaic Equity Trust (the “Trust”), including the Investors Fund, Balanced Fund, Mid-Cap Fund, and Disciplined Equity Fund (collectively, the “Funds”), as of December 31, 2008 and the related statement of operations for the year then ended and the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 Trust’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, 2008 by correspondence with the Funds’ custodian and brokers. We believe that our audits provide 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 each of the Funds constituting the Trust as of December 31, 2008, and the results of their operations for the year then ended and the changes in their net assets for each of the two years in the period then ended and financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
(signature)
Grant Thornton LLP
Chicago, Illinois
February 20, 2009
10 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Investors Fund - Portfolio of Investments
NUMBER OF SHARES |
| |
COMMON STOCKS: 98.3% of net assets | ||
CONSUMER DISCRETIONARY: 10.0% | ||
Best Buy Co., Inc. | 25,380 | $713,432 |
Mohawk Industries Inc. | 16,835 | 723,400 |
Staples Inc. | 35,479 | 635,784 |
Target Corp. | 21,095 | 728,410 |
CONSUMER STAPLES: 10.0% | ||
Coca-Cola Co. | 21,908 | 991,775 |
Diageo PLC - ADR | 13,250 | 751,805 |
Walgreen Co. | 42,907 | 1,058,516 |
ENERGY: 4.0% | ||
Apache Corp. | 5,595 | 416,995 |
Schlumberger Ltd. | 16,645 | 704,583 |
FINANCIAL SERVICES: 8.7% | ||
American Express Co. | 25,055 | 464,770 |
Franklin Resources | 8,795 | 560,945 |
State Street Corp. | 16,900 | 664,677 |
Wells Fargo & Co. | 25,298 | 745,785 |
HEALTH CARE: 22.9% | ||
Charles River Laboratories, Inc.* | 36,403 | 953,759 |
Covance Inc.* | 14,170 | 652,245 |
Johnson & Johnson | 9,869 | 590,462 |
Medtronic Inc. | 24,289 | 763,160 |
Millipore Corp.* | 13,038 | 671,718 |
Novartis AG - ADR | 20,618 | 1,025,952 |
Quest Diagnostics Inc. | 17,320 | 899,081 |
Zimmer Holdings Inc.* | 21,041 | 850,477 |
INDUSTRIAL: 11.1% | ||
3M Company | 14,076 | 809,933 |
ABB Ltd - ADR | 51,270 | 769,563 |
General Electric Co. | 45,517 | 737,375 |
Jacobs Engineering Group Inc.* | 16,365 | 787,157 |
INSURANCE: 10.4% | ||
Aflac Inc. | 19,041 | 872,840 |
Berkshire Hathaway Inc.- Class B* | 366 | 1,176,324 |
Markel Corp. | 2,946 | 880,854 |
MEDIA & ENTERTAINMENT: 3.3% | ||
Comcast Corp. - Special Class A* | 16,835 | 911,668 |
TECHNOLOGY: 17.9% | ||
Cisco Systems, Inc.* | 78,184 | 1,274,399 |
EMC Corp. | 54,470 | 570,301 |
Fiserv Inc.* | 23,471 | 853,640 |
Google Inc.- Class A* | 3,622 | 1,114,308 |
Microsoft Corp. | 62,369 | 1,212,453 |
TOTAL COMMON STOCKS (Cost $37,515,100) | $27,538,546 | |
REPURCHASE AGREEMENT: 1.6% of net assets | ||
With U.S. Bank National Association issued 12/31/08 at 0.01%, due 1/2/09, collateralized by $462,825 in Freddie Mac MBS #E99430 due 9/1/18. Proceeds at maturity are $453,727. (Cost $453,726) | 453,726 | |
TOTAL INVESTMENTS: 99.9% of net assets (Cost $37,968,826) | $27,992,272 | |
CASH AND RECEIVABLES LESS LIABILITIES: 0.1% of net assets | 38,112 | |
NET ASSETS: 100% | $28,030,384 |
*Non-income producing
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 11
Madison Mosaic Equity Trust December 31, 2008
Balanced Fund - Portfolio of Investments
NUMBER OF SHARES |
| |
COMMON STOCKS: 60.0% of net assets | ||
CONSUMER DISCRETIONARY: 6.2% | ||
Best Buy Co., Inc. | 5,755 | $161,773 |
Mohawk Industries Inc. | 3,635 | 156,196 |
Staples Inc. | 8,445 | 151,334 |
Target Corp. | 4,545 | 156,939 |
CONSUMER STAPLES: 6.2% | ||
Coca-Cola Co. | 4,775 | 216,164 |
Diageo PLC-ADR | 2,925 | 165,964 |
Walgreen Co. | 9,980 | 246,207 |
ENERGY: 2.5% | ||
Apache Corp. | 1,210 | 90,181 |
Schlumberger Ltd. | 3,960 | 167,627 |
FINANCIAL SERVICES: 5.0% | ||
American Express Co. | 5,325 | 98,779 |
Franklin Resources | 1,820 | 116,080 |
State Street Corp. | 3,395 | 133,525 |
Wells Fargo & Co. | 5,400 | 159,192 |
HEALTH CARE: 13.8% | ||
Charles River Laboratories, Inc.* | 7,800 | 204,360 |
Covance inc.* | 3,065 | 141,082 |
Johnson & Johnson | 2,070 | 123,848 |
Medtronic Inc. | 5,435 | 170,768 |
Millipore Corp.* | 3,020 | 155,590 |
Novartis AG - ADR | 4,585 | 228,150 |
Quest Diagnostics Inc. | 3,710 | 192,586 |
Zimmer Holdings Inc.* | 4,601 | 185,972 |
INDUSTRIAL: 6.8% | ||
3M Company | 3,240 | 186,430 |
ABB Ltd - ADR | 10,925 | 163,984 |
General Electric Co. | 10,127 | 164,057 |
Jacobs Engineering Group Inc.* | 3,540 | 170,274 |
INSURANCE: 6.5% | ||
Aflac Inc. | 4,095 | 187,715 |
Berkshire Hathaway Inc.- Class B* | 85 | 273,190 |
Markel Corp. | 654 | 195,546 |
MEDIA & ENTERTAINMENT: 2.1% | ||
Comcast Corp. - Special Class A* | 13,137 | 212,163 |
TECHNOLOGY: 10.9% | ||
Cisco Systems, Inc.* | 17,315 | 282,234 |
EMC Corp. | 11,095 | 116,165 |
Fiserv Inc.* | 5,005 | 182,032 |
Google Inc. - Class A* | 835 | 256,888 |
Microsoft Corp. | 13,950 | 271,188 |
TOTAL COMMON STOCKS (Cost $7,778,233) | $6,084,183 | |
PRINCIPAL AMOUNT |
| |
DEBT INSTRUMENTS: 33.4% of net assets | ||
CORPORATE OBLIGATIONS: 20.2% | ||
BANKS: 1.2% | ||
Wachovia Corp., 5.25%, 8/1/14 | $125,000 | $116,577 |
COMPUTERS & PERIPHERAL: 1.0% | ||
Hewlett-Packard Co., 4.5%, 3/1/13 | 100,000 | 101,604 |
CONSUMER GOODS: 2.6% | ||
Costco Wholesale Corp., 5.3%, 3/15/12 | 100,000 | 104,442 |
Wal-Mart Stores, Inc., 4.75%, 8/15/10 | 150,000 | 155,804 |
CONSUMER STAPLES: 2.0% | ||
Kraft Foods, Inc., 5.625%, 11/1/11 | 100,000 | 102,245 |
Sysco Corp. 5.25%, 2/12/18 | 100,000 | 101,540 |
ENERGY: 1.5% | ||
Valero Energy Corp., 6.875%, 4/15/12 | 150,000 | 150,954 |
FINANCIALS: 2.9% | ||
American Express, 4.875%, 7/15/13 | 150,000 | 139,376 |
International Lease Finance, 4.875%, 9/1/10 | 200,000 | 156,834 |
The Notes to Financial Statements are an integral part of these statements.
12 Annual Report • December 31, 2008
Balanced Fund • Portfolio of Investments • December 31, 2008 (concluded)
PRINCIPAL AMOUNT |
| |
HEALTH CARE: 2.9% | ||
Abbot Laboratories, 5.6%, 11/30/17 | 125,000 | 135,511 |
UnitedHealth Group, 5%, 8/15/14 | 175,000 | 161,168 |
INDUSTRIAL: 1.1% | ||
United Parcel, 5.5%, 1/15/18 | 100,000 | 107,004 |
TECHNOLOGY: 2.0% | ||
Cisco Systems, Inc., 5.25%, 2/22/11 | 100,000 | 103,865 |
Oracle Corp., 4.95%, 4/15/13 | 100,000 | 103,197 |
TELECOMMUNICATIONS: 3.0% | ||
AT & T Broadband, 8.375%, 3/15/13 | 150,000 | 155,315 |
Verizon New England, 6.5%, 9/15/11 | 150,000 | 148,992 |
US TREASURY & AGENCY OBLIGATIONS: 13.2% | ||
Fannie Mae, 6.625%, 11/15/10 | 200,000 | 220,391 |
Fannie Mae, 4.875%, 5/18/12 | 150,000 | 163,474 |
Federal Home Loan Bank, 4.375% 9/17/10 | 200,000 | 211,293 |
Federal Home Loan Bank, 5.5% 8/13/14 | 150,000 | 173,164 |
Freddie Mac, 4.875%, 11/15/13 | 150,000 | 167,543 |
US Treasury Note, 5.125%, 6/30/11 | 300,000 | 332,133 |
US Treasury Note, 3.875%, 5/15/18 | 60,000 | 68,438 |
TOTAL DEBT INSTRUMENTS (Cost $3,327,455) | $3,380,864 | |
REPURCHASE AGREEMENT: 9.1% of net assets | ||
With U.S. Bank National Association issued 12/31/08 at 0.01%, due 1/2/09, collateralized by $946,313 in Freddie Mac MBS #E99430 due 9/1/18. Proceeds at maturity are $927,711. (Cost $927,711) | 927,711 | |
TOTAL INVESTMENTS: 102.5% of net assets (Cost $12,033,399) | $10,392,758 | |
LIABILITIES LESS CASH AND RECEIVABLES: (2.5%) of net assets | (253,836) | |
NET ASSETS: 100% | $10,138,922 |
*Non-income producing
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 13
Madison Mosaic Equity Trust December 31, 2008
Disciplined Equity Fund - Portfolio of Investments
NUMBER OF SHARES |
| |
COMMON STOCKS: 95.8% of net assets | ||
CONSUMER DISCRETIONARY: 7.4% | ||
Best Buy Co., Inc. | 1,475 | $41,462 |
Brown-Forman Corp. Class B | 1,182 | 60,861 |
Mohawk Industries Inc. | 1,235 | 53,068 |
Staples Inc. | 2,000 | 35,840 |
Target Corp. | 1,030 | 35,566 |
CONSUMER STAPLES: 10.3% | ||
Clorox Co. | 460 | 25,558 |
Coca-Cola Co. | 1,345 | 60,888 |
Diageo Ltd - ADR | 835 | 47,378 |
Procter & Gamble | 1,100 | 68,002 |
Unilever NV | 2,260 | 55,483 |
Walgreen Co. | 2,415 | 59,578 |
ENERGY: 12.7% | ||
Apache Corp. | 950 | 70,804 |
Chevron Corp. | 390 | 28,848 |
ConocoPhillips Inc. | 1,425 | 73,815 |
Exxon Mobil Corp. | 375 | 29,936 |
Schlumberger Ltd. | 1,455 | 61,590 |
Transocean Ltd. | 800 | 37,800 |
Unit Corp. | 1,000 | 26,720 |
XTO Energy Inc. | 1,685 | 59,430 |
FINANCIAL SERVICES: 8.6% | ||
American Express Co. | 1,925 | 35,709 |
Brookfield Asset Management Inc. | 1,500 | 22,905 |
Franklin Resources | 700 | 44,646 |
Goldmans Sachs Group Inc. | 400 | 33,756 |
Marshall & Isley Corp. | 2,745 | 37,442 |
State Street Corp. | 1,150 | 45,229 |
Wells Fargo & Co. | 1,565 | 46,136 |
HEALTH CARE: 14.7% | ||
Charles River Laboratories, Inc.* | 2,580 | 67,596 |
Covance Inc.* | 745 | 34,292 |
Johnson & Johnson | 700 | 41,881 |
Medtronic, Inc. | 1,655 | 52,000 |
Millipore Corp.* | 955 | 49,202 |
Novartis AG - ADR | 1,875 | 93,300 |
Quest Diagnostics Inc. | 1,040 | 53,986 |
Zimmer Holdings Inc.* | 1,457 | 58,892 |
INDUSTRIAL: 11.4% | ||
3M Company | 960 | 55,238 |
ABB Ltd - ADR | 3,680 | 55,237 |
Autoliv Inc. | 1,270 | 27,254 |
Expeditors International of WA Inc. | 1,465 | 48,741 |
General Electric Co. | 3,580 | 57,996 |
Jacobs Engineering Group Inc.* | 1,395 | 67,100 |
United Technologies | 720 | 38,592 |
INSURANCE: 4.9% | ||
Aflac Inc. | 665 | 30,484 |
Berkshire Hathaway Inc.- Class B* | 21 | 67,494 |
Markel Corp.* | 172 | 51,428 |
MATERIALS: 3.1% | ||
Ball Corp. | 885 | 36,807 |
Praxair Inc. | 510 | 30,274 |
Valspar Corp. | 1,625 | 29,396 |
MEDIA & ENTERTAINMENT: 1.7% | ||
Comcast Corp. - Special Class A* | 3,232 | 52,197 |
TECHNOLOGY: 14.3% | ||
Adobe Systems Inc.* | 1,270 | 27,038 |
Apple Computer Inc.* | 305 | 26,032 |
Cisco Systems, Inc.* | 7,650 | 124,695 |
EMC Corp. | 4,095 | 42,875 |
Fiserv Inc.* | 875 | 31,824 |
Google Inc. - Class A* | 234 | 71,990 |
Microsoft Corp. | 5,950 | 115,668 |
The Notes to Financial Statements are an integral part of these statements.
14 Annual Report • December 31, 2008
Disciplined Equity Fund • Portfolio of Investments • December 31, 2008 (concluded)
NUMBER OF SHARES |
| |
TELECOMMUNICATIONS: 3.3% | ||
America Movil-ADR | 1,280 | 39,667 |
China Mobile Ltd.-ADR | 575 | 29,239 |
Vodafone Group-ADR | 1,535 | 31,375 |
UTILITIES: 3.4% | ||
Entergy Corp. | 660 | 54,866 |
FPL Group Inc. | 965 | 48,568 |
TOTAL COMMON STOCKS (Cost $3,832,942) | $2,941,674 | |
REPURCHASE AGREEMENT: 4.2% of net assets | ||
With U.S. Bank National Association issued 12/31/08 at 0.01%, due 1/2/09, collateralized by $131,869 in Freddie Mac MBS #E99430 due 9/1/18. Proceeds at maturity are $129,277. (Cost $129,277) | 129,277 | |
TOTAL INVESTMENTS: 100.0% of net assets (Cost $3,962,219) | $3,070,951 | |
CASH AND RECEIVABLES LESS LIABILITIES: 0.0% of net assets | 733 | |
NET ASSETS: 100% | $3,071,684 |
*Non-income producing
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 15
Madison Mosaic Equity Trust December 31, 2008
Mid-Cap Fund - Portfolio of Investments
NUMBER OF SHARES |
| |
COMMON STOCKS: 94.0% of net assets | ||
CONSUMER DISCRETIONARY: 16.4% | ||
Bed Bath & Beyond Inc.* | 58,890 | $1,496,984 |
Brown-Forman Corp. - Class B | 59,393 | 3,058,146 |
CarMax Inc.* | 122,089 | 962,061 |
Mohawk Industries Inc.* | 70,925 | 3,047,647 |
Starbucks Corp.* | 218,070 | 2,062,942 |
Tiffany & Company | 71,258 | 1,683,826 |
YUM! Brands Inc. | 71,390 | 2,248,785 |
CONSUMER STAPLES: 2.8% | ||
Clorox Co. | 44,289 | 2,460,697 |
ENERGY: 3.6% | ||
Noble Corp. | 59,405 | 1,310,474 |
Unit Corp.* | 70,815 | 1,892,177 |
FINANCIAL SERVICES: 8.2% | ||
Brookfield Asset Management Inc. | 169,886 | 2,594,159 |
Leucadia National Corp. | 117,635 | 2,329,173 |
SEI Investments Co. | 151,154 | 2,374,629 |
Synovous Financial Corp. | ||
HEALTH CARE: 12.0% | ||
Charles River Laboratories, Inc.* | 79,791 | 2,090,524 |
Laboratory Corp of America Holdings* | 39,654 | 2,554,114 |
Millipore Corp.* | 37,380 | 1,925,818 |
Techne Corp.* | 30,109 | 1,942,633 |
Zimmer Holdings Inc. | 54,855 | 2,217,239 |
INDUSTRIAL: 19.1% | ||
Copart, Inc.* | 83,835 | 2,279,474 |
Dun & Bradstreet Corp. | 35,545 | 2,744,074 |
Expeditors Int’l of Washington Inc. | 74,700 | 2,485,269 |
Iron Mountain* | 130,557 | 3,228,675 |
Jacobs Engineering Group Inc.* | 42,415 | 2,040,161 |
Kaydon Corp. | 43,570 | 1,496,630 |
Waste Management, Inc. | 82,515 | 2,734,547 |
INSURANCE: 12.0% | ||
Brown & Brown, Inc. | 136,242 | 2,847,458 |
Markel Corp.* | 14,507 | 4,337,593 |
Odyssey Re Holdings Corp. | 67,620 | 3,503,392 |
MATERIALS: 6.6% | ||
Ecolab Inc. | 42,335 | 1,488,075 |
IDEX Corp. | 85,484 | 2,064,439 |
Martin Marietta Materials | 23,721 | 2,302,835 |
MEDIA & ENTERTAINMENT: 2.4% | ||
Liberty Global Inc. - Series C* | 138,585 | 2,103,720 |
TECHNOLOGY: 7.9% | ||
Fiserv Inc.* | 80,181 | 2,916,183 |
Total System Services Inc. | 122,932 | 1,721,048 |
Zebra Technologies Corp. - Class A* | 120,048 | 2,432,172 |
UTILITIES: 3.0% | ||
Covanta Holding Corp.* | 119,834 | 2,631,555 |
TOTAL COMMON STOCKS (Cost $103,636,402) | $83,609,328 | |
REPURCHASE AGREEMENT: 3.5% of net assets | ||
With U.S. Bank National Association issued 12/31/08 at 0.01%, due 1/2/09, collateralized by $3,208,528 in Freddie Mac MBS #E99430 due 9/1/18. Proceeds at maturity are $3,145,458. (Cost $3,145,456) | 3,145,456 | |
TOTAL INVESTMENTS: 97.5% of net assets (Cost $106,781,858) | $86,754,784 | |
CASH AND RECEIVABLES LESS LIABILITIES: 2.5% of net assets | 2,209,120 | |
NET ASSETS: 100.00% | $88,963,904 |
*Non-income producing
The Notes to Financial Statements are an integral part of these statements.
16 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Statements of Assets and Liabilities
Investors | Balanced | Disciplined | Mid-Cap | |
ASSETS | ||||
Investments, at value (Notes 1 and 2) | ||||
Investment securities | $27,538,546 | $9,465,047 | $2,941,674 | $83,609,328 |
Repurchase agreements | 453,726 | 927,711 | 129,277 | 3,145,456 |
Total investments* | 27,992,272 | 10,392,758 | 3,070,951 | 86,754,784 |
Receivables | ||||
Investment securities sold | 183,991 | -- | -- | 1,371,209 |
Dividends and interest | 32,404 | 52,525 | 4,089 | 52,819 |
Capital shares sold | 11,125 | 43 | -- | 1,009,132 |
Total assets | 28,219,792 | 10,445,326 | 3,075,040 | 89,187,944 |
LIABILITIES | ||||
Payables | ||||
Investment securities purchased | -- | 256,918 | -- | -- |
Dividends | -- | 38,061 | 1,133 | -- |
Capital shares redeemed | 179,033 | 7,550 | 848 | 211,165 |
Independent trustee fees | 3,875 | 875 | 375 | 3,875 |
Auditor fees | 6,500 | 3,000 | 1,000 | 9,000 |
Total liabilities | 189,408 | 306,404 | 3,356 | 224,040 |
NET ASSETS | $28,030,384 | $10,138,922 | $3,071,684 | $88,963,904 |
Net assets consists of: | ||||
Paid in capital | 41,812,178 | 12,155,418 | 4,302,521 | 126,146,320 |
Undistributed net investment income | 15,784 | -- | -- | -- |
Accumulated net realized losses | (3,821,024) | (375,855) | (339,569) | (17,155,342) |
Net unrealized depreciation on investments | (9,976,554) | (1,640,641) | (891,268) | (20,027,074) |
Net assets | $28,030,384 | $10,138,922 | $3,071,684 | $88,963,904 |
CAPITAL SHARES OUTSTANDING | ||||
An unlimited number of capital shares, without par value, are authorized. (Note 7) | 2,477,405 | 762,661 | 348,620 | 11,601,119 |
NET ASSET VALUE PER SHARE | $11.31 | $13.29 | $8.81 | $7.67 |
*INVESTMENT SECURITIES, AT COST | $37,968,826 | $12,033,399 | $3,962,219 | $106,781,858 |
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 17
Madison Mosaic Equity Trust December 31, 2008
Statements of Operations
For the year ended December 31, 2008
Investors | Balanced | Disciplined | Mid-Cap | |
INVESTMENT INCOME (Note 1) | ||||
Interest income | $19,523 | $224,853 | $2,986 | $162,738 |
Dividend income | 623,714 | 111,219 | 70,962 | 982,034 |
Other income | 146 | -- | -- | -- |
Total investment income | 643,383 | 336,072 | 73,948 | 1,144,772 |
EXPENSES (Notes 3 and 5) | ||||
Investment advisory fees | 317,846 | 92,460 | 29,803 | 916,308 |
Other expenses: | ||||
Service agreement fees | 97,473 | 50,545 | 10,228 | 586,437 |
Independent trustee fees | 15,500 | 3,500 | 1,500 | 15,500 |
Auditor fees | 14,500 | 5,750 | 3,600 | 23,000 |
Line of credit interest and fees | 280 | 250 | 250 | 250 |
Other expenses waived | -- | -- | (3,205) | -- |
Total other expenses | 127,753 | 60,045 | 12,373 | 625,187 |
Total expenses | 445,599 | 152,505 | 42,176 | 1,541,495 |
NET INVESTMENT INCOME (LOSS) | 197,784 | 183,567 | 31,772 | (396,723) |
REALIZED AND UNREALIZED LOSS ON INVESTMENTS | ||||
Net realized loss on investments | (3,690,284) | (374,909) | (339,569) | (17,155,342) |
Change in net unrealized depreciation of investments | (12,030,041) | (2,446,122) | (1,252,633) | (37,108,476) |
NET LOSS ON INVESTMENTS | (15,720,325) | (2,821,031) | (1,592,202) | (54,263,818) |
TOTAL DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | $(15,522,541) | $(2,637,464) | $(1,560,430) | $(54,660,541) |
The Notes to Financial Statements are an integral part of these statements.
18 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Statements of Changes in Net Assets
For the period indicated
Investors Fund | Balanced Fund | |||
Year Ended Dec. 31, | Year Ended Dec. 31, | |||
2008 | 2007 | 2008 | 2007 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||||
Net investment income | $197,784 | $1,241,405 | $183,567 | $220,474 |
Net realized gain (loss) on investments | (3,690,284) | 13,032,510 | (374,909) | 1,004,513 |
Net unrealized depreciation on investments | (12,030,041) | (17,737,016) | (2,446,122) | (903,900) |
Total increase (decrease) in net assets resulting from operations | (15,522,541) | (3,463,101) | (2,637,464) | 321,087 |
DISTRIBUTIONS TO SHAREHOLDERS | ||||
From net investment income | (182,000) | (1,241,405) | (183,567) | (220,474) |
From net capital gains | (1,977,544) | (11,698,835) | (442,077) | (670,949) |
Total distributions | (2,159,544) | (12,940,240) | (625,644) | (891,423) |
CAPITAL SHARE TRANSACTIONS (Note 7) | (10,278,608) | (104,467,045) | (397,601) | (1,896,987) |
TOTAL DECREASE IN NET ASSETS | (27,960,693) | (120,870,386) | (3,660,709) | (2,467,323) |
NET ASSETS | ||||
Beginning of period | $55,991,077 | $176,861,463 | $13,799,631 | $16,266,954 |
End of period | $28,030,384 | $55,991,077 | $10,138,922 | $13,799,631 |
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 19
Statements of Changes in Net Assets (concluded)
Disciplined Equity Fund | Mid-Cap Fund | |||
Year Ended Dec. 31, | Year Ended Dec. 31, | |||
2008 | 2007 | 2008 | 2007 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||||
Net investment income (loss) | $31,772 | $18,188 | $(396,723) | $(269,776) |
Net realized gain (loss) on investments | (339,569) | 472,074 | (17,155,342) | 17,415,605 |
Net unrealized depreciation on investments | (1,252,633) | (103,795) | (37,108,476) | (6,395,270) |
Total increase (decrease) in net assets resulting from operations | (1,560,430) | 386,467 | (54,660,541) | 10,750,559 |
DISTRIBUTIONS TO SHAREHOLDERS | ||||
From net investment income | (31,772) | (18,188) | -- | -- |
From net capital gains | (55,612) | (439,180) | (5,114,645) | (13,693,126) |
Total distributions | (87,384) | (457,368) | (5,114,645) | (13,693,126) |
CAPITAL SHARE TRANSACTIONS (Note 7) | 220,282 | 488,661 | 2,361,460 | 2,198,400 |
TOTAL INCREASE (DECREASE) IN NET ASSETS | (1,427,532) | 417,760 | (57,413,726) | (744,167) |
NET ASSETS | ||||
Beginning of period | $4,499,216 | $4,081,456 | $146,377,630 | $147,121,797 |
End of period | $3,071,684 | $4,499,216 | $88,963,904 | $146,377,630 |
The Notes to Financial Statements are an integral part of these statements.
20 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Financial Highlights
Selected data for a share outstanding for the periods indicated.
INVESTORS FUND
Year Ended December 31, | |||||
2008 | 2007 | 2006 | 2005 | 2004 | |
Net asset value, beginning of year | $18.44 | $20.57 | $18.81 | $20.82 | $18.79 |
Investment operations: | |||||
Net investment income | 0.08 | 0.20 | 0.09 | 0.06 | 0.13 |
Net realized and unrealized gain (loss) on investments | (6.28) | (0.21) | 3.02 | (0.62) | 2.03 |
Total from investment operations | (6.20) | (0.01) | 3.11 | (0.56) | 2.16 |
Less distributions: | |||||
From net investment income | (0.08) | (0.20) | (0.09) | (0.06) | (0.13) |
From net capital gains | (0.85) | (1.92) | (1.26) | (1.39) | -- |
Total distributions | (0.93) | (2.12) | (1.35) | (1.45) | (0.13) |
Net asset value, end of year | $11.31 | $18.44 | $20.57 | $18.81 | $20.82 |
Total return (%) | (33.40) | (0.18) | 16.55 | (2.81) | 11.49 |
Ratios and supplemental data | |||||
Net assets, end of year (in thousands) | $28,030 | $55,991 | $176,861 | $130,339 | $164,121 |
Ratio of expenses to average net assets (%) | 1.05 | 0.94 | 0.95 | 0.94 | 0.88 |
Ratio of net investment income to average net assets (%) | 0.47 | 0.78 | 0.55 | 0.29 | 0.70 |
Portfolio turnover (%) | 47 | 51 | 52 | 41 | 40 |
BALANCED FUND
Year Ended December 31, | |||||
2008 | 2007 | 2006 | 2005 | 2004 | |
Net asset value, beginning of year | $17.62 | $18.39 | $17.40 | $19.51 | $18.22 |
Investment operations: | |||||
Net investment income | 0.25 | 0.28 | 0.23 | 0.18 | 0.20 |
Net realized and unrealized gain (loss) on investments | (3.72) | 0.13 | 1.84 | (0.60) | 1.29 |
Total from investment operations | (3.47) | 0.41 | 2.07 | (0.42) | 1.49 |
Less distributions: | |||||
From net investment income | (0.25) | (0.28) | (0.23) | (0.18) | (0.20) |
From net capital gains | (0.61) | (0.90) | (0.85) | (1.51) | -- |
Total distributions | (0.86) | (1.18) | (1.08) | (1.69) | (0.20) |
Net asset value, end of year | $13.29 | $17.62 | $18.39 | $17.40 | $19.51 |
Total return (%) | (19.92) | 2.24 | 11.96 | (2.16) | 8.19 |
Ratios and supplemental data | |||||
Net assets, end of year (in thousands) | $10,139 | $13,800 | $16,267 | $17,514 | $26,398 |
Ratio of expenses to average net assets (%) | 1.24 | 1.22 | 1.22 | 1.21 | 1.20 |
Ratio of net investment income to average net assets (%) | 1.49 | 1.47 | 1.24 | 0.88 | 1.06 |
Portfolio turnover (%) | 50 | 42 | 35 | 34 | 38 |
The Notes to Financial Statements are an integral part of these statements.
Madison Mosaic Equity Trust 21
Financial Highlights (concluded)
Selected data for a share outstanding for the periods indicated.
DISCIPLINED EQUITY FUND
Year Ended December 31, | |||||
2008 | 2007 | 2006 | 2005 | 2004 | |
Net asset value, beginning of year | $13.78 | $14.07 | $12.61 | $13.38 | $12.59 |
Investment operations: | |||||
Net investment income | 0.09 | 0.06 | 0.07 | 0.03 | 0.07 |
Net realized and unrealized gain (loss) on investments | (4.80) | 1.21 | 2.05 | (0.35) | 0.79 |
Total from investment operations | (4.71) | 1.27 | 2.12 | (0.32) | 0.86 |
Less distributions: | |||||
From net investment income | (0.09) | (0.06) | (0.07) | (0.03) | (0.07) |
From net capital gains | (0.17) | (1.50) | (0.59) | (0.42) | -- |
Total distributions | (0.26 | (1.56) | (0.66) | (0.45) | (0.07) |
Net asset value, end of year | $8.81 | $13.78 | $14.07 | $12.61 | $13.38 |
Total return (%) | (34.20) | 9.05 | 16.83 | (2.34) | 6.83 |
Ratios and supplemental data | |||||
Net assets, end of year (in thousands) | $3,072 | $4,499 | $4,081 | $3,608 | $4,789 |
Ratio of expenses to average net assets before fee waiver (%) | 1.14 | 1.26 | 1.27 | 1.25 | 1.25 |
Ratio of expenses to average net assets after fee waiver (%) | 1.06 | N/A | N/A | N/A | N/A |
Ratio of net investment income to average net assets before fee waiver (%) | 0.72 | 0.41 | 0.54 | 0.24 | 0.54 |
Ratio of net investment income to average net assets after fee waiver (%) | 0.80 | N/A | N/A | N/A | N/A |
Portfolio turnover (%) | 63 | 70 | 54 | 122 | 39 |
MID-CAP FUND
Year Ended December 31, | |||||
2008 | 2007 | 2006 | 2005 | 2004 | |
Net asset value, beginning of year | $12.87 | $13.04 | $11.99 | $12.52 | $11.06 |
Investment operations: | |||||
Net investment loss | (0.03) | (0.02) | (0.02) | (0.05) | (0.01) |
Net realized and unrealized gain (loss) on investments | (4.71) | 1.15 | 1.98 | 0.12 | 2.10 |
Total from investment operations | (4.74) | 1.13 | 1.96 | 0.07 | 2.09 |
Less distributions from capital gains | (0.46) | (1.30) | (0.91) | (0.60) | (0.63) |
Net asset value, end of year | $7.67 | $12.87 | $13.04 | $11.99 | $12.52 |
Total return (%) | (36.61) | 8.62 | 16.32 | 0.55 | 18.90 |
Ratios and supplemental data | |||||
Net assets, end of year (in thousands) | $88,964 | $146,378 | $147,122 | $146,266 | $115,809 |
Ratio of expenses to average net assets (%) | 1.26 | 1.25 | 1.25 | 1.25 | 1.24 |
Ratio of net investment income to average net assets (%) | (0.33) | (0.18) | (0.18) | (0.37) | (0.09) |
Portfolio turnover (%) | 76 | 43 | 47 | 46 | 38 |
The Notes to Financial Statements are an integral part of these statements.
22 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Notes to Financial Statements
1. Summary of Significant Accounting Policies. Madison Mosaic Equity Trust (the “Trust”) is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end, investment management company. This report contains information about four separate funds (the “Funds”): the Investors Fund, Balanced Fund, Mid-Cap Fund and Disciplined Equity Fund whose objectives and strategies are described in the Trust’s prospectus for the Funds. A fifth Trust portfolio, available to certain institutional investors (as defined in the portfolio’s prospectus) presents its financial information in a separate report.
Securities Valuation: Securities traded on a national securities exchange are valued at their closing sale price. Repurchase agreements and other securities having maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities having longer maturities, for which quotations are readily available, are valued at the mean between their closing bid and ask prices. Securities for which market quotations are not readily available are valued at their fair value as determined in good faith under procedures approved by the Board of Trustees.
The Funds adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements (FAS 157) effective January 1, 2008. In accordance with FAS 157, fair value is defined as the price that the Funds would receive to sell an investment or pay to transfer a liability in an orderly transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. FAS 157 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes.
Various inputs as noted above are used in determining the value of the Funds’ investments and other financial instruments. These inputs are summarized in the three broad levels listed below.
- Level 1: Quoted prices in active markets for identical securities
- Level 2: Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
- Level 3: Significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Funds’ assets as of December 31, 2008:
Investments in Securities | ||
Valuation Inputs | Investors | Balanced |
Level 1: Quoted prices | $27,538,546 | $6,084,183 |
Level 2: Other significant observable inputs | 453,726 | 4,308,575 |
Level 3: Significant unobservable inputs | -- | -- |
Total | $27,992,272 | $10,392,758 |
Valuation Inputs | Disciplined | Mid-Cap |
Level 1: Quoted prices | $2,941,674 | $83,609,328 |
Level 2: Other significant observable inputs | 129,277 | 3,145,456 |
Level 3: Significant unobservable inputs | -- | -- |
Total | $3,070,951 | $86,754,784 |
Madison Mosaic Equity Trust 23
Notes to Financial Statements (continued)
Investment Transactions: Investment transactions are recorded on a trade date basis. The cost of investments sold is determined on the identified cost basis for financial statement and federal income tax purposes.
Investment Income: Interest income is recorded on an accrual basis. Bond premium is amortized and original issue discount and market discount are accreted over the expected life of each applicable security using the effective interest method. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date. Other income is accrued as earned.
Distribution of Income and Gains: Distributions are recorded on the ex-dividend date. Net investment income, determined as gross investment income less total expenses, is declared as a regular dividend and distributed to shareholders at year-end for the Investors, Mid-Cap and Disciplined Equity Funds. The Trust intends to declare and pay regular dividends quarterly on the Balanced Fund. Capital gain distributions, if any, are declared and paid annually at year-end.
The tax character of distributions paid during 2008 and 2007 were as follows:
2008 | 2007 | |
Investors Fund: | ||
Distributions paid from: | ||
Ordinary income | $182,000 | $1,241,405 |
Short-term capital gains | 341,483 | 577,431 |
Long-term capital gains | 1,636,061 | 11,121,404 |
Balanced Fund: | ||
Distributions paid from: | ||
Ordinary income | $183,567 | $220,474 |
Short-term capital gains | 32,244 | 109,880 |
Long-term capital gains | 409,833 | 561,069 |
Disciplined Equity Fund: | ||
Distributions paid from: | ||
Ordinary income | $31,772 | $18,188 |
Short-term capital gains | -- | 193,322 |
Long-term capital gains | 55,612 | 245,858 |
Mid-Cap Fund: | ||
Distributions paid from: | ||
Short-term capital gains | $2,196,654 | $2,056,124 |
Long-term capital gains | 2,917,991 | 11,637,002 |
The Investors Fund, Balanced Fund, Mid-Cap Fund and Disciplined Equity Fund designate 100%, 58%, 25% and 100%, respectively, of dividends declared from net investment income and short-term capital gains during the fiscal year ended December 31, 2008 as qualified income under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
As of December 31, 2008, the components of distributable earnings on a tax basis were as follows:
Investors Fund: | |
Undistributed net investment income | $15,784 |
Accumulated net realized losses | (2,506,837) |
Net unrealized depreciation on investments | (11,290,741) |
$(13,781,794) | |
Balanced Fund: | |
Accumulated net realized losses | $(235,669) |
Net unrealized depreciation on investments | (1,780,827) |
$(2,016,496) | |
Disciplined Equity Fund: | |
Accumulated net realized losses | $(234,547) |
Net unrealized depreciation on investments | (996,290) |
$(1,230,837) | |
Mid-Cap Fund: | |
Accumulated net realized losses | $(8,967,149) |
Net unrealized depreciation on investments | (28,215,267) |
$(37,182,416) |
Net realized gains or losses may differ for financial and tax reporting purposes as a result of loss deferrals related to wash sales and post-October transactions.
Income Tax: No provision is made for federal income taxes since it is the intention of the Trust to comply with the provisions of Subchapter M of the Internal Revenue Code available to investment companies and to make the requisite distribution to shareholders of taxable income which will be sufficient to relieve it from all or substantially all federal income taxes.
The Funds adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The implementation of FIN 48 resulted in no material liability for unrecognized tax benefits and no material change to the beginning net asset value of the Funds.
24 Annual Report • December 31, 2008
Notes to Financial Statements (continued)
As of and during the year ended December 31, 2008, the Funds did not have a liability for any unrecognized tax benefits. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the Funds did not incur any interest or penalties.
As of December 31, 2008, capital loss carryovers available to offset future capital gains for federal income tax purposes for the Balanced, Disciplined Equity and Mid-Cap Funds is $235,669. $234,547 and $8,967,149, respectively. These losses expire December 31, 2016. For the Investors Fund, losses of $130,741 and $2,376,096 expire December 31, 2010 and 2016, respectively. A portion of the losses set to expire in 2010 were acquired through its merger with Mosaic Focus Fund on July 1, 2002 and is subject to certain limitations.
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 for the 2008 fiscal year have been identified and appropriately reclassified on the Statement of Assets and Liabilities. In the Mid-Cap Fund, a permanent book and tax difference relating to net investment losses in the amount of $396,723 was reclassified from accumulated undistributed net investment income to paid in surplus.
Use of Estimates: The preparation of the 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.
2. Investments in Repurchase Agreements. When the Funds purchase securities under agreements to resell, the securities are held for safekeeping by the custodian bank as collateral. Should the market value of the securities purchased under such an agreement decrease below the principal amount to be received at the termination of the agreement plus accrued interest, the counterparty is required to place an equivalent amount of additional securities in safekeeping with the Trust’s custodian bank. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Funds, along with other registered investment companies having Advisory and Services Agreements with the same advisor, transfers uninvested cash balances into a joint trading account. The aggregate balance in this joint trading account is invested in one or more consolidated repurchase agreements whose underlying securities are U.S. Treasury or federal agency obligations. As of December 31, 2008, the Investors Fund had approximately a 6.2% interest, the Balanced Fund approximately a 12.8% interest, the Disciplined Equity Fund approximately a 1.8% interest and the Mid-Cap Fund approximately a 43.3% interest in the consolidated repurchase agreement of $7,263,519 collateralized by $7,409,165 in Freddie Mac Mortgage Backed Security Notes. Proceeds at maturity were $7,263,523.
3. Investment Advisory Fees and Other Transactions with Affiliates. The investment advisor to the Trust, Madison Mosaic, LLC, a wholly owned subsidiary of Madison Investment Advisors, Inc. (collectively “the Advisor”), earns an advisory fee equal to 0.75% per annum of the average net assets of the Balanced, Mid-Cap and Disciplined Equity Funds and the first $100 million in the Investors Fund. The advisory fee paid by the Investors Fund is reduced to 0.60% per annum on assets over $100 million. The fees are accrued daily and are paid monthly.
4. Investment Transactions. Purchases and sales of securities (excluding short-term securities) for the year ended December 31, 2008 were as follows:
Purchases | Sales | |
Investors Fund: | ||
U. S. Gov’t Securities | -- | -- |
Other | $19,553,514 | $ 31,580,013 |
Balanced Fund: | ||
U. S. Gov’t Securities | $690,095 | $2,524,039 |
Other | $ 5,188,768 | $4,499,427 |
Disciplined Equity Fund: | ||
U. S. Gov’t Securities | -- | -- |
Other | $2,671,355 | $2,431,291 |
Madison Mosaic Equity Trust 25
Notes to Financial Statements (continued)
Purchases | Sales | |
Mid-Cap Fund: | ||
U. S. Gov’t Securities | -- | -- |
Other | $86,808,524 | $ 89,727,823 |
5. Other Expenses. Under a separate Services Agreement, the Advisor will provide or arrange for each Fund to have all other necessary operational and support services for a fee based on a percentage of average net assets. These fees, presented below for the year ended December 31, 2008, are accrued daily and paid monthly. This percentage was 0.41% for the Balanced Fund and 0.39% for the Disciplined Equity Fund through April 30, 2008. Effective May 1, 2008, this fee was reduced to 0.35% for the Disciplined Equity Fund. Additionally, the Advisor agreed to waive 0.11% of this fee. This waiver may end at any time. The direct expenses paid by the Disciplined Equity Fund and referenced below come out of this fee. For the Investors Fund, this fee was 0.23% on the first $100 million and 0.20% on all assets greater than $100 million. For the Mid-Cap Fund, this fee was 0.48% on the first $150 million and 0.45% on all assets greater than $150 million.
The Funds pay the expenses of the Funds’ Independent Trustees directly. For the year ended December 31, 2008, these fees were $15,500, $3,500, $1,500 and $15,500 for the Investors, Balanced, Disciplined Equity and Mid-Cap Funds, respectively.
The Funds also pay the expenses of the Funds’ Independent auditors directly. For the year ended December 31, 2008, the amounts expensed for these fees were $14,500, $5,750, $3,600 and $23,000 for the Investors, Balanced, Disciplined Equity and Mid-Cap Funds, respectively.
6. Aggregate Cost and Unrealized Appreciation (Depreciation). The aggregate cost for federal income tax purposes and the net unrealized appreciation (depreciation) are as follows as of December 31, 2008:
Investors Fund | Balanced | |
Aggregate Cost | $39,283,013 | $12,173,585 |
Gross unrealized appreciation | 239,817 | 231,288 |
Gross unrealized depreciation | (11,530,558) | (2,012,115) |
Net unrealized depreciation | $(11,290,741) | $(1,780,827) |
Disciplined | Mid-Cap | |
Aggregate Cost | $4,067,241 | $114,970,051 |
Gross unrealized appreciation | 51,379 | 3,314,769 |
Gross unrealized depreciation | (1,047,669) | (31,530,036) |
Net unrealized depreciation | $(996,290) | $(28,215,267) |
7. Capital Share Transactions. An unlimited number of capital shares, without par value, are authorized. Transactions in capital shares were as follows:
Year Ended December 31, | ||
Investors Fund | 2008 | 2007 |
In Dollars | ||
Shares sold | $2,371,218 | $ 31,582,221 |
Shares issued in reinvestment of dividends | 2,069,858 | 12,701,345 |
Total shares issued | 4,441,076 | 44,283,566 |
Shares redeemed | (14,719,684) | (152,505,320) |
Net decrease | $(10,278,608) | $(108,221,754) |
In Shares | ||
Shares sold | 154,758 | 1,538,636 |
Shares issued in reinvestment of dividends | 190,420 | 681,403 |
Total shares issued | 345,178 | 2,220,039 |
Shares redeemed | (903,981) | (7,783,321) |
Net decrease | (558,803) | (5,563,282) |
Year Ended December 31, | ||
Balanced Fund | 2008 | 2007 |
In Dollars | ||
Shares sold | $553,255 | $555,770 |
Shares issued in reinvestment of dividends | 574,299 | 824,152 |
Total shares issued | 1,127,554 | 1,379,922 |
Shares redeemed | (1,525,155) | (3,276,909) |
Net decrease | $(397,601) | $(1,896,987) |
In Shares | ||
Shares sold | 35,053 | 30,207 |
Shares issued in reinvestment of dividends | 41,331 | 46,433 |
Total shares issued | 76,384 | 76,640 |
Shares redeemed | (96,967) | (177,745) |
Net decrease | (20,583) | (101,105) |
26 Annual Report • December 31, 2008
Notes to Financial Statements (concluded)
Year Ended December 31, | ||
Disciplined Equity Fund | 2008 | 2007 |
In Dollars | ||
Shares sold | $343,286 | $482,409 |
Shares issued in reinvestment of dividends | 86,250 | 451,618 |
Total shares issued | 429,536 | 934,027 |
Shares redeemed | (209,254) | (445,366) |
Net increase | $220,282 | $488,661 |
In Shares | ||
Shares sold | 31,179 | 33,375 |
Shares issued in reinvestment of dividends | 9,790 | 32,773 |
Total shares issued | 40,969 | 66,148 |
Shares redeemed | (18,775) | (29,752) |
Net increase | 22,194 | 36,396 |
Year Ended December 31, | ||
Mid-Cap Fund | 2008 | 2007 |
In Dollars | ||
Shares sold | $45,558,885 | $35,218,979 |
Shares issued in reinvestment of dividends | 4,664,982 | 13,100,835 |
Total shares issued | 50,223,867 | 48,319,814 |
Shares redeemed | (47,862,407) | (48,138,841) |
Net increase | $2,361,460 | $180,973 |
In Shares | ||
Shares sold | 4,387,485 | 2,563,622 |
Shares issued in reinvestment of dividends | 641,675 | 1,013,996 |
Total shares issued | 5,029,160 | 3,577,618 |
Shares redeemed | (4,805,004) | (3,483,433) |
Net increase | 224,156 | 94,185 |
In addition, for the Investors and Mid-Cap funds for the year ended December 31, 2007, gains associated with a redemption of securities in kind in the amounts of $3,754,709 and $2,017,427, respectively were credited to paid in surplus as a capital adjustment.
8. Line of Credit. The Investors Fund, Balanced Fund, Disciplined Equity Fund and Mid-Cap Fund have lines of credit of $13 million, $4 million, $1 million and $35 million, respectively. Each line is a revolving credit facility with a bank to be used for temporary emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The interest rate on the outstanding principal amount is equal to the prime rate less 1/2%. Each Fund paid $250 for the year to maintain its line of credit.During the year ended December 31, 2008, the Balanced, Disciplined Equity and Mid-Cap Funds did not borrow on their respective lines of credit. The Investors Fund had total draws during the year of $144,000 with interest paid on those draws of $30. All draws were paid back by the end of the year.
9. Accounting Pronouncements. On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years and interim periods beginning after November 15, 2008. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined.
Madison Mosaic Equity Trust 27
Fund Expenses (unaudited)
Example: As a shareholder of one of the Funds, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including investment advisory fees and other expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in any Fund and to compare these costs with the ongoing costs of investing in other mutual funds. See Notes 3 and 5 above for an explanation of the types of costs charged by the Funds. This Example is based on an investment of $1,000 invested on July 1, 2008 and held for the six-months ended December 31, 2008.
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,500 ending account valued divided by $1,000 = 8.5), then multiply the result by the number under the heading entitled “Expenses Paid During the Period.”
Based on Actual Total Return1 | ||||
Beginning | Ending | Annualized | Expenses Paid | |
Investors Fund | $1,000.00 | $755.30 | 1.05% | $4.83 |
Balanced Fund | $1,000.00 | $860.72 | 1.24% | $5.87 |
Disciplined Equity Fund | $1,000.00 | $717.47 | 1.06%* | $4.71 |
Mid-Cap Fund | $1,000.00 | $730.41 | 1.26% | $5.54 |
*After fee waiver. See Note 5. |
Hypothetical Example for Comparison Purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not any Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in a fund offered by the Trust and other funds. To do so, compare the 5.00% hypothetical example relating to the applicable Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Based on Hypothetical Total Return1 | ||||
Beginning | Ending | Annualized | Expenses Paid | |
Investors Fund | $1,000.00 | $1,025.40 | 1.05% | $5.36 |
Balanced Fund | $1,000.00 | $1,025.40 | 1.24% | $6.30 |
Disciplined Equity Fund | $1,000.00 | $1,025.40 | 1.06%* | $5.41 |
Mid-Cap Fund | $1,000.00 | $1,025.40 | 1.26% | $6.43 |
*After fee waiver. See Note 5. |
28 Annual Report • December 31, 2008
Madison Mosaic Equity Trust December 31, 2008
Management Information
Independent Trustees
Name, Address | Position(s) Held with Fund | Term of Office | Principal Occupation(s) | Number of Portfolios in Fund Complex Overseen | Other Directorships Held |
Philip E. Blake | Trustee | Indefinite Term since May 2001 | Retired investor; formerly Vice President - Publishing, Lee Enterprises Inc. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Madison Newspapers, Inc. of Madison, WI; Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Nerites Corp. |
James R. Imhoff, Jr. | Trustee | Indefinite Term since July 1996 | Chairman and CEO of First Weber Group, Inc. (real estate brokers) of Madison, WI. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Park Bank, FSB. |
Lorence D. Wheeler | Trustee | Indefinite Term since July 1996 | 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 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Grand Mountain Bank, FSB; Grand Mountain Bancshares, Inc. |
Interested Trustee*
Frank E. Burgess | Trustee and Vice President | Indefinite Terms since July 1996 | Founder, President and Director of Madison Investment Advisors, Inc. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Capitol Bank, FSB; American Riviera Bank. |
Officers*
Katherine L. Frank | President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and President of Madison Mosaic, LLC | President of all 13 Madison Mosaic Funds. Trustee of all Madison Mosaic Funds except Equity Trust; President and Trustee of the Madison Strategic Sector Premium Fund. | None |
Jay R. Sekelsky | Vice President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and Vice President of Madison Mosaic, LLC | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Madison Mosaic Equity Trust 29
Management Information (concluded)
Name, Address | Position(s) Held with Fund | Term of Office | Principal Occupation(s) | Number of Portfolios in Fund Complex Overseen | Other Directorships Held |
Christopher Berberet | Vice President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and Vice President of Madison Mosaic, LLC | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
W. Richard Mason | Secretary, General Counsel and Chief Compliance Officer | Indefinite Terms since November 1992 | Principal of Mosaic Funds Distributor, LLC; General Counsel and Chief Compliance Officer for the Advisor, Madison Scottsdale, LC and Madison Mosaic, LLC; General Counsel for Concord Asset Management, LLC. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Greg Hoppe | Chief Financial Officer | Indefinite Term since August 1999 | Vice President of Madison Mosaic, LLC | All 13 Madison 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 Madison Mosaic Funds at 1-800-368-3195.
Forward-Looking Statement Disclosure. One of our most important responsibilities as mutual fund 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 Trust adopted policies that provide guidance and set forth parameters for the voting of proxies relating to securities held in the Trust’s portfolios. Additionally, information regarding how the Trust voted proxies related to portfolio securities for the period ended June 30, 2008 is available. These policies and voting information are available to you upon request and free of charge by writing to Madison Mosaic Funds, 550 Science Drive, Madison, WI 53711 or by calling toll-free at 1-800-368-3195. The Trust’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 Trust 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 Trust 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 Trust’s Forms N-Q are available on the Commission’s website. The Trust’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 1-202-551-8090. Form N-Q and other information about the Trust 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 Madison Mosaic at
30 Annual Report • December 31, 2008
800-368-3195 if you would like a copy of Form N-Q and we will mail one to you at no charge.
Discussion of Contract Renewal (Unaudited)
The Trustees considered a number of factors when the Board most recently approved the advisory contract between the advisor and the four Trust portfolios included in this report in July 2008. Rather than providing you with a list of factors or conclusory statements that explained the Board’s decision-making process, the following discussion is designed to describe what you would have seen and heard if you had been at the Trust’s Board meeting when it most recently approved the advisory contract:
With regard to the nature, extent and quality of the services to be provided by the advisor, the Board reviewed the biographies and tenure of the personnel involved in fund management. They recognized the wide array of investment professionals employed by the firm. The officers of the investment advisor discussed the firm’s ongoing investment philosophies and strategies intended to provide superior performance consistent with each funds’ investment objectives under various market scenarios. The Trustees also noted their familiarity with the advisor due to the advisor’s history of providing advisory services to the Madison Mosaic family.
The Board also discussed the quality of services provided by the transfer agent, US Bancorp Fund Services, LLC. The advisor reported that the transfer agent has routinely ranked at or near the top in customer service surveys for third party transfer agents. The Independent Trustees noted that they had just completed a satisfactory on-site review of the transfer agent’s facilities and operations, including its main operations in Milwaukee, Wisconsin and its emergency recovery center located in West Allis, Wisconsin.
With regard to the investment performance of each fund and the investment advisor, the Board reviewed current performance information. They discussed the reasons for both outperformance and underperformance compared with peer groups and applicable indices. In the course of the Board’s discussion with the advisor regarding fund performance, the advisor expressed its belief to the Board that the equity markets should soon see a change in leadership to the types of stocks owned by Madison Mosaic and emphasized investor focus on the longer term. Although past performance does not predict future results, the advisor discussed how Madison Mosaic’s Equity portfolios did not change their sector allocation during the technology bubble of 1999 – 2000 and, as a result, Equity Trust shareholders were rewarded in the long-term. Similarly, the advisor did not and does not intend to change its sector allocation to chase short-term energy and materials sector or low-quality stock performance under current market conditions. A comprehensive discussion of fund performance and market conditions followed. In the course of this discussion, the advisor sought to address the Board’s concerns regarding investment return by the Equity Trust portfolios for the more recent periods ended June 30, 2008, including the effect on fund performance as a result of the recent spike in oil prices.
The Board engaged in a comprehensive discussion of fund performance and market conditions. The officers of the advisor also discussed the advisor’s methodology for arriving at the peer groups and indices used for performance comparisons. The Board reviewed both short-term and long-term standardized performance, i.e. one, five and ten year (or since inception) average annual total returns for each fund.
With regard to the costs of the services to be provided and the profits to be realized by the investment advisor and its affiliates from the relationship with each Mosaic fund, the Board reviewed the expense ratios for each Madison Mosaic fund compared with funds with similar investment objectives and of similar size. The Board reviewed such comparisons based on a variety of peer group comparisons from data extracted from industry databases including comparison to funds with similar investment objectives based on their broad asset category and total asset size, as well as from data provided directly by funds that most resembled each portfolio’s asset size and investment objective for the last year. The advisor discussed the objective manner by which Madison Mosaic fees were compared to fees in the industry.
As in past years, the Trustees recognized that each Madison Mosaic fund’s fee structure should be reviewed based on total fund expense ratio rather than simply comparing advisory fees to other advisory fees in light of the simple expense structure (i.e. a single advisory and a single services fee, with only the fixed fees of the Independent Trustees and auditors paid separately). As such, the Board focused its attention on the total expense ratios paid by other funds of similar size and category when considering the individual components of the expense ratios. The Board also recognized that investors are often required to pay distribution fees (loads) over and above the amounts identified in the expense ratio comparison reviewed by the Board, whereas no such fees are paid by Madison Mosaic shareholders.
The Trustees sought to ensure that fees were adequate so that the advisor did not neglect its management responsibilities for the Trusts in favor of more “profitable” accounts. At the same time, the Trustees sought to ensure that compensation paid to the advisor was not unreasonably high. The Board reviewed materials demonstrating that although the advisor is compensated for a variety of the administrative services it provides or arranges to provide pursuant to its Services Agreements, such compensation generally does not cover all costs due to the relatively small size of the funds in the Madison Mosaic family. Administrative, operational,
Madison Mosaic Equity Trust 31
regulatory and compliance fees and costs in excess of the Services Agreement fees are paid by the advisor from its investment advisory fees earned. For these reasons, the Trustees recognized that examination of total expense ratios compared to those of other investment companies was more meaningful than a simple comparison of basic “investment management only” fee schedules.
In reviewing costs and profits, the Trustees recognized that Madison Mosaic Funds are to a certain extent “subsidized” by the greater Madison Investment Advisors, Inc. organization because the salaries of all portfolio management personnel, trading desk personnel, corporate accounting personnel and employees of the advisor who served as officers of the funds, as well as facility costs (rent), could not be supported by fees received from the funds alone. However, although Madison Mosaic represents only a few hundred million dollars of assets out of the multiple billions of assets managed by the Madison Investment Advisors, Inc. organization in Wisconsin at the time of the meeting, the Madison Mosaic family is profitable to the advisor at the margin because such salaries and fixed costs are proportionately paid from revenue generated by management of the remaining assets. The Trustees reviewed a profitability analysis of the funds and recognized that, as explained above, full salaries of all portfolio managers had not been factored into the analyses. As a result, although the fees paid by each respective Madison Mosaic fund at its present size might not be sufficient to profitably support a “stand-alone” mutual fund complex, the funds are reasonably profitable to the advisor as part of its larger, diversified organization. The Trustees also recognized that Madison Mosaic’s reputation benefited the advisor’s reputation in attracting separately managed accounts and other investment advisory business. In sum, the Trustees recognized that Madison Mosaic Funds are important to the advisor, are managed with the attention given to other firm clients and are not treated as “loss leaders.”
The Board engaged in a general and detailed discussion regarding fees. As part of the Board’s review of the costs of services and the profits to be realized by the advisor, the Board considered the reasonableness and propriety of the securities research and so-called “soft dollar” benefits, if any, that the advisor receives in connection with brokerage transactions. The Trustees also recognized that the advisor had materially lowered fees in connection with the Disciplined Equity Fund in order to help make it more competitive with larger funds and was also waiving fees and expenses applicable to this fund for the same reasons.
With regard to the extent to which economies of scale would be realized as a fund grows, the Trustees recognized that Madison Mosaic Funds, both individually and as a complex, remain small and that economies of scale would likely be addressed after funds see assets grow significantly beyond their current levels. In light of their size, the Trustees noted that at current asset levels, it was premature to discuss economies of scale for any funds other than the Mid-Cap Fund, which currently has a break-point schedule for assets in excess of $150 million. The Investors Fund’s assets were currently below the fund’s applicable fee break-point levels but the Trustees recognized that such break-points would apply as that fund acquired assets above $100 million.
Finally, the Board reviewed the role of Mosaic Funds Distributor, LLC. They noted that the advisor pays all distribution expenses of Madison Mosaic Funds because the funds themselves do not pay distribution fees. Such expenses include FINRA regulatory fees and “blue sky” fees charged by state governments in order to permit the funds to be offered in the various United States jurisdictions.
Based on all of the material factors explained above, plus a number of other matters that the Trustees are generally required to consider under guidelines developed by the Securities and Exchange Commission, the Trustees concluded that the advisor’s contract should be renewed for another year.
32 Annual Report • December 31, 2008
The Madison Mosaic Family of Mutual Funds
Madison Mosaic Equity Trust
Investors Fund
Balanced Fund
Mid-Cap Fund
Small/Mid-Cap Fund
Disciplined Equity Fund
Madison Institutional Equity Option Fund
Madison Mosaic Income Trust
Government Fund
Core Bond Fund
Institutional Bond Fund
Corporate Income Shares (COINS) Fund
Madison Mosaic Tax-Free Trust
Virginia Tax-Free Fund
Tax-Free National Fund
Madison Mosaic Government Money Market
For more complete information on any Mosaic fund, including charges and expenses, request a prospectus by calling 1-800-368-3195. Read it carefully before you invest or send money. This document does not constitute an offering by the distributor in any jurisdiction in which such offering may not be lawfully made. Mosaic Funds Distributor, LLC.
TRANSFER AGENT
Madison Mosaic Funds
c/o US Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
TELEPHONE NUMBERS
Shareholder Service
Toll-free nationwide: 888-670-3600
550 Science Drive
Madison, Wisconsin 53711
(Madison Mosaic logo)
Madison Mosaic Funds
www.mosaicfunds.com
SEC File Number 811-3615
Annual Report
December 31, 2008
Madison Institutional Equity Option Fund (MADOX)
Active Equity Management combined with a Covered Call Option Strategy
Madison Investment Advisors, Inc.
www.madisonfunds.com
MADOX - Madison Institutional Equity Option Fund
Table of Contents
Management’s Discussion of Fund Performance | 1 |
Report of Independent Registered Public Accounting Firm | 4 |
Portfolio of Investments | 5 |
Statement of Assets and Liabilities | 7 |
Statement of Operations | 8 |
Statement of Changes in Net Assets | 9 |
Financial Highlights | 10 |
Notes to Financial Statements | 11 |
Management Information | 15 |
MADOX - Madison Institutional Equity Option Fund
Management’s Discussion of Fund Performance
This past year has been an extremely trying one for virtually all equity portfolios and Madison Institutional Equity Option Fund (the “Fund” or “MADOX”) has been no exception. While we have always looked to own high-quality companies, the market was indiscriminate in its downslide. Although option income was a plus to our performance, we could not maintain fund value in this environment. That said, we have to recognize that we invest for the future and cannot change the past and we see some encouraging signs for the Fund. First of all, the option income potential for 2009 looks as bright now as any time in the Fund’s history and we like the valuations we are obtaining for our underlying securities. We have confidence that the history-making, massive federal interventions will eventually gain traction and that, as a result, we should see better results in 2009.
The year 2008 has already been memorialized as one of the worst calendar years for stocks in history, with the S&P 500 dropping -37.0%, its second worst annual loss in its history. Unlike some previous market drops, such as the dot.com crash of 2000-2002, this decline was broad and relatively indiscriminate, affecting all market sectors and capitalization ranges.
Virtually all risk assets were hammered in 2008 in the wake of broad economic problems, while a flight to safety concentrated positive returns among the most secure assets, primarily U.S. government issued Treasury securities. The stock market hit its annual high as trading opened in January, but it was far from clear that 2008 was going to be as bad as it turned out. At first it appeared the credit problems that were sparked by the subprime loan crisis might be contained, and by May 19th the market was nipping at new annual highs in the wake of a bailout plan for investment bank Bear Stearns. However, as the year progressed, the problems that began in the subprime mortgage area bloomed into a full fledged credit crisis, with the signature event being the collapse of Lehman Brothers investment bank in September. The credit crisis sent unexpected shock waves into virtually all areas of the global economy, sparking a worldwide economic slowdown and recession. As credit froze, highly leveraged firms began to spiral downward, and many financial and industrial firms with household names found themselves on the brink—or over the brink—of insolvency.
Countering the crisis in the financial sector was a series of significant, even historically unprecedented, federal interventions. Beginning in January, the Federal Reserve made the first of a series of rate cuts which, by the December cut, lowered the target federal funds rate to a range of 0% to 0.25%, the lowest in modern history. In addition to rate cuts, the Federal government has injected massive stimulus into the financial system in order to provide a solid base from which to repair balance sheets and normalize credit markets. These federal interventions were headlines throughout the year, including: the bailout of Bear Stearns; what amounted to a federal acquisition of mortgage companies Fannie Mae and Freddie Mac; and the Congressional creation of the $700 billion TARP program. An additional large stimulus package is expected once the new administration takes control under the new presidential administration.
The S&P 500 hit its 2008 low on November 20 and rallied into the New Year with a 20% rise off the low, but still closed the year 37% lower than it opened. All in all, it was one of the most tumultuous years ever for the U.S. financial system and markets, and the result was widespread fear among investors and considerable uncertainty about the direction of the U.S. economy over the six months.
As of December 31, 2008, MADOX held 36 common stocks and the Fund’s managers wrote options which resulted in $2,006,453 of premiums over the 12-month period. The Fund generally writes “out-of-the-money” options, and as of December 31, 2008, 85% of MADOX’s 33 outstanding written (sold) stock options were still “out-of-the-money.” This should allow the fund to appreciate in price should our equity positions rally.
We are pleased to report that MADOX generated sufficient income in 2008 to declare a $1.44 per share dividend. The dividend represented earned net income and long and short term capital gains.
Annual Report - December 31, 2008 - 1
MADOX - Madison Institutional Equity Option Fund - Management's Discussion of Fund Performance - continued
The Fund’s NAV (net asset value per share) decreased $6.69 during 2008 from $18.13 to $11.44. This represented a total return of -29.9%, including the reinvestment of dividends versus -37.0% for the S&P 500 and -28.9% for the CBOE Buy Write (“BXM”) Index during the same period. The main reason we were able to outperform the S&P 500 was significant income from the Fund’s call writing strategy. The main source for the slight performance gap with the BXM could be attributed to the fortunes of the underlying stocks. MADOX tends to concentrate its holdings in the Consumer Discretionary, Financial, and Technology Sectors, all of which performed poorly in 2008. Furthermore, two of the best three performing sectors in the S&P 500 were Consumer Staples and Utilities and the Fund did not have any holdings in these sectors in 2008. Currently, we feel we have a portfolio of high-quality stocks trading at attractive prices on a number of valuation metrics.
From a sector perspective, MADOX’s largest exposure was in the Consumer Discretionary Sector, followed by Financials, Health Care and Technology. We continue to remain absent from the Consumer Staples, Materials and Utilities Sectors.
Madison Asset Management’s stock picking strategy involves seeking a portfolio of common stocks that have favorable “PEG” ratios (price-earnings ratio to growth rate) as well as financial strength and industry leadership. As bottom-up investors, we focus on the fundamental businesses of our companies. Our stock selection philosophy strays away from the “beat the street” objective, as we look for companies that have sustainable competitive advantages, predictable cash flows, solid balance sheets and high-quality management teams. By concentrating on long-term prospects and circumventing the “instant gratification” school of thought, we believe we bring
2 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund - Management's Discussion of Fund Performance - concluded
elements of consistency, stability and predictability to our shareholders.
Once we have selected attractive and solid names for the Fund, we employ our option writing strategy. This procedure entails selling calls that are primarily out-of the-money, meaning that the strike price is higher than the common stock price, so that the Fund can participate in some stock appreciation. By receiving option premiums, the Fund receives a high level of investment income and adds an element of downside protection. In addition, we believe that our concentration in the Consumer Discretionary and Retail, Technology, Medical Health and Pharmaceutical and Financial sectors provides opportunities for larger premiums than those that would come from other sectors or from writing index options. Call options may be written over a number of time periods and at differing strike prices in an effort to maximize the protective value to the strategy and spread income evenly throughout the year.
Outlook
As we enter 2009, the U.S. economy, and most of the world, is mired in a severe recession. It is increasingly difficult to find reason for optimism in upcoming economic data. U.S. consumer confidence has fallen to generational lows. Manufacturers are paring back production and employment in anticipation of a prolonged recession. Unemployment rates are rising, and likely to rise further. Credit remains tight and is only available to the most worthy of borrowers.
The process of de-leveraging, begun in 2007, will likely continue into 2009 and beyond. The financial sector de-leveraging, while well-advanced, has more room to run. Private sector corporate de-leveraging will likely be a less troublesome issue, as non-financial corporate balance sheets remain in good shape. The process of consumer de-leveraging, we fear, is still in its early stages, and should only be magnified as the unemployment rate rises and the recession deepens.
Despite this, there are bright spots. The monetary and fiscal stimulus brought to bear so far is staggering, and should eventually have its intended effect. Estimates of U.S. Government infusions into the banking industry alone are in the $1-$2 trillion range. And the $100 decline in the price of a barrel of crude could put up to $260 billion back into consumers’ pockets — a large stimulus in and of itself. After a gloomy first half, we expect the economy to begin to show signs of life in the second half of 2009.
On the option writing side, the VIX Index spiked as high as 80 in November resulting in some of the most attractive option premiums since we started the Fund. Going forward, we feel this higher level of volatility will allow us to earn very attractive returns from writing options for the Fund.
TOP TEN STOCK HOLDINGS AS OF
DECEMBER 31, 2008 FOR MADISON
INSTITUTIONAL EQUITY OPTION FUND
% of net assets | |
Wells Fargo & Co. | 6.35% |
Target Corp. | 5.13% |
Biogen Idec | 5.13% |
UnitedHealth Group | 5.10% |
Apache Corp. | 4.82% |
Capital One Financial Corp. | 4.12% |
Lowe’s Cos Inc. | 3.99% |
Mylan Inc. | 3.84% |
Pfizer Inc. | 3.82% |
Marshall & Ilsley Co. | 3.53% |
Annual Report - December 31, 2008 - 3
MADOX - Madison Institutional Equity Option Fund
Report of Independent Registered Public Accounting Firm | December 31, 2008
To the Board of Trustees and Shareholders of Madison Institutional Equity Option Fund
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments of the Madison Institutional Equity Option Fund (the “Fund”), as of December 31, 2008 and the related statement of operations for the year then ended and the statements of changes in net assets for each of the two years in the period then ended and financial highlights for each of the two years in the period then ended and for the period from March 31, 2006 (commencement of operations) through December 31, 2006. 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 audits 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 audits 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, 2008 by correspondence with the Fund’s custodian and brokers. We believe that our audits provide 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, 2008, and the results of its operations for the year then ended and the changes of its net assets for each of the two years in the period then ended, and financial highlights for each of the two years in the period then ended and for the period from March 31, 2006 (commencement of operations) through December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
(signature)
Grant Thornton, LLP
Chicago, Illinois
February 20, 2009
4 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund
Portfolio of Investments | December 31, 2008
Number of Shares | Value | |
COMMON STOCKS: 106.6% of net assets | ||
CONSUMER DISCRETIONARY: 26.0% | ||
10,000 | American Eagle Outfitters, Inc. | $93,600 |
4,900 | Bed Bath & Beyond Inc.* | 124,558 |
3,500 | Best Buy Co, Inc. | 98,385 |
7,000 | Coach Inc.* | 145,390 |
4,500 | Kohl’s Corp.* | 162,900 |
8,600 | Lowe’s Cos, Inc. | 185,072 |
17,000 | Starbucks Corp.* | 160,820 |
6,900 | Target Corp. | 238,257 |
CONSUMER SERVICES: 8.7% | ||
4,700 | Garmin, Ltd. | 90,099 |
500 | Google Inc.- Class A* | 153,825 |
6,800 | Intuit Inc.* | 161,772 |
ENERGY: 10.5% | ||
3,000 | Apache Corp. | 223,590 |
2,500 | Schlumberger Ltd. | 105,825 |
4,500 | XTO Energy Inc. | 158,715 |
FINANCIALS: 23.2% | ||
3,000 | Affiliated Managers Group, Inc.* | 125,760 |
2,550 | Bank of America Corp. | 35,904 |
6,000 | Capital One Financial Corp. | 191,340 |
9,500 | Citigroup, Inc. | 63,745 |
12,000 | Marshall & Ilsley Corp. | 163,680 |
6,200 | Merrill Lynch & Co, Inc. | 72,168 |
8,000 | Morgan Stanley & Co. | 128,320 |
10,000 | Wells Fargo & Co. | 294,800 |
HEALTH CARE: 20.7% | ||
5,000 | Biogen Idec* | 238,150 |
2,000 | Genzyme Corp.* | 132,740 |
18,000 | Mylan Inc.* | 178,020 |
10,000 | Pfizer Inc. | 177,100 |
8,900 | UnitedHealth Group | 236,740 |
INSURANCE: 0.7% | ||
9,000 | MGIC Investment Corp.* | 31,320 |
SOFTWARE: 0.9% | ||
3,000 | Symantec Corp.* | $40,560 |
TECHNOLOGY: 15.9% | ||
6,000 | Altera Corp. | 100,260 |
8,500 | Cisco Systems, Inc.* | 138,550 |
11,500 | EMC Corp. | 120,405 |
19,000 | Flextronics International Ltd.* | 48,640 |
6,000 | Linear Technology Corp. | 132,720 |
4,500 | Xilinx, Inc. | 80,190 |
5,900 | Zebra Technologies Corp. - Class A* | 119,534 |
TOTAL COMMON STOCKS (Cost $9,818,310) | $4,953,454 | |
SHORT-TERM INVESTMENTS: | ||
REPURCHASE AGREEMENT: 4.0% | ||
With U.S. Bank National Association issued 12/31/08 at 0.01%, due 1/2/09, collateralized by $190,683 in Freddie Mac MBS #E99430 due 9/1/18. Proceeds at maturity are $186,935. (Cost $186,935) | 186,935 | |
TOTAL INVESTMENTS: 110.6% of net assets (Cost $10,005,245) | $5,140,389 | |
Liabilities Less Cash and Other Assets: (3.2%) | (151,685) | |
Total Call Options Written: (7.4%) | (346,853) | |
NET ASSETS: 100% | $4,641,851 |
*Non-income producing.
The Notes to Financial Statements are an integral part of this statement.
Annual Report - December 31, 2008 - 5
MADOX - Madison Institutional Equity Option Fund - Portfolio of Investments - concluded
Contracts | CALL OPTIONS WRITTEN | Expiration | Exercise | Market | |
30 | Affiliated Managers Group, Inc. | March 2009 | $ 40.00 | $20,850 | |
30 | Altera Corp. | March 2009 | 15.00 | 7,650 | |
30 | Altera Corp. | June 2009 | 17.50 | 5,625 | |
66 | American Eagle Outfitters, Inc. | February 2009 | 10.00 | 4,950 | |
30 | Apache Corp. | July 2009 | 80.00 | 32,250 | |
49 | Bed Bath & Beyond Inc. | May 2009 | 25.00 | 19,110 | |
15 | Best Buy Inc. | March 2009 | 30.00 | 3,450 | |
40 | Biogen Idec | July 2009 | 55.00 | 14,000 | |
60 | Capital One Financial Corp. | June 2009 | 35.00 | 35,400 | |
70 | Coach Inc. | May 2009 | 25.00 | 13,475 | |
115 | EMC Corp. | April 2009 | 12.00 | 7,590 | |
90 | Flextronics International Ltd. | January 2009 | 12.50 | 450 | |
30 | Garmin Ltd | July 2009 | 25.00 | 5,475 | |
20 | Genzyme Corp. | July 2009 | 72.50 | 10,800 | |
5 | Google, Inc. | March 2009 | 300.00 | 16,750 | |
50 | Intuit Inc. | April 2009 | 25.00 | 9,750 | |
45 | Kohl’s Corp. | July 2009 | 45.00 | 16,200 | |
30 | Linear Technology Corp. | May 2009 | 22.50 | 7,050 | |
30 | Linear Technology Corp. | May 2009 | 25.00 | 4,050 | |
60 | Lowe’s Companies, Inc. | January 2009 | 22.50 | 2,850 | |
26 | Lowe’s Companies, Inc. | April 2009 | 27.50 | 1,690 | |
50 | Marshall & Ilsley Corp. | January 2009 | 17.50 | 250 | |
30 | Marshall & Ilsley Corp. | March 2009 | 22.50 | 150 | |
40 | Morgan Stanley & Co. | April 2009 | 19.00 | 6,400 | |
150 | Mylan Inc. | April 2009 | 10.00 | 22,500 | |
25 | Schlumberger Ltd. | May 2009 | 50.00 | 8,250 | |
100 | Starbucks Corp. | April 2009 | 11.00 | 6,800 | |
30 | Symantec Corp. | April 2009 | 15.00 | 3,300 | |
69 | Target Corp. | April 2009 | 40.00 | 25,875 | |
89 | UnitedHealth Group | March 2009 | 30.00 | 12,238 | |
70 | Wells Fargo & Co. | January 2009 | 30.00 | 12,600 | |
45 | XTO Energy Inc. | February 2009 | 40.00 | 7,650 | |
10 | Zebra Technologies | May 2009 | 22.50 | 1,425 | |
TOTAL CALL OPTIONS WRITTEN (Premiums Received $420,804) | $346,853 |
The Notes to Financial Statements are an integral part of this statement.
6 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund
Statement of Assets and Liabilities | December 31, 2008
ASSETS | |
Investments, at value (Note 1 and 2) | |
Investment securities | $4,953,454 |
Repurchase agreements | 186,935 |
Total investments (cost $10,005,245) | 5,140,389 |
Dividends and interest receivable | 2,065 |
Total assets | 5,142,454 |
LIABILITIES | |
Options written, at value (premiums received of $420,804) | 346,853 |
Payables | |
Independent trustee fees | 750 |
Auditor fees | 3,000 |
Capital shares redeemed | 150,000 |
Total liabilities | 500,603 |
NET ASSETS | $4,641,851 |
Net assets consists of: | |
Paid in capital | $9,747,155 |
Undistributed net investment income | 1,833 |
Accumulated net realized gain on investments and options transactions | (316,232) |
Net unrealized depreciation on investments and options transactions | (4,790,905) |
Net assets | $4,641,851 |
CAPITAL SHARES ISSUED AND OUTSTANDING | |
An unlimited number of capital shares authorized, $.01 par value per share (Note 7) | 405,599 |
NET ASSET VALUE PER SHARE | $11.44 |
The Notes to Financial Statements are an integral part of this statement.
Annual Report - December 31, 2008 - 7
MADOX - Madison Institutional Equity Option Fund
Statement of Operations | For the year ended December 31, 2008
INVESTMENT INCOME (Note 1) | |
Interest income | $13,834 |
Dividend income | 135,695 |
Other income | 300 |
Total investment income | 149,829 |
EXPENSES (Notes 3 and 5) | |
Investment advisory fees | 75,724 |
Performance fulcrum fee | (15,921) |
Other expenses: | |
Service agreement fees | 10,043 |
Independent trustee fees | 3,000 |
Auditor fees | 7,150 |
Total other expenses | 20,193 |
Total expenses | 79,996 |
NET INVESTMENT INCOME | 69,833 |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | |
Net realized gain (loss) on: | |
Investments | (1,678,391) |
Options | 1,748,118 |
Net unrealized depreciation on: | |
Investments | (2,846,298) |
Options | (399,113) |
NET LOSS ON INVESTMENTS AND OPTIONS TRANSACTIONS | (3,175,684) |
TOTAL DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | $(3,105,851) |
The Notes to Financial Statements are an integral part of this statement.
8 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund
Statement of Changes in Net Assets
For the period indicated
Year Ended Dec. 31, | Year Ended Dec. 31, | |
2008 | 2007 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||
Net investment income | $69,833 | $79,344 |
Net realized gain on investments and options transactions | 69,727 | 1,463,005 |
Net unrealized depreciation on investments and options transactions | (3,245,411) | (2,139,502) |
Total decrease in net assets resulting from operations | (3,105,851) | (597,153) |
DISTRIBUTION TO SHAREHOLDERS | ||
From net investment income | (68,000) | (79,344) |
From net capital gains | (708,647) | (1,289,423) |
Total distributions | (776,647) | (1,368,767) |
CAPITAL SHARE TRANSACTIONS | (4,628,800) | 3,608,268 |
TOTAL INCREASE (DECREASE) IN NET ASSETS | (8,511,298) | 1,642,348 |
NET ASSETS | ||
Beginning of period | $13,153,149 | $11,510,801 |
End of period | $4,641,851 | $13,153,149 |
The Notes to Financial Statements are an integral part of this statement.
Annual Report - December 31, 2008 - 9
MADOX - Madison Institutional Equity Option Fund
Financial Highlights
Per Share Operating Performance for One Share Outstanding Throughout the Period
Year Ended | For the period March 31, 2006* through | ||
2008 | 2007 | December 31, 2006 | |
Net Asset Value, Beginning of Period | $18.13 | $21.18 | $20.00 |
Investment Operations | |||
Net investment income | 0.15 | 0.13 | 0.10 |
Net realized and unrealized gain on investments and options transactions | (5.40) | (0.84) | 1.44 |
Total from investment operations | (5.25) | (0.71) | 1.54 |
Less distributions from: | |||
Net investment income | (0.15) | (0.13) | (0.10) |
Capital gains | (1.29) | (2.21) | (0.26) |
Total distributions | (1.44) | (2.34) | (0.36) |
Net Asset Value, End of Period | $11.44 | $18.13 | $21.18 |
Total Investment Return (%) | (29.91) | (3.98) | 7.74 |
Ratios and Supplemental Data | |||
Net assets, end of period (thousands) | $4,642 | $13,153 | $11,511 |
Ratio of expenses to average net assets (%) | 0.79 | 0.95 | 0.94** |
Ratio of net investment Income to average net assets (%) | 0.69 | 0.65 | 0.83** |
Portfolio turnover (%) | 40 | 103 | 41 |
* Commencement of operations.
** Annualized.
The Notes to Financial Statements are an integral part of this statement.
10 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund
Notes to Financial Statements | December 31, 2008
Note 1 – Summary of Significant Accounting Policies.
Madison Mosaic Equity Trust (the “Trust”) is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end, investment management company. The Trust currently offers five portfolios, each of which is a diversified mutual fund. This report contains information about one of these portfolios, the Madison Institutional Equity Option Fund (the “Fund”), which commenced operations March 31, 2006. Its objectives and strategies are detailed in its prospectus. The remaining four Trust portfolios present their financial information in a separate report.
Securities Valuation: Securities traded on a national securities exchange are valued at their closing sale price. Repurchase agreements and other securities having maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities having longer maturities, for which quotations are readily available, are valued at the mean between their closing bid and ask prices. Securities for which market quotations are not readily available are valued at their fair value as determined in good faith under procedures approved by the Board of Trustees. Exchange-traded options are valued at the mean of the best bid and best ask prices across all option exchanges.
The Funds adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements (FAS 157) effective January 1, 2008. In accordance with FAS 157, fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in an orderly transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. FAS 157 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes.
Various inputs as noted above are used in determining the value of the Fund’s investments and other financial instruments. These inputs are summarized in the three broad levels listed below.
- Level 1: Quoted prices in active markets for identical securities
- Level 2: Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
- Level 3: Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund’s assets as of December 31, 2008:
Valuation Inputs | Investments in Securities | Other Financial Instruments* |
Level 1: Quoted prices | $4,953,454 | $(346,853) |
Level 2: Other significant observable inputs | 186,935 | -- |
Level 3: Significant unobservable inputs | -- | -- |
Total | $5,140,389 | $(346,853) |
* Consists of call options written. |
Investment Transactions: Investment transactions are recorded on a trade date basis. The cost of investments sold is determined on the identified cost basis for financial statement and federal income tax purposes.
Investment Income: Interest income is recorded on an accrual basis. Bond premium is amortized and original issue discount and market discount are accreted over the expected life of each applicable security using the effective interest method. Dividend income is recorded net of applicable withholding taxes on the ex-dividend date. Other income is accrued as earned.
Distribution of Income and Gains: Distributions are recorded on the ex-dividend date. Net investment income, determined as gross investment income less total expenses, is declared as a regular dividend and distributed to shareholders at year-end for the Fund. Capital gain distributions, if any, are declared and paid annually at year-end.
The tax character of distributions paid to shareholders was $741,526 of ordinary income and $35, 121 of long-term gains in 2008 and $1,349,660 of ordinary income and $19,107 of long-term gains in 2007, respectively. The Fund designates 7.28% of dividends declared from net investment income and short-term capital gains during the fiscal year ended December 31, 2008 as qualified income under the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Annual Report - December 31, 2008 - 11
MADOX - Madison Institutional Equity Option Fund - Notes to Financial Statements - continued
As of December 31, 2008, the components of distributable earnings on a tax basis were as follows:
Undistributed net investment income | $1,833 |
Net unrealized depreciation on investments | (5,107,137) |
$(5,105,304) |
Net realized gains or losses may differ for financial and tax reporting purposes as a result of loss deferrals related to wash sales and post-October transactions.
Income Tax: No provision is made for federal income taxes since it is the intention of the Trust to comply with the provisions of Subchapter M of the Internal Revenue Code available to investment companies and to make the requisite distribution to shareholders of taxable income which will be sufficient to relieve it from all or substantially all federal income taxes.
The Fund adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The implementation of FIN 48 resulted in no material liability for unrecognized tax benefits and no material change to the beginning net asset value of the Fund.
As of and during the year ended December 31, 2008, the Fund did not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the Fund did not incur any interest or penalties.
Information on the tax components of investments, excluding option contracts, as of December 31, 2008 is as follows:
Aggregate Cost | $10,321,477 |
Gross unrealized appreciation | 20,288 |
Gross unrealized depreciation | (5,201,376) |
Net unrealized depreciation | $(5,181,088) |
Use of Estimates: The preparation of the 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.
Note 2 – Investments in Repurchase Agreements.
When the Fund purchases securities under agreements to resell, the securities are held for safekeeping by the custodian bank as collateral. Should the market value of the securities purchased under such an agreement decrease below the principal amount to be received at the termination of the agreement plus accrued interest, the counterparty is required to place an equivalent amount of additional securities in safekeeping with the Trust’s custodian bank. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other registered investment companies having Advisory and Services Agreements with the same advisor, transfers uninvested cash balances into a joint trading account. The aggregate balance in this joint trading account is invested in one or more consolidated repurchase agreements whose underlying securities are U.S. Treasury or federal agency obligations. As of December 31, 2008, the Fund had approximately an 2.6% interest in the consolidated repurchase agreement of $7,263,519 collateralized by $7,409,165 in Freddie Mac Mortgage Backed Security Notes. Proceeds at maturity were $7,263,523.
Note 3 – Investment Advisory Fees and Other Transactions with Affiliates.
The investment advisor to the Fund, Madison Asset Management, LLC, a wholly owned subsidiary of Madison Investment Advisors, Inc. (collectively “the Advisor”), earns an advisory fee equal to 0.75% per annum of the average net assets of the Fund. As of April 1, 2007, a fulcrum fee was applied to the advisory fee which can increase, decrease or have no effect on the advisory fee based on certain performance criteria described in the Fund’s offering materials. The fee is accrued daily and is paid monthly.
Note 4 – Investment Transaction.
Purchases and sales, excluding short-term investments for the year ended December 31, 2008 were $3,919,724 and $5,484,677, respectively. No U.S. Government securities were purchased or sold during the period.
Note 5 – Other Expenses.
Under a separate Services Agreement, the Advisor will provide or arrange for the Fund to have all other necessary operational and support services for a fee based on a percentage of average net assets. These fees are accrued daily and paid monthly. The Fund also pays the expenses of the Fund’s Independent Trustees and auditors directly. For the year ended December 31, 2008, these fees amounted to $3,000 and $7,150, respectively. The combined Services Agreement fees paid to the Advisor and Independent Trustees and auditor fees may not exceed 0.20% of average net assets.
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
12 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fundm - Notes to Financial Statements - continued
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 year ended December 31, 2008 were as follows:
Number of Contracts | Premiums Received | |
Options outstanding, beginning of period | 3,047 | $817,346 |
Options written | 6,788 | 2,006,453 |
Options expired | (2,653) | (661,643) |
Options closed | (4,709) | (1,531,999) |
Options assigned | (844) | (209,353) |
Options outstanding at end of period | 1,629 | $420,804 |
Note 7 – Capital Share Transactions.
An unlimited number of capital shares, without par value, are authorized. Transactions in capital shares were as follows:
Year Ended December 31, | ||
2008 | 2007 | |
In Dollars | ||
Shares sold | $-- | $3,532,271 |
Shares issued in reinvestment of dividends | 758,333 | 1,368,770 |
Total shares issued | 758,333 | 4,901,041 |
Shares redeemed | (5,387,133) | (1,292,773) |
Net increase (decrease) | $(4,628,800) | $3,608,268 |
In Shares | ||
Shares sold | -- | 174,406 |
Shares issued in reinvestment of dividends | 55,026 | 69,604 |
Total shares issued | 55,026 | 244,010 |
Shares redeemed | (374,854) | (62,040) |
Net increase (decrease) | (319,828) | 181,970 |
Note 8 – Accounting Pronouncements.
On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years and interim periods beginning after November 15, 2008. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined.
Fund Expenses
Example: As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including Investment advisory fees and Other expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. See Notes 3 and 5 above for an explanation of the types of costs charged by the Fund. This Example is based on an investment of $1,000 invested on July 1, 2008 and held for the six-months ended December 31, 2008.
Annual Report - December 31, 2008 - 13
MADOX - Madison Institutional Equity Option Fund - Notes to Financial Statements - concluded
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,500 ending account valued divided by $1,000 = 8.5), then multiply the result by the number under the heading entitled “Expenses Paid During the Period.”
Based on Actual Total Return1 | ||||
Beginning | Ending | Annualized | Expenses Paid | |
Madison Institutional Equity Option Fund | $1,000.00 | $768.37 | 0.79% | $3.63 |
1For the six-months ended December 31, 2008. |
Hypothetical Example for Comparison Purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Based on Hypothetical Total Return1 | ||||
Beginning | Ending | Annualized | Expenses Paid | |
Madison Institutional Equity Option Fund | $1,000.00 | $1,025.40 | 0.79% | $4.05 |
1For the six-months ended December 31, 2008. |
14 | Annual Report | December 31, 2008
MADOX - Madison Institutional Equity Option Fund
Management Information
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 | Trustee | Indefinite Term since May 2001 | Retired investor; formerly Vice President - Publishing, Lee Enterprises Inc. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Madison Newspapers, Inc. of Madison, WI; Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Nerites Corp. |
James R. Imhoff, Jr. | Trustee | Indefinite Term since July 1996 | Chairman and CEO of First Weber Group, Inc. (real estate brokers) of Madison, WI. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Park Bank, FSB. |
Lorence D. Wheeler | Trustee | Indefinite Term since July 1996 | 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 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Grand Mountain Bank, FSB; Grand Mountain Bancshares, Inc. |
Interested Trustee*
Frank E. Burgess | Trustee and Vice President | Indefinite Terms since July 1996 | Founder, President and Director of Madison Investment Advisors, Inc. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | Trustee of the Madison Claymore Covered Call and Equity Strategy Fund; Capitol Bank, FSB; American Riviera Bank. |
Officers*
Katherine L. Frank | President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and President of Madison Mosaic, LLC | President of all 13 Madison Mosaic Funds. Trustee of all Madison Mosaic Funds except Equity Trust; President and Trustee of the Madison Strategic Sector Premium Fund. | None |
Jay R. Sekelsky | Vice President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and Vice President of Madison Mosaic, LLC | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Christopher Berberet | Vice President | Indefinite Term since July 1996 | Principal and Vice President of Madison Investment Advisors, Inc. and Vice President of Madison Mosaic, LLC | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Annual Report - December 31, 2008 - 15
MADOX - Madison Institutional Equity Option Fund - Management's Information - concluded
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 |
W. Richard Mason | Secretary, General Counsel and Chief Compliance Officer | Indefinite Terms since November 1992 | Principal of Mosaic Funds Distributor, LLC; General Counsel and Chief Compliance Officer for the Advisor, Madison Scottsdale, LC and Madison Mosaic, LLC; General Counsel for Concord Asset Management, LLC. | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
Greg Hoppe | Chief Financial Officer | Indefinite Term since August 1999 | Vice President of Madison Mosaic, LLC | All 13 Madison Mosaic Funds and the Madison Strategic Sector Premium Fund. | None |
*All interested Trustees and Officers of the Trust are employees and/or owners of the Advisor. Since the Advisor 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. Additionally, information regarding how the Fund voted proxies related to portfolio securities, if applicable, during the period ended June 30, 2008 is available to you upon request and free of charge, by writing to Madison Institutional Equity Option 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 1-202-551-8090. 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.
16 | Annual Report | December 31, 2008
Madison Investment Advisors, Inc.
550 Science Drive
Madison, WI 53711
1-800-767-0300
www.madisonfunds.com
SEC File Number 811-3615
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, 2003.
(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 Madison Mosaic Funds at 800-368-3195 and requesting a copy of the Madison Mosaic Funds Sarbanes Oxley Code of Ethics.
Item 3. Audit Committee Financial Expert.
In July 2008, Lorence D. Wheeler, an “independent” Trustee and a member of the Trust’s audit committee, was elected to serve as the Trust’s audit committee financial expert among the three Madison Mosaic independent Trustees who so qualify to serve in that capacity. He succeeded Philip E. Blake who served in that capacity from August 2007 through July 2008.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. Total audit fees paid (or to be paid) to the registrant's principal accountant for the fiscal years ended December 31, 2008 and 2007, respectively, out of the Services Agreement fees collected from or paid on behalf of all Madison Mosaic Funds were $88,500 ($113,750 including the Madison Strategic Sector Premium Fund, an affiliated closed-end fund ("MSP")) and $86,500 ($111,500 including MSP). Of these amounts, approximately $54,000 and $52,000, respectively, was or will be attributable to Madison Mosaic Equity Trust and the remainder was or will be attributable to audit services provided to other Madison Mosaic Funds registrants.
(b) Audit-Related Fees. None.
(c) Tax-Fees. None.
(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.
Not applicable.
Item 6. Schedule of Investments
Schedule included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
No changes. The Trust does not normally hold shareholder meetings.
Item 11. Controls and Procedures.
(a) The Trust’s principal executive officer and principal financial officer determined that the Trust’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) are effective, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934 within 90 days of the date of this report. There were no significant changes in the Trust’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 were no changes in the Trust's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) 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 Trust's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics referred to in Item 2 (no change from the previously filed Code).
(a)(2) Certifications of principal executive and principal financial officers as required by Rule 30a-2(a) under the Act.
(b) Certification of principal executive and principal financial officers as required by Rule 30a-2(b) under the Act.
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 Mosaic Equity Trust
By: (signature)
W. Richard Mason, Secretary
Date: February 20, 2009
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 20, 2009
By: (signature)
Greg Hoppe, Chief Financial Officer
Date: February 20, 2009