OMB APPROVAL
OMB Number: 3235-0570
Expires: August 31, 2010
Estimated average burden hours per response...18.9
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)
Pamela M. Krill
Madison Funds Legal and Compliance Department
550 Science Drive
Madison, WI 53711
(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: June 30, 2010
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, inspection, 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.
Semi-Annual Report (unaudited)
June 30, 2010
Madison Mosaic Equity Trust
· | Investors Fund |
· | Balanced Fund |
· | Mid-Cap Fund |
· | Disciplined Equity Fund |
· | Small/Mid-Cap Fund |
Madison Mosaic Funds
(Madison Mosaic Logo)
www.mosaicfunds.com
Contents
Review of Period | |
Economic Review | 1 |
Interview with lead equity manager Jay Sekelsky | 1 |
Investors Fund | 2 |
Mid-Cap Fund | 4 |
Small/Mid-Cap Fund | 6 |
Disciplined Equity Fund | 7 |
Balanced Fund | 8 |
Portfolio of Investments | |
Investors Fund | 10 |
Mid-Cap Fund | 11 |
Small/Mid-Cap Fund | 12 |
Disciplined Equity Fund | 14 |
Balanced Fund | 16 |
Statements of Assets and Liabilities | 18 |
Statements of Operations | 19 |
Statements of Changes in Net Assets | 20 |
Financial Highlights | 22 |
Notes to Financial Statements | 25 |
Other Information | 31 |
Madison Mosaic Equity Trust
Review of Period
ECONOMIC REVIEW
As 2010 unfolded we were in the wake of one of the most volatile periods in U.S. and global economic history. From stock market highs in the fall of 2007 the domestic stock market had dived to more than a 50% loss by March of 2009 – with even worse drops in many foreign markets as the global financial system seemed on the brink of collapse. Then unprecedented global government stimulus seemed to get traction and investor psychology turned from fear to optimism. Stocks had one of their steepest rallies in history, led by the same highly leveraged and cyclical companies which had suffered the most during the downside. During this period the domestic bond market reflected the same split personality, with the lowest-risk Treasury securities leading the market during the stock market collapse, while riskier high-yield bonds had a huge ru n-up in value during the recovery.
As we entered 2010 economists and market watchers were in two general camps regarding the American economy. On one side we had the optimists, who saw a "V" shaped recovery in strong corporate earnings. On the other side, pessimists found plenty of reason for gloom, including stubbornly high unemployment, continued woes in the housing sector and the long-term prospects of a painful deleveraging from a period of excess and unsustainable borrowing.
The optimists seemed to have their way at first as the market rally continued well into the first half of 2010, with the S&P 500 peaking on April 23, adding an additional 8.68% to the 26.46% return of 2009. Then a series of external calamities began shaking the market, beginning with the lack of resolution of the Greek sovereign debt crisis and the disastrous Gulf of Mexico oil spill. From the April 23 market high through June 30, the S&P 500 fell -14.97%. Once again there was a flight to quality in the bond market, as investors around the world found comfort in the relative strength of the U.S. dollar and yields on the 10-Year Treasury fell from their period high of 3.99% on April 5 to a period low of 2.93% on the last day of June, driving strong returns for holders of these securities.
By the end of the period, the S&P 500 was showing a year-to-date decline of -6.65%. Broad international indices were down even more, with the MSCI EAFE Index down -12.8%. Among larger American companies as represented by the S&P 500, the drop affected all market sectors, with Industrials, Consumer Discretionary, Financials and Consumer Staples suffering the least, while Materials, Technology and Energy dropped double-digits. Smaller stocks outperformed larger stocks, a trend which was true of international stocks as well as domestic. In the meantime, individual investors continued to sell stocks and buy bonds, and were rewarded for holding them for this six-month period, as virtually all sectors of the domestic bond market saw positive returns.
The ups and downs of 2010 have hardly resolved the outlook for the domestic or global economy or the potential returns for securities, as indicators remain mixed. Corporate profits are strong, but hiring continues to be weak. The prospects for problem inflation seem remote, but some quarters are raising concerns over the possibility of economically painful deflation. We are carefully monitoring the major economic indicators and trends and at this point see little cause for either panic or celebration. From our perspective, the stock market correction was a healthy, predictable event given the sharp rally since March 2009. From our perspective, we see the likelihood of slow and gradual economic improvement. Nimble bond management will likely be rewarded as yields fluctuate in response to spotty economic data. For equities, we favor high-qu ality, well-established companies which can thrive during slower growth periods.
PERFORMANCE OVERVIEW WITH LEAD MANAGER JAY SEKELSKY
Can you summarize the performance of the funds in Equity Trust in the first half of 2010?
(photo of Jay Sekelsky)
After the deep losses of 2008 and early 2009, the S&P 500 made a dramatic 84% recovery from March 9, 2009 through
Semi-Annual Report 1
Madison Mosaic Equity Trust | Review of Period | continued
April 23, 2010, the most recent market peak. We were of the mind that this steep recovery was bound to settle back into a correction at some point, and that point occurred in the last third of this six-month period. By the end of the six-month period, all the major domestic indices and all the funds in Equity Trust were showing year-to-date negative returns, even as the one-year returns remained impressive. When we look at the performance of the Equity Trust funds on a six-month basis, we can’t help feeling a bit disappointed, since we believe we had structured the portfolios in a manner which could protect principal in down markets. The correction in May and June was quite broad and the normally defensive positions we hold did not, in general, show as much resilience as we would have hoped. That said, Madison Mosaic Mid-Cap and Sma ll/Mid-Cap did make up ground against their indices over the second half of the quarter and our overall deviation from benchmark performance was not so severe as to limit our optimism about closing that gap going forward. As always, the artificial timeframes produced by calendar periods and semi-annual reporting can sometimes skew results and cloud the overall picture. We manage all of our funds for long-term results and full-market-cycle performance. Maintaining a longer-term view is always a good way to temper emotion over short term results, regardless of their strength or weakness.
MADISON MOSAIC INVESTORS FUND
INVESTMENT STRATEGY HIGHLIGHTS
Madison Mosaic Investors Fund invests primarily in the common stocks of large-sized U.S. corporations. The fund typically owns 25-40 securities which are selected using our long-held investment discipline of seeking the highest-quality, proven companies and purchasing them when valuations appear advantageous. We follow a rigorous three-step process when evaluating companies. We consider the business model, the management team and the valuation of each potential investment. The final step in the process is assessing the proper valuation for the company. We strive to purchase securities trading at a discount to their intrinsic value as determined by discounted cash flows. We corroborate this valuation work with additional valuation methodologies. The fund typically sells a stock when the fundamental expectations for the purchase no longer a pply, the price exceeds its perceived value or other stocks appear more attractively priced relative to their growth potential.
![](https://capedge.com/proxy/N-CSRS/0000310407-10-000195/eqncsrs06101.jpg)
LARGE-CAP INVESTING ENVIRONMENT
The six-month period ending June 30, 2010 was a tale of two markets. Through April 23 large-cap stocks continued their steep rally of 2009 before facing a sharp correction, sparked by a series of negative external events. The fund’s benchmark S&P 500 Index rose 8.68% through April 23 before finishing the period down -6.65%. In general, the decline in the market was broad and undiscriminating, and although the portfolio’s emphasis on high-quality, stable companies should provide some defense in a market decline, the typically defensive companies and sectors dropped along with the broader market. Riskier, smaller, and more speculative companies led the market as it rose early in the period. With the broad decline following, it was difficult for the fund to match the return of the broader large-cap indices.
SECTOR ALLOCATION AS A PERCENTAGE OF NET ASSETS AS OF 6/30/10 | |
Consumer Discretionary | 7.4% |
Consumer Staples | 15.0% |
Energy | 12.2% |
Financials | 13.0% |
Health Care | 18.4% |
Industrials | 8.4% |
Information Technology | 20.5% |
Cash & Other | 5.1% |
Semi-Annual Report 2
Madison Mosaic Equity Trust | Review of Period | continued
PERFORMANCE DISCUSSION WITH LEAD EQUITY MANAGER JAY SEKELSKY
How did the fund perform in the first half of 2010?
The Investors Fund ended the six-month period with a loss of -8.69%, trailing its S&P 500 benchmark’s -6.65% return. The return was much closer to its peer average, as measured by the Morningstar Large Cap Growth Category, which fell -8.24%. The fund’s relative and real return has been frustrating since we would have hoped to have done better in this environment. Essentially, our stock selection has not been in synch with the market, and many of the defensive names we expected to hold up well have had disappointing returns so far this year. We believe this is a temporary condition.
Have you made any significant changes to the portfolio since December 31, 2009?
In terms of general sector allocation, we saw stretched valuations among the sectors that have been the strongest so far this year, particularly Industrials, Consumer Discretionary and Financials. That’s where we see the fewest opportunities and those sectors represent the smallest relative weightings in the fund. We simply aren’t finding extensive opportunities in these sectors that meet our valuation metrics. In order to justify the valuations, investors have been using projections that go out further and further into the future, and we’re not comfortable making these assumptions. On the flipside, we are seeing the best opportunities in Health Care, Technology and Energy. These areas appear to have very good risk/reward characteristics. If you look at technology companies in particular, we think they have great balance sheets compared to the market overall and stand to benefit from pent‑up demand for corporate spending.
As the market turned from bull to bear over the course of the quarter we looked to upgrade the portfolio by adding to our high conviction names. In addition, we added Chevron which we felt was being unfairly punished in the Energy Sector selloff during the Gulf spill. However, our overall weighting in Energy remained relatively steady. We also trimmed names that showed relative strength. The combination led to the fund increasing in Technology and actually declining a bit in Consumer Discretionary. It ended the period relatively overweight in Health Care and Energy as well.
What factors were the strongest contributors to fund performance?
As previously mentioned, when the market turned south, it turned sharply and broadly, with every S&P sector showing negative returns for the first six months. We were unable to overcome this overall trend, but did have positive results from the fund’s Consumer Discretionary holdings, while its financial stocks were just fractionally negative. We had a number of holdings that produced positive returns for the period, led by Berkshire Hathaway in Financials, Yum! Brands in Consumer Discretionary, and Health Care name Covance, which the fund sold in March.
What factors were the largest constraints on performance?
With all sectors dipping, the majority of the fund’s holdings slipped in value over the period. We saw the sharpest losses in Energy names, where the sector suffered a broad pullback during the Gulf oil spill, although the fund didn’t own the companies most directly related to this disaster. Technology was also weak. In Energy we had negative results across the board, while in Technology the worst results came from two of what we consider the strongest companies, Google and Microsoft. Outside of these sectors, Walgreen Co. was the fund’s largest laggard. In all three of these specific companies, we continue to believe in their prospects and, or in the case of Google, added additional shares.
TOP TEN STOCK HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
Google Inc., Class A | 4.46% |
Johnson & Johnson | 3.95% |
Microsoft Corp. | 3.87% |
PepsiCo Inc. | 3.81% |
IBM Corp. | 3.64% |
Novartis AG, ADR | 3.63% |
3M Company | 3.50% |
Cisco Systems Inc. | 3.37% |
Berkshire Hathaway Inc., Class B | 3.24% |
Waste Management Inc. | 3.19% |
Semi-Annual Report 3
Madison Mosaic Equity Trust | Review of Period | continued
MADISON MOSAIC MID-CAP FUND
INVESTMENT STRATEGY HIGHLIGHTS
Madison Mosaic Mid-Cap Fund invests primarily in the common stocks of mid-sized U.S. corporations. The fund typically owns 25-40 securities which are selected using our long-held investment discipline of seeking the highest-quality, proven companies and purchasing them when valuations appear advantageous. We follow a rigorous three-step process when evaluating companies. We consider the business model, the management team and the valuation of each potential investment. The final step in the process is assessing the proper valuation for the company. We strive to purchase securities trading at a discount to their intrinsic value as determined by discounted cash flows. We corroborate this valuation work with additional valuation methodologies. The fund typically sells a stock when the fundamental expectations for the purchase no longer apply , the price exceeds its perceived value or other stocks appear more attractively priced relative to their growth potential.
![Fund-At-A-Glance](https://capedge.com/proxy/N-CSRS/0000310407-10-000195/eqncsrs06102.jpg)
MID-CAP INVESTING ENVIRONMENT
The small and mid-cap indices were considerably stronger than the large-cap benchmarks through this six-month period. While broad trends like this seldom have a singular cause, one factor was the decline of the international markets and the strength of the dollar. With economic and monetary woes in Europe and a slowdown in China, global companies (which include virtually all of the larger U.S.-based corporations) had significant headwinds, with the prospects of diminishing sales in these markets and lower margins due to currency conversion. Smaller, domestically based companies tend to rely on the U.S. market for a much higher percentage of their revenues and were thus insulated from international and currency issues.
SECTOR ALLOCATION AS A PERCENTAGE OF NET ASSETS AS OF 6/30/10 | |
Consumer Discretionary | 13.9% |
Consumer Staples | 5.7% |
Energy | 7.8% |
Financials | 23.1% |
Health Care | 11.7% |
Industrials | 16.4% |
Information Technology | 9.7% |
Materials | 3.8% |
Cash & Other | 7.9% |
PERFORMANCE DISCUSSION WITH RICH EISINGER, CO-MANAGER OF MADISON MOSAIC MID-CAP
How would you characterize the performance of Madison Mosaic Mid-Cap in 2010?
(photo of Rich Eisinger)
This was a challenging six-months, as we watched higher risk assets top the performance charts through late April, as they had since the recovery began in March of 2009. While this is a normal phenomenon coming off of a major bear market, it remains one of the more difficult markets for our discipline to negotiate. When the rally stumbled in late April the fund was a relative beneficiary as its defensive holdings began to get traction. While its return of -3.35% was strong when compared to the overall market returns (the S&P 500 fell -6.65%), it was a period which, from beginning to end, still favored riskier and smaller companies. We continued to focus on finding the values and risk/reward ratios in fundamentally solid firms on the larger side of the mid-cap spectrum during this period. The fund’s benchmark, the Russell Midcap¨ Index was down -2.06% for the period. The fund remained slightly ahead of its Morningstar Mid-Cap Growth peer group, which lost an average -3.53% for the period. So while it is never pleasant to experience a negative return, the silver lining in the cloud was the relative strength of the fund’s holdings in the latter part of the period, a trend which we hope to see continue going forward.
Did you make any significant changes to the portfolio since December 31, 2009?
We worked very hard through the market crash of 2008 and early 2009 to assemble the highest quality portfolio
Semi-Annual Report 4
Madison Mosaic Equity Trust | Review of Period • Mid-Cap Fund | continued
possible. As previously mentioned, this was not of immediate benefit, as the steep rally that began in March 2009 favored just the opposite: highly leveraged, more speculative companies. Low-quality rallies have historically lasted about a year after bear markets, and over the course of this six-month period we passed that milestone.
In terms of overall sector weightings, we continued with some of the same themes, finding more attractions in Consumer Discretionary and Health Care than represented in the fund’s benchmark, and underweighting the Consumer Staples and Technology Sectors, although we did expand Technology holdings significantly from the beginning of the period. Another notable shift was our expansion within Financial Sector holdings from about a 1% underweighting at the beginning of the period to a 4% overweight position at the end. As always, these kinds of sector shifts are more the result of opportunistic stock selection, rather than top-down calls on future sector performance.
In terms of individual securities, as the market continued to rise through April we found reasons to trim some of the fund’s holdings. We sold the fund’s position in Health Care Sector contract research organization Covance in April at what we felt was full valuation, having previously sold Energy Sector oil and gas producer EOG Resources and Industrial Sector holding Dun & Bradstreet.
One specific area where we found attractive opportunities was in insurance. Many companies in this industry are trading at or close to historically low price-to-book ratios and pricing is about at the same level as in 2000. We see this as a temporary situation since inflation has driven up costs and investment income is much lower. In our opinion, this as an environment where pressure is building for higher rates. When we look at these companies and assess the value, we see the potential for the prices of some of these stocks doubling over the next three to five years if and when prices harden. One example was the addition of W. R. Berkley Corporation, a company focused on the property and casualty insurance business. In a similar vein, we also added Arch Capital Group LTD, a worldwide writer of insurance and re-insurance.
Other new names in the portfolio over the period include Western Union, Technology Sector data-management specialist Teradata Corp., McCormick & Co, known best for its household spices, and FactSet Research Systems Inc, a provider of research and databases for the financial services industry.
What factors were the strongest contributors to fund performance?
When the market turned downwards in late April investors shifted from riskier securities to more secure ones, and that favored the stronger, higher quality holdings we prefer. Over the course of the six months the fund had its best relative performance in its technology and consumer discretionary names. We had less success with stock selection among the industrial names. Four of the fund’s top five best-performing holdings were in the broad consumer area, with Consumer Discretionary names Liberty Global, Yum! Brands, Interactive Data and Consumer Staples holding Brown Forman all producing positive results against the negative market backdrop. We also saw strong positive results from the fund’s position in financial holding SEI Investments. Under the cloud of the Gulf oil spill, Energy Sector holdings trailed, with Weatherford International and Noble Corp. the most affected. The fund also underperformed in Health Care, where we saw what we feel were temporary setbacks from new holding Dentsply, a dental supply company and Techne Corp., a manufacturer of biological products used in hospitals and research labs.
What do you see for Mid-Cap looking ahead?
We think the initial, massive, deep, cyclical rally that we’ve seen is over. We’ve likely entered a period of more modest growth as some of the concerns we’ve mentioned play out. This should benefit the risk-conscious investment process that we utilize as investors seek the more predictable, dependable earners — the higher-quality stocks we purchase for the fund. We believe the fund is well positioned going forward.
TOP TEN STOCK HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
Brookfield Asset Management Inc. | 4.31% |
Markel Corp. | 3.89% |
Teradata Corp. | 3.31% |
McCormick & Co. Inc. | 3.23% |
Techne Corp. | 3.14% |
YUM! Brands Inc. | 3.14% |
Laboratory Corp. of America Holdings | 3.08% |
Brown & Brown Inc. | 3.02% |
Arch Capital Group Ltd. | 2.98% |
Waste Management Inc. | 2.97% |
Semi-Annual Report 5
Madison Mosaic Equity Trust | Review of Period | continued
MADISON MOSAIC SMALL/MID-CAP FUND
INVESTMENT STRATEGY HIGHLIGHTS
Madison Mosaic Small/Mid-Cap Fund invests primarily in the common stocks of small-to-mid-sized U.S. corporations. The fund typically owns 40-80 securities which are selected using our long-held investment discipline of seeking the highest-quality, proven companies and purchasing them when valuations appear advantageous. We follow a rigorous three-step process when evaluating companies. We consider the business model, the management team and the valuation of each potential investment. The final step in the process is assessing the proper valuation for the company. We strive to purchase securities trading at a discount to their intrinsic value as determined by discounted cash flows. We corroborate this valuation work with additional valuation methodologies. The fund typically sells a stock when the fundamental expectations for the purchase no longer apply, the price exceeds its perceived value or other stocks appear more attractively priced relative to their growth potential.
![Fund-At-A-Glance](https://capedge.com/proxy/N-CSRS/0000310407-10-000195/eqncsrs06104.jpg)
SMALL AND MID-CAP INVESTING ENVIRONMENT
The small and mid-cap indices were considerably stronger than the large-cap benchmarks through this six-month period. While broad trends like this seldom have a singular cause, one factor was the decline of the international markets and the strength of the dollar. With economic and monetary woes in Europe and a slowdown in China, global companies (which include virtually all of the larger U.S.-based corporations) had significant headwinds, with the prospects of diminishing sales in these markets and lower margins due to currency conversion. Smaller domestically based companies tend to rely on the U.S. market for a much higher percentage of their revenues and were thus insulated from international and currency issues.
SECTOR ALLOCATION AS A PERCENTAGE OF NET ASSETS AS OF 6/30/10 | |
Consumer Discretionary | 11.4% |
Consumer Staples | 3.8% |
Energy | 7.6% |
Financials | 21.4% |
Health Care | 9.2% |
Industrials | 15.5% |
Information Technology | 12.5% |
Materials | 4.5% |
Telecommunication Services | 2.0% |
Utilities | 1.3% |
Cash & Other | 10.8% |
PERFORMANCE DISCUSSION
Madison Mosaic Small/Mid-Cap Fund returned -3.02% for the six-month period, better than the overall market as measured by the S&P 500, but trailing the fund’s benchmark, the Russell 2500¨ Index, which returned -1.69%. For the first part of the period the fund had a hard time keeping up with the tremendous market rally that began last year. This rally was led by highly leveraged, cyclical and lower-quality companies, while our discipline is designed to emphasize just the opposite. Once the market rolled over, the fund’s relative performance improved considerably. The fund’s best relative success was in the Consumer Staples, Financial and Materials Sectors. The fund trailed its benchmark sectors in Health Care, Industrials and Consumer Discretionary. Its best returning securities were AutoZone, SEI Investments, Fa stenal Co., and Cliffs Natural Resources Inc. Two of its greatest detractors were in the troubled Energy Sector: Weatherford International and Noble Corp., with additional losses from Sears Holding Company, technology holding Brocade, and financial conglomerate Leucadia National Corp.
TOP TEN STOCK HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
iShares COMEX Gold Trust | 2.39% |
Brookfield Asset Management Inc. | 2.25% |
McCormick & Co. Inc. | 2.18% |
Laboratory Corp. of America Holdings | 2.10% |
YUM! Brands Inc. | 2.06% |
Arch Capital Group Ltd. | 2.02% |
Teradata Corp. | 2.01% |
Techne Corp. | 2.01% |
Crown Castle International Corp. | 1.97% |
Intercontinental Exchange Inc. | 1.94% |
Semi-Annual Report 6
Madison Mosaic Equity Trust | Review of Period | continued
MADISON MOSAIC DISCIPLINED EQUITY
INVESTMENT STRATEGY HIGHLIGHTS
Madison Mosaic Disciplined Equity Fund invests primarily in the common stocks of large-sized U.S. corporations. The fund seeks to maintain an overall sector weighting in line with the broader market, with quarterly rebalancing. The fund typically owns 50-70 securities which are selected using our long-held investment discipline of seeking the highest-quality, proven companies and purchasing them when valuations appear advantageous. We follow a rigorous three-step process when evaluating companies. We consider the business model, the management team and the valuation of each potential investment. The final step in the process is assessing the proper valuation for the company. We strive to purchase securities trading at a discount to their intrinsic value as determined by discounted cash flows. We corroborate this valuation work with additi onal valuation methodologies. The fund typically sells a stock when the fundamental expectations for the purchase no longer apply, the price exceeds its perceived value or other stocks appear more attractively priced relative to their growth potential.
![Fund-At-A-Glance](https://capedge.com/proxy/N-CSRS/0000310407-10-000195/eqncsrs06105.jpg)
PERFORMANCE DISCUSSION WITH JAY SEKELSKY
How would you characterize the performance of the Disciplined Equity Fund for the period?
Against the fund’s benchmark S&P 500’s loss of -6.65%, Disciplined Equity dipped -7.98%. The fund’s Morningstar Large Blend Category returned an average -7.07% for the period. With its portfolio allocated broadly across S&P 500 sectors, the result against the S&P 500 was largely a function of our stock selection. The higher quality, well-established companies we prefer did not lead the market for this period, which favored smaller and highly leveraged firms.
Have you made any significant changes to the portfolio since December 31, 2009?
As in the past, the fund’s 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. Our goal is for the fund to own the highest quality companies it 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. We took several names out of the portfolio during this period, including EMC, AutoZone and State Street. Among the new names were Visa Inc. and QUALcomm, in the Technology Sector and Financial Sector companies Blackrock Inc. and U.S. Bancorp, and Industrial Sector names Aecom, ITT Corp. and Illinois Tool Works.
What factors had the largest impact on this period’s performance?
All S&P 500 sectors were negative for the period, but there was quite a bit of disparity in return, with Energy and Materials down just over 13%, while Consumer Discretionary and Industrials lost around 2%. With the market favoring smaller and lower quality companies, this was a period in which the fund’s concentrated holdings within each sector had trouble keeping up with the broader market. While the fund had better-than-market returns for Consumer Discretionary, Telecommunications and Materials, it trailed the market in Consumer Staples, Energy, Industrials, Health Care and Technology. The fund’s best results on an individual stock basis came from Berkshire Hathaway, AutoZone, Yum! Brands and Intercontinental Exchange Inc. The biggest detractors to performance were Microsoft, Google, and Energy holding Weatherford Inter national.
Semi-Annual Report 7
Madison Mosaic Equity Trust | Review of Period • Disciplined Equity Fund | continued
SECTOR ALLOCATION AS A PERCENTAGE OF NET ASSETS AS OF 6/30/10 | |
Consumer Discretionary | 8.1% |
Consumer Staples | 10.3% |
Energy | 10.6% |
Financials | 14.6% |
Health Care | 11.4% |
Industrials | 8.9% |
Information Technology | 16.7% |
Materials | 2.3% |
Telecommunication Services | 2.5% |
Utilities | 3.3% |
Cash & Other | 11.3% |
TOP TEN STOCK HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
Microsoft Corp. | 3.19% |
Cisco Systems Inc. | 2.76% |
Google Inc., Class A | 2.69% |
IBM Corp. | 2.61% |
ConocoPhillips | 2.46% |
Chevron Corp. | 2.44% |
PepsiCo Inc. | 2.30% |
Novartis AG - ADR | 2.26% |
Johnson & Johnson | 2.21% |
Schlumberger Ltd. | 2.06% |
Balanced Fund
INVESTMENT STRATEGY HIGHLIGHTS
Madison Mosaic Balanced Fund invests primarily in the common stocks of large-sized U.S. corporations along with an actively managed portfolio of investment-grade intermediate-term bonds. The bond exposure is targeted to be at least 30% of the fund’s total assets. The fund typically owns 25-40 securities on the stock side which are selected using our long-held investment discipline of seeking the highest-quality, proven companies and purchasing them when valuations appear advantageous. Bonds are managed to seek the best risk-adjusted return through active management of sectors (corporate, Treasury and Agency), duration, and yield-curve positioning.
![Fund-At-A-Glance](https://capedge.com/proxy/N-CSRS/0000310407-10-000195/eqncsrs06106.jpg)
PERFORMANCE DISCUSSION WITH JAY SEKELSKY AND PAUL LEFURGEY.
How did the Balanced Fund perform for the year?
The Balanced Fund fell -4.81%, a return in line with a combination of the bond and stock markets, as bonds advanced and large-cap stocks, as represented by the S&P 500 fell -6.65%. The fund’s Morningstar peer group, Moderate Allocation, fell -3.14% for the period. This discrepancy can be assigned to both the stock side of the portfolio, where its high-quality large stocks lagged more speculative and smaller stocks, and to the bond portfolio. Our active management of risk kept the fund on the conservative side of a bond market which, for the first part of the period, rewarded higher risk securities. When the market mood shifted in April, there was a flight to Treasuries, in which the fund was underweighted, due to valuation concerns.
Have you made any significant changes to the portfolio since December 31, 2009?
The stock holdings of Balanced mirror the holdings of the Investors Fund, 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. The fund began the period holding 65.9% stocks, and ended the period with a 61.6% in stocks, a result which reflects the relative fortunes of stocks and bonds over this period, rather than any decreasing confidence in stocks as an asset class.
On the bond side, we kept the fund’s bond allocation fairly steady from the first of the year, with a modest tilt towards corporate holdings over government bonds.
How did the stock holdings in Balanced contribute to overall performance?
The stock holdings in Balanced were down for this period, as the fund trailed the market in general as measured by the S&P 500. The holdings mirror the stocks held in the Investors Fund, discussed at some length above.
Semi-Annual Report 8
Madison Mosaic Equity Trust | Review of Period • Balanced Fund | concluded
How did the bond holdings in Balanced contribute to overall performance?
While our avoidance of high-yield ("junk bonds") kept us from participating in the continued surge of this sector through the first part of the year, higher-risk assets were punished in May and June in the wake of a series of anxiety-producing world events. The resulting flight to quality put Treasuries at the top of the performance heap for the six-month period. Concerns over Treasury valuations kept our exposure to this bond sector below the fund’s benchmark, and this was a drag on period performance, along with our shorter, more conservative duration. Still, bond holdings were an overall solid positive contribution to the fund’s performance in 2010.
TOP FIVE STOCK AND FIXED INCOME HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
Top Five Stock Holdings (61.6% of net assets in stocks) | |
Google Inc., Class A | 2.83% |
Microsoft Corp. | 2.55% |
IBM Corp. | 2.54% |
Johnson & Johnson | 2.50% |
PepsiCo Inc. | 2.40% |
% of net assets | |
Top Five Fixed Income Holdings (35.6% of net assets in fixed income) | |
US Treasury Note, 1%, 7/31/11 | 2.42% |
Fannie Mae, 6.625%, 11/15/10 | 1.79% |
Federal Home Loan Bank, 4.375%, 9/17/10 | 1.77% |
US Treasury Note, 3.75%, 11/15/18 | 1.74% |
US Treasury Note, 3.125%, 10/31/16 | 1.61% |
COMMON STOCK ALLOCATION AS A PERCENTAGE OF NET ASSETS AS OF JUNE 30, 2010 | |
Consumer Discretionary | 4.5% |
Consumer Staples | 10.1% |
Energy | 8.0% |
Financials | 8.5% |
Health Care | 11.8% |
Industrials | 5.3% |
Information Technology | 13.4% |
PORTFOLIO INVESTMENT BLEND AS A PERCENTAGE OF NET ASSETS AS OF JUNE 30, 2010 | |
Common Stocks | 61.6% |
Corporate Bonds | 19.5% |
Government Bonds | 16.1% |
Cash & Other | 2.8% |
Semi-Annual Report 9
Madison Mosaic Equity Trust | June 30, 2010
Investors Fund • Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS - 94.9% | ||
Consumer Discretionary - 7.4% | ||
Target Corp. | 23,080 | $ 1,134,844 |
Walt Disney Co./The | 20,305 | 639,607 |
YUM! Brands Inc. | 24,450 | 954,528 |
Consumer Staples - 15.0% | ||
Coca-Cola Co./The | 12,713 | 637,176 |
Costco Wholesale Corp. | 12,055 | 660,976 |
Diageo PLC, ADR | 14,577 | 914,561 |
PepsiCo Inc. | 23,092 | 1,407,457 |
Walgreen Co. | 29,585 | 789,919 |
Wal-Mart Stores Inc. | 23,145 | 1,112,580 |
Energy - 12.2% | ||
Chevron Corp. | 16,550 | 1,123,083 |
Noble Corp. | 21,530 | 665,492 |
Schlumberger Ltd. | 21,111 | 1,168,283 |
Southwestern Energy Co. | 25,823 | 997,801 |
Weatherford International Ltd.* | 42,965 | 564,560 |
Financials - 13.0% | ||
Bank of New York Mellon Corp. | 44,593 | 1,101,001 |
Berkshire Hathaway Inc., Class B* | 15,010 | 1,196,147 |
Franklin Resources Inc. | 7,807 | 672,885 |
Markel Corp.* | 2,911 | 989,740 |
Wells Fargo & Co. | 33,033 | 845,645 |
Health Care - 18.4% | ||
Baxter International | 25,760 | 1,046,886 |
Johnson & Johnson | 24,689 | 1,458,132 |
Novartis AG, ADR | 27,733 | 1,340,059 |
Quest Diagnostics Inc. | 21,825 | 1,086,230 |
St. Jude Medical Inc.* | 27,375 | 987,964 |
UnitedHealth Group Inc. | 30,595 | 868,898 |
Industrials - 8.4% | ||
3M Company | 16,331 | 1,289,986 |
Jacobs Engineering Group Inc.* | 17,515 | 638,247 |
Waste Management Inc. | 37,580 | 1,175,878 |
Number of Shares | Value | |
Information Technology - 20.5% | ||
Cisco Systems Inc.* | 58,409 | $ 1,244,696 |
Google Inc., Class A* | 3,703 | 1,647,650 |
IBM Corp. | 10,888 | 1,344,450 |
Intel Corp. | 59,905 | 1,165,152 |
Microsoft Corp. | 62,089 | 1,428,668 |
QUALCOMM Inc. | 22,640 | 743,498 |
Total Common Stocks (Cost $36,440,845) | $35,042,679 | |
REPURCHASE AGREEMENT - 5.2% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $1,949,768 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $1,911,532 (Cost $1,911,532) | 1,911,532 | |
TOTAL INVESTMENTS - 100.1% (Cost 38,352,377) | $36,954,211 | |
NET OTHER ASSETS AND LIABILITIES - (0.1)% | (45,436) | |
TOTAL NET ASSETS - 100.0% | $36,908,775 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 10
Madison Mosaic Equity Trust | June 30, 2010
Mid-Cap Fund • Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS - 92.1% | ||
Consumer Discretionary - 13.9% | ||
Bed Bath & Beyond Inc.* | 95,745 | $ 3,550,225 |
CarMax Inc.* | 150,684 | 2,998,612 |
ITT Educational Services Inc.* | 31,515 | 2,616,375 |
Liberty Global Inc., Class C* | 97,669 | 2,538,417 |
Omnicom Group Inc. | 101,260 | 3,473,218 |
YUM! Brands Inc. | 113,340 | 4,424,794 |
Consumer Staples - 5.7% | ||
Brown-Forman Corp., Class B | 62,018 | 3,549,290 |
McCormick & Co. Inc. | 119,995 | 4,555,010 |
Energy - 7.8% | ||
Noble Corp. | 120,120 | 3,712,909 |
Southwestern Energy Co.* | 99,220 | 3,833,861 |
Weatherford International Ltd.* | 260,250 | 3,419,685 |
Financials - 23.1% | ||
Arch Capital Group Ltd.* | 56,305 | 4,194,723 |
Brookfield Asset Management Inc., Class A | 268,641 | 6,076,659 |
Brown & Brown Inc. | 222,690 | 4,262,287 |
Leucadia National Corp. | 175,895 | 3,431,712 |
Markel Corp.* | 16,142 | 5,488,280 |
SEI Investments Co. | 190,729 | 3,883,242 |
T Rowe Price Group Inc. | 59,562 | 2,643,957 |
WR Berkley Corp. | 96,231 | 2,546,272 |
Health Care - 11.7% | ||
CR Bard Inc. | 51,020 | 3,955,580 |
Dentsply International Inc. | 125,229 | 3,745,599 |
Laboratory Corp. of America Holdings* | 57,602 | 4,340,311 |
Techne Corp. | 77,157 | 4,432,670 |
Industrials - 16.4% | ||
Copart Inc.* | 105,768 | 3,787,552 |
Expeditors International of Washington Inc. | 109,750 | 3,787,472 |
IDEX Corp. | 117,314 | 3,351,661 |
Jacobs Engineering Group Inc.* | 86,220 | 3,141,857 |
Ritchie Bros. Auctioneers Inc. | 110,743 | 2,017,738 |
Wabtec Corp. | 70,969 | 2,830,953 |
Waste Management Inc. | 133,770 | 4,185,663 |
Number of Shares | Value | |
Information Technology - 9.7% | ||
Amphenol Corp., Class A | 89,646 | $ 3,521,295 |
FactSet Research Systems Inc. | 42,946 | 2,876,953 |
Teradata Corp.* | 152,861 | 4,659,203 |
Western Union Co. | 179,400 | 2,674,854 |
Materials - 3.8% | ||
Ecolab Inc. | 66,910 | 3,004,928 |
Martin Marietta Materials Inc. | 28,237 | 2,394,780 |
Total Common Stocks (Cost $126,807,853) | $129,908,597 | |
REPURCHASE AGREEMENT - 8.3% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $11,963,291 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $11,728,690 (Cost $11,728,687) | 11,728,687 | |
TOTAL INVESTMENTS - 100.4% (Cost $138,536,540) | $141,637,284 | |
NET OTHER ASSETS AND LIABILITIES - (0.4)% | (692,741) | |
TOTAL NET ASSETS - 100.0% | $140,944,543 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 11
Madison Mosaic Equity Trust | June 30, 2010
Small/Mid-Cap Fund • Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS - 89.2% | ||
Consumer Discretionary - 11.4% | ||
Bed Bath & Beyond Inc.* | 630 | $ 23,360 |
CarMax Inc.* | 1,035 | 20,597 |
ITT Educational Services Inc.* | 220 | 18,265 |
Lamar Advertising Co., Class A* | 760 | 18,635 |
Omnicom Group Inc. | 620 | 21,266 |
Sears Holdings Corp.* | 272 | 17,585 |
YUM! Brands Inc. | 680 | 26,547 |
Consumer Staples - 3.8% | ||
Brown-Forman Corp., Class B | 375 | 21,461 |
McCormick & Co. Inc. | 740 | 28,090 |
Energy - 7.6% | ||
Contango Oil & Gas* | 270 | 12,082 |
Ensco PLC, ADR | 575 | 22,586 |
Noble Corp. | 705 | 21,792 |
Southwestern Energy Co.* | 565 | 21,831 |
Weatherford International Ltd.* | 1,475 | 19,382 |
Financials - 21.4% | ||
Arch Capital Group Ltd.* | 350 | 26,075 |
Brookfield Asset Management Inc., Class A | 1,285 | 29,067 |
Brookfield Properties Corp. | 1,715 | 24,078 |
Brown & Brown Inc. | 1,160 | 22,202 |
Intercontinental Exchange Inc.* | 221 | 24,980 |
Leucadia National Corp. | 1,045 | 20,388 |
Markel Corp.* | 71 | 24,140 |
Morningstar Inc.* | 535 | 22,748 |
RLI Corp. | 435 | 22,842 |
SEI Investments Co. | 1,080 | 21,989 |
T Rowe Price Group Inc. | 382 | 16,957 |
WR Berkley Corp. | 774 | 20,480 |
Health Care - 9.2% | ||
CR Bard Inc. | 270 | 20,933 |
Dentsply International Inc. | 765 | 22,881 |
IDEXX Laboratories Inc.* | 355 | 21,620 |
Laboratory Corp. of America Holdings* | 360 | 27,126 |
Techne Corp. | 450 | 25,852 |
Number of Shares | Value | |
Industrials - 15.5% | ||
Aecom Technology Corp.* | 827 | $ 19,071 |
Copart Inc.* | 652 | 23,348 |
Expeditors International of Washington Inc. | 650 | 22,432 |
Fastenal Co. | 290 | 14,555 |
IDEX Corp. | 800 | 22,856 |
Jacobs Engineering Group Inc.* | 520 | 18,949 |
Knight Transportation Inc. | 980 | 19,835 |
Ritchie Bros. Auctioneers Inc. | 975 | 17,765 |
Wabtec Corp. | 460 | 18,349 |
Waste Management Inc. | 705 | 22,059 |
Ritchie Brothers Auctioneers | 710 | 16,650 |
Information Technology - 12.5% | ||
Adobe Systems Inc.* | 580 | 15,330 |
Altera Corp. | 610 | 15,134 |
Amphenol Corp., Class A | 540 | 21,211 |
BMC Software Inc.* | 610 | 21,124 |
FactSet Research Systems Inc. | 315 | 21,102 |
FLIR Systems Inc.* | 715 | 20,799 |
Teradata Corp.* | 850 | 25,908 |
Western Union Co. | 1,390 | 20,725 |
Materials - 4.5% | ||
Ecolab Inc. | 495 | 22,230 |
Martin Marietta Materials Inc. | 186 | 15,775 |
Valspar Corp. | 670 | 20,180 |
Telecommunication Services - 2.0% | ||
Crown Castle International Corp.* | 680 | 25,337 |
Utilities - 1.3% | ||
EQT Corp. | 475 | 17,167 |
Total Common Stocks (Cost $1,114,729) | $1,149,078 | |
*Non-income producing |
See accompanying Notes to Financial Statements.
Semi-Annual Report 12
Madison Mosaic Equity Trust | Small/Mid-Cap Fund • Portfolio of Investments | June 30, 2010 | concluded
Number of Shares | Value | |
INVESTMENT COMPANIES - 2.4% | ||
iShares COMEX Gold Trust* | 2,530 | $ 30,790 |
Total Investment Companies - (Cost $23,635) | $30,790 | |
REPURCHASE AGREEMENT - 8.6% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $113,438 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $111,213 (Cost $111,213) | $ 111,213 | |
TOTAL INVESTMENTS - 100.2% (Cost $1,249,577) | $1,291,081 | |
NET OTHER ASSETS AND LIABILITIES - (0.2)% | (2,065) | |
TOTAL NET ASSETS - 100.0% | $1,289,016 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 13
Madison Mosaic Equity Trust | June 30, 2010
Disciplined Equity Fund • Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS - 88.7% | ||
Consumer Discretionary - 8.1% | ||
ITT Educational Services Inc.* | 9,291 | $ 771,339 |
NIKE Inc., Class B | 13,745 | 928,475 |
Omnicom Group Inc. | 28,780 | 987,154 |
Target Corp. | 22,335 | 1,098,212 |
Walt Disney Co./The | 13,920 | 438,480 |
YUM! Brands Inc. | 25,235 | 985,174 |
Consumer Staples - 10.3% | ||
Coca-Cola Co./The | 16,690 | 836,503 |
Costco Wholesale Corp. | 17,485 | 958,703 |
Diageo PLC, ADR | 18,350 | 1,151,279 |
Pepsico Inc. | 24,190 | 1,474,380 |
Walgreen Co. | 35,415 | 945,580 |
Wal-Mart Stores Inc. | 25,840 | 1,242,129 |
Energy - 10.6% | ||
Chevron Corp. | 23,045 | 1,563,834 |
ConocoPhillips | 32,135 | 1,577,507 |
Noble Corp. | 27,205 | 840,906 |
Schlumberger Ltd. | 23,825 | 1,318,476 |
Southwestern Energy Co.* | 22,507 | 869,670 |
Weatherford International Ltd.* | 46,215 | 607,265 |
Financials - 14.6% | ||
American Express Co. | 15,650 | 621,305 |
Bank of New York Mellon Corp. | 45,290 | 1,118,210 |
Berkshire Hathaway Inc., Class B* | 14,675 | 1,169,451 |
Blackrock Inc. | 7,029 | 1,007,959 |
Brookfield Asset Management Inc., Class A | 29,395 | 664,915 |
Franklin Resources Inc. | 11,533 | 994,029 |
Markel Corp.* | 3,476 | 1,181,840 |
Morgan Stanley | 36,090 | 837,649 |
US Bancorp | 28,075 | 627,476 |
Wells Fargo & Co. | 43,990 | 1,126,144 |
Number of Shares | Value | |
Health Care - 11.4% | ||
Allergan Inc. | 10,675 | $ 621,926 |
Baxter International | 19,935 | 810,158 |
Covance Inc.* | 11,285 | 579,146 |
Johnson & Johnson | 24,015 | 1,418,326 |
Novartis AG, ADR | 29,950 | 1,447,184 |
Quest Diagnostics Inc. | 18,080 | 899,842 |
St. Jude Medical Inc.* | 23,735 | 856,596 |
UnitedHealth Group Inc. | 24,350 | 691,540 |
Industrials - 8.9% | ||
3M Company | 16,135 | 1,274,504 |
Aecom Technology Corp.* | 42,365 | 976,937 |
ITT Corp. | 14,775 | 663,693 |
Illinois Tool Works | 14,025 | 578,952 |
Jacobs Engineering Group Inc.* | 26,645 | 970,944 |
Waste Management Inc. | 39,640 | 1,240,335 |
Information Technology - 16.7% | ||
Cisco Systems Inc.* | 83,010 | 1,768,943 |
Google Inc., Class A* | 3,878 | 1,725,516 |
Hewlett-Packard Co. | 16,595 | 718,232 |
IBM Corp. | 13,525 | 1,670,067 |
Intel Corp. | 50,205 | 976,487 |
Microsoft Corp. | 88,695 | 2,040,872 |
QUALCOMM Inc. | 26,385 | 866,484 |
Visa Inc., Class A | 13,075 | 925,056 |
Materials - 2.3% | ||
Ecolab Inc. | 8,935 | 401,271 |
Martin Marietta Materials Inc. | 4,930 | 418,113 |
Praxair Inc. | 8,425 | 640,216 |
Telecommunication Services - 2.5% | ||
AT & T | 27,745 | 671,151 |
Vodaphone Group, ADR | 43,830 | 905,966 |
Utilities - 3.3% | ||
Entergy Corp. | 13,160 | 942,519 |
NextEra Energy Inc. | 24,450 | 1,192,183 |
Total Common Stocks (Cost $61,452,569) | $56,837,203 | |
*Non-income producing |
See accompanying Notes to Financial Statements.
Semi-Annual Report 14
Madison Mosaic Equity Trust | Disciplined Equity Fund • Portfolio of Investments | June 30, 2010 | concluded
Number of Shares | Value | |
REPURCHASE AGREEMENT - 10.0% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $6,564,008 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $6,435,287 (Cost $6,435,285) | $ 6,435,285 | |
TOTAL INVESTMENTS - 98.7% (Cost $67,887,854) | $63,272,488 | |
NET OTHER ASSETS AND LIABILITIES - 1.3% | 795,427 | |
TOTAL NET ASSETS: 100.0% | $64,067,915 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 15
Madison Mosaic Equity Trust | June 30, 2010
Balanced Fund • Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS – 61.6% | ||
Consumer Discretionary - 4.5% | ||
Target Corp. | 4,265 | $ 209,710 |
Walt Disney Co./The | 3,820 | 120,330 |
YUM! Brands Inc. | 4,835 | 188,759 |
Consumer Staples - 10.1% | ||
Coca-Cola Co./The | ||
Costco Wholesale Corp. | 2,885 | 144,596 |
Diageo PLC, ADR | 2,565 | 140,639 |
Pepsico Inc. | 2,935 | 184,142 |
Walgreen Co. | 4,502 | 274,397 |
Wal-Mart Stores Inc. | 6,650 | 177,555 |
4,940 | 237,466 | |
Energy - 8.0% | ||
Chevron Corp. | 3,400 | 230,724 |
Noble Corp. | 4,625 | 142,959 |
Schlumberger Ltd. | 4,145 | 229,384 |
Southwestern Energy Co.* | 5,302 | 204,869 |
Weatherford International Ltd.* | 8,440 | 110,902 |
Financials - 8.5% | ||
Bank of New York Mellon Corp. | 9,122 | 225,222 |
Berkshire Hathaway Inc., Class B* | 2,995 | 238,671 |
Franklin Resources Inc. | 1,598 | 137,732 |
Markel Corp.* | 577 | 196,180 |
Wells Fargo & Co. | 6,580 | 168,448 |
Health Care - 11.8% | ||
Baxter International | 5,065 | 205,841 |
Johnson & Johnson | 4,830 | 285,260 |
Novartis AG, ADR | 5,455 | 263,586 |
Quest Diagnostics Inc. | 4,270 | 212,518 |
St. Jude Medical Inc.* | 5,905 | 213,111 |
UnitedHealth Group Inc. | 6,060 | 172,104 |
Industrials - 5.3% | ||
3M Company | 3,250 | 256,717 |
Jacobs Engineering Group Inc.* | 3,365 | 122,621 |
Waste Management, Inc. | 6,825 | 213,554 |
Number of Shares | Value | |
Information Technology - 13.4% | ||
Cisco Systems Inc.* | 11,550 | $ 246,130 |
Google Inc., Class A* | 728 | 323,924 |
IBM Corp. | 2,347 | 289,808 |
Intel Corp. | 12,210 | 237,485 |
Microsoft Corp. | 12,650 | 291,076 |
QUALCOMM Inc. | 4,475 | 146,959 |
Total Common Stocks (Cost $7,085,535) | $ 7,043,379 | |
Principal Amount | ||
DEBT INSTRUMENTS - 35.6% | ||
Corporate Obligations - 19.5% | ||
Consumer Discretionary - 2.3% | ||
Costco Wholesale Corp., 5.3%, 3/15/12 | $100,000 | $ 107,223 |
Wal-Mart Stores Inc., 4.75%, 8/15/10 | 150,000 | 150,058 |
Consumer Staples - 1.9% | ||
Kraft Foods Inc., 5.625%, 11/1/11 | 100,000 | 105,262 |
Sysco Corp. 5.25%, 2/12/18 | 100,000 | 112,083 |
Energy - 3.4% | ||
Devon Energy Corp., 6.3%, 1/15/19 | 100,000 | 116,044 |
Marathon Oil Corp., 6.0%, 10/1/17 | 100,000 | 111,899 |
Valero Energy Corp., 6.875%, 4/15/12 | 150,000 | 161,562 |
Financials - 4.9% | ||
Allstate Corp., 6.2%, 5/16/14 | 100,000 | 113,534 |
American Express Co., 4.875%, 7/15/13 | 150,000 | 160,267 |
BP Capital Markets PLC, 3.875%, 3/10/15 | 52,000 | 44,358 |
General Electric Capital Corp., 4.8%, 5/1/13 | 100,000 | 106,678 |
Wachovia Corp., 5.25%, 8/1/14 | 125,000 | 132,494 |
Health Care - 1.3% | ||
Abbott Laboratories, 5.6%, 11/30/17 | 125,000 | 145,320 |
Industrials - 1.0% | ||
United Parcel Service, 5.5%, 1/15/18 | 100,000 | 114,615 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 16
Madison Mosaic Equity Trust | Balanced Fund • Portfolio of Investments | June 30, 2010 | concluded
Principal Amount | Value | |
DEBT INSTRUMENTS (continued) | ||
Corporate Obligations (continued) | ||
Information Technology - 2.8% | ||
Cisco Systems Inc., 5.25%, 2/22/11 | 100,000 | $ 102,735 |
Hewlett-Packard Co., 4.5%, 3/1/13 | 100,000 | 108,008 |
Oracle Corp., 4.95%, 4/15/13 | 100,000 | 109,457 |
Telecommunication Services - 1.9% | ||
AT & T Broadband, 8.375%, 3/15/13 | 55,000 | 63,727 |
Verizon New England, 6.5%, 9/15/11 | 150,000 | 158,461 |
US Government & Agency Obligations - 16.1% | ||
Fannie Mae - 3.2% | ||
Fannie Mae, 6.625%, 11/15/10 | 200,000 | 204,851 |
Fannie Mae, 4.875%, 5/18/12 | 150,000 | 161,663 |
Federal Home Loan Bank - 3.3% | ||
Federal Home Loan Bank, 4.375% 9/17/10 | 200,000 | 201,763 |
Federal Home Loan Bank, 5.5% 8/13/14 | 150,000 | 173,074 |
Freddie Mac - 1.5% | ||
Freddie Mac, 4.875%, 11/15/13 | 150,000 | 167,783 |
U.S. Treasury Notes - 8.1% | ||
US Treasury Note, 5.125%, 6/30/11 | 150,000 | 157,084 |
US Treasury Note, 1.00%, 7/31/11 | 275,000 | 276,762 |
US Treasury Note, 4.25%, 8/15/14 | 100,000 | 111,164 |
US Treasury Note, 3.125%, 10/31/16 | 175,000 | 183,600 |
US Treasury Note, 3.75%, 11/15/18 | 185,000 | 199,365 |
Total Debt Instruments (Cost $3,855,012) | $ 4,060,894 | |
Principal Amount | Value | |
REPURCHASE AGREEMENT - 2.4% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $280,529 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $275,028 (Cost $275,028) | $ 275,028 | |
TOTAL INVESTMENTS - 99.6% (Cost $11,215,575) | $11,379,301 | |
NET OTHER ASSETS AND LIABILITIES - 0.4% | 46,871 | |
NET ASSETS - 100.0% | $11,426,172 |
*Non-income producing
See accompanying Notes to Financial Statements.
Semi-Annual Report 17
Madison Mosaic Equity Trust | June 30, 2010
Statements of Assets and Liabilities (unaudited)
Investors Fund | Mid-Cap Fund | Small/ Mid-Cap Fund | Disciplined Equity Fund | Balanced Fund | |
ASSETS | |||||
Investments, at value (Notes 1 and 2) | |||||
Investment securities | $35,042,679 | $129,908,597 | $1,179,868 | $56,837,203 | $11,104,273 |
Repurchase agreements | 1,911,532 | 11,728,687 | 111,213 | 6,435,285 | 275,028 |
Total investments* | 36,954,211 | 141,637,284 | 1,291,081 | 63,272,488 | 11,379,301 |
Receivables | |||||
Dividends and interest | 18,450 | 63,574 | 877 | 76,106 | 51,527 |
Capital shares sold | 29,982 | 207,211 | 1,099 | 1,371,276 | 2,506 |
Total assets | 37,002,643 | 141,908,069 | 1,293,057 | 64,719,870 | 11,433,334 |
LIABILITIES | |||||
Payables | |||||
Investment securities purchased | – | 903,685 | 3,416 | 647,389 | – |
Dividends | – | – | – | – | 2,166 |
Capital shares redeemed | 83,243 | 45,120 | – | 441 | 1,408 |
Auditor fees | 6,750 | 10,846 | 625 | 3,750 | 2,713 |
Independent trustee fees | 3,875 | 3,875 | – | 375 | 875 |
Total liabilities | 93,868 | 963,526 | 4,041 | 651,955 | 7,162 |
NET ASSETS | $36,908,775 | $140,944,543 | $1,289,016 | $64,067,915 | $11,426,172 |
Net assets consists of: | |||||
Paid in capital | 44,609,737 | 153,620,273 | 1,181,785 | 68,331,955 | 11,821,340 |
Undistributed net investment income (loss) | 103,276 | (324,956) | (2,794) | 190,050 | – |
Accumulated net realized gains (losses) | (6,406,072) | (15,451,518) | 68,521 | 161,276 | (558,894) |
Net unrealized appreciation (depreciation) on investments | (1,398,166) | 3,100,744 | 41,504 | (4,615,366) | 163,726 |
Net assets | $36,908,775 | $140,944,543 | $1,289,016 | $64,067,915 | $11,426,172 |
CAPITAL SHARES OUTSTANDING | |||||
An unlimited number of capital shares, without par value, are authorized. (Note 7) | 2,683,078 | 15,265,651 | 111,553 | 5,971,913 | 736,595 |
NET ASSET VALUE PER SHARE | $13.76 | $9.23 | $11.56 | $10.73 | $15.51 |
*INVESTMENT SECURITIES, AT COST | $38,352,377 | $138,536,540 | $1,249,577 | $67,887,854 | $11,215,575 |
See accompanying Notes to Financial Statements.
Semi-Annual Report 18
Madison Mosaic Equity Trust
Statements of Operations (unaudited)
For the six-months ended June 30, 2010
Investors Fund | Mid-Cap Fund | Small/ Mid-Cap Fund | Disciplined Equity Fund | Balanced Fund | |
INVESTMENT INCOME (Note 1) | |||||
Interest income | $ 89 | $ 452 | $ – | $ 182 | $ 83,411 |
Dividend income | 300,447 | 594,373 | 4,961 | 425,299 | 61,612 |
Total investment income | 300,536 | 594,825 | 4,961 | 425,481 | 145,023 |
EXPENSES (Notes 3 and 5) | |||||
Investment advisory fees | 149,439 | 549,665 | 4,653 | 178,357 | 45,248 |
Other expenses: | |||||
Service agreement fees | 33,321 | 351,520 | 2,477 | 78,733 | 24,736 |
Auditor fees | 6,750 | 10,846 | 625 | 3,750 | 2,713 |
Independent trustee fees | 7,750 | 7,750 | – | 750 | 1,750 |
Other expenses waived | – | – | – | (26,159) | – |
Total other expenses | 47,821 | 370,116 | 3,102 | 57,074 | 29,199 |
Total expenses | 197,260 | 919,781 | 7,755 | 235,431 | 74,447 |
NET INVESTMENT INCOME (LOSS) | 103,276 | (324,956) | (2,794) | 190,050 | 70,576 |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | |||||
Net realized gain on investments | 402,025 | 3,131,777 | 47,959 | 605,804 | 199,240 |
Change in net unrealized depreciation of investments | (4,059,143) | (7,733,771) | (94,108) | (5,866,970) | (857,993) |
NET LOSS ON INVESTMENTS | (3,657,118) | (4,601,994) | (46,149) | (5,261,166) | (658,753) |
TOTAL DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | $(3,553,842) | $(4,926,950) | $ (48,943) | $(5,071,116) | $ (588,177) |
See accompanying Notes to Financial Statements.
Semi-Annual Report 19
Madison Mosaic Equity Trust
Statements of Changes in Net Assets
For the period indicated
Investors Fund | Mid-Cap Fund | |||
(unaudited) Six-Months Ended June 30, | Year Ended Dec. 31, | (unaudited) Six-Months Ended June 30, | Year Ended Dec. 31, | |
2010 | 2009 | 2010 | 2009 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||||
Net investment income (loss) | $ 103,276 | $ 128,323 | $ (324,956) | $ (409,288) |
Net realized gain (loss) on investments | 402,025 | (2,987,073) | 3,131,777 | (1,427,953) |
Net unrealized appreciation (depreciation) on investments | (4,059,143) | 12,637,531 | (7,733,771) | 30,861,589 |
Net increase (decrease) in net assets resulting from operations | (3,553,842) | 9,778,781 | (4,926,950) | 29,024,348 |
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME | – | (144,107) | – | – |
CAPITAL SHARE TRANSACTIONS (Note 7) | 778,541 | 2,019,018 | 5,323,926 | 22,559,315 |
TOTAL INCREASE (DECREASE) IN NET ASSETS | (2,775,301) | 11,653,692 | 396,976 | 51,583,663 |
NET ASSETS | ||||
Beginning of period | $39,684,076 | $28,030,384 | $140,547,567 | $ 88,963,904 |
End of period | $36,908,775 | $39,684,076 | $140,944,543 | $140,547,567 |
Small/Mid-Cap Fund | Disciplined Equity Fund | |||
(unaudited) Six-Months Ended June 30, | Year Ended Dec. 31,* | (unaudited) Six-Months Ended June 30, | Year Ended Dec. 31, | |
2010 | 2009 | 2010 | 2009 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||||
Net investment income (loss) | $ (2,794) | $ (2,595) | $ 190,050 | $ 47,510 |
Net realized gain (loss) on investments | 47,959 | 109,107 | 605,804 | (104,959) |
Net unrealized appreciation (depreciation) on investments | (94,108) | 135,612 | (5,866,970) | 2,142,872 |
Net increase (decrease) in net assets resulting from operations | (48,943) | 242,124 | (5,071,116) | 2,085,423 |
DISTRIBUTIONS TO SHAREHOLDERS | ||||
From net investment income | – | – | – | (47,510) |
From net capital gains | – | (85,950) | – | – |
Total distributions | – | (85,950) | – | (47,510) |
CAPITAL SHARE TRANSACTIONS (Note 7) | 281,946 | 899,839 | 27,688,902 | 36,340,532 |
TOTAL INCREASE IN NET ASSETS | 233,003 | 1,056,013 | 22,617,786 | 38,378,445 |
NET ASSETS | ||||
Beginning of period | $1,056,013 | $ – | $41,450,129 | $ 3,071,684 |
End of period | $1,289,016 | $1,056,013 | $64,067,915 | $41,450,129 |
* Inception of Fund was December 31, 2008 with effective date of January 1, 2009.
See accompanying Notes to Financial Statements.
Semi-Annual Report 20
Madison Mosaic Equity Trust | Statements of Changes in Net Assets | concluded
For the period indicated
Balanced Fund | ||
(unaudited) Six-Months Ended June 30, | Year Ended Dec. 31, | |
2010 | 2009 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||
Net investment income | $ 70,576 | $ 126,787 |
Net realized gain (loss) on investments | 199,240 | (382,279) |
Net unrealized appreciation (depreciation) on investments | (857,993) | 2,662,360 |
Net increase (decrease) in net assets resulting from operations | (588,177) | 2,406,868 |
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME | (70,576) | (126,787) |
CAPITAL SHARE TRANSACTIONS (Note 7) | (34,086) | (299,992) |
TOTAL INCREASE (DECREASE) IN NET ASSETS | (692,839) | 1,980,089 |
NET ASSETS | ||
Beginning of period | $12,119,011 | $10,138,922 |
End of period | $11,426,172 | $12,119,011 |
See accompanying Notes to Financial Statements.
Semi-Annual Report 21
Madison Mosaic Equity Trust
Financial Highlights
Selected data for a share outstanding for the periods indicated.
INVESTORS FUND
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |||||
2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |
Net asset value, beginning of period | $15.07 | $11.31 | $18.44 | $20.57 | $18.81 | $20.82 |
Investment operations: | ||||||
Net investment income | 0.04 | 0.05 | 0.08 | 0.20 | 0.09 | 0.06 |
Net realized and unrealized gain (loss) on investments | (1.35) | 3.76 | (6.28) | (0.21) | 3.02 | (0.62) |
Total from investment operations | (1.31) | 3.81 | (6.20) | (0.01) | 3.11 | (0.56) |
Less distributions: | ||||||
From net investment income | – | (0.05) | (0.08) | (0.20) | (0.09) | (0.06) |
From net capital gains | – | – | (0.85) | (1.92) | (1.26) | (1.39) |
Total distributions | – | (0.05) | (0.93) | (2.12) | (1.35) | (1.45) |
Net asset value, end of period | $13.76 | $15.07 | $11.31 | $18.44 | $20.57 | $18.81 |
Total return (%) | (8.69) | 33.73 | (33.40) | (0.18) | 16.55 | (2.81) |
Ratios and supplemental data | ||||||
Net assets, end of period (in thousands) | $36,909 | $39,684 | $28,030 | $55,991 | $176,861 | $130,339 |
Ratio of expenses to average net assets (%) | 0.981 | 1.00 | 1.05 | 0.94 | 0.95 | 0.94 |
Ratio of net investment income to average net assets (%) | 0.511 | 0.40 | 0.47 | 0.78 | 0.55 | 0.29 |
Portfolio turnover (%) | 18 | 74 | 47 | 51 | 52 | 41 |
MID-CAP FUND
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |||||
2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |
Net asset value, beginning of period | $9.55 | $7.67 | $12.87 | $13.04 | $11.99 | $12.52 |
Investment operations: | ||||||
Net investment loss | (0.02) | (0.03) | (0.03) | (0.02) | (0.02) | (0.05) |
Net realized and unrealized gain (loss) on investments | (0.30) | 1.91 | (4.71) | 1.15 | 1.98 | 0.12 |
Total from investment operations | (0.32) | 1.88 | (4.74) | 1.13 | 1.96 | 0.07 |
Less distributions from capital gains | – | – | (0.46) | (1.30) | (0.91) | (0.60) |
Net asset value, end of period | $9.23 | $9.55 | $7.67 | $12.87 | $13.04 | $11.99 |
Total return (%) | (3.35) | 24.51 | (36.61) | 8.62 | 16.32 | 0.55 |
Ratios and supplemental data | ||||||
Net assets, end of period (in thousands) | $140,945 | $140,548 | $88,964 | $146,378 | $147,122 | $146,266 |
Ratio of expenses to average net assets (%) | 1.251 | 1.26 | 1.26 | 1.25 | 1.25 | 1.25 |
Ratio of net investment income to average net assets (%) | (0.44)1 | (0.36) | (0.33) | (0.18) | (0.18) | (0.37) |
Portfolio turnover (%) | 30 | 63 | 76 | 43 | 47 | 46 |
1Annualized.
See accompanying Notes to Financial Statements.
Madison Mosaic Equity Trust | Financial Highlights | continued
Semi-Annual Report 22
Selected data for a share outstanding for the periods indicated.
SMALL/MID-CAP FUND
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
2010 | 2009 | |
Net asset value, beginning of year | $11.92 | $10.00* |
Investment operations: | ||
Net investment loss | (0.03) | (0.03) |
Net realized and unrealized gain (loss) on investments | (0.33) | 3.01 |
Total from investment operations | (0.36) | 2.98 |
Less distribution: | ||
From net capital gains | – | (1.06) |
Net asset value, end of year | $11.56 | $11.92 |
Total return (%) | (3.02) | 29.66 |
Ratios and supplemental data | ||
Net assets, end of year (in thousands) | $1,289 | $1,056 |
Ratio of expenses to average net assets (%) | 1.241 | 1.24 |
Ratio of net investment loss to average net assets (%) | (0.45)1 | (0.31) |
Portfolio turnover (%) | 35 | 74 |
DISCIPLINED EQUITY FUND
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |||||
2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |
Net asset value, beginning of period | $11.66 | $8.81 | $13.78 | $14.07 | $12.61 | $13.38 |
Investment operations: | ||||||
Net investment income | 0.05 | 0.01 | 0.09 | 0.06 | 0.07 | 0.03 |
Net realized and unrealized gain (loss) on investments | (0.98) | 2.85 | (4.80) | 1.21 | 2.05 | (0.35) |
Total from investment operations | (0.93) | 2.86 | (4.71) | 1.27 | 2.12 | (0.32) |
Less distributions: | ||||||
From net investment income | – | (0.01) | (0.09) | (0.06) | (0.07) | (0.03) |
From net capital gains | – | – | (0.17) | (1.50) | (0.59) | (0.42) |
Total distributions | – | (0.01) | (0.26 | (1.56) | (0.66) | (0.45) |
Net asset value, end of period | $10.73 | $11.66 | $8.81 | $13.78 | $14.07 | $12.61 |
Total return (%) | (7.98) | 32.50 | (34.20) | 9.05 | 16.83 | (2.34) |
Ratios and supplemental data | ||||||
Net assets, end of period (in thousands) | $64,068 | $41,450 | $3,072 | $4,499 | $4,081 | $3,608 |
Ratio of expenses to average net assets before fee waiver (%) | 1.091 | 1.06 | 1.14 | 1.26 | 1.27 | 1.25 |
Ratio of expenses to average net assets after fee waiver (%) | 0.981 | 0.96 | 1.06 | N/A | N/A | N/A |
Ratio of net investment income to average net assets before fee waiver (%) | 0.681 | 0.49 | 0.72 | 0.41 | 0.54 | 0.24 |
Ratio of net investment income to average net assets after fee waiver (%) | 0.791 | 0.60 | 0.80 | N/A | N/A | N/A |
Portfolio turnover (%) | 18 | 62 | 63 | 70 | 54 | 122 |
1Annualized.
* Inception of Fund was December 31, 2008 with effective date of January 1, 2009.
See accompanying Notes to Financial Statements.
Semi-Annual Report 23
Madison Mosaic Equity Trust | Financial Highlights | concluded
Selected data for a share outstanding for the periods indicated.
BALANCED FUND
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |||||
2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |
Net asset value, beginning of period | $16.39 | $13.29 | $17.62 | $18.39 | $17.40 | $19.51 |
Investment operations: | ||||||
Net investment income | 0.10 | 0.17 | 0.25 | 0.28 | 0.23 | 0.18 |
Net realized and unrealized gain (loss) on investments | (0.88) | 3.10 | (3.72) | 0.13 | 1.84 | (0.60) |
Total from investment operations | (0.78) | 3.27 | (3.47) | 0.41 | 2.07 | (0.42) |
Less distributions: | ||||||
From net investment income | (0.10) | (0.17) | (0.25) | (0.28) | (0.23) | (0.18) |
From net capital gains | – | – | (0.61) | (0.90) | (0.85) | (1.51) |
Total distributions | (0.10) | (0.17) | (0.86) | (1.18) | (1.08) | (1.69) |
Net asset value, end of period | $15.51 | $16.39 | $13.29 | $17.62 | $18.39 | $17.40 |
Total return (%) | (4.81) | 24.82 | (19.92) | 2.24 | 11.96 | (2.16) |
Ratios and supplemental data | ||||||
Net assets, end of period (in thousands) | $11,426 | $12,119 | $10,139 | $13,800 | $16,267 | $17,514 |
Ratio of expenses to average net assets (%) | 1.221 | 1.25 | 1.24 | 1.22 | 1.22 | 1.21 |
Ratio of net investment income to average net assets (%) | 1.161 | 1.19 | 1.49 | 1.47 | 1.24 | 0.88 |
Portfolio turnover (%) | 18 | 57 | 50 | 42 | 35 | 34 |
1Annualized.
See accompanying Notes to Financial Statements.
Semi-Annual Report 24
Madison Mosaic Equity Trust | June 30, 2010 (unaudited)
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, diversified investment management company. This report contains information about five separate funds included within the Trust (the "Funds"): the Investors Fund, Mid-Cap Fund, Small/Mid-Cap Fund, Disciplined Equity Fund and Balanced Fund, each of whose objectives and strategies are described in the Funds’ prospectus. A sixth Trust portfolio, available to certain institutional investors (as defined in the portfolio’s prospectus), presents its financial information in a separate report.
Securities Valuation: The Funds adopted Financial Accounting Standards Board ("FASB") guidance on fair value measurements. 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. The Funds utilize 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 assump tions 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 table represents the Funds’ investments carried on the Statements of Assets and Liabilities by caption and by level within the fair value hierarchy as of June 30, 2010 (unaudited):
Semi-Annual Report 25
Madison Mosaic Equity Trust | Notes to Financal Statements | continued
Fund | Level 1 | Level 2 | Level 3 | Value at 12/31/2009 |
Investors | ||||
Common Stocks | $ 35,042,679 | $ – | $ – | $ 35,042,679 |
Repurchase Agreement | – | 1,911,532 | – | 1,911,532 |
Total | $ 35,042,679 | $1,911,532 | – | $ 36,954,211 |
Mid-Cap | ||||
Common Stocks | $129,908,597 | $ – | $ – | $129,908,597 |
Repurchase Agreement | – | 11,728,687 | – | 11,728,687 |
Total | $129,908,597 | $11,728,687 | $ – | $141,637,284 |
Small/Mid-Cap | ||||
Common Stocks | $ 1,149,078 | $ – | $ – | $ 1,149,078 |
Investment Companies | 30,790 | – | – | 30,790 |
Repurchase Agreement | – | 111,213 | – | 111,213 |
Total | $ 1,179,868 | $ 111,213 | $ – | $ 1,291,081 |
Disciplined Equity | ||||
Common Stocks | $ 56,837,203 | $ – | $ – | $ 56,837,203 |
Repurchase Agreement | – | 6,435,285 | – | 6,435,285 |
Total | $ 56,837,203 | $6,435,285 | $ – | $ 63,272,488 |
Balanced | ||||
Common Stocks | $ 7,043,379 | $ – | $ – | $ 7,043,379 |
Corporate Obligations | – | 2,223,785 | – | 2,223,785 |
U.S. Treasury & Agency Obligations | – | 1,837,109 | – | 1,837,1090 |
Repurchase Agreement | – | 275,028 | – | 275,028 |
Total | $ 7,043,379 | $4,335,922 | $ – | $ 11,379,301 |
Please see the Portfolio of Investments for each respective Fund for a listing of all securities within each caption. |
In March 2008, FASB issued guidance regarding enhanced disclosures about funds’ derivative and hedging activities. Management has determined that there is no impact on the Funds’ financial statements as the Funds currently do not hold derivative financial instruments.
In January 2010, amended guidance was issued by FASB for fair value measurement disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, inputs and valuation techniques used to measure fair value. The amended guidance is effective for financial statements for fiscal years and interim periods beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. For the six-months ended June 30, 2010, none of the Funds had securities that transferred between classification levels.
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,
Semi-Annual Report 26
Madison Mosaic Equity Trust | Notes to Financal Statements | continued
is declared as a regular dividend and distributed to shareholders at year-end for the Investors, Mid-Cap, Small/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 2009 and 2008 was as follows:
2009 | 2008 | |
Investors Fund: | ||
Distributions paid from: | ||
Ordinary income | $ 144,107 | $ 182,000 |
Short-term capital gains | – | 341,483 |
Long-term capital gains | – | 1,636,061 |
Mid-Cap Fund: | ||
Distributions paid from: | ||
Short-term capital gains | $ – | $2,196,654 |
Long-term capital gains | – | 2,917,991 |
Small/Mid-Cap Fund: | ||
Distributions paid from: | ||
Short-term capital gains | $ 85,950 | $ – |
Disciplined Equity Fund: | ||
Distributions paid from: | ||
Ordinary income | $ 47,510 | $ 31,772 |
Long-term capital gains | – | 55,612 |
Balanced Fund: | ||
Distributions paid from: | ||
Ordinary income | $ 126,787 | $ 183,567 |
Short-term capital gains | – | 32,244 |
Long-term capital gains | – | 409,833 |
As of June 30, 2010, the components of distributable earnings on a tax basis were as follows (unaudited):
Investors Fund: | |
Undistributed net investment income | $ 103,276 |
Accumulated net realized losses | (6,300,114) |
Net unrealized depreciation on investments | (1,504,124) |
$ (7,700,962) | |
Mid-Cap Fund: | |
Undistributed net investment loss | $ (324,956) |
Accumulated net realized losses | (13,995,297) |
Net unrealized appreciation on investments | 1,644,523 |
$(12,675,730) | |
Small/Mid-Cap Fund: | |
Undistributed net investment loss | $ (2,794) |
Accumulated net realized gains | 68,521 |
Net unrealized appreciation on investments | 41,504 |
$107,231 | |
Disciplined Equity Fund: | |
Undistributed net investment income | $ 190,050 |
Accumulated net realized gains | 162,940 |
Net unrealized depreciation on investments | (4,617,030) |
$(4,264,040) | |
Balanced Fund: | |
Accumulated net realized losses | $ (531,167) |
Net unrealized appreciation on investments | 135,999 |
$ (395,168) |
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 FASB guidance on accounting for uncertainty in income taxes. The implementation of this guidance resulted in no material liability for unrecognized tax benefits and no material change to the beginning net asset value of the Funds.
As of and for the six-months ended June 30, 2010, 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, 2009, capital loss carryovers available to offset future capital gains for federal income tax purposes were as follows:
Expiration Date | Investors Fund | Mid-Cap Fund | Disciplined Equity Fund |
December 31, 2010 | $ 130,741 | – | – |
December 31, 2016 | 2,376,096 | $8,967,149 | $234,547 |
December 31, 2017 | 4,195,302 | 8,159,925 | 208,317 |
Balanced Fund | |
December 31, 2016 | $235,669 |
December 31, 2017 | 494,738 |
Semi-Annual Report 27
Madison Mosaic Equity Trust | Notes to Financal Statements | continued
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 agree-ments 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 Trust, along with other registered investment companies having Advisory and Services Agreements with the same investment adviser, transfers uninvested cash balances into a joint trading accoun t. 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 June 30, 2010, the Investors Fund had approximately a 7.4% interest, the Mid-Cap Fund approximately a 45.7% interest, the Small/Mid-Cap Fund approximately a 0.4% interest, the Disciplined Equity Fund approximately a 25.1% interest and the Balanced Fund approximately a 1.1% interest in the consolidated repurchase agreement of $25,674,778 collateralized by $26,188,339 in Freddie Mac Mortgage Backed Security Notes. Proceeds at maturity were $25,674,785.
3. Investment Advisory Fees. For the period covered by this report, the investment adviser to the Trust, Madison Investment Advisors, Inc. and Madison Mosaic, LLC, a wholly owned subsidiary of Madison Investment Advisors, Inc. (together, the "Adviser"), earned an advisory fee equal to 0.75% per annum of the average net assets of the Mid-Cap, Small/Mid-Cap, Disciplined Equity and Balanced 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 six-months ended June 30, 2010 were as follows (unaudited):
Purchases | Sales | |
Investors Fund: | ||
U. S. Gov’t Securities | – | – |
Other | $7,758,015 | $6,710,204 |
Mid-Cap Fund: | ||
U. S. Gov’t Securities | – | – |
Other | $46,476,453 | $40,853,986 |
Small/Mid-Cap Fund: | ||
U. S. Gov’t Securities | – | – |
Other | $662,342 | $401,553 |
Disciplined Equity Fund: | ||
U. S. Gov’t Securities | – | – |
Other | $30,530,389 | $8,037,664 |
Balanced Fund: | ||
U. S. Gov’t Securities | $453,216 | $332,735 |
Other | $1,697,587 | $1,901,409 |
5. Other Expenses. Under a separate Services Agreement, the Adviser 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 are accrued daily and paid monthly. This percentage was 0.50% for the Small/Mid-Cap Fund and 0.35% for the Disciplined Equity Fund. Additionally, for the Disciplined Equity Fund, the Adviser agreed to waive 0.11% of this fee. This waiver may end at any time. The direct expenses paid by the Small/Mid-Cap Fund and Disciplined Equity Fund (described below) come out of this fee.
The percentage for the Balanced Fund was 0.41% plus 0.08% for payment of direct expenses described below. For the Investors Fund, this fee was capped at 0.24% on the Fund’s assets at current levels. The direct expenses noted below are paid out of this capped fee. 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 plus 0.02% for payment of direct expenses described below.
The Funds pay the expenses of the Funds’ Independent Trustees directly. For the six-months ended June 30, 2010, these fees were $7,750, $7,750, $0, $750 and $1,750, for the Investors, Mid-Cap, Small/Mid-Cap, Disciplined Equity and Balanced Funds, respectively.
Semi-Annual Report 28
Madison Mosaic Equity Trust | Notes to Financal Statements | continued
The Funds also pay the expenses of the Funds’ independent registered public accountants directly. For the six-months ended June 30, 2010, the amounts expensed for these fees were $6,750, $10,846, $625, $3,750 and $2,713 for the Investors, Mid-Cap, Small/Mid-Cap, Disciplined Equity and Balanced Funds, respectively.
6. Aggregate Cost and Unrealized Appreciation (Depreciation). The aggregate cost of securities for federal income tax purposes and the net unrealized appreciation (depreciation) are as follows as of June 30, 2010 (unaudited):
Investors Fund | Mid-Cap Fund | |
Aggregate Cost | $38,458,335 | $139,992,761 |
Gross unrealized appreciation | 1,527,237 | 7,576,695 |
Gross unrealized depreciation | (3,031,361) | (5,932,172) |
Net unrealized appreciation (depreciation) | $ (1,504,124) | $ 1,644,523 |
Small/ Mid-Cap Fund | Disciplined Equity Fund | |
Aggregate Cost | $1,249,577 | $67,889,518 |
Gross unrealized appreciation | 94,451 | 348,166 |
Gross unrealized depreciation | (52,947) | (4,965,196) |
Net unrealized appreciation (depreciation) | $ 41,504 | $(4,617,030) |
Balanced Fund | |
Aggregate Cost | $11,243,302 |
Gross unrealized appreciation | 618,430 |
Gross unrealized depreciation | (482,431) |
Net unrealized appreciation | $ 135,999 |
7. Capital Share Transactions. An unlimited number of capital shares, without par value, are authorized. Transactions in capital shares were as follows:
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Investors Fund | 2010 | 2009 |
In Dollars | ||
Shares sold | $4,496,056 | $6,615,204 |
Shares issued in reinvestment of dividends | – | 134,890 |
Total shares issued | 4,496,056 | 6,750,094 |
Shares redeemed | (3,717,515) | (4,731,076) |
Net increase | $ 778,541 | $2,019,018 |
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Investors Fund (cont.) | 2010 | 2009 |
In Shares | ||
Shares sold | 294,871 | 528,650 |
Shares issued in reinvestment of dividends | – | 8,951 |
Total shares issued | 294,871 | 537,601 |
Shares redeemed | (245,055) | (381,744) |
Net increase | 49,816 | 155,857 |
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Mid-Cap Fund | 2010 | 2009 |
In Dollars | ||
Shares sold | $20,962,142 | $46,974,339 |
Shares issued in reinvestment of dividends | – | – |
Total shares issued | 20,962,142 | 46,974,339 |
Shares redeemed | (15,638,216) | (24,415,024) |
Net increase | $ 5,323,926 | $22,559,315 |
In Shares | ||
Shares sold | 2,153,122 | 6,112,573 |
Shares issued in reinvestment of dividends | – | – |
Total shares issued | 2,153,122 | 6,112,573 |
Shares redeemed | (1,603,583) | (2,997,580) |
Net increase | 549,539 | 3,114,993 |
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Small/Mid-Cap Fund | 2010 | 2009 |
In Dollars | ||
Shares sold | $308,938 | $967,188 |
Shares issued in reinvestment of dividends | – | 85,951 |
Total shares issued | 308,938 | 1,053,139 |
Shares redeemed | (26,992) | (153,300) |
Net increase | $281,946 | $899,839 |
In Shares | ||
Shares sold | 25,224 | 96,421 |
Shares issued in reinvestment of dividends | – | 7,139 |
Total shares issued | 25,224 | 103,560 |
Shares redeemed | (2,231) | (15,000) |
Net increase | 22,993 | 88,560 |
Semi-Annual Report 29
Madison Mosaic Equity Trust | Notes to Financal Statements | concluded
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Disciplined Equity Fund | 2010 | 2009 |
In Dollars | ||
Shares sold | $27,818,866 | $36,598,913 |
Shares issued in reinvestment of dividends | – | 47,426 |
Total shares issued | 27,818,866 | 36,646,339 |
Shares redeemed | (129,964) | (305,807) |
Net increase | $27,688,902 | $36,340,532 |
In Shares | ||
Shares sold | 2,429,459 | 3,232,595 |
Shares issued in reinvestment of dividends | – | 4,068 |
Total shares issued | 2,429,459 | 3,236,663 |
Shares redeemed | (11,193) | (31,636) |
Net increase | 2,418,266 | 3,205,027 |
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
Balanced Fund | 2010 | 2009 |
In Dollars | ||
Shares sold | $480,169 | $ 596,811 |
Shares issued in reinvestment of dividends | 65,805 | 115,728 |
Total shares issued | 545,974 | 712,539 |
Shares redeemed | (580,060) | (1,012,531) |
Net decrease | $(34,086) | $(299,992) |
In Shares | ||
Shares sold | 28,558 | 40,612 |
Shares issued in reinvestment of dividends | 4,061 | 8,145 |
Total shares issued | 32,619 | 48,757 |
Shares redeemed | (35,304) | (72,138) |
Net decrease | (2,685) | (23,381) |
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%. During the six-months ended June 30, 2010, the Investors, Mid-Cap, Disciplined Equity and Balanced Funds did not borrow on their respective lines of credit.
9. Subsequent Events. Management has evaluated the impact of all subsequent events on the Funds’ financial statements through August 23, 2010, the date the financial statements were issued, and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.
Semi-Annual Report 30
Madison Mosaic Equity Trust
Other Information
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 January 1, 2010 and held for the six-months ended June 30, 2010.
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 Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period2 | |
Investors Fund | $1,000.00 | $913.07 | 0.98% | $4.83 |
Mid-Cap Fund | $1,000.00 | $966.49 | 1.25% | $6.24 |
Small/Mid-Cap Fund | $1,000.00 | $969.80 | 1.24% | $6.22 |
Disciplined Equity Fund | $1,000.00 | $920.24 | 0.98%* | $4.81 |
Balanced Fund | $1,000.00 | $951.94 | 1.22% | $6.07 |
*After fee waiver. See Note 5. 1For the six-months ended June 30, 2010. 2Expenses are equal to each Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
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 Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period2 | |
Investors Fund | $1,000.00 | $1,025.05 | 0.98% | $4.94 |
Mid-Cap Fund | $1,000.00 | $1,025.05 | 1.25% | $6.25 |
Small/Mid-Cap Fund | $1,000.00 | $1,025.05 | 1.24% | $6.21 |
Disciplined Equity Fund | $1,000.00 | $1,025.05 | 0.98%* | $4.92 |
Balanced Fund | $1,000.00 | $1,025.05 | 1.22% | $6.15 |
*After fee waiver. See Note 5. 1For the six-months ended June 30, 2010. 2Expenses are equal to each Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
Semi-Annual Report 31
Madison Mosaic Equity Trust | Other Information | concluded
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 Trust only invests in non-voting securities. Nevertheless, 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. These policies 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 may also be obtained by visiting the Securities and Exchange Commission ("SEC") web site at www.sec.gov. The Trust will respond to shareholder requests for copies of our policies within two business da ys 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 SEC for the first and third quarters of each fiscal year on Form N-Q. The Trust’s Forms N-Q are available on the SEC’s website. The Trust’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Form N-Q and other information about the Trust are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. Copies of this information may also be obtained, upon payment of a duplicating fe e, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, DC 20549-0102. Finally, you may call Madison Mosaic at 800-368-3195 if you would like a copy of Form N-Q and we will mail one to you at no charge.
Semi-Annual Report 32
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
Intermediate Income Fund
Institutional Bond Fund
Corporate Income Shares (COINS)
Madison Mosaic Tax-Free Trust
Virginia Tax-Free Fund
Tax-Free National Fund
Madison Mosaic Government Money Market
For more complete information on any Madison 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
Shareholder Service
Toll-free nationwide: 888-670-3600
550 Science Drive
Madison, Wisconsin 53711
Madison Mosaic Funds
www.mosaicfunds.com
SEC File Number 811-03615
Madison Mosaic Equity Trust
Madison Institutional Equity Option Fund (MADOX)
Semi-Annual Report (unaudited)
June 30, 2010
Active Equity Management Combined With a Covered Call Option Strategy
MADOX | Madison Institutional Equity Option Fund
Table of Contents
Review of Period | 1 |
Portfolio of Investments | 4 |
Statement of Assets and Liabilities | 6 |
Statement of Operations | 7 |
Statement of Changes in Net Assets | 8 |
Financial Highlights | 9 |
Notes to Financial Statements | 10 |
Other Information | 14 |
MADOX | Madison Institutional Equity Option Fund
Review of Period
What happened in the market during the first half of 2010?
The first half of the year witnessed a dramatic shift in the stock market and investor sentiment. Through the first quarter and early second quarter, U.S. stock markets continued the rally which began in March 2009. Growing economic and European sovereign debt concerns had little negative effect on investor sentiment as stock prices moved higher regardless of the growing underlying fundamental risks. As the second quarter progressed, it became increasingly clear that the sovereign debt crisis in Europe, and the correspondingly weaker Euro would begin to have a real-time detrimental impact on U.S. economic growth. At a minimum, U.S. exports to Europe would be notably curtailed. Meanwhile, the Gulf of Mexico oil disaster, which stemmed from a horrific drilling rig explosion on April 20th, slowly began to be recognized for what it was and is — an environmental and economic catastrophe for the Gulf Coast region. Finally, later in the second quarter, various reports began to indicate that U.S. economic growth appeared to be cooling. Given the previously buoyant mood of equity investors, the markets responded quite negatively to these unfolding developments, with the S&P 500 declining some 15% from the April highs and ending the first six months of the year with a negative return of -6.65%.
As the market shifted, sector leadership also shifted as economically sensitive and cyclical sectors such as Technology and Consumer Discretionary ceded leadership to more defensive sectors such as Consumer Staples, Utilities and Health Care. As the market correction gathered steam in May and June, correlation between stocks increased as a general movement away from equities impacted all areas of the market. This made it more challenging to add value through stock selection as there was very little differentiation between high/low quality stocks and growth/value stocks. As the overall market stabilizes in coming months, we would expect investors to gravitate toward higher quality companies with strong fundamental attributes. This trend would be beneficial for the fund.
With the market’s change in direction came an increase in volatility as investors ran for the sideline in the later part of the second quarter. The CBOE VIX Index, a key measure of market volatility, soared from a level of near 15 in early April to 45 by mid-May before settling just below 25 at the end of June. This increase in volatility led to rising option premiums, improving the fund’s ability to maintain a high income level and provide downside protection.
SECTOR ALLOCATION AS A PERCENTAGE OF TOTAL INVESTMENTS AS OF 6/30/10 | |
Consumer Discretionary | 8.1% |
Energy | 11.9% |
Exchange Traded Funds | 3.9% |
Financials | 25.1% |
Health Care | 22.1% |
Information Technology | 19.8% |
Materials | 2.1% |
Cash & Other | 7.0% |
How did the fund perform given the marketplace conditions during the first six months of 2010?
Given the diverse and difficult market conditions during the first half of 2010, the fund performed in line with expectations as the fund’s Net Asset Value (NAV) declined -8.54% behind the S&P 500’s decline of -6.65% but ahead of the CBOE S&P BuyWrite Index (BXM) which declined -9.29%. During the early months of the year the fund lagged the S&P 500 Index which is typical of a covered call strategy in a strong upwardly trending market. This was exacerbated by a growing cash position which resulted from numerous option assignments, primarily in January. With the market appearing expensive following such a strong year-long rally, the fund was awaiting opportunities to reinvest on weakness. Such an opportunity presented itself in May and June as the market corrected and the cash position was worked lower by purchasing high-quality companies at significantly more attractive prices than earlier in the period. During the market correction, the fund performance relative to the S&P 500 improved dramatically, overtaking the performance of the BXM Index and approaching that of the S&P 500. As cash was redeployed later in the period,
Semi-Annual Report 1
MADOX | Madison Institutional Equity Option Fund | Review of Period | continued
call writing accelerated and benefitted from higher market volatility and correspondingly higher option premiums.
Describe the fund’s portfolio equity and option structure.
As of June 30, 2010, the fund held 38 equity securities and unexpired covered call options had been written against 37% of the fund’s stock holdings. During the six-month period, the fund generated premiums of $155,143 from its covered call writing activities. It is the strategy of the fund to write "out-of-the-money" call options. As of June 30, 94% of the fund’s call options (15 of 16 different options) remained "out-of-the-money" (out-of-the-money means the stock price is below the strike price at which the shares could be called away by the option holder). The number of "out-of-the-money" options has increased from the beginning of the year as the market correction has held many share prices below their corresponding option strike prices. As the market begins to improve, the fund’s managers intend to increasingly cov er a greater percentage of the portfolio in order to take advantage of higher call option premiums available since the market volatility increased in late April.
Which sectors are prevalent in the fund?
From a sector perspective, the fund’s largest exposure as of June 30, 2010 was to the Financial Sector followed by Health Care, Technology (and technology related), Energy and Consumer Discretionary. The fund had a small weighting in the Materials sector and was absent the Consumer Staples, Telecommunication Services and Utilities Sectors, which although defensive in nature, typically provide less attractive call writing opportunities.
Discuss the fund’s security and option selection process.
The fund is managed by two teams of investment professionals. We like to think of these teams as a "right hand" and "left hand" meaning they work together to make common stock and option decisions. We use fundamental analysis to select solid companies with good growth prospects and attractive valuations. We then seek attractive call options to write on those stocks. It is our belief that this partnership of active management between the equity and option teams provides investors with an innovative, risk-moderated approach to equity investing. The fund’s portfolio managers seek to invest in 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 s election philosophy strays away from the "beat the street" mentality, as we seek companies that have sustainable competitive advantages, predictable cash flows, solid balance sheets and high-quality management teams.
Once we have selected what we believe are attractive and solid names for the fund, we employ our call 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. 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.
What is management’s outlook for the market and fund in 2010?
Our perspective on the economy is that we are experiencing more of a soft patch than the beginning of a double-dip recession. Although leading economic indicators settled back somewhat and gave credence to a slowdown, we believe we are at an economically self-sustaining level. Interest rates are low, the economy is growing, corporate profits are nearing record levels, corporate balance sheets are strong and credit is available again. All of these elements are polar opposites of 2008 (when the U.S. last went into a recession). With that backdrop, we believe a double-dip recession is unlikely; instead, we are expecting the economy to continue to move ahead at a slow pace.
One could argue that the equity markets have already made good progress over the past couple of months in adjusting and lowering longer-term expectations to much more realistic levels. We believe we will continue to see earnings growth in the second half of the year, albeit at a more modest pace. Overall, this is positive for equities. We also believe that volatility will remain elevated for many months
Semi-Annual Report 2
MADOX | Madison Institutional Equity Option Fund | Review of Period | concluded
to come as the market digests conflicting news on economic, earnings and global issues.
TOP TEN STOCK HOLDINGS AS OF JUNE 30, 2010 | |
% of net assets | |
UnitedHealth Group Inc. | 4.80% |
Capital One Financial Corp. | 4.59% |
Biogen Idec | 4.50% |
Powershares QQQ Nasdaq 100 | 4.05% |
Mylan Inc. | 3.88% |
Exxon Mobil Corp. | 3.46% |
Google Inc., Class A | 3.38% |
Lowe’s Cos. Inc. | 3.33% |
Morgan Stanley | 3.30% |
Bank of New York Mellon Corp. | 3.28% |
Semi-Annual Report 3
MADOX | Madison Institutional Equity Option Fund | June 30, 2010
Portfolio of Investments (unaudited)
Number of Shares | Value | |
COMMON STOCKS - 95.6% | ||
Consumer Discretionary - 8.4% | ||
10,000 | American Eagle Outfitters Inc. | $ 117,500 |
4,000 | Best Buy Co. Inc. | 135,440 |
400 | Garmin Ltd. | 11,672 |
8,600 | Lowe’s Cos. Inc. | 175,612 |
Energy:12.2% | ||
3,194 | Exxon Mobil Corp. | 182,282 |
4,000 | Noble Corp. | 123,640 |
2,000 | Schlumberger Ltd. | 110,680 |
2,100 | Transocean Ltd.* | 97,293 |
10,000 | Weatherford Intl Ltd.* | 131,400 |
ETFs - 4.1% | ||
5,000 | Powershares QQQ Nasdaq 100 | 213,550 |
Financials - 24.6% | ||
7,878 | Bank of America Corp. | 113,207 |
7,000 | Bank of New York Mellon Corp. | 172,830 |
6,000 | Capital One Financial Corp. | 241,800 |
14,000 | Citigroup Inc.* | 52,640 |
1,200 | Goldman Sachs Group Inc./The | 157,524 |
12,000 | Marshall & Ilsley Corp. | 86,160 |
7,500 | Morgan Stanley | 174,075 |
5,000 | State Street Corp. | 169,100 |
5,000 | Wells Fargo & Co. | 128,000 |
Health Care - 22.7% | ||
5,000 | Biogen Idec* | 237,250 |
2,100 | Celgene Corp.* | 106,722 |
2,000 | Genzyme Corp.* | 101,540 |
5,000 | Gilead Sciences Inc.* | 171,400 |
12,000 | Mylan Inc.* | 204,480 |
8,500 | Pfizer Inc. | 121,210 |
8,900 | UnitedHealth Group Inc. | 252,760 |
Insurance - 1.2% | ||
9,000 | MGIC Investment Corp.* | 62,010 |
Number of Shares | Value | |
Information Technology - 20.3% | ||
3,800 | Adobe Systems Inc.* | $ 100,434 |
20,000 | Brocade Communications Systems Inc.* | 103,200 |
5,000 | Cisco Systems Inc.* | 106,550 |
4,200 | EMC Corp.* | 76,860 |
19,000 | Flextronics International Ltd.* | 106,400 |
400 | Google Inc., Class A* | 177,980 |
5,000 | QUALCOMM Inc. | 164,200 |
6,000 | Symantec Corp.* | 83,280 |
1,800 | Visa Inc., Class A | 127,350 |
1,000 | Zebra Technologies Corp., Class A* | 25,370 |
Materials - 2.1% | ||
1,900 | Freeport-McMoRan Copper & Gold Inc. | 112,346 |
Total Common Stocks (Cost $8,291,979) | 5,035,747 | |
SHORT-TERM INVESTMENTS: | ||
REPURCHASE AGREEMENT - 7.2% | ||
With U.S. Bank National Association issued 6/30/10 at 0.01%, due 7/1/10, collateralized by $388,159 in Freddie Mac MBS #G11649 due 2/1/20. Proceeds at maturity are $380,547 (Cost $380,547) | 380,547 | |
TOTAL INVESTMENTS - 102.8% (Cost $8,672,526) | 5,416,294 | |
NET OTHER ASSETS AND LIABILITIES - (2.2)% | (115,790) | |
Total Call Options Written - (0.6)% | (31,461) | |
NET ASSETS - 100.0% | $5,269,043 | |
*Non-income producing. |
See accompanying Notes to Financial Statements.
Semi-Annual Report 4
MADOX | Madison Institutional Equity Option Fund | Portfolio of Investments | June 30, 2010 | concluded
Contracts (100 shares per contract) | CALL OPTIONS WRITTEN | Expiration Date | Exercise Price | Market Value | |
40 | BestBuyCo.Inc. | December2010 | $44.00 | $2,420 | |
50 | Biogen Idec | October 2010 | 55.00 | 3,875 | |
60 | Capital One Financial Corp. | September 2010 | 49.00 | 3,690 | |
50 | Cisco Systems Inc. | October 2010 | 26.00 | 975 | |
42 | EMC Corp. | July 2010 | 18.00 | 2,688 | |
70 | Flextronics International Ltd. | October 2010 | 7.50 | 700 | |
4 | Garmin Ltd. | July 2010 | 33.00 | 34 | |
86 | Lowe’s Cos. Inc. | July 2010 | 25.00 | 129 | |
35 | Morgan Stanley | October 2010 | 30.00 | 875 | |
90 | Mylan Inc. | October 2010 | 22.00 | 1,350 | |
50 | Powershares QQQ Nasdaq 100 | September 2010 | 46.00 | 4,800 | |
20 | Schlumberger Ltd. | January 2011 | 65.00 | 7,100 | |
60 | Symantec Corp. | January 2011 | 17.50 | 2,250 | |
100 | Weatherford International Ltd. | August 2010 | 19.00 | 300 | |
50 | Wells Fargo & Co. | July 2010 | 30.00 | 175 | |
10 | Zebra Technologies Corp. | August 2010 | 30.00 | 100 | |
TOTAL CALL OPTIONS WRITTEN (Premiums Received $163,375) | $31,461 |
See accompanying Notes to Financial Statements.
Semi-Annual Report 5
MADOX | Madison Institutional Equity Option Fund | June 30, 2010
Statement of Assets and Liabilities (unaudited)
ASSETS | |
Investments, at value (Note 1 and 2) | |
Investment securities | $5,035,747 |
Repurchase agreements | 380,547 |
Total investments (cost $8,672,526) | 5,416,294 |
Dividends and interest receivable | 2,023 |
Total assets | 5,418,317 |
LIABILITIES | |
Options written, at value (premiums received of $163,375) | 31,461 |
Payables | |
Investment securities purchased | 114,413 |
Auditor fees | 2,650 |
Independent trustee fees | 750 |
Total liabilities | 149,274 |
NET ASSETS | $5,269,043 |
Net assets consists of: | |
Paid in capital | 9,525,735 |
Undistributed net investment income (loss) | (5,150) |
Accumulated net realized loss on investments and options transactions | (1,127,224) |
Net unrealized depreciation on investments and options transactions | (3,124,318) |
Net assets | $5,269,043 |
CAPITAL SHARES ISSUED AND OUTSTANDING | |
An unlimited number of capital shares authorized, $.01 par value per share (Note 7) | 390,605 |
NET ASSET VALUE PER SHARE | $13.49 |
See accompanying Notes to Financial Statements.
Semi-Annual Report 6
MADOX | Madison Institutional Equity Option Fund
Statements of Operations (unaudited)
For the six-months ended June 30, 2010
INVESTMENT INCOME (Note 1) | |
Interest income | $ 99 |
Dividend income | 18,179 |
Total investment income | 18,278 |
EXPENSES (Notes 3 and 5) | |
Investment advisory fees | 22,806 |
Performance fulcrum fee | (5,460) |
Other expenses: | |
Service agreement fees | 1,932 |
Auditor fees | 2,650 |
Independent trustee fees | 1,500 |
Total other expenses | 6,082 |
Total expenses | 23,428 |
NET INVESTMENT INCOME | (5,150) |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | |
Net realized gain (loss) on: | |
Investments | (53,420) |
Options | 109,983 |
Net unrealized appreciation (depreciation) on: | |
Investments | (772,924) |
Options | 227,028 |
NET LOSS ON INVESTMENTS AND OPTIONS TRANSACTIONS | (489,333) |
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ (494,483) |
See accompanying Notes to Financial Statements.
Semi-Annual Report 7
MADOX | Madison Institutional Equity Option Fund
Statements of Changes in Net Assets
For the period indicated
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
2010 | 2009 | |
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | ||
Net investment income | $ (5,150) | $ 3,540 |
Net realized gain (loss) on investments and options transactions | 56,563 | (867,555) |
Net unrealized appreciation (depreciation) on investments and options transactions | (545,896) | 2,212,483 |
Net increase (decrease) in net assets resulting from operations | (494,483) | 1,348,468 |
DISTRIBUTION TO SHAREHOLDERS | ||
From net investment income | – | (5,373) |
From net capital gains | – | – |
Total distributions | – | (5,373) |
CAPITAL SHARE TRANSACTIONS (Note 7) | (273,401) | 51,981 |
NET INCREASE (DECREASE) IN NET ASSETS | $ (767,884) | $1,395,076 |
NET ASSETS | ||
Beginning of period | $6,036,927 | $4,641,851 |
End of period | $5,269,043 | $6,036,927 |
See accompanying Notes to Financial Statements.
Semi-Annual Report 8
MADOX | Madison Institutional Equity Option Fund | June 30, 2010
Financial Highlights
Per Share Operating Performance for One Share Outstanding Throughout the Period
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | For the period March 31, 2006* through | |||
2010 | 2009 | 2008 | 2007 | December 31, 2006 | |
Net Asset Value, Beginning of Period | $14.75 | $11.44 | $18.13 | $21.18 | $20.00 |
Investment Operations | |||||
Net investment income | (0.01) | 0.01 | 0.15 | 0.13 | 0.10 |
Net realized and unrealized gain (loss) on investments and options transactions | (1.25) | 3.31 | (5.40) | (0.84) | 1.44 |
Total from investment operations | (1.26) | 3.32 | (5.25) | (0.71) | 1.54 |
Less distributions from: | |||||
Net investment income | – | (0.01) | (0.15) | (0.13) | (0.10) |
Capital gains | – | – | (1.29) | (2.21) | (0.26) |
Total distributions | – | (0.01) | (1.44) | (2.34) | (0.36) |
Net Asset Value, End of Period | $13.49 | $14.75 | $11.44 | $18.13 | $21.18 |
Total Investment Return (%) | (8.54) | 29.05 | (29.91) | (3.98) | 7.74 |
Ratios and Supplemental Data | |||||
Net assets, end of period (thousands) | $5,269 | $6,037 | $4,642 | $13,153 | $11,511 |
Ratio of expenses to average net assets (%) | 0.77** | 0.76 | 0.79 | 0.95 | 0.94** |
Ratio of net investment income to average net assets (%) | (0.17)** | 0.07 | 0.69 | 0.65 | 0.83** |
Portfolio turnover (%) | 37 | 46 | 40 | 103 | 41 |
* Commencement of operations. ** Annualized. Net asset value figures are based on average daily shares outstanding during the year. |
See accompanying Notes to Financial Statements.
Semi-Annual Report 9
MADOX | Madison Institutional Equity Option Fund | June 30, 2010
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, diversified investment management company. The Trust currently offers six 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 five Trust portfolios present their financial information in a separate report.
Securities Valuation: The Fund adopted Financial Accounting Standards Board ("FASB") guidance on fair value measurements. 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. The Fund utilizes 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 assumpti ons 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 table represents the Fund’s investments carried on the Statement of Assets and Liabilities by caption and by level within the fair value hierarchy as of June 30, 2010 (unaudited):
Fund | Level 1 | Level 2 | Level 3 | Value at 6/30/2010 |
Madison Institutional Equity Option | ||||
Assets: | ||||
Common Stocks | $5,035,747 | $ – | $ – | $5,035,747 |
Repurchase Agreement | – | 380,547 | – | 380,547 |
Total | $5,035,747 | $ 380,547 | $ – | $5,416,294 |
Liabilities: | ||||
Written optons | $ 31,461 | $ – | $ – | $31,461 |
Total | $ 31,461 | $ – | $ – | $31,461 |
Please see Portfolio of Investments for common stock sector breakdown and listing of all securities within each caption. |
Semi-Annual Report 10
MADOX | Madison Institutional Equity Option Fund | Notes to Financial Statements | continued
In March 2008, the FASB issued guidance intended to enhance financial statement disclosures for derivative instruments and hedging activities and enable investors to understand: a) how and why a fund uses derivative instruments, b) how derivative instruments and related hedge fund items are accounted for, and c) how derivative instruments and related hedge items affect a fund’s financial position, results of operations and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
The following table presents the types of derivatives in the Fund by location as presented on the Statement of Assets and Liabilities as of June 30, 2010 (unaudited):
Statement of Asset & Liability Presentation of Fair Values of Derivative Instruments | ||||
Asset Derivatives | Liability Derivatives | |||
Derivatives not accounted for as hedging instruments | Statement of Assets and Liabilities Location | Fair Value | Statement of Assets and Liabilities Location | Fair Value |
Equity contracts | -- | Options written | $31,461 |
The following table presents the effect of Derivative Instruments on the Statement of Operations for the six-months ended June 30, 2010 (unaudited):
Realized Gain on Derivatives: | Change in Unrealized Appreciation on Derivatives | |
Derivatives not accounted for as hedging instruments | ||
Equity contracts | $109,983 | $227,028 |
In January 2010, amended guidance was issued by FASB for fair value measurement disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation, inputs and valuation techniques used to measure fair value. The amended guidance is effective for financial statements for fiscal years and interim periods beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. For the six-months ended June 30, 2010, the Fund did not have any securities that transferred bet ween classification levels.
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 $5,373 of ordinary income in 2009 and $741,526 of ordinary income and $35,121 of long-term gains in 2008, respectively.
Semi-Annual Report 11
MADOX | Madison Institutional Equity Option Fund | Notes to Financial Statements | continued
As of June 30, 2010, the components of distributable earnings on a tax basis were as follows (unaudited):
Undistributed net investment loss | $ (5,150) |
Net realized losses on investments | (1,123,944) |
Net unrealized depreciation on investments | (3,127,598) |
$(4,256,692) |
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 FASB guidance on accounting for incertainty in income taxes. The implementation of this guidance 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 six-months ended June 30, 2010, 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.
As of December 31, 2009, the Fund had available for federal income tax purposes $1,125,781 of capital loss carryovers which will expire December 31, 2017.
Information on the tax components of investments, excluding option contracts, as of June 30, 2010 is as follows (unaudited):
Aggregate Cost | $8,675,806 |
Gross unrealized appreciation | 28,025 |
Gross unrealized depreciation | (3,287,537) |
Net unrealized depreciation | $(3,259,512) |
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 Fund purchases securities under agree-ments 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. The Fund, along with other registered investment companies having Advisory and Services Agreements with the same investment adviser, transfers uninvested cash balances into a joint trading account. The aggregat e 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 June 30, 2010, the Fund had approximately an 1.5% interest in the consolidated repurchase agreement of $25,674,778 collateralized by $26,188,339 in Freddie Mac Mortgage Backed Security Notes. Proceeds at maturity were $25,674,785.
3. Investment Advisory Fees. For the period covered by this report, the investment adviser to the Fund, Madison Asset Management, LLC, a controlled subsidiary of Madison Investment Advisors, Inc. (the "Adviser"), 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 prospectus. The fee is accrued daily and is paid monthly.
4. Investment Transactions. Purchases and sales of securities, excluding short-term investments, for the six-months ended June 30, 2010 were $2,402,843 and $1,896,586, respectively. No U.S. Government securities were purchased or sold during the period.
5. Other Expenses. Under a separate Services Agreement, the Adviser 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
Semi-Annual Report 12
MADOX | Madison Institutional Equity Option Fund | Notes to Financial Statements | continued
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 six-months ended June 30, 2010, these fees amounted to $1,500 and $2,650, respectively. The combined Services Agreement fees paid to the Adviser and Independent Trustees and auditor fees may not exceed 0.20% of average net assets.
6. Covered Call Options. The Fund will pursue its primary objective by employing an option strategy of writing (selling) covered call options on common stocks. The number of call options the Fund can write (sell) is limited by the amount of equity securities the Fund holds in its portfolio. The Fund will not write (sell) "naked" or uncovered call options. The Fund seeks to produce a high level of current income and gains generated from option writing premiums and, to a lesser extent, from dividends.
Transactions in option contracts during the six-months ended June 30, 2010 were as follows (unaudited):
Number of Contracts | Premiums Received | |
Options outstanding, beginning of period | 1,434 | $311,756 |
Options written | 800 | 155,143 |
Options expired | (410) | (99,058) |
Options closed | (349) | (75,561) |
Options assigned | (658) | (128,905) |
Options outstanding at end of period | 817 | $163,375 |
Note 7 – Capital Share Transactions.
An unlimited number of capital shares, without par value, are authorized. Transactions in capital shares were as follows:
(unaudited) Six-Months Ended June 30, | Year Ended December 31, | |
2010 | 2009 | |
In Dollars | ||
Shares sold | $10,000 | $92,646 |
Shares issued in reinvestment of dividends | – | 5,206 |
Total shares issued | 10,000 | 97,852 |
Shares redeemed | (283,401) | (45,871) |
Net increase (decrease) | $(273,401) | $51,981 |
In Shares | ||
Shares sold | 645 | 6,877 |
Shares issued in reinvestment of dividends | – | 353 |
Total shares issued | 645 | 7,230 |
Shares redeemed | (19,416) | (3,453) |
Net increase (decrease) | (18,771) | 3,777 |
8. Subsequent Events. Management has evaluated the impact of all subsequent events on the Fund’s financial statements through August 23, 2010, the date the financial statements were issued, and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.
Semi-Annual Report 13
MADOX | Madison Institutional Equity Option Fund
Other Information
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 fund 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 January 1, 2010 and held for the six-months ended June 30, 2010.
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 Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period2 | |
Madison Institutional Equity Option Fund | $1,000.00 | $914.58 | 0.77% | $3.80 |
1For the six-months ended June 30, 2010. 2Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
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 Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period2 | |
Madison Institutional Equity Option Fund | $1,000.00 | $1,025.05 | 0.77% | $3.84 |
1For the six-months ended June 30, 2010. 2Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
Semi-Annual Report 14
MADOX | Madison Institutional Equity Option Fund | Other Information | continued
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, 2009 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 ("SEC") 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 SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Form N-Q and other information about the Fund are available on the EDGAR Database on the SEC’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 SEC’s Public Reference Section, Washington, DC 20549-0102. Finally, you may call the Fund at 8 00-368-3195 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 approved the renewal of the advisory contract between the advisor and the Fund during its meeting in February 2010. 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 Fund’s Board meeting when it renewed the Fund’s advisory contract:
The Board reviewed a variety of matters in connection with Fund’s investment advisory contract with Madison Asset Management, LLC ("MAM").
With regard to the nature, extent and quality of the services to be provided by the Adviser, the Board reviewed the biographies and tenure of the personnel involved in Fund management and the experience of MAM and its affiliates as investment manager to other investment companies with similar investment strategies. They recognized the wide array of investment professionals employed by the firm. The Adviser discussed the firm’s ongoing investment philosophies and strategies intended to provide superior performance consistent with the fund’s investment objectives under various market scenarios. The Trustees also noted their familiarity with MAM and its affiliates due to the Madison Investment Advisors, Inc. ("Madison") history of providing adv isory services to the Madison Mosaic organization.
The Board also discussed the quality of services provided to the Fund by its transfer agent and custodian as well as the various administrative services provided by directly the Adviser.
With regard to the investment performance of the Fund and the investment adviser, the Board reviewed current performance information provided in the written
Semi-Annual Report 15
MADOX | Madison Institutional Equity Option Fund | Other Information | continued
Board materials. They discussed the reasons for both outperformance and underperformance compared with peer groups and applicable indices and benchmarks.
The Board recognized that during the most recent year, the Fund produced a total cumulative return of 29.05%, compared to 26.46% for the S&P 500 Index and 25.91% for the CBOE Buy Write ("BXM") Index during the same period. The fund outperformed both indices for the year reflecting the fund’s returns from option writing as well as stock and sector selection choices in accordance with its investment objectives.
MAM’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, it focuses on the fundamental businesses of companies. As such, the Fund’s stock selection philosophy stays away from the "beat the street" objective, as MAM looks 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, the Adviser explained that it believes it seeks to bring elements of consistency, stability and predictability to Fund shareholders under normal market conditions.
A comprehensive discussion of fund performance and market conditions followed. The Board recognized that because the Fund has a fulcrum fee, the Adviser is monetarily penalized for underperforming its market index (the BXM) and rewarded for material outperformance. As such, in colloquial terms, the Board recognized that the Adviser "puts its money where its mouth is."
The Adviser discussed with the Board the methodology for arriving at the peer groups and indices used for performance comparisons.
With regard to the costs of the services to be provided and the profits to be realized by the investment adviser and its affiliates from the relationship with the Fund, the Board reviewed the expense ratios for a variety of other options funds in the Fund’s peer group with similar investment objectives. Based on peer group comparisons, the Board recognized that the Fund’s costs were low for the quality and extent of services provided.
The Board noted that the Adviser provided options strategy management services to other investment company clients and considered the fees charged by the Adviser to such funds for purposes of determining whether the given advisory fee was disproportionately large under the so-called "Gartenberg" standard traditionally used by investment company boards in connection with contract renewal considerations. Although the Board took those fees into account, the Board considered the differences in services and time required by the various types of funds to which the Adviser provided services. They recognized that significant differences may exist between the services provided to one type of fund and those provided to others, such as those resulting from a greater frequency of shareholder redemptions in a mutual fund and the higher turnover of mut ual fund assets. The Board gave such comparisons the weight that they merit in light of the similarities and differences between the services that the various funds require and were wary of "inapt comparisons." They considered that if the services rendered by the Adviser to one type of fund differ significantly from others, then the comparison should not be used. In the case of the Fund, the Board recognized that fees charged to a closed-end fund for which the Adviser acts solely as subadviser for another investment adviser is understandably lower than the fee charged to the Fund. This reflects the various administrative, operational, compliance, legal and corporate communication services required to be handled by the Adviser which are not performed in a subadvisory capacity.
The Board also recognized that the obligations, responsibilities and management considerations involved with being an investment adviser to a closed-end fund differs significantly from serving as an investment adviser to an open-end (mutual) fund.
The Trustees recognized that the 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 maintained by the Fund (i.e. an advisory fee, adjusted up or down by a fulcrum fee, with a cap on administrative expenses). As such, the
Semi-Annual Report 16
MADOX | Madison Institutional Equity Option Fund | Other Information | concluded
Board focused its attention on the total expense ratios paid by other funds with similar investment objectives, recognizing that such a comparison was not a "be-all and end-all" exercise, but was nevertheless an important consideration.
The Trustees sought to ensure that fees were adequate so that MAM (and its affiliates) did not neglect its management responsibilities to MADOX in favor of more "profitable" accounts. At the same time, the Trustees sought to ensure that compensation paid to MAM was not unreasonably high. The Board reviewed materials demonstrating that although MAM is compensated for a variety of the administrative services it provides or arranges to provide pursuant to its Services Agreement with MADOX, such compensation generally does not cover all costs due to the cap on administrative expenses. Administrative, operational, regulatory and compliance fees and costs in excess of the Services Agreement fees are paid by the MAM and Madison from investment advisory fees earned. For these reasons, the Trustees recognized that examination of the fund’s t otal expense ratio 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 Board recognized that the Fund is to a certain extent "subsidized" by the greater Madison organization because the salaries of all portfolio management personnel, trading desk personnel, corporate accounting personnel and employees of Madison who serve as Trust officers, as well as facility costs (rent), could not be supported by fees received from the Fund alone. However, the Board recognized that the Fund is profitable to Madison because such salaries and fixed costs are already paid in whole or in part from revenue generated by management of the remaining assets. The Trustees noted that total Madison managed assets, including subsidiaries, approximated $15 billion at the time of the meeting. As a result, although the fees paid by the Fund at its present size might not be sufficient to profitably supp ort a stand-alone fund, it is reasonably profitable to Madison as part of its larger, diversified organization. In sum, the Trustees recognized that the Fund is important to the Adviser, is managed with the attention given to other firm clients and is not treated as "loss leader."
With regard to the extent to which economies of scale would be realized as the Fund grows, the Trustees recognized that at the fund’s current size, it was premature to discuss any economies of scale.
After further discussion and analysis and reviewing the totality of the information presented, including the information set forth above and the other information considered by the Board of Trustees, the Trustees concluded that the Fund’s advisory fees are fair and reasonable and that renewal of its respective Advisory and Services Agreements without change are in the best interests of the Fund and its shareholders.
Semi-Annual Report 17
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
Intermediate Income Fund
Institutional Bond Fund
Corporate Income Shares (COINS)
Madison Mosaic Tax-Free Trust
Virginia Tax-Free Fund
Tax-Free National Fund
Madison Mosaic Government Money Market
For more complete information on any Madison 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
Shareholder Service
Toll-free nationwide: 888-670-3600
550 Science Drive
Madison, Wisconsin 53711
Madison Mosaic Funds
www.mosaicfunds.com
SEC File Number 811-03615
Item 2. Code of Ethics.
Not applicable in semi-annual report.
Item 3. Audit Committee Financial Expert.
Not applicable in semi-annual report.
Item 4. Principal Accountant Fees and Services.
Not applicable in semi-annual report.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments
Included in report to shareholders (Item 1) above.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
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)
Holly Baggot, Secretary
Date: August 24, 2010
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: August 24, 2010
By: (signature)
Greg Hoppe, Chief Financial Officer
Date: August 24, 2010