Madison Mid Cap takes a moderate approach to growth.
In every issue, Undiscovered Manager profiles a manager on the Morningstar Prospects list compiled by Morningstar Research Services’ manager research group. As comanager of Madison Mid Cap Fund
Toyama hunts for shares of fast-growing companies, but narrows his search to those stocks sporting relatively tame valuations, wide-moat business models and high-quality management. And with the strategy’s mid-cap focus, Toyama believes investors are gaining exposure to a segment of the stock market that carries less risk than small companies but more growth potential than market behemoths.
“We’re very risk-averse, but we want the upside,” he says. “We find these wonderful companies with great track records. Their competitive advantages have been honed over multiple economic cycles. They’re not yet so giant that they are slow and lumbering.”
This investment process has led to strong long-term performance since Toyama’s comanager Rich Eisinger started on the fund nearly 20 years ago. The fund’s annualized return of 8.9% from the beginning of 1998 through June is well ahead of the mid-cap growth average of 7.1% and beats the Russell Mid Cap Growth Index’s 7.9%. The fund’s Morningstar risk-adjusted return over that time beats that of more than 80% of its peers.
While the fund’s returns over the past 10 years are middling, its Morningstar risk score is Low over the three-, five, and 10-year periods. In the strong stock market rallies of 2009 and 2013, the fund landed in the bottom decile of the category. But in the years over the past decade with more moderate rallies or down markets, the fund has been comfortably in the top half.
Thanks in large part to its strong, long-term risk-adjusted performance, Madison Mid Cap is on the Morningstar Prospects list of under-the-radar or up-and-coming fund strategies.
“There’s an appealing conservatism to their strategy—the focus on relatively higher-quality mid-caps, and holding an above-average stake in cash when opportunities are scarce,” says Greg Carlson, a senior analyst at Morningstar Research Services who oversees the Prospects selection process. “Also, the lower-turnover approach, of course, leads to lower transaction costs. This fund could easily be someone’s sole mid-cap holding.”
Path to Madison
Madison Investments, based in Wisconsin’s capital city, was founded in 1974 by Frank Burgess, who today serves as the firm’s chairman. The independent, employee-owned company manages $16 billion. Madison’s historical emphasis was on conservative bond strategies. But its U.S. equity team today manages $5.1 billion, of which $1.5 billion is in the mid-cap growth strategy, including just under $400 million in the fund. (Madison Funds carried the Mosiac Fund brand name until April 2013.)