02.28.2020 Market Update


Our philosophy and process have helped us navigate major financial market cycles over several decades. Matt Hayner, Portfolio Manager - Madison Large Cap Equity

Over the past week, the fear of Covid-19 coronavirus spreading within the U.S. has triggered more than a 10% decline in the major stock indices. We have also seen 10-year and 30-year Treasury yields hit new all-time lows.

Madison U.S. Equity Team

  • As of early 2020, financial markets valuations are extended and global growth has been choppy. Thus, there are risks to market and economic confidence even without the COVID-19 coronavirus outbreak.
  • While no one knows what the future will bring for the market, we feel good that over the long term our portfolio holdings will weather the business disruptions created by the coronavirus outbreak. Our focus on businesses with sustainable competitive advantages and strong balance sheets are paramount to planning for unforecastable events such as this.
  • The shape of the economic impact is unknowable and evolving and is predicated on how people and governments respond. We would expect that the longer in duration any economic dislocation becomes, the more likely higher-quality investments will gain market share at the expense of weaker competitors. Because our high-conviction portfolios consist of investments in well-managed, high-quality companies that exhibit sustainable competitive advantages, prudent financial leverage and durable growth characteristics our portfolio is designed with these types of market risks in mind.
  • Our philosophy and process have helped us navigate major financial market cycles over several decades. We are confident our process will serve as a good foundation for navigating the COVID-19 coronavirus outbreak.

Madison Fixed Income Team

  • Our goal in managing portfolios is to generate capital appreciation while also providing downside protection during market volatility. Historically, our allocation to U.S. Treasuries and higher-quality corporate bonds has provided some insulation during periods of uncertainty when compared to riskier assets. While this has held true in the recent downturn, there is no assurance that it will be so in the future.
  • We believe it is hard to make a fundamental case for owning longer-term Treasuries at late-February valuations.
  • In the long-run, COVID-19 coronavirus and the tariffs are inflationary as businesses are forced to shift supply chains and accept increased input costs.
  • In the end, the Madison Fixed Income Team manages portfolios by focusing on economic fundamentals. We will continue to implement our disciplined philosophy and process which has served our clients well over many market environments. The current fixed income market is trading based upon fear and uncertainty which historically has provided attractive investment opportunities for client portfolios.

Madison Multi-Asset solutions Team

  • We feel investors became overconfident in late 2019 on the heels of newfound central bank liquidity and a thaw in the U.S./China trade war.
  • Lost in the outsized 2019 market advance was the continual erosion of global economic conditions and less than robust corporate earnings growth.
  • The S&P 500 index entered 2020 priced for much to go right and absolutely nothing to go wrong. The index’s forward P/E multiple reached 19x 2020 earnings estimates, significantly above the historical average.
  • By late January the world was introduced to COVID-19 coronavirus , which is now approaching pandemic status. The virus and the associated quarantines have shuttered manufacturing and travel/tourism across several countries, most notably China/South Korea, both of which are critical to global supply chains.
  • At this time we believe the sharp market drop is most likely due to a reality check on what were already aggressive future earnings expectations. As painful as the decline has been, it is needed to restore equity valuations.
  • Overall, our conservative positioning has helped shield our investors from larger market losses and our cash holdings give us the ability to take advantage future market opportunities. Moving forward we continue to closely monitor the evolution of the virus’ impact on the global economy, and stand ready to act further to protect capital if warranted. We believe Madison’s active, risk-conscious, investment approach is well-suited for today’s more volatile environment.

Hansberger International Growth Team

  • Prior to the COVID-19 panic, we had continued to take profits in certain stocks with elevated valuations following previously strong price performance while redistributing to areas with robust fundamentals, higher expected upside and consequently, higher relative margins of safety.
  • We believe companies that have consistently demonstrated global competitiveness through growing faster, being more profitable and having stronger financial conditions are in a better fundamental business position to weather economic cycles, and even unexpected exogenous shocks (such as pandemics).
  • While market panics may be turbulent, there are often opportunities created to take advantage of mispricing and to acquire positions in excellent companies at bargain prices. So that even though our favored Blue-Chip stocks may be sold temporarily by market participants for liquidity and flow reasons, we will be on the lookout to strengthen the portfolio and set up for future outperformance.
  • We remain vigilant in applying our bottom-up investment process to maintain exposure to a diversified portfolio of high-quality growth companies.

In Conclusion

When we looked at previous health scares we saw short-term impact on the market. While much about the coronavirus is still mysterious, Harvard epidemiology professor Marc Lipsitch and many colleagues predict we may be in for a longer haul this time around.1 While that sounds at first like bad news, it has a silver lining. Many people infected have light symptoms, others none at all. He suggests the likely outcome will be a steady spread around the world and an additional bug to the seasonal colds and flu we live with now.

When we look at the results of high-quality investments over the past ten years, there is little gap between them and the broader market. We know from past rocky periods that this can change. We believe our high-quality bias provides an advantage over the long-term. Considering the uncertainties ahead, we take comfort that anticipating unexpected economic disruptions is part of our security selection process.

We thank you for your trust, and we remain invested alongside you for the long-term.

Our goal in managing portfolios is to generate capital appreciation while also providing downside protection during market volatility. MIKE SANDERS, CFA® CO-HEAD OF FIXED INCOME, PORTFOLIO MANAGER
Mike-sanders
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. MAM and MIA are registered as an investment adviser with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison's toll-free number is 800-767-0300. | Any performance data shown represents past performance. Past performance is no guarantee of future results. | Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate. | This website is intended to be for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
1. Coronavirus Outbreak: What We Know and What We Don’t Know
Alvin Powell - https://news.harvard.edu/gazette/story/2020/01/coronavirus-outbreak-what-we-know-and-what-we-dont-know/
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.
P/E (Price-to-Earnings Ratio): measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share.
Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
All investing involves risks including the possible loss of principal. There can be no assurance the asset allocation portfolios will achieve their investment objectives. The portfolios may invest in equities which are subject to market volatility. In addition to the general risk of investing, the portfolio is subject to additional risks including investing in bond and debt securities, which includes credit risk, prepayment risk and interest rate risk. When interest rates rise, bond prices generally fall. Securities rated below investment grade are more sensitive to economic, political and adverse development changes. International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.
“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”), which also includes the Madison Scottsdale office. Hansberger Growth Investors, L.P. or “HGI” is an affiliate of “Madison Investments.” MAM, MIA and HGI are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.
Any performance data shown represents past performance. Past performance is no guarantee of future results.
Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Bonds are subject to certain risks including interest rate risk, credit risk and inflation risk. Equity risk is the risk that securities will fluctuate in value due to general market or economic conditions.
Please consult with your financial advisor to determine your risk tolerance and investment objectives. While Madison constructs portfolios for various risk tolerances, it does not determine individual client’s risk tolerance or investment objectives.