Madison Fund: Covered Calls Beat the S&P in Q2 Rally

Madison Covered Call & Equity Income Fund beat the S&P 500 in the second quarter, with its Class R6 shares returning 11.84% against the index's 10.19%. The fund's covered call strategy captured most of the equity upside while the option income added a cushion during the quarter's drawdowns.

The semiconductor sector drove the broad market's best quarterly performance in years. The fund's largest sector allocation was to technology at 27.2%, followed by financials at 15.7% and health care at 13.0%. Top individual holdings included Nvidia, Microsoft, Apple, Amazon, and Meta Platforms. The fund wrote calls on roughly 25-35% of its portfolio value, generating premium income that replaced some of the forgone upside on names that rallied hard.

A 90-day market decline in late April and early May wiped out year-to-date gains. The fund's option overlay helped offset part of the drawdown. When the recovery came in May and June, fund managers said they rotated call-writing toward names with lower upside conviction, keeping more exposure on the semiconductor names that led the bounce.

The energy sector was the largest negative contributor for the quarter, with the fund's 9.6% allocation there lagging the broader market. The portfolio ended June with a 30-day SEC yield of 6.07% on its Class R6 shares. Distributions for the quarter totalled $0.29 per share across all share classes.

Madison runs the fund with a 0.95% expense ratio for Class R6 shares. The strategy aims to deliver equity-like returns with lower volatility through systematic call writing. The managers said they expect continued market choppiness in the second half and plan to keep option coverage in the 25-35% range.