Morningstar Magazine - August/September 2017 - 62

Investors

A Happy Medium
Madison Mid Cap takes a moderate
approach to growth.

UNDISCOVERED MANAGER

Tom Lauricella

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 GTSGX,
Haruki Toyama is focused on investing in the
sweet spot.
Toyama hunts for shares of fast-growing
companies, but narrows his search to those stocks
sporting relatively tame valuations, widemoat 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.

Morningstar August/September 2017

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-theradar 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

Sekelsky, came over from Wellington Management
in a move back to his home state of Wisconsin.
Eisinger joined Madison in 1998. Toyama had met
Eisinger in business school at Cornell University,
and after a stint at MFS Investment Management,
he joined Madison in 2002. He left in 2004
to help launch Marcus Asset Management in
Milwaukee, where he ran a long/short hedge fund,
but he returned to Madison in 2014.
Toyama, 46 years old, traces his path to Madison
back to his awareness of the Japanese real
estate bubble as the child of two Japanese doctors
who had immigrated to the United States.
He was born in Buffalo, N.Y., then spent his
childhood in Miami before his family moved back
to Japan for five years.
"By the time I was in college [at Brown University],
Japan was booming, and you could see the
bubble form," Toyama says. "Every year, I would
go back to Japan, and I saw the bubble burst.
That got me very interested in economics."
While at graduate school at Cornell, Toyama was
introduced to the concept of classic value
investing: "I was very interested in international
politics, macro thinking. But it just clicked
that instead of trying to speculate on what a stock
price may be based on what other people
think, I'm just buying a piece of a company. Why
should the analysis be different than if I was
buying the whole company?"
The Right Balance

Toyama, Eisinger, and the rest of the eightperson equity team are hunting for growth stocks,
but there is a decided quality and value tilt
to the approach.

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.)

"We think as 'value' investors because we are
looking for value, but the word has certain
connotations," Toyama says. "[Some] value guys
are looking for beaten-up Kias that they
can buy for $500 and flip for $1,000. Another
definition of value is that you get more for
the money with a BMW or Mercedes, but you still
want to pay less than they are worth."

Madison was still a small bond shop in 1990
when the firm's now chief investment officer, Jay

Madison screens among stocks with a
market cap between $500 million and $40 billion

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