Compensation. Madison believes portfolio managers should receive compensation for the performance of the firm’s client accounts, their individual effort, and the overall profitability of the firm. As such, portfolio managers receive a base salary, as well as an incentive bonus based on the attainment of certain goals and objectives in the portfolio management process (described below). The manager also participates in the overall profitability of the firm directly, through an ownership interest in the firm, or indirectly, through a firm-sponsored profit sharing plan. Madison believes its portfolio managers’ goals are aligned with those of long-term investors, recognizing client goals to outperform over the long-term, rather than focused on short-term performance contests.
With regard to incentive compensation, the incentive pools for the asset allocation, equity and fixed-income teams are calculated based on a percentage of revenue from each investment strategy. Equity and fixed income teams managers are rewarded for performance relative to their benchmark(s) over both a one- and three-year period (measured on a pre-tax basis). The asset allocation team managers are rewarded for performance relative to their benchmark(s) over a one-, three- and five-year period (measured on a pre-tax basis), which is based on a risk-adjusted return. Incentive compensation earned is paid out over a two year period, so that if a portfolio manager leaves the employ of Madison, he or she forfeits a percentage of his or her incentive compensation. The purpose of this structured payout is to aid in the retention of investment personnel.
All incentive compensation must be approved by the compensation committee. With the exception of Mr. Burgess, all portfolio managers are eligible to participate in the incentive compensation pool.
The incentive compensation pool shared by the members of the firm’s asset allocation and equity management teams is based on the performance of the firm’s various asset allocation and equity composites (or some combination of such composites and the relevant mutual fund(s)) measured against the appropriate index benchmarks. All firm asset allocation and equity accounts, including mutual funds, regardless of whether they are included in such composites, are managed with the same general investment philosophy, approach and applicable allocations, quality and other portfolio characteristics.
The incentive compensation pool shared by the members of the firm’s fixed-income management team is based on the performance of the firm’s various fixed-income composites measured against the appropriate index benchmarks. All firm fixed-income accounts, including mutual funds, regardless of whether they are included in such composites, are managed with the same general investment philosophy, approach and applicable allocations regarding duration, spreads and other fixed-income characteristics.
There is no difference in the way the firm compensates portfolio managers for managing a mutual fund or a private client account (or any other type of account). Instead, compensation is based on the entire employment relationship, not on the performance of any single account or type of account.
Other Accounts Managed (as of December 31, 2014):
David Hottmann – Target Allocation and Target Retirement Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Patrick Ryan – Target Allocation and Target Retirement Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Chris Nisbet – Government Bond, High Quality Bond and Diversified Income (fixed income portion) Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Paul Lefurgey – Tax-Free, Government Bond, Core Bond, High Quality Bond, Corporate Bond and Diversified Income (fixed income portion) Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
John Brown – Diversified Income (equity portion), Dividend Income and Large Cap Value Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Drew Justman – Diversified Income, Dividend Income and Large Cap Value Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Jay Sekelsky – Dividend Income, Investors and Large Cap Growth Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Frank Burgess – Covered Call & Equity Income Fund
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Ray DiBernardo – Covered Call & Equity Income and Large Cap Growth Funds
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Richard Eisinger – Mid Cap Fund
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Total Assets in Accounts with Performance-Based
Advisory Fees
Registered Investment Companies 1 $301,817,313 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 2,463 $1,322,699,519 0 $0
Haruki Toyama – Mid Cap Fund
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Total Assets in Accounts with Performance-Based
Advisory Fees
Registered Investment Companies 0 $0 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 2,463 $1,322,699,519 0 $0
Matt Hayner – Investors Fund
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Total Assets in Accounts with Performance-Based
Advisory Fees
Registered Investment Companies 1 $301,817,313 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 2,463 $1,322,699,519 0 $0
Material Conflicts of Interest: Potential conflicts of interest may arise because Madison engages in portfolio management activities for clients other than the funds. For example, portfolio managers at Madison and its affiliates typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts (assets managed on behalf of wealthy individuals as well as institutions such as pension funds, colleges and universities, insurance companies and foundations), subadvised accounts that we manage for other investment advisers and model accounts for which we only provide recommendations to our clients and do not have discretion to actually trade the accounts.
Our portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices, and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio. Likewise, we may purchase securities for one portfolio and sell the same security from another.
To address the potential conflicts that occur as a result, Madison adopted a variety of portfolio security aggregation, brokerage and trade allocation policies which are designed to provide reasonable assurance that buy and sell opportunities are allocated fairly among clients. Likewise, Madison has policies to address “cross selling” from one account to another. In this manner, we seek to address any potential conflicts associated with managing multiple accounts for multiple clients. Also, as disclosed under the “Portfolio Manager Compensation” section, our portfolio managers’
compensation is determined in the same manner with respect to all portfolios managed by the portfolio manager.
In connection with the management of the Target Allocation Funds, Trustees and officers of the Target Allocation Funds and the underlying affiliated mutual funds in which they invest (the “Underlying Madison Funds”) and certain directors and officers of Madison and its affiliates also serve in similar positions with most of the Underlying Madison Funds. Therefore, if the interests of the Target Allocation Funds and the Underlying Madison Funds were ever to diverge, it is possible that a conflict of interest could arise and affect how fund Trustees and officers fulfill their fiduciary duties to these funds. Trustees of the Target Allocation Funds believe they have structured these funds to avoid these concerns. However, a situation could conceivably occur where proper action for the Target Allocation Funds could be adverse to the interests of an Underlying Madison Fund, or the reverse could occur. If such a possibility arises, Trustees and officers of the affected funds and the directors and officers of Madison will carefully analyze the situation and take all steps they believe are reasonable to minimize and, where possible, eliminate the potential conflict.
Fund Ownership: As of December 31, 2014, the portfolio managers’ ownership in fund shares was as follows: Ray DiBernardo Covered Call & Equity Income $10,001 - $50,000
Greg Poplett Core Bond
Compensation: SCM offers a highly competitive total compensation package. All team members receive a complete benefits package, base salary, and an annual bonus predicated on individual and firm performance. The percentage of compensation from salary and bonus varies by a team member’s merit. Typically, a bonus is a larger percentage of annual compensation for team members that have made contributions to the firm and achieved a long tenure with the firm.
Messrs. Shenkman, Flanagan, Slatky, Dobbin, Schweitzer and Kricheff serve as co-portfolio managers for the High Income Fund. Portfolio managers represent the majority of the firm’s senior management. Their compensation is not formally tied to a specific list of criteria. They are compensated based on their ability to implement the firm’s investment strategy, their ability to effectively perform their respective managerial functions, the overall investment performance of the firm, as well as the firm’s growth and profitability. All of the senior portfolio managers are owners of the firm.
The portfolio managers’ compensation is not based on the performance of the High Income Fund or the value of assets held in its portfolio.
Other Accounts Managed (as of October 31, 2014):
Mark Shenkman – High Income Fund
Types of Accounts Number of Other
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Accounts Managed Total Assets in Accounts Accounts with Performance-Based Advisory Fees
Material Conflicts of Interest: As a general matter, SCM attempts to minimize conflicts of interest. To that end, SCM has implemented policies and procedures for the identification of conflicts of interest, a full copy of which is set forth in the firm’s compliance manual. In accordance with this policy, SCM has identified certain potential conflicts of interest in connection with its management of the High Income Fund.
A potential conflict of interest may arise as a result of SCM’s management of other accounts with varying investment guidelines. SCM adheres to a systematic process for the approval, allocation and execution of trades. It is SCM’s basic policy that investment opportunities be allocated among client accounts with similar investment objectives fairly over time. Because of the differences in client investment objectives and strategies, risk tolerances, tax status and other criteria, there may, however, be differences among clients in invested positions and securities held. Moreover, SCM may purchase a security for one client account while appropriately selling that same security for another client account. Furthermore, SCM may sell securities for only some client accounts without selling the same securities for other client accounts. Certain accounts managed by SCM may also be permitted to sell securities short. Accordingly, SCM and its employees may take short positions in equity securities of certain issuers for their own
account or for the account of any other client at the same time the debt securities, convertible securities or bank loans of such issuers are held long in client accounts. When SCM or its employees engages in short sales of securities they could be seen as harming the performance of one or more clients, including the High Income Fund, for the benefit of the account engaging in short sales if the short sales cause the market value of the securities to fall. Conversely, SCM and its employees may take long positions in equity securities of certain issuers for their own account or for the account of any other client at the same time the debt securities, convertible securities or bank loans of such issuers are sold out of client accounts.
SCM also acts as investment manager to companies that have, or may in the future have, non-investment grade securities outstanding. SCM may purchase these securities for its client accounts, including for the High Income Fund. Additionally, SCM is not precluded from investing in securities of a company held in some of its client accounts in which such other of its clients have senior or subordinated rights relative to the other, or vice versa.
From time to time, SCM may have arrangements with brokers and/or affiliates of brokers who may recommend SCM’s products or services to their respective clients (in such capacity, “Sponsors/Consultants”). Generally, SCM does not compensate Sponsors/Consultants in connection with any such arrangements (to the extent SCM does compensate Sponsors/Consultants, the terms of such arrangements are disclosed in accordance with Rule 206(4)-3 under the Investment Advisers Act of 1940). A conflict of interest may arise because SCM may execute securities transactions on behalf of its clients, including the High Income Fund, through brokers who are, or who have affiliates who are, Sponsors/Consultants. As a fiduciary, SCM has an obligation to obtain best execution for its clients. The allocation of transactions to brokers who are (or that have affiliates who are) Sponsors/Consultants is subject at all times to SCM’s obligation to obtain best execution under the circumstances. SCM’s Chief Compliance Officer periodically monitors SCM’s arrangements with Sponsors/Consultants and its trading activity with brokers who are (or who have affiliates who are) Sponsors/Consultants to ensure that SCM has obtained best execution in accordance with its policies and procedures.
From time to time, it may be appropriate for SCM to aggregate client orders for the purchase or sale of securities. SCM engages in this practice to achieve more favorable execution prices for clients by buying and selling securities in greater quantities. In aggregating client orders for securities, including any orders placed for private investment vehicles, SCM will ensure that no investment advisory client will be favored over any other investment advisory client; and each client that participates in an aggregated order shall typically participate on an average price basis for SCM’s transactions in that security on a relevant day and transaction costs (if any) shall be shared among clients on an equitable basis.
SCM permits its team members to trade securities for their own accounts. Investment personnel, through their position with the firm, are in a position to take investment opportunities for themselves before such opportunities are executed on behalf of clients. Thus, SCM has an obligation to assure that its team members do not “front-run” trades for clients or otherwise favor their own accounts. To that end, SCM maintains a personal trading policy that includes pre-clearance procedures that require team members to pre-clear all securities trades as well as shares of mutual funds for which SCM acts as subadviser.
SCM may share in performance-based compensation, manage both client accounts that are charged performance-based compensation and accounts that are charged only an based fee (i.e., a non-performance based fee). In addition, certain client accounts may have higher asset-based fees or more favorable performance asset-based compensation arrangements than other accounts. When SCM and its investment personnel manage more than one client account a potential exists for one client account to be favored over another client account. SCM and its investment personnel have a greater incentive to favor client accounts that pay it (and indirectly certain investment personnel) performance-based compensation or higher fees, particularly with respect to “new issue” investments. SCM maintains procedures to review the holdings of each account periodically to assure that all securities in the account comply with the investment and risk parameters of such account. SCM believes that if it charges a
performance fee on accounts that receive new issues, SCM may have a potential conflict of interest in allocating new issues to these accounts.
SCM states that it maintains an allocation policy and the Chief Compliance Officer oversees a periodic review of allocations of new issues periodically to ensure that they are being allocated among all eligible accounts in a fair and equitable manner.
SCM may execute transactions between or among client accounts (including rebalancing trades between client accounts) by executing simultaneous purchase and sale orders for the same security. Even in situations where SCM believes there is no disadvantage to its clients, these “cross trade”
transactions may nonetheless create an inherent conflict of interest. When engaging in cross transactions, SCM will act in good faith and ensure that cross transactions are fair and in the best interests of all participating client accounts.
Fund Ownership: As of October 31, 2014, no portfolio manager beneficially owned any fund shares.
Wellington Management Company LLP
Compensation. Wellington Management receives a fee based on the assets under management of the Small Cap Fund, as set forth in the Subadvisory Agreement between Wellington Management and Madison. Wellington Management pays its investment professionals out of its total revenues, including the advisory fees earned with respect to the Small Cap Fund. The following information relates to the fiscal year ended October 31, 2014.
Wellington Management’s compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Management’s compensation of the Small Cap Fund’s managers listed in the prospectus who are primarily responsible for the day-to-day management of the Small Cap Fund (“Investment Professionals”) includes a base salary and incentive components. The base salary for each Investment Professional who is a partner (a "Partner") of Wellington Management Group LLP, the ultimate holding company of Wellington Management, is generally a fixed amount that is determined by the managing partners of Wellington Management Group LLP. Each Investment Professional is eligible to receive an incentive payment based on the revenues earned by Wellington
Each Investment Professional’s incentive payment relating to the Small Cap Fund is linked to the gross pre-tax performance of the portion of the Small Cap Fund managed by the Investment Professional compared to the benchmark index and/or peer group identified below over one and three year periods, with an emphasis on three year results. In 2012, Wellington Management began placing increased emphasis on long-term
performance and is phasing in a five-year performance comparison period, which will be fully implemented by December 31, 2016. Wellington Management applies similar incentive compensation structures (although the benchmarks or peer groups, time periods and rates may differ) to other accounts managed by these Investment Professionals, including accounts with performance fees.
Portfolio-based incentives across all accounts managed by an investment professional can, and typically do, represent a significant portion of an investment professional’s overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year.
The Investment Professionals may also be eligible for bonus payments based on their overall contribution to Wellington Management’s business
The Investment Professionals may also be eligible for bonus payments based on their overall contribution to Wellington Management’s business