ck0001040612-20231031

STATEMENT OF ADDITIONAL INFORMATION
Madison Funds®
550 Science Drive
Madison, Wisconsin 53711




Ticker Symbol
Fund Class A Class C Class Y Class I Class R6
Madison Conservative Allocation Fund MCNAX MCOCX N/A N/A N/A
Madison Moderate Allocation Fund MMDAX MMDCX N/A N/A N/A
Madison Aggressive Allocation Fund MAGSX MAACX N/A N/A N/A
Madison Diversified Income Fund MBLAX MBLCX N/A N/A N/A
Madison Tax-Free Virginia Fund N/A N/A GTVAX N/A N/A
Madison Tax-Free National Fund N/A N/A GTFHX N/A N/A
Madison High Quality Bond Fund N/A N/A MIIBX MIIRX N/A
Madison Core Bond Fund MBOAX N/A MBOYX MBOIX MBORX
Madison Covered Call & Equity Income Fund MENAX MENCX MENYX MENIX MENRX
Madison Dividend Income Fund MADAX N/A BHBFX MDMIX MADRX
Madison Investors Fund MNVAX N/A MINVX MIVIX MNVRX
Madison Sustainable Equity Fund N/A N/A MFSYX MFSIX N/A
Madison Mid Cap Fund MERAX N/A GTSGX MDCIX MMCRX
Madison Small Cap Fund MASMX N/A BVAOX MSCIX MSCRX
Madison International Stock Fund MINAX N/A MINYX N/A N/A
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N/A Fund does not offer this share class.








    
This is not a prospectus. This statement of additional information (“SAI”) should be read in conjunction with the currently effective prospectus (the “prospectus”) for Madison Funds (the “Trust”), which is referred to herein. The prospectus concisely sets forth information that a prospective investor should know before investing. For a copy of the Trust’s prospectus dated February 28, 2024, please call 1-800-877-6089 or write Madison Funds, P.O. Box 219083, Kansas City, MO 64121-9083.
The audited financial statements for the funds are incorporated herein by reference to the funds’ most recent annual report, which has been filed with the Securities and Exchange Commission (the “SEC”) and provided to all shareholders. For a copy, without charge, of the funds’ most recent annual report to shareholders, please call the Trust at 1-800-877-6089 or visit our website at www.madisonfunds.com.

The date of this SAI is February 28, 2024.
















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TABLE OF CONTENTS PAGE
GENERAL INFORMATION.................................................................................................
INVESTMENT PRACTICES...............................................................................................
Lending Portfolio Securities................................................................................
                Illiquid Securities ................................................................................................
Foreign Transactions..........................................................................................
Options on Securities and Securities Indices.....................................................
Futures Contracts and Options on Futures Contracts........................................
Swap Agreements..............................................................................................
Certain Bond Fund Practices..............................................................................
Lower-Rated Corporate Debt Securities.............................................................
Foreign Government Debt Securities..................................................................
Convertible Securities.........................................................................................
U.S. Government Securities...............................................................................
Other Debt Securities..........................................................................................
Mortgage-Backed (Mortgage Pass-Through) Securities.....................................
Other Securities Related to Mortgages...............................................................
Municipal Securities............................................................................................
Privately Arranged Loans and Participations......................................................
Restricted Securities...........................................................................................
Repurchase Agreements....................................................................................
Reverse Repurchase Agreements......................................................................
Forward Commitment and When-Issued Securities............................................
Real Estate Investment Trusts............................................................................
Exchange-Traded Funds.....................................................................................
Shares of Other Investment Companies.............................................................
Temporary Defensive Positions..........................................................................
Definition of Market Capitalization......................................................................
Types of Investment Risk....................................................................................
FUND NAMES....................................................................................................................
INVESTMENT LIMITATIONS..............................................................................................
PORTFOLIO TURNOVER..................................................................................................
MANAGEMENT OF THE TRUST.......................................................................................
Trustees and Officers..........................................................................................
Trustee Compensation........................................................................................
Board Qualifications............................................................................................
Board Committees..............................................................................................
Leadership Structure of the Board......................................................................
Trustees’ Holdings...............................................................................................
PORTFOLIO MANAGEMENT.............................................................................................
PORTFOLIO MANAGERS..................................................................................................
TRANSFER AGENT............................................................................................................
CUSTODIAN.......................................................................................................................
LENDING PORTFOLIO SECURITIES................................................................................
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TABLE OF CONTENTS PAGE
DISTRIBUTION..................................................................................................................
Principal Distributor and Distribution of Fund Shares.........................................
Distribution and Service Plans............................................................................
BROKERAGE.....................................................................................................................
PROXY VOTING POLICIES, PROCEDURES AND RECORDS........................................
SELECTIVE DISCLOSURE OF PORTFOLIO HOLDINGS................................................
CODE OF ETHICS.............................................................................................................
SHARES OF THE TRUST..................................................................................................
Shares of Beneficial Interest...............................................................................
Voting Rights.......................................................................................................
Limitation of Shareholder Liability.......................................................................
Limitation of Trustee and Officer Liability............................................................
Limitation of Interseries Liability..........................................................................
NET ASSET VALUE OF SHARES......................................................................................
Portfolio Valuation...............................................................................................
DISTRIBUTIONS AND TAXES...........................................................................................
Distributions........................................................................................................
Federal Tax Status of the Funds.........................................................................
Shareholder Taxation..........................................................................................
MORE ABOUT PURCHASING AND SELLING SHARES...................................................
Share Class Availability........................................................................................
Investment Minimums..........................................................................................
Offering Price......................................................................................................
Calculation of the Sales Charge.........................................................................
Sales Charge on Class A Shares........................................................................
Sales Charge on Class C Shares.......................................................................
Purchase by Exchange.......................................................................................
Selling Shares....................................................................................................
                Redemptions in Kind..........................................................................................
ADDITIONAL INVESTOR SERVICES................................................................................
                Automatic Investment Plan.................................................................................
Systematic Withdrawal Plan...............................................................................
Systematic Exchange Plan.................................................................................
Reinstatement or Reinvestment Privilege...........................................................
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.........................................
FINANCIAL STATEMENTS.................................................................................................
    
    

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GENERAL INFORMATION
Madison Funds (the "Trust"), is a diversified, open-end management investment company consisting of separate investment portfolios or funds (each, a “fund” and collectively, the “funds”), each of which has a different investment objective and policies. Each fund is a diversified, open-end management investment company, commonly known as a mutual fund. The funds described in this SAI are as follows: Conservative Allocation, Moderate Allocation, Aggressive Allocation and Diversified Income Funds (collectively, the “Allocation Funds”);Tax-Free Virginia and Tax-Free National Funds (collectively, the “Tax-Free Funds”); High Quality Bond and Core Bond Funds (collectively, the “Income Funds”); Income, Covered Call & Equity Income, Dividend Income, Investors, Sustainable Equity, Mid Cap and Small Cap Funds (collectively, the “Equity Funds”) and International Stock Fund.
The Trust was organized under the laws of the state of Delaware on May 21, 1997 and is a Delaware statutory trust. As a Delaware statutory trust, the operations of the Trust are governed by its Amended and Restated Declaration of Trust (the “Declaration of Trust”) and its Certificate of Trust (the “Certificate”). The Certificate is on file with the Office of the Secretary of State in Delaware. Each shareholder agrees to be bound by the Declaration of Trust, as amended from time to time, upon such shareholder’s initial purchase of shares of beneficial interest in any one of the funds. Prior to February 2013, the Trust was known as MEMBERS Mutual Funds.
INVESTMENT PRACTICES
The prospectus describes the investment objective and policies of each of the funds. The following information is provided for those investors wishing to have more comprehensive information than that contained in the prospectus.
Since each Allocation Fund will invest in shares of other investment companies, except as disclosed in the prospectus, to the extent that an investment practice noted below describes specific securities, if an Allocation Fund invests in those securities, it does so indirectly, through its investment in underlying funds.
Lending Portfolio Securities
Each fund may lend portfolio securities. Loans will be made only in accordance with guidelines established by the Board of Trustees of the Trust (the “Board” or the “Board of Trustees”) and on the request of broker-dealers or institutional investors deemed qualified, and only when the borrower agrees to maintain cash or U.S. government securities as collateral with a fund equal at all times to at least 102% of the value of domestic securities and 105% of the value of non-domestic securities, based upon the prior days market value for securities loaned. A fund will continue to receive interest or dividends, in the form of substitute payments which may not be as beneficial from a tax perspective to the fund as the actual interest or dividend payment, on the securities loaned and will, at the same time, earn an agreed-upon amount of interest on the collateral which will be invested in readily marketable short-term, high quality government securities. A fund will retain the right to call the loaned securities and may call loaned voting securities if important shareholder meetings are imminent. Such security loans will not be made if, as a result, the aggregate of such loans exceeds 33⅓% of the value of a fund’s assets. The fund may terminate such loans at any time.
The primary risk associated with securities lending is loss associated with investment of cash and non-cash collateral. To mitigate this risk, the funds will invest collateral only in high quality government securities. A secondary risk is if the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons. To mitigate the risk, loans will be made only to firms deemed by the funds’ investment adviser, Madison Asset Management, LLC (“Madison” or the "Investment Adviser"), to be in good financial standing and will not be made unless, in Madison’s judgment, the consideration to be earned from such loans would justify the risk. The fund could experience delays and costs in recovering securities loaned or in gaining access to the collateral. Under the funds' agreement with State Street Bank and Trust Company, the fund's securities lending agent, the securities lending agent has provided a limited indemnification in the event of a borrower default. The funds do not have a master netting agreement.
Illiquid Securities
Each fund may invest in illiquid securities as a non-principal investment strategy up to 15% of its net assets. In accordance with Rule 22e-4 under the Investment Company Act of 1940, as amended (the "1940 Act"), the funds are subject to the guidelines set forth in the Trust’s liquidity risk management program, and a Fund may not acquire any illiquid investment if, immediately after the acquisition, the Fund would have invested more than 15% of its net assets in illiquid investments.  The term “illiquid security” is defined as a security that the Investment Adviser reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the security. 
Foreign Transactions
Foreign Securities. With the exception of the Tax-Free Funds, each fund may invest in foreign securities. Investing in foreign securities is a principal investment strategy of the International Stock Fund (refer to the prospectus for more information). The percentage limitations on each fund’s investment in foreign securities are set forth in the prospectus.
Foreign securities refers to securities that are: (i) issued by companies organized outside the U.S. or whose principal operations are outside the U.S., or issued by foreign governments or their agencies or instrumentalities (“foreign issuers”); (ii) principally traded outside of the U.S.; and/or (iii) quoted or denominated in a foreign currency (“non-dollar securities”).
Foreign securities may offer potential benefits that are not available from investments exclusively in securities of domestic issuers or dollar-denominated securities. Such benefits may include the opportunity to invest in foreign issuers that appear to offer better opportunity for long-term capital appreciation, more income or current earnings than investments in domestic issuers, the opportunity to invest in foreign countries with economic policies or business cycles different from those of the U.S. and the opportunity to invest in foreign securities markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in foreign securities involves significant risks that are not typically associated with investing in U.S. dollar-denominated securities or in securities of domestic issuers. Such investments may be affected by changes in currency exchange rates, changes in foreign or U.S. laws or restrictions applicable to such investments and in exchange control regulations (e.g., currency blockage). Some foreign stock markets may have
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substantially less volume than, for example, the New York Stock Exchange and securities of some foreign issuers may be less liquid than securities of comparable domestic issuers. Commissions and dealer mark-ups on transactions in foreign investments may be higher than for similar transactions in the U.S. In addition, clearance and settlement procedures may be different in foreign countries and, in certain markets, on certain occasions, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic companies. There may be less publicly available information about a foreign issuer than about a domestic one. In addition, there is generally less government regulation of stock exchanges, brokers, and listed and unlisted issuers in foreign countries than in the U.S. Furthermore, with respect to certain foreign countries, there is a possibility of expropriation or confiscatory taxation, imposition of withholding taxes on dividend or interest payments, limitations on the removal of funds or other assets of the fund making the investment, or political or social instability or diplomatic developments which could affect investments in those countries. Investments in short-term debt obligations issued either by foreign issuers or foreign financial institutions or by foreign branches of U.S. financial institutions (collectively, “foreign money market securities”) present many of the same risks as other foreign investments. In addition, foreign money market securities present interest rate risks similar to those attendant to an investment in domestic money market securities.
Investments in ADRs, EDRs, GDRs and SDRs. Many securities of foreign issuers are represented by American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and Swedish Depositary Receipts ("SDRs"). With the exception of the Tax-Free Funds, each fund may invest in ADRs, EDRs, GDRs and SDRs.
ADRs are receipts typically issued by a U.S. financial institution or trust company which represent the right to receive securities of foreign issuers deposited in a domestic bank or a foreign correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on exchanges or over-the-counter and are sponsored and issued by domestic banks. In general, there is a large, liquid market in the U.S. for ADRs quoted on a national securities exchange or the NASDAQ Global Market. The information available for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject.
EDRs, GDRs and SDRs are receipts evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in non-U.S. securities markets. EDRs are typically issued in bearer form and are designed for trading in the European markets. GDRs, including SDRs, are issued either in bearer or registered form, are designed for trading on a global basis. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security.
Depositary receipts do not eliminate all the risk inherent in investing in the securities of foreign issuers. To the extent that a fund acquires depositary receipts through banks which do not have a contractual relationship with the foreign issuer of the security underlying the receipt to issue and service such depositary receipts, there may be an increased possibility that the fund would not become aware of and be able to respond to corporate actions such as stock splits or rights offerings involving the foreign issuer in a timely manner. The market value of depositary receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the receipts and the underlying are quoted. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. However, by investing in depositary receipts rather than directly in the stock of foreign issuers, a fund will avoid currency risks during the settlement period for either purchases or sales.
Investments in Emerging Markets. Each fund, except the Tax-Free Funds, may invest in securities of issuers located in countries with emerging economies and/or securities markets, often referred to as “emerging markets.” For this purpose, emerging markets are those not normally associated with generally recognized developed markets identified by industry observers such as Standard and Poor's ("S&P") or Morgan Stanley Capital International ("MSCI"). Political and economic structures in many of these countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result, the risks of foreign investment generally, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the values of a fund’s investments in those countries and the availability to the fund of additional investments in those countries.
The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in those countries may also make investments in such countries illiquid and more volatile than investments in more developed markets, and the funds may be required to establish special custody or other arrangements before making certain investments in those countries. There may be little financial or accounting information available with respect to issuers located in certain of such countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers.
A fund’s purchase or sale of portfolio securities in certain emerging markets may be constrained by limitations as to daily changes in the prices of listed securities, periodic trading or settlement volume and/or limitations on aggregate holdings of foreign investors. Such limitations may be computed based on aggregate trading volume by or holdings of a fund, Madison or its affiliates, a subadviser and its affiliates, and each such person’s respective clients and other service providers. A fund may not be able to sell securities in circumstances where price, trading or settlement volume limitations have been reached.
Foreign investment in certain emerging securities markets is restricted or controlled to varying degrees that may limit investment in such countries or increase the administrative cost of such investments. For example, certain countries may restrict or prohibit investment opportunities in issuers or industries important to national interests. Such restrictions may affect the market price, liquidity and rights of securities that may be purchased by a fund.
Settlement procedures in emerging markets are frequently less developed and reliable than those in the U.S. and may involve a fund’s delivery of securities before receipt of payment for their sale. In addition, significant delays are common in certain markets in registering the transfer of securities. Settlement or registration problems may make it more difficult for a fund to value its portfolio assets and could cause a fund to miss attractive investment opportunities, to have its assets uninvested or to incur losses due to the failure of a counterparty to pay for securities that the fund has delivered or due to the fund’s inability to complete its contractual obligations.
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Currently, there is no market or only a limited market for many management techniques and instruments with respect to the currencies and securities markets of emerging market countries. Consequently, there can be no assurance that suitable instruments for hedging currency and market related risks will be available at the times when the Investment Adviser of the fund wishes to use them.
Sovereign Debt. The Core Bond Fund may invest in sovereign debt, which may trade at a substantial discount from face value. The funds may hold and trade sovereign debt of emerging market countries in appropriate circumstances and participate in debt conversion programs. Emerging country sovereign debt involves a high degree of risk, is generally lower-quality debt, and is considered speculative in nature. The issuer or governmental authorities that control sovereign debt repayment (“sovereign debtors”) may be unable or unwilling to repay principal or interest when due in accordance with the terms of the debt. A sovereign debtor’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy towards the International Monetary Fund (the “IMF”) and the political constraints to which the sovereign debtor may be subject. Sovereign debtors may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearage on their debt. The commitment of these third parties to make such disbursements may be conditioned on the sovereign debtor’s implementation of economic reforms or economic performance and the timely service of the debtor’s obligations. The sovereign debtor’s failure to meet these conditions may cause these third parties to cancel their commitments to provide funds to the sovereign debtor, which may further impair the debtor’s ability or willingness to timely service its debts. In certain instances, the International Stock Fund may invest in sovereign debt that is in default as to payments of principal or interest. Under these circumstances, the funds may incur additional expenses in connection with any restructuring of the issuer’s obligations or in otherwise enforcing its rights thereunder.
Supranational Entities. The Core Bond Fund may invest in securities issued by supranational entities, such as the International Bank for Reconstruction and Development (commonly called the “World Bank”), the Asian Development Bank and the Inter-American Development Bank. The governmental members of these supranational entities are “stockholders” that typically make capital contributions to support or promote such entities’ economic reconstruction or development activities and may be committed to make additional capital contributions if the entity is unable to repay its borrowings. A supranational entity’s lending activities may be limited to a percentage of its total capital, reserves and net income. There can be no assurance that the constituent governments will be able or willing to honor their commitments to those entities, with the result that the entity may be unable to pay interest or repay principal on its debt securities, and the fund may lose money on such investments. Obligations of a supranational entity that are denominated in foreign currencies will also be subject to the risks associated with investments in foreign currencies, as described in the section “Foreign Currency Transactions.”
Foreign Currency Transactions. Because investment in foreign issuers will usually involve currencies of foreign countries, and because each fund, except the Tax-Free Funds, may have currency exposure independent of their securities positions, the value of the assets of these funds, as measured in U.S. dollars, will be affected by changes in foreign currency exchange rates. An issuer of securities purchased by a fund may be domiciled in a country other than the country in whose currency the instrument is denominated or quoted.
Currency exchange rates may fluctuate significantly over short periods of time causing, along with other factors, a fund’s net asset value (“NAV”) to fluctuate as well. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the U.S. or abroad. The market in forward foreign currency exchange contracts and other privately negotiated currency instruments offers less protection against defaults by the other party to such instruments than is available for currency instruments traded on an exchange. To the extent that a substantial portion of a fund’s total assets, adjusted to reflect the fund’s net position after giving effect to currency transactions, is denominated or quoted in the currencies of foreign countries, the fund will be more susceptible to the risk of adverse economic and political developments within those countries.
In addition to investing in securities denominated or quoted in a foreign currency, certain of the funds may engage in a variety of foreign currency management techniques. These funds may hold foreign currency received in connection with investments in foreign securities when, in the judgment of the fund’s Investment Adviser, it would be beneficial to convert such currency into U.S. dollars at a later date, based on anticipated changes in the relevant exchange rate. These funds will incur costs in connection with conversions between various currencies.
Forward Foreign Currency Exchange Contracts. Each fund, except the Tax-Free Funds, may also purchase or sell forward foreign currency exchange contracts for defensive or hedging purposes when the fund’s Investment Adviser anticipates that the foreign currency will appreciate or depreciate in value, but securities denominated or quoted in that currency do not present attractive investment opportunities and are not held in the fund’s portfolio. In addition, these funds may enter into forward foreign currency exchange contracts in order to protect against anticipated changes in future foreign currency exchange rates and may engage in cross-hedging by using forward contracts in a currency different from that in which the hedged security is denominated or quoted if the fund’s Investment Adviser determines that there is a pattern of correlation between the two currencies.
These funds may enter into contracts to purchase foreign currencies to protect against an anticipated rise in the U.S. dollar price of securities it intends to purchase. They may enter into contracts to sell foreign currencies to protect against the decline in value of its foreign currency denominated or quoted portfolio securities, or a decline in the value of anticipated dividends from such securities, due to a decline in the value of foreign currencies against the U.S. dollar. Contracts to sell foreign currency could limit any potential gain which might be realized by a fund if the value of the hedged currency increased.
If a fund enters into a forward foreign currency exchange contract to buy foreign currency for any purpose, the fund will be required to place cash or liquid securities in a segregated account with the fund’s custodian in an amount equal to the value of the fund’s total assets committed to the consummation of the forward contract. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the segregated account so that the value of the account will equal the amount of a fund’s commitment with respect to the contract.
Forward contracts are subject to the risk that the counterparty to such contract will default on its obligations. Since a forward foreign currency exchange contract is not guaranteed by an exchange or clearinghouse, a default on the contract would deprive a fund of unrealized profits, transaction costs or the benefits of a currency hedge or force the fund to cover its purchase or sale commitments, if any, at the current market price.
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A fund will not enter into such transactions unless the credit quality of the unsecured senior debt or the claims-paying ability of the counterparty is considered to be investment grade by the fund’s Investment Adviser.
Forward foreign currency exchange contract transactions are considered transactions in derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Options on Foreign Currencies. Each fund, except the Tax-Free Funds, may also purchase and sell (write) put and call options on foreign currencies for the purpose of protecting against declines in the U.S. dollar value of foreign portfolio securities and anticipated dividends on such securities and against increases in the U.S. dollar cost of foreign securities to be acquired. These funds may use options on currency to cross-hedge, which involves writing or purchasing options on one currency to hedge against changes in exchange rates for a different currency, if there is a pattern of correlation between the two currencies. As with other kinds of option transactions, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received. A fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to a fund’s position, the fund may forfeit the entire amount of the premium plus related transaction costs. In addition, these funds may purchase call or put options on currency to seek to increase total return when the fund’s Investment Adviser anticipates that the currency will appreciate or depreciate in value, but the securities quoted or denominated in that currency do not present attractive investment opportunities and are not held in the fund’s portfolio. When purchased or sold to increase total return, options on currencies are considered speculative. Options on foreign currencies to be written or purchased by these funds will be traded on U.S. and foreign exchanges or over-the-counter. See the “Options on Securities and Securities IndicesRisks Associated with Options Transactions” section, below, for a discussion of the liquidity risks associated with options transactions.
Foreign currency options are considered derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Special Risks Associated with Options on Currency. An exchange traded options position may be closed out only on an options exchange which provides a secondary market for an option of the same series. Although a fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time. For some options no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that a fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the sale of underlying securities pursuant to the exercise of put options. If a fund as a covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to identify the underlying currency (or security quoted or denominated in that currency) until the option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of the Options Clearing Corporation inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers’ orders.
The amount of the premiums which a fund may pay or receive may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option purchasing and writing activities.
Options on Securities and Securities Indices
Writing Options. Each fund may write (sell) covered call and put options on any securities in which it may invest. A call option written by a fund obligates such fund to sell specified securities to the holder of the option at a specified price if the option is exercised at any time before the expiration date. All call options written by a fund are covered, which means that such fund will effectively own the securities subject to the option so long as the option is outstanding. It should be noted that a principal investment strategy of the Covered Call & Equity Income Fund is to write covered call put options (see the prospectus for more information). A fund’s purpose in writing covered call options is to realize greater income than would be realized on portfolio securities transactions alone. However, a fund may forgo the opportunity to profit from an increase in the market price of the underlying security.
A put option written by a fund would obligate such fund to purchase specified securities from the option holder at a specified price if the option is exercised at any time before the expiration date. All put options written by a fund would be covered, which means that such fund would have deposited with its custodian cash or liquid securities with a value at least equal to the exercise price of the put option. The purpose of writing such options is to generate additional income for a fund. However, in return for the option premium, a fund accepts the risk that it will be required to purchase the underlying securities at a price in excess of the securities’ market value at the time of purchase.
In addition, in the Investment Adviser’s discretion, a written call option or put option may be covered by maintaining cash or liquid securities (either of which may be denominated in any currency) in a segregated account with the fund’s custodian, by entering into an offsetting forward contract and/or by purchasing an offsetting option which, by virtue of its exercise price or otherwise, reduces a fund’s net exposure on its written option position.
Each fund may also write and sell covered call and put options on any securities index composed of securities in which it may invest. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. A fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the underlying index, or by having an absolute and immediate right to acquire such securities without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities in its portfolio. A fund may cover call and put options on a securities index by maintaining cash or liquid securities with a value equal to the exercise price in a segregated account with its custodian. Writing and selling options on securities indices is considered transacting in derivative securities. Except for the Covered Call & Equity Income Fund, the Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
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A fund may terminate its obligations under an exchange-traded call or put option by purchasing an option identical to the one it has written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as “closing purchase” transactions.
Purchasing Options. Each fund may purchase put and call options on any securities in which it may invest or options on any securities index based on securities in which it may invest. A fund would also be able to enter into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
A fund would normally purchase call options in anticipation of an increase in the market value of securities of the type in which it may invest. The purchase of a call option would entitle a fund, in return for the premium paid, to purchase specified securities at a specified price during the option period. A fund would ordinarily realize a gain if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise such a fund would realize a loss on the purchase of the call option.
A fund would normally purchase put options in anticipation of a decline in the market value of securities in its portfolio (“protective puts”) or in securities in which it may invest. The purchase of a put option would entitle a fund, in exchange for the premium paid, to sell specified securities at a specified price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of a fund’s securities. Put options may also be purchased by a fund for the purpose of affirmatively benefiting from a decline in the price of securities which it does not own. A fund would ordinarily realize a gain if, during the option period, the value of the underlying securities decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise such a fund would realize no gain or loss on the purchase of the put option. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of the underlying portfolio securities.
A fund would purchase put and call options on securities indices for the same purpose as it would purchase options on individual securities.
Yield Curve Options. The Tax-Free Funds and Income Funds may enter into options on the yield “spread,” or yield differential between two securities. Such transactions are referred to as “yield curve” options. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated securities, rather than the prices of the individual securities, and is settled through cash payments. Accordingly, a yield curve option is profitable to the holder if this differential widens (in the case of a call) or narrows (in the case of a put), regardless of whether the yields of the underlying securities increase or decrease.
These five (5) funds may purchase or write yield curve options for the same purposes as other options on securities. For example, a fund may purchase a call option on the yield spread between two securities if it owns one of the securities and anticipates purchasing the other security and wants to hedge against an adverse change in the yield between the two securities. A fund may also purchase or write yield curve options in an effort to increase its current income if, in the judgment of the Investment Adviser, the fund will be able to profit from movements in the spread between the yields of the underlying securities. The trading of yield curve options is subject to all of the risks associated with the trading of other types of options. In addition, however, such options present risk of loss even if the yield of one of the underlying securities remains constant, if the spread moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Tax-Free Funds and Income Funds will be “covered.” A call (or put) option is covered if a fund holds another call (or put) option on the spread between the same two securities and maintains in a segregated account with its custodian cash or liquid securities sufficient to cover the fund’s net liability under the two options. Therefore, a fund’s liability for such a covered option is generally limited to the difference between the amount of the fund’s liability under the option written by the fund less the value of the option held by the fund. Yield curve options may also be covered in such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations. Yield curve options are traded over-the-counter, and because they have been only recently introduced, established trading markets for these options have not yet developed.
Yield curve options are considered derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Risks Associated with Options Transactions. There is no assurance that a liquid secondary market on an options exchange will exist for any particular exchange-traded option or at any particular time. If a fund is unable to effect a closing purchase transaction with respect to covered options it has written, the fund will not be able to sell the underlying securities or dispose of assets held in a segregated account until the options expire or are exercised. Similarly, if a fund is unable to effect a closing sale transaction with respect to options it has purchased, it will have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Each fund may purchase and sell both options that are traded on U.S. and foreign exchanges (however, the Tax-Free Funds cannot purchase/sell options traded on foreign exchanges) and options traded over-the-counter with broker-dealers who make markets in these options. The ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, the funds will treat purchased over-the counter options and all assets used to cover written over-the-counter options as illiquid securities, except that with respect to options written with primary dealers in U.S. Government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to the formula.
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Transactions by a fund in options on securities and stock indices will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities governing the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert. Thus, the number of options which a fund may write or purchase may be affected by options written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading facility may order the liquidations of positions found to be in excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The successful use of protective puts for hedging purposes depends in part on the Investment Adviser’s ability to predict future price fluctuations and the degree of correlation between the options and securities markets.
Futures Contracts and Options on Futures Contracts
The Core Bond Fund may purchase and sell futures contracts and purchase and write options on futures contracts. The fund may purchase and sell futures contracts based on various securities (such as U.S. Government securities), securities indices, foreign currencies and other financial instruments and indices. The fund will engage in futures or related options transactions only for bona fide hedging purposes as defined below or for purposes of seeking to increase total returns to the extent permitted by regulations of the Commodity Futures Trading Commission (the “CFTC”), including applicable registration requirements. All futures contracts entered into by a fund are traded on U.S. exchanges or boards of trade that are licensed and regulated by the CFTC or on foreign exchanges.
Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a fund can seek through the sale of futures contracts to offset a decline in the value of its current portfolio securities. When rates are falling or prices are rising, a fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects anticipated purchases. Similarly, a fund can sell futures contracts on a specified currency to protect against a decline in the value of such currency and its portfolio securities which are denominated in such currency. Funds can purchase futures contracts on foreign currency to fix the price in U.S. dollars of a security denominated in such currency that such fund has acquired or expects to acquire.
Positions taken in the futures markets are not normally held to maturity, but are instead liquidated through offsetting transactions which may result in a profit or a loss. While a fund’s futures contracts on securities or currency will usually be liquidated in this manner, it may instead make or take delivery of the underlying securities or currency whenever it appears economically advantageous for the fund to do so. A clearing corporation (associated with the exchange on which futures on a security or currency are traded) guarantees that, if still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies. Hedging by use of futures contracts seeks to establish more certainty of (than would otherwise be possible) the effective price, rate of return or currency exchange rate on securities that the fund owns or proposes to acquire. The fund may, for example, take a “short” position in the futures market by selling futures contracts in order to hedge against an anticipated rise in interest rates or a decline in market prices or foreign currency rates that would adversely affect the U.S. dollar value of the fund’s portfolio securities. Such futures contracts may include contracts for the future delivery of securities held by a fund or securities with characteristics similar to those of the fund’s portfolio securities. Similarly, the fund may sell futures contracts on a currency in which its portfolio securities are denominated or in one currency to hedge against fluctuations in the value of securities denominated in a different currency if there is an established historical pattern of correlation between the two currencies.
If, in the opinion of the Investment Adviser, there is a sufficient degree of correlation between price trends for the fund’s portfolio securities and futures contracts based on other financial instruments, securities indices or other indices, the fund may also enter into such futures contracts as part of its hedging strategy. Although under some circumstances prices of securities in the fund’s portfolio may be more or less volatile than prices of such futures contracts, the Investment Adviser will attempt to estimate the extent of this difference in volatility based on historical patterns and to compensate for it by having the fund enter into a greater or lesser number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the fund’s securities portfolio. When hedging of this character is successful, any depreciation in the value of portfolio securities will substantially be offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the fund’s portfolio securities would be substantially offset by a decline in the value of the futures position.
On other occasions, the fund may take a “long” position by purchasing such futures contracts. This would be done, for example, when the fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on futures contracts will give the fund the right (but not the obligation) for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the fund obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the fund’s assets. By writing a call option, the fund becomes obligated, in exchange for the premium, to sell a futures contract which may have a value higher than the exercise price. Conversely, the writing of a put option on a futures contract generates a premium, which may partially offset an increase in the price of securities that the fund intends to purchase. However, the fund becomes obligated to purchase a futures contract, which may have a value lower than the exercise price. Thus, the loss incurred by the fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The fund will incur transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by selling or purchasing an offsetting option on the same series. There is no guarantee that such closing transactions can be effected. The fund’s ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid market.
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Other Considerations. Where permitted, the fund will engage in futures transactions and in related options transactions for hedging purposes or to seek to increase total return. The fund will determine that the price fluctuations in the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities held by the fund or which it expects to purchase. Except as stated below, each fund’s futures transactions will be entered into for traditional hedging purposes, that is to say, futures contracts will be used to protect against a decline in the price of securities (or the currency in which they are denominated) that the fund owns, or futures contracts will be purchased to protect the fund against an increase in the price of securities (or the currency in which they are denominated) it intends to purchase. As evidence of this hedging intent, the fund expects that on most of the occasions on which it takes a long futures or option position (involving the purchase of a futures contract), the fund will have purchased, or will be in the process of purchasing equivalent amounts of related securities (or assets denominated in the related currency) in the cash market at the time when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for a fund to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or other assets.
The CFTC, a federal agency, regulates trading activity in futures contracts and related options contracts pursuant to the Commodity Exchange Act, as amended (the “CEA”). The CFTC requires the registration of a commodity pool operator (“CPO”), which is defined as any person engaged in a business which is of the nature of an investment trust, syndicate or a similar form of enterprise, and who, in connection therewith, solicits, accepts or receives from others funds, securities or property for the purpose of trading in a commodity for future delivery on or subject to the rules of any contract market. The CFTC has adopted Rule 4.5, which provides an exclusion from the definition of commodity pool operator for any registered investment company which files a notice of eligibility. The investment adviser, on behalf of the Core Bond Fund, which may invest in futures transactions and related options transactions, has filed a notice of eligibility claiming exclusion from the status of CPO and, therefore, is not subject to registration or regulation as a CPO under the CEA. Prior to engaging in such transactions, should the eligibility for continuing the claim of exclusion no longer be available, the fund may be subject to registration or regulation as a CPO if no other exclusion from these requirements are then available.
As permitted, the fund will engage in transactions in futures contracts and in related options transactions only to the extent such transactions are consistent with the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), for maintaining its qualification as a regulated investment company for federal income tax purposes (see the “Distributions and Taxes” section, below).
Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating a fund to purchase securities or currencies, require the fund to segregate with its custodian cash or liquid securities in an amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce certain risks, such transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for the fund than if it had not entered into any futures contracts or options transactions. In the event of an imperfect correlation between a futures position and portfolio position which is intended to be protected, the desired protection may not be obtained and the fund may be exposed to risk of loss.
Perfect correlation between the fund’s futures positions and portfolio positions may be difficult to achieve. The only futures contracts available to hedge a fund’s portfolio are various futures on U.S. Government securities, securities indices and foreign currencies. In addition, it is not possible for a fund to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors not related to currency fluctuations.
Swap Agreements
The Core Bond Fund may enter into interest rate, credit default, index, currency exchange rate and total return swap agreements for hedging purposes in attempts to obtain a particular desired return at a lower cost to the fund than if the fund had invested directly in an instrument that yielded the desired return, and to seek to increase the fund’s total return. The funds may also enter into special interest rate swap arrangements such as caps, floors and collars for both hedging purposes and to seek to increase total return. The funds would typically use interest rate swaps to shorten the effective duration of their portfolios.
Swap agreements are contracts entered into by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular pre-determined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount” (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate), in a particular foreign currency, or in a “basket” of securities representing a particular index. The “notional amount” of the swap agreement is only a fictive basis on which to calculate the obligations the parties to a swap agreement have agreed to exchange. A fund’s obligations (or rights) under a swap agreement are equal only to the amount to be paid or received under the agreement based on the relative values of the positions held by each party (the “net amount”). A fund’s obligations under a swap agreement are accrued daily (offset against any amounts owing to the fund) and any accrued but unpaid net amounts owed to a swap counterparty are covered by the maintenance of a segregated assets.
Interest rate swaps involve the exchange by a fund with another party of their respective commitments to pay or receive interest, such as an exchange of fixed rate payments for floating rate payments. Credit default swaps involve a contract by a fund with another party to transfer the credit exposure of a specific commitment between the parties. Currency swaps involve the exchange by a fund with another party of their respective rights to make or receive payments in specified currencies. A total return swap involves an agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. The underlying asset that is used is usually an equities index, loan or a basket of assets. The purchase of an interest rate cap entitles the purchaser to receive from the seller of the cap payments of interest on a notional amount equal to the amount by which a specified index exceeds a stated interest rate. The purchase of an interest rate floor entitles the purchaser to receive from the seller of the floor payments of interest on a notional amount equal to the amount by which a specified index falls below a stated interest rate. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a stated range of interest rates. Since interest rate swaps, currency swaps and interest rate caps, floors and collars are individually negotiated, the funds expect to achieve an acceptable degree of correlation between their portfolio investments and their interest rate or currency swap positions entered into for hedging purposes.
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The funds may only enter into interest rate swaps on a net basis, which means the two payment streams are netted out, with the fund receiving or paying, as the case may be, only the net amount of the two payments. Interest rate swaps do not involve the delivery of securities, or underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the fund is contractually obligated to make. If the other party to an interest rate swap defaults, a fund’s risk of loss consists of the net amount of interest payments that the fund is contractually entitled to receive. In contrast, currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
To the extent the funds engage in such activity, the Trust would maintain in a segregated account with its custodian, cash or liquid securities equal to the net amount, if any, of the excess of each fund’s obligations over its entitlements with respect to swap transactions. The funds will not enter into swap transactions unless the unsecured commercial paper, senior debt or claims paying ability of the other party is considered investment grade by the Investment Adviser. If there is a default by the other party to such a transaction, the funds will have contractual remedies pursuant to the agreement related to the transaction.
The use of interest rate, credit default and currency swaps (including caps, floors and collars) is a highly specialized activity which involves investment techniques and risks different from those associated with traditional portfolio securities activities. If the Investment Adviser is incorrect in its forecasts of market values, interest rates and currency exchange rates, the investment performance of the funds would be less favorable than it would have been if this investment technique were not used.
In as much as swaps are entered into for good faith hedging purposes or are offset by segregated assets, the Investment Adviser does not believe that swaps constitute senior securities as defined in the 1940 Act, and, accordingly, will not treat swaps as being subject to the funds’ borrowing restrictions. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid compared with the markets for other similar instruments which are traded in the interbank market. Nevertheless, the staff of the SEC takes the position that currency swaps are illiquid investments subject to a fund’s 15% limitation on such investments.
In recent years, the SEC and the CFTC have adopted rules creating a new, comprehensive regulatory framework for swaps transactions. Under the new rules, certain swaps transactions are required to be executed on a regulated trading platform and cleared through a derivatives clearing organization. Additionally, the new rules impose other requirements on the parties entering into swaps transactions, including requirements relating to posting margin, and reporting and documenting swaps transactions. Funds engaging in swaps transactions may incur additional expense as a result of these new regulatory requirements. For these reasons, the Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in swap transactions for the Core Bond Fund.
Certain Bond Fund Practices
The Income Funds may invest all or a portion of their assets in debt securities. As stated in the prospectus, the funds will emphasize investment grade securities.
These funds may also make use of certain derivatives, such as options, to manage risks and returns, including the risk of fluctuating interest rates. These instruments will be used to control risk and obtain additional income and not with a view toward speculation. The funds will invest only in options which are exchange-traded or sold over-the-counter.
In the debt securities market, purchases of some issues are occasionally made under firm (forward) commitment agreements. The purchase of securities under such agreements can involve risk of loss due to changes in the market rate of interest between the commitment date and the settlement date. As a matter of operating policy, no fund will commit itself to forward commitment agreements in an amount in excess of 25% of total assets and will not engage in such agreements for leveraging purposes.
Lower-Rated Corporate Debt Securities
Each fund, except the Tax-Free Funds and High Quality Bond Fund, may make certain investments in corporate debt obligations that are unrated or rated below investment grade (i.e., ratings of BB or lower by Standard & Poor’s or Ba or lower by Moody’s). Bonds rated BB or Ba or below by Standard & Poor’s or Moody’s (or comparable unrated securities) are commonly referred to as “lower-rated” or “high yield” securities, or as “junk bonds,” and are considered speculative with regard to principal and interest payments. In some cases, such bonds may be highly speculative with a high probability of default. As a result, investment in such bonds will entail greater speculative risks than those associated with investment in investment-grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard & Poor’s or Aaa, Aa, A or Baa by Moody’s).
Factors having an adverse impact on the market value of lower rated securities will have an adverse effect on a fund’s NAV to the extent it invests in such securities. In addition, a fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings.
The secondary market for junk bond securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on a fund’s ability to dispose of a particular security when necessary to meet its liquidity needs. Under adverse market or economic conditions, the secondary market for junk bond securities could contract further, independent of any specific adverse changes in the condition of a particular issuer. As a result, a fund’s Investment Adviser could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. Prices realized upon the sale of such lower rated or unrated securities, under these circumstances, may be less than the prices used in calculating a fund’s NAV.
Since investors generally perceive that there are greater risks associated with lower-rated debt securities, the yields and prices of such securities may tend to fluctuate more than those of higher rated securities. In the lower quality segments of the fixed-income securities market, changes in perceptions of issuers’ creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in higher quality segments of the fixed-income securities market resulting in greater yield and price volatility.
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Another factor which causes fluctuations in the prices of fixed-income securities is the supply and demand for similarly rated securities. In addition, the prices of fixed-income securities fluctuate in response to the general level of interest rates. Fluctuations in the prices of portfolio securities subsequent to their acquisition will not affect cash income from such securities but will be reflected in a fund’s NAV.
Lower-rated (and comparable non-rated) securities tend to offer higher yields than higher-rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. Since lower rated securities generally involve greater risks of loss of income and principal than higher-rated securities, investors should consider carefully the relative risks associated with investment in securities which carry lower ratings and in comparable non-rated securities. In addition to the risk of default, there are the related costs of recovery on defaulted issues. A fund’s Investment Adviser will attempt to reduce these risks through diversification of these funds’ portfolios and by analysis of each issuer and its ability to make timely payments of income and principal, as well as broad economic trends in corporate developments.
Foreign Government Debt Securities
Each fund, except the Tax-Free Funds, may invest in debt obligations of foreign governments and governmental agencies, including those of countries with emerging economies and/or securities markets. Investment in sovereign debt obligations involves special risks not present in debt obligations of corporate issuers. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due in accordance with the terms of such debt, and the funds may have limited recourse in the event of a default. Periods of economic uncertainty or market stress may result in the volatility of market prices of sovereign debt, and in turn the fund’s NAV, to a greater extent than the volatility inherent in debt obligations of U.S. issuers. A sovereign debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward principal international lenders and the political constraints to which a sovereign debtor may be subject.
Convertible Securities
Each fund may invest in convertible securities. Convertible securities may include corporate notes or preferred stock but are ordinarily a long-term debt obligation of the issuer convertible at a stated conversion rate into common stock of the issuer. As with all debt and income-bearing securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. However, when the market price of the common stock underlying a convertible security exceeds the conversion price, the price of the convertible security tends to reflect the value of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a yield basis, and thus may not decline in price to the same extent as the underlying common stock. Convertible securities rank senior to common stocks in an issuer’s capital structure and are consequently of higher quality and entail less risk than the issuer’s common stock. In evaluating a convertible security, a fund’s Investment Adviser gives primary emphasis to the attractiveness of the underlying common stock. The convertible debt securities in which any other fund may invest are subject to the same rating criteria as that fund’s investments in non-convertible debt securities. Convertible debt securities, the market yields of which are substantially below prevailing yields on non-convertible debt securities of comparable quality and maturity, are treated as equity securities for the purposes of a fund’s investment policies or restrictions.
U.S. Government Securities
Each fund may purchase U.S. Government securities (subject to certain restrictions regarding mortgage-backed securities described in the “Mortgage-Backed (Mortgage Pass-Through) Securities” section, below). U.S. Government securities are obligations issued or guaranteed by the U.S. Government, its agencies, authorities or instrumentalities.
Certain U.S. Government securities, including U.S. Treasury bills, notes and bonds, and Government National Mortgage Association (“Ginnie Mae”) certificates, are backed by the full faith and credit guarantee of the U.S. Government. Certain other U.S. Government securities, issued or guaranteed by federal agencies or government sponsored enterprises, do not have the full faith and credit guarantee of the U.S. Government, but may be supported by the right of the issuer to borrow from the U.S. Treasury.
Pass-through securities that are issued by Ginnie Mae, the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal National Mortgage Association (“Fannie Mae”) are mortgage-backed securities which provide monthly payments which are, in effect, a “pass-through” of the monthly interest and principal payments (including any prepayments) made by individual borrowers on the pooled mortgage loans.
Collateralized mortgage obligations (“CMOs”) in which a fund may invest are securities that are collateralized by a portfolio of mortgages or mortgage-backed securities. Each fund may invest in separately traded principal and interest components of securities guaranteed or issued by the U.S. Treasury if such components are traded independently under the Separate Trading of Registered Interest and Principal of Securities program (“STRIPS”).
Each fund may acquire securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities in the form of custody receipts. Such receipts evidence ownership of future interest payments, principal payments or both on certain notes or bonds issued by the U.S. Government, its agencies, authorities or instrumentalities. For certain securities law purposes, custody receipts are not considered obligations of the U.S. Government.
Other Debt Securities
Zero Coupon, Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds. The Income Funds and Diversified Income Fund may invest in zero coupon bonds as well as in capital appreciation bonds (“CABs”), deferred interest and pay-in-kind bonds. Zero coupon, deferred interest, pay-in-kind and CABs are debt obligations which are issued at a significant discount from face value. The original discount approximates the total amount of interest the bonds will accrue and compound over the period until maturity or the first interest accrual date at a rate of interest reflecting the market rate of the security at the time of issuance.
Zero coupon bonds are debt obligations that do not entitle the holder to any periodic payments of interest prior to maturity or provide for a specified cash payment date when the bonds begin paying current interest. As a result, zero coupon bonds are generally issued and traded at a significant
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discount from their face value. The discount approximates the present value amount of interest the bonds would have accrued and compounded over the period until maturity. CABs are distinct from traditional zero coupon bonds because the investment return is considered to be in the form of compounded interest rather than accreted original issue discount. For this reason, the initial principal amount of a CAB would be counted against a municipal issuer’s statutory debt limit, rather than the total par value, as is the case for a traditional zero coupon bond.
Zero coupon bonds benefit the issuer by mitigating its initial need for cash to meet debt service, but generally provide a higher rate of return to compensate investors for the deferment of cash interest or principal payments. Such securities are often issued by companies that may not have the capacity to pay current interest and so may be considered to have more risk than current interest-bearing securities. In addition, the market price of zero coupon bonds generally is more volatile than the market prices of securities that provide for the periodic payment of interest. The market prices of zero coupon bonds are likely to fluctuate more in response to changes in interest rates than those of interest-bearing securities having similar maturities and credit quality.
Zero coupon bonds carry the additional risk that, unlike securities that provide for the periodic payment of interest to maturity, the fund will realize no cash until a specified future payment date unless a portion of such securities is sold. If the issuer of such securities defaults, the fund may obtain no return at all on its investment. In addition, the fund’s investment in zero coupon bonds may require it to sell certain of its portfolio securities to generate sufficient cash to satisfy certain income distribution requirements.
While zero coupon bonds do not require the periodic payment of interest, deferred interest bonds generally provide for a period of delay before the regular payment of interest begins. Although this period of delay is different for each deferred interest bond, a typical period is approximately one-third of the bond’s term to maturity. Pay-in-kind securities are securities that have interest payable by the delivery of additional securities. Such investments benefit the issuer by mitigating its initial need for cash to meet debt service, but some also provide a higher rate of return to attract investors who are willing to defer receipt of such cash. Such investments experience greater volatility in market value due to changes in interest rates than debt obligations which provide for regular payments of interest. A fund will accrue income on such investments for tax and accounting purposes, as required, which is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities to satisfy the fund’s distribution obligations.
Structured Securities. The Income Funds may invest in structured securities. The value of the principal of and/or interest on such securities is determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial indicators (the “Reference”) or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, may result in the loss of the fund’s investment. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may entail a greater degree of market risk than other types of fixed-income securities. Structured securities may also be more volatile, less liquid and more difficult to accurately price than less complex fixed-income investments.
Structured securities are considered transactions in derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Mortgage-Backed (Mortgage Pass-Through) Securities
The Income Funds may invest in mortgage-backed, or mortgage pass-through, securities, which are securities representing interests in “pools” of mortgage loans. Monthly payments of interest and principal by the individual borrowers on mortgages are passed through to the holders of the securities (net of fees paid to the issuer or guarantor of the securities) as the mortgages in the underlying mortgage pools are paid off. The average lives of these securities are variable when issued because their average lives depend on interest rates. The average life of these securities is likely to be substantially shorter than their stated final maturity as a result of unscheduled principal prepayments. Prepayments on underlying mortgages result in a loss of anticipated interest, and all or part of a premium if any has been paid, and the actual yield (or total return) to the holder of a pass-through security may be different than the quoted yield on such security. Mortgage prepayments generally increase with falling interest rates and decrease with rising interest rates. Like other fixed income securities, when interest rates rise, the value of a mortgage pass-through security generally will decline; however, when interest rates are declining, the value of mortgage pass-through securities with prepayment features may not increase as much as that of other fixed income securities due to increased principal prepayments.
Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by prepayments of principal resulting from the sale, refinancing or foreclosure of the underlying property, net of fees or costs which may be incurred. Some mortgage pass-through securities (such as securities issued by Ginnie Mae), are described as “modified pass-through.” These securities entitle the holder to receive all interest and principal payments owned on the mortgages in the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is Ginnie Mae, which is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of Federal Housing Administration-insured or Veteran’s Administration (VA)-guaranteed mortgages. These guarantees, however, do not apply to the market value or yield of mortgage pass-through securities. Ginnie Mae securities are often purchased at a premium over the maturity value of the underlying mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full faith and credit of the U.S. Government) include Fannie Mae and Freddie Mac. Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional residential mortgages (i.e., mortgages not insured or
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guaranteed by any governmental agency) from a list of approved seller/servicers which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment by Fannie Mae of principal and interest.
Freddie Mac was created by Congress in 1970 as a corporate instrumentality of the U.S. Government for the purpose of increasing the availability of mortgage credit for residential housing. Freddie Mac issues Participation Certificates (“PCs”) which represent interest in conventional mortgages (i.e., not federally insured or guaranteed) from Freddie Mac’s national portfolio. Freddie Mac guarantees timely payment of interest and ultimate collection of principal regardless of the status of the underlying mortgage loans.
The obligations of Fannie Mae and Freddie Mac are not guaranteed by the U.S. Government. Fannie Mae and Freddie Mac were placed into conservatorship by the Federal Housing Finance Agency (“FHFA”), an independent regulator, in 2008, and the FHFA succeeded to all of their rights, titles, powers, and privileges. Fannie Mae and Freddie Mac remain in conservatorship, and the effect that this conservatorship will have on the companies’ debt and equity securities is unclear. The FHFA has the right to transfer or sell any asset or liability of Fannie Mae or Freddie Mac without any approval, assignment or consent, although the FHFA has stated that it has no present intention to do so. In addition, holders of mortgage-backed securities issued by Fannie Mae or Freddie Mac may not enforce certain rights related to such securities against the FHFA, or the enforcement of such rights may be delayed, during the conservatorship.
The U.S. Department of the Treasury has taken steps to capitalize and provide financing to Fannie Mae and Freddie Mac and has agreed to purchase direct obligations and residential mortgage-backed securities issued or guaranteed by them in an effort to ensure their financial stability. However, there can be no assurance that the U.S. Government will continue to provide financial support to Fannie Mae and Freddie Mac and the future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements. Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury, noted that the guarantee structure of Fannie Mae and Freddie Mac required examination and that changes in the structures of the entities were necessary to reduce risk to the financial system.
The problems faced by Fannie Mae and Freddie Mac that resulted in their being placed into federal conservatorship have stirred debate among some federal policy makers regarding the continued role of the U.S. Government in providing liquidity for the residential mortgage market. The gradual recovery of the housing market has made Fannie Mae and Freddie Mac profitable again and increased the uncertainty about their futures. Proposals to end the conservatorships have included recapitalization initiatives, the use of loss-absorbing instruments, and regulatory capital and liquidity requirements to ensure that Fannie Mae and Freddie Mac can operate in a safe and sound manner without posing systemic risk to the economy. Furthermore, the existing purchase agreements with the US. Department of Treasury could be amended and further credit enhancements could be provided by guarantors chartered by the FHFA and other sources of first-loss private capital to ensure that payments on mortgage-backed securities remain supported. However, the success of any such reforms, whether accomplished through legislation or administrative rulemaking, depends on a number of political, economic, and other factors, which may or may not materialize. For example, future presidential or congressional elections may result in legal and regulatory changes to government-sponsored enterprises’ participation in the mortgage industry being reprioritized, revised, or abandoned altogether, and new guarantors and other sources of capital may not enter the secondary market for residential mortgage loans and mortgage-backed securities if reform efforts fail to reduce Fannie Mae’s and Freddie Mac’s competitive advantages. Accordingly, no assurances can be given that any existing credit support by the U.S. Government will continue to remain in place or that any proposed new credit enhancement proposals will be implemented.
Under the FHFA’s “Single Security Initiative,” Fannie Mae and Freddie Mac have entered into a joint initiative to develop a common securitization platform for the issuance of Uniform Mortgage-Backed Securities (“UMBS”), which would generally align the characteristics of Fannie Mae and Freddie Mac mortgage-backed securities. In June 2019, Fannie Mae and Freddie Mac started to issue UMBS in place of their current offerings of TBA-eligible mortgage-backed securities. The initial effects of the issuance of UMBS on the market for mortgage-related securities have been relatively minimal, however the long-term effects are still uncertain and the issuance of UMBS could have unanticipated or adverse effects
Credit unions, commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of mortgage loans. Such issuers may also be the originators and/or servicers of the underlying mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of mortgage loans in these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements.
Other Securities Related to Mortgages
CMOs and Multiclass Pass-Through Securities. The Income Funds may invest a portion of their assets in CMOs, which are debt obligations collateralized by mortgage loans or mortgage pass-through securities. The following is a description of CMOs and types of CMOs but is not intended to be an exhaustive or exclusive list of each type of CMO a fund may invest in. Typically, CMOs are collateralized by certificates issued by Ginnie Mae, Fannie Mae or Freddie Mac, but also may be collateralized by whole loans or private mortgage pass-through securities (such collateral collectively hereinafter referred to as “Mortgage Assets”). The funds listed above may also invest a portion of their assets in multiclass pass-through securities which are equity interests in a trust composed of Mortgage Assets. Unless the context indicates otherwise, all references herein to CMOs include multiclass pass-through securities. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs may be issued by agencies or instrumentalities of the United States government or by private originators of, or investors in, mortgage loans, including credit unions, savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit (“REMIC”).
In a CMO, a series of bonds or certificates are usually issued in multiple classes with different maturities. Each class of CMOs, often referred to as a “tranche,” is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all
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or a part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semiannual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. In a common structure, payments of principal, including any principal pre-payments, on the Mortgage Assets are applied to the classes of the series of a CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class of CMOs until all other classes having an earlier stated maturity or final distribution date have been paid in full. Certain CMOs may be stripped (securities which provide only the principal or interest factor of the underlying security). See the “–Stripped Mortgage-Backed Securities subsection, below, for a discussion of the risks of investing in these stripped securities and of investing in classes consisting primarily of interest payments or principal payments.
The funds listed above may also invest in parallel pay CMOs and Planned Amortization Class CMOs (“PAC Bonds”). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO structures, must be retired by its stated maturity date or final distribution date, but may be retired earlier. PAC Bonds generally require payments of a specified amount of principal on each payment date. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes.
CMOs and multiclass pass-through securities are considered derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Stripped Mortgage-Backed Securities. The Income Funds may invest a portion of their assets in stripped mortgage-backed securities (“SMBS”) which are derivative multiclass mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of Mortgage Assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the Mortgage Assets, while another class receives most of the interest and the remainder of the principal. In the most extreme case, one class will receive an “IO” (the right to receive all of the interest) while the other class will receive a “PO” (the right to receive all of the principal). The yield to maturity on an IO is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying Mortgage Assets, and a rapid rate of principal payments may have a material adverse effect on such security’s yield to maturity. If the underlying Mortgage Assets experience greater than anticipated prepayments of principal, a fund may fail to fully recoup its initial investment in these securities. The market value of the class consisting primarily or entirely of principal payments generally is unusually volatile in response to changes in interest rates.
Stripped mortgage-backed securities are considered transactions in derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Mortgage Dollar Rolls. The Income Funds may enter into mortgage “dollar rolls” in which the fund sells securities for delivery in the current month and simultaneously contracts with the same counterparty to repurchase substantially similar (same type, coupon and maturity) but not identical securities on a specified future date. During the roll period, a fund loses the right to receive principal and interest paid on the securities sold. However, a fund would benefit to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase as well as from the receipt of any associated fee income plus interest earned on cash proceeds of the securities sold until the settlement date for the forward purchase. Unless such benefits exceed the income, capital appreciation and gain or loss due to mortgage prepayments that would have been realized on the securities sold as part of the mortgage dollar roll, the use of this technique will diminish the investment performance of a fund. Successful use of mortgage dollar rolls depends upon the Investment Adviser’s ability to predict correctly interest rates and mortgage prepayments. There is no assurance that mortgage dollar rolls can be successfully employed. A fund will hold and maintain until the settlement date segregated cash or liquid assets in an amount equal to the forward purchase price. For financial reporting and tax purposes, each fund treats mortgage dollar rolls as two separate transactions; one involving the purchase of a security and a separate transaction involving a sale. These funds do not currently intend to enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls are considered transactions in derivative securities. The Investment Adviser must obtain the explicit approval of the Board of Trustees prior to engaging in derivative transactions of this type.
Municipal Securities
With regard to the Tax-Free Funds, Madison’s principal investment strategy is to invest in municipal securities. In addition, the Income Funds may, from time to time, invest in municipal bonds. However, there are many different kinds of municipal securities and Madison must make various decisions in its efforts to follow this principal investment strategy. The market for municipal securities is diverse and constantly changing. The following is therefore not necessarily a complete description of all types of municipal securities Madison may purchase for these funds.
Who Issues Municipal Securities in General? The term “municipal securities” includes a variety of debt obligations that are issued for public purposes by or on behalf of states, territories and possessions of the United States, their political subdivisions, the District of Columbia, Guam, Puerto Rico and other territories. They are also issued by the duly constituted authorities, agencies, public corporations and other instrumentalities of these jurisdictions.
What are Municipal Securities Used For? Municipal securities may be used for many public purposes, including constructing public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets, water and sewer works and gas and electric utilities. Municipal securities may also be used to refund outstanding obligations, to obtain funds to lend to other public institutions and certain private borrowers or for general operating expenses.
How are Municipal Securities Classified by Purpose? Municipal securities are usually classified as either “general obligation,” “revenue” or “industrial development.”
▪.General Obligation. General obligation securities are the obligations of an issuer with taxing power and are payable from the issuer’s general unrestricted revenues. These securities are backed by the full faith, credit and taxing power of the issuer for the payment of
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principal and interest. They are not limited to repayment from any particular fund or revenue source. For example, a bond issued directly by the State of Missouri is a general obligation bond.
▪.Revenue. Revenue securities are repayable only from revenues derived from a particular facility, local agency, special tax, facility user or other specific revenue source. Certain revenue issues may also be backed by a reserve fund or specific collateral. Ordinary revenue bonds are used to finance income producing projects such as public housing, toll roads and bridges. The investor bears the risk that the project will produce insufficient revenue and have insufficient reserves to cover debt service on the bonds.
▪.Industrial Development. Industrial development securities are revenue obligations backed only by the agreement of a specific private sector entity to make regular payments to the public authority in whose name they were issued. Collateral may or may not be pledged. States or local authorities generally issue industrial development securities on behalf of private organizations for the purpose of attracting or assisting local industry. These securities usually have no credit backing from any public body. Industrial development securities include pollution and environmental control revenue bonds. Industrial revenue bonds are used to finance privately-operated facilities for business, manufacturing, housing, sports and other purposes and are limited to $10 million per issuer, except when used for certain exempted purposes. Pollution and environmental control revenue bonds are used to finance air and water pollution control facilities required by private users. Repayment of revenue bonds issued to finance privately used or operated facilities is usually dependent entirely on the ability of the private beneficiary to meet its obligations and on the value of any collateral pledged.
How are Municipal Securities Further Classified? Municipal securities may be classified according to maturity as “notes” if up to about two years in term, or as “bonds” if longer in term.
▪.Callable Bonds. Callable municipal bonds are municipal bonds that contain a provision in the bond indenture permitting the issuer to redeem bonds prior to maturity. A bond indenture is the legal document that contains the important terms of the security. Callable bonds are generally subject to call during periods of declining interest rates. If the proceeds of a called bond under such circumstances are reinvested, the result may be a lower overall yield due to lower interest rates. If, when purchased, Madison paid a premium for the bond, some or all of that premium may not be recovered, depending on the call price.
▪.Notes. Notes are generally used to meet short-term financing needs and include the following specific types:
•     Tax Anticipation Notes. Normally, these are general obligation issues that are issued to meet cash needs prior to collecting taxes and generally are payable from specific future tax revenues.
•     Bond Anticipation Notes. Like tax anticipation notes, these also are normally general obligation issues. They are issued to provide interim financing in anticipation of sales of long-term bonds and generally are payable from the proceeds of a specific proposed bond issue.
•     Revenue Anticipation Notes. These may be general obligation issues and are issued to provide cash prior to receipt of expected non-tax revenues from a specific source, such as scheduled payments due from the federal government.
•     Project Notes. Local authorities issue these notes to finance various local redevelopment and housing projects conducted under sponsorship of the federal government. Project notes are guaranteed and backed by the full faith and credit of the United States.
•     Construction Loan Notes. These notes provide interim financing for construction projects. They are frequently issued in connection with federally insured or guaranteed mortgage financing and may also be insured or guaranteed by the federal government.
•     Tax-Exempt Commercial Paper. These notes (sometimes called “municipal paper”) are similar to conventional commercial paper, but are tax-free. Municipal paper may be either a general obligation or a revenue issue, although the latter is more common. These issues may provide greater flexibility in scheduling maturities than other municipal notes.
Municipal Lease Obligations. Municipalities issue municipal lease obligations to finance their obligation to pay rent on buildings or equipment they use. Madison intends to limit its investments in such obligations to those that represent liquid securities for purposes of each fund’s limitation on investments in illiquid securities. Madison will make daily determinations of the liquidity and appropriate valuation of each such obligation, basing its decision on all relevant facts including: (1) the frequency of trades and quotes for the obligation; (2) the number of dealers willing to purchase or sell the security; (3) the number of other potential buyers; (4) the willingness of dealers to make a market in the security; and (5) the nature of the marketplace. With regard to the nature of the marketplace, Madison will consider the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer.
    A municipal lease obligation will not be considered liquid unless there is reasonable assurance that its marketability will be maintained throughout the time Madison holds the instrument for the funds. Madison must conclude that the obligation is liquid considering: (1) whether the lease can be canceled; (2) what assurance there is that the assets represented by the lease can be sold; (3) the strength of the lessee’s general credit; (4) the likelihood that the municipality will discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality; and (5) Madison’s legal recourse in the event of failure to appropriate.
How Can You Tell the Identity of the Issuer? From time to time, Madison must make determinations as to the identity of the issuer of a particular municipal security. Madison will make this determination considering its understanding of the assets and revenue principally backing the issue and the most significant source of repayment of principal and interest for the issue. If the specific securities are backed by assets and revenues that are independent or separate from the assets and revenues of the jurisdiction or agency in whose name they were issued, then Madison will normally consider those securities to have a separate issuer.
What are the Risks of Geographic Concentration of Investments? If the credit standing of a particular state or type of issuer generally declined, then a fund could be more adversely affected than if its investments were more diversified. This risk is greatest in the Tax-Free Virginia Fund since it is expected to invest principally in the securities of one state.
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What are the Risks of Investing in Various Municipal Securities? Municipal securities generally are subject to possible default, bankruptcy or insolvency of the issuer. Principal and interest repayment may be affected by federal, state and local legislation, referendums, judicial decisions and executive acts. The tax-exempt status of municipal securities may be affected by future changes in the tax laws, litigation involving the tax status of the securities and errors and omissions by issuers and their counsel. Madison will not attempt to make an independent determination of the present or future tax-exempt status of municipal securities acquired for the funds.
    While most municipal securities have a readily available market, a variety of factors, including the scarcity of issues and the fact that tax-free investments are inappropriate for significant numbers of investors, limit the depth of the market for these securities. Accordingly, it may be more difficult for the funds to sell large blocks of municipal securities advantageously than would be the case with comparable taxable securities.
Summary of the Economy of Virginia (applicable to the Tax-Free Virginia Fund only). Virginia’s general fund revenue collections continue to outperform. Revenues exceeded budget by $3.0 billion in fiscal 2023, following $1.9 billion positive variance in fiscal 2022. The December 2023 revenue report shows fiscal 2024 revenues continuing this trend, coming in 7.1% ahead of December 2023 revenue forecast incorporated in the governor’s budget proposal, primarily due to strong personal income tax collections. Combined revenue stabilization fund and revenue reserve fund balances are strong and have grown to $3.8 billion at fiscal 2023 year-end, or more than 15% of revenue, with the fiscal year-end 2024 balance projected at almost $4.6 billion or more than 18% of revenues. Economic assumptions forecast a national GDP of only 1.5% in 2024 and 1.4% in 2025 which will be offset by the large surpluses Virginia has in its reserve fund. Virginia is expected to follow that trend although per capita personal income tax collections continue to exceed national levels (103%). The biggest risk factors to those assumptions are a major recession that significantly increases the unemployment rate and severely curtails consumer spending behavior. However, Virginia's proximity to Washington, D.C., and the stable federal employment base should mitigate many of those economic concerns. In addition, Virginia's own economic diversity, a sizable military presence, and the defense industry sector have been important job providers and stabilizing factors for its economy in the past. .
Virginia’s non-farm employment continued to grow in fiscal year 2023 at a rate of 2.7%. This was a modest slowdown from the rapid 3.3% growth rate in fiscal year 2022 and mirrored the national pattern of slowing employment growth. Virginia gained 107,300 jobs in fiscal 2023. This brought total employment to over 4.1 million, which eclipsed the pre-pandemic high of approximately 4.0 million employed in fiscal year 2019 and represents the highest fiscal year employment level in state history. The commonwealth’s unemployment rate inched down to 2.9% in fiscal year 2023, well below the national rate of 3.6 percent though the gap between the two has been narrowing. Improvement in the unemployment rate was relatively small because the labor force grew at a similar rate as employment in fiscal 2023 as more job seekers flowed back into the labor market.
Personal income provides an important gauge of the health of Virginia’s economy. It is also a key determinant of consumer spending, which accounts for nearly 70 percent of GDP at the national level. State personal income increased by 0.8 percent in fiscal 2023. This comes after a 1.6 percent decrease in fiscal year 2022 due to discontinuation of pandemic-related federal transfer payments. In comparison, real personal income shrank at the national level by 0.3 percent in fiscal 2023. Wages and salaries, which make up the majority of total personal income, grew 1.9 percent in fiscal 2023, slightly lower than the average 2.2 percent growth rate during the previous five fiscal years (2018-2022).
Specific to the state’s economic outlook, Standard & Poor’s believes the commonwealth will likely continue to demonstrate conservative financial management and make timely budget adjustments as necessary for structural balance if projected revenue growth fails to materialize. The commonwealth’s practice of fully funding pension payments and directing certain deposits to an additional revenue reserve fund as a continued focus on structural balance should continue to position Virginia for unexpected economic slowdowns or shortfalls. As such, Standard & Poor’s has assigned its highest rating of AAA with a stable outlook. However, if revenue significantly misses projections and budget management relies heavily on one-time resources or substantial draws on one-time reserves and liquidity sources with no plan to replenish, the rating could be adjusted lower.
According to S&P, Virginia’s general obligation (GO) debt reflects a diverse economy with a solid cash and liquidity position-especially in regard to managing the budget during the pandemic. In addition, the commonwealth maintains strong financial policies and practices throughout its long history of proactive and conservative financial management. Finally, moderate debt levels are expected to remain manageable.
Virginia has a manageable debt burden with low debt service carrying charges due to extraordinarily low interest rates. As of June 30, 2023, the Virginia Comprehensive Annual Financial Report ("CAFR") reported total debt of $55.4 billion, an increase of $1.7 billion, or 3.2 percent from the prior fiscal year. The commonwealth issued new debt in the amount of $4.7 billion which is a significant decrease from fiscal 2022 ($6.2 billion). Of this new debt, $1.6 billion was for the primary government and $3.1 billion for the component units. Tax-supported debt represented roughly 46% of total debt, of which 36% is scheduled to be retired within ten years. Total debt and aggregate tax-supported debt as a percentage of state GDP was 5.82% and 9.68%, respectively. Debt ratios are moderate, with overall tax-supported debt per capital of $1,500 and 2.2% of personal income.
As of the date of this SAI, bonds representing general obligations of the Commonwealth of Virginia carry ratings of AAA with a stable outlook by S&P and Aaa with a stable outlook by Moody’s.
Privately Arranged Loans and Participations
Madison may make or acquire participations in privately negotiated loans to municipal borrowers on behalf of the Tax-Free Funds. Frequently, such loans have variable interest rates and may be backed by a bank letter of credit. In other cases, they may be unsecured. If Madison engages in this type of investment strategy, Madison will rely on the opinion of tax or bond counsel to the borrower as to the tax status of these loans. Such transactions may provide an opportunity to achieve higher tax-free yields than would be available from municipal securities offered and sold to the general public.
Privately arranged loans, however, will generally not be rated by a credit rating agency and will normally be illiquid. In most cases, Madison will only be able to sell such loans through a provision requiring repayment following demand by the funds. Such loans made by the funds will normally have a demand provision permitting the funds to require repayment within seven days. Participations in such loans, however, may not have such a demand provision and may not be otherwise marketable. To the extent these securities are illiquid, they will be subject to each fund’s limitation on
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investments in illiquid securities. Recovery of an investment in any private loan that is illiquid and payable on demand may depend on the ability of the municipal borrower to meet an obligation for full repayment of principal and payment of accrued interest within the demand period. The demand period is normally seven days or less (unless Madison determines that a particular loan issue, unlike most such loans, has a readily available market). If appropriate, Madison will establish procedures to monitor the credit standing of each such municipal borrower, including its ability to honor contractual payment obligations.
Restricted Securities
Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933, as amended.  Where registration is required, a fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell a security and the time a fund may be permitted to sell a security under an effective registration statement.  If, during such a period, adverse market conditions were to develop, a fund might obtain a less favorable price than that which prevailed when it decided to sell.  Restricted securities will be priced at fair value as determined in good faith in accordance with methodologies approved by the Board.
Repurchase Agreements
Each fund may enter into repurchase agreements. In a repurchase agreement, a security is purchased for a relatively short period (usually not more than seven days) subject to the obligation to sell it back to the seller at a fixed time and price plus accrued interest. The funds will enter into repurchase agreements only with member banks of the Federal Reserve System, U.S. Central Credit Union and with “primary dealers” in U.S. Government securities. A fund’s Investment Adviser will continuously monitor the creditworthiness of the parties with whom the funds enter into repurchase agreements.
The Trust has established a procedure providing that the securities serving as collateral for each repurchase agreement must be delivered to the Trust’s custodian either physically or in book-entry form and that the collateral must be marked to market daily to ensure that each repurchase agreement is fully collateralized at all times. In the event of bankruptcy or other default by a seller of a repurchase agreement, a fund could experience delays in liquidating the underlying securities during the period in which the fund seeks to enforce its rights thereto, possible subnormal levels of income, declines in value of the underlying securities or lack of access to income during this period and the expense of enforcing its rights.
Reverse Repurchase Agreements
Each fund may also enter into reverse repurchase agreements which involve the sale of U.S. Government securities held in its portfolio to a bank with an agreement that the fund will buy back the securities at a fixed future date at a fixed price plus an agreed amount of “interest” which may be reflected in the repurchase price. Reverse repurchase agreements are considered to be borrowings by a fund entering into them. Reverse repurchase agreements involve the risk that the market value of securities purchased by a fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the fund which it is obligated to repurchase. A fund that has entered into a reverse repurchase agreement will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting their repurchase. To minimize various risks associated with reverse repurchase agreements, each fund will establish and maintain with the Trust’s custodian a separate account consisting of liquid securities, of any type or maturity, in an amount at least equal to the repurchase prices of the securities (plus any accrued interest thereon) under such agreements. No fund will enter into reverse repurchase agreements and other borrowings (except from banks as a temporary measure for extraordinary emergency purposes) in amounts in excess of 30% of the fund’s total assets (including the amount borrowed) taken at market value. No fund will use leverage to attempt to increase income. No fund will purchase securities while outstanding borrowings exceed 5% of the fund’s total assets. Each fund will enter into reverse repurchase agreements only with federally insured banks which are approved in advance as being creditworthy by the Board of Trustees. Under procedures established by the Board of Trustees, a fund’s Investment Adviser will monitor the creditworthiness of the banks involved.
Forward Commitment and When-Issued Securities
Each fund may purchase securities on a when-issued or forward commitment basis. “When-issued” refers to securities whose terms are specified and for which a market exists, but which have not been issued. Each fund will engage in when-issued transactions with respect to securities purchased for its portfolio in order to obtain what is considered to be an advantageous price and yield at the time of the transaction. For when-issued transactions, no payment is made until delivery is due, often a month or more after the purchase. In a forward commitment transaction, a fund contracts to purchase securities for a fixed price at a future date beyond customary settlement time.
When a fund engages in forward commitment and when-issued transactions, it relies on the seller to consummate the transaction. The failure of the issuer or seller to consummate the transaction may result in a fund’s losing the opportunity to obtain a price and yield considered to be advantageous. The purchase of securities on a when-issued or forward commitment basis also involves a risk of loss if the value of the security to be purchased declines prior to the settlement date.
On the date a fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the fund will segregate cash or liquid securities, of any type or maturity, equal in value to the fund’s commitment. These assets will be valued daily at market, and additional cash or securities will be segregated to the extent that the total value of the assets in the account declines below the amount of the when-issued commitments. Alternatively, a fund may enter into offsetting contracts for the forward sale of other securities that it owns.
Real Estate Investment Trusts
Each fund, except the Tax-Free Funds, may invest in shares of real estate investment trusts (“REITs”). REITs are pooled investment vehicles that invest primarily in income-producing real estate or real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest primarily in real property and earn rental income from leasing those properties.  They also may realize gains or losses from the sale of properties.  Equity REITs generally exercise some degree of control over the operational aspects of their real estate investments, lease terms and property maintenance and repair.  Mortgage REITs invest primarily in mortgages and similar real estate interests and receive interest payments from the owners of the mortgaged properties and are paid interest by the owners of the financed properties.  Hybrid REITs invest both in real property and in mortgages.  A REIT generally is not taxed on income distributed to its shareholders if it complies with certain federal income tax requirements relating primarily to its organization, ownership, assets and income and,
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further, if it distributes at least 90% its taxable income to its shareholders each year.  Consequently, REITs tend to focus on income-producing real estate investments. 
The funds’ investments in REITs may be adversely affected by deteriorations of the real estate rental market, in the case of REITs that primarily own real estate, or by deteriorations in the creditworthiness of property owners and changes in interest rates in the case of REITs that primarily hold mortgages.  Equity and mortgage REITs also are dependent upon specialized management skills, may not be diversified in their holdings and are subject to the risks of financing projects.  REITs also may be subject to heavy cash flow dependency, defaults by borrowers and self-liquidation.  Under certain circumstances, a REIT may fail to qualify for the special tax treatment available to REITs, which would subject the REIT to federal income taxes at the REIT level and adversely affect the value of its securities.
In general, qualified REIT dividends that an investor receives directly from a REIT are automatically eligible for the 20% qualified business income deduction available under Section 199A of the Code. Additionally, a dividend or part of a dividend paid by a regulated investment company and reported as a “Section 199A Dividend” is treated by the recipient as a qualified REIT dividend for purposes of the 20% qualified business income deduction.
Exchange-Traded Funds
Each fund may invest in exchange-traded funds (“ETFs”), which are shares of publicly-traded unit investment trusts, open-end funds, or depositary receipts that seek to track the performance and dividend yield of specific indexes or companies in related industries. These indexes may be either broad-based, sector or international. ETF shareholders are generally subject to the same risks as holders of the underlying securities they are designed to track.
ETFs are also subject to certain additional risks, including (i) the risk that their prices may not correlate perfectly with changes in the prices of the underlying securities they are designed to track, and (ii) the risk of possible trading halts due to market conditions or other reasons, based on the policies of the exchange upon which an ETF trades. In addition, an exchange-traded sector fund may be adversely affected by the performance of that specific sector or group of industries on which it is based. The fund would bear, along with other shareholders of an ETF, its pro rata portion of the ETF’s expenses, including management fees. Accordingly, in addition to bearing their proportionate share of the fund’s expenses (i.e., management fees and operating expenses), shareholders of the fund may also indirectly bear similar expenses of an ETF.
Shares of Other Investment Companies
Each fund, other than the Allocation Funds, may invest up to 10% of its assets in shares of other investment companies. Each fund, other than the Allocation Funds, and Diversified Income Fund, complies with the general statutory limits for such investments prescribed by the 1940 Act. The statutory limits are that immediately after any investment: (i) not more than 5% of a fund's total assets are invested in the securities of any one investment company; (ii) not more than 10% of a fund's total assets are invested in the aggregate in securities of investment companies as a group; (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by the fund; and (iv) not more than 10% of the outstanding voting stock of any one investment company will be owned in the aggregate by the fund and other investment companies advised by Madison, or any of its affiliates. Notwithstanding the foregoing, each fund may invest in shares of money market funds in excess of the above described statutory limitations, in accordance with the exemption contained in Rule 12d1-1 under the 1940 Act.
Rule 12d1-4 of the 1940 Act provides an exemption from Section 12(d)(1) that allows a fund to invest all of its assets in other registered funds, including ETFs, if the fund satisfies certain conditions specified in the Rule, including, among other conditions, that the fund and its advisory group will not control (individually or in the aggregate) an acquired fund (e.g., hold more than 25% of the outstanding voting securities of an acquired fund that is a registered open-end management investment company). However, such control and other conditions under Rule 12d1-4 do not apply if either the acquiring fund is in the same group of investment companies as the acquired fund, or the acquiring fund's subadviser or an affiliate is the acquired fund's adviser. Because the Allocation Funds and the Diversified Income Fund are structured as funds-of-funds, they rely on Rule 12d1-4 to implement their investment strategies.
As a shareholder of another investment company, a fund would bear, along with other shareholders, its pro rata portion of the expenses of such other investment company, including investment management fees, general fund expenses, trading, custodial and interest expenses and distribution/shareholder servicing fees (if any). These expenses would be in addition to the advisory and other expenses that a fund bears directly in connection with its own operations and may represent a duplication of fees to shareholders of the fund.
Temporary Defensive Positions
Although each fund expects to pursue its investment objective utilizing its principal investment strategies regardless of market conditions, each fund may invest up to 100% in money market securities as a defensive tactic in abnormal market conditions (with regard to the Tax-Free Funds, the funds may invest up to 100% in tax-free money market securities for this purpose).
With regard to the Tax-Free Funds, under normal market conditions, Madison does not intend to invest in any taxable securities on behalf of the funds. Madison may decide, however, that extraordinary conditions require it to purchase taxable investments. The “taxable investments” that Madison may purchase for the funds are limited to the following U.S. dollar denominated investments: (i) U.S. Government securities; (ii) obligations of banks having total assets of $750 million or more; (iii) commercial paper and other investment grade corporate debt securities; and (iv) repurchase agreements involving any of the foregoing securities or municipal securities. Maturities of taxable investments may exceed one year in extraordinary circumstances when Madison has determined to invest more than 20% of a fund’s assets in taxable securities.
To the extent any fund engages in a temporary defensive position in this manner, it would not be invested in accordance with its stated investment objectives.
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Definition of Market Capitalization
Market capitalization is the value of a corporation determined by multiplying total outstanding shares by the current market price. Total outstanding shares include common stock, non-restricted exchangeable shares and partnership units/membership interests where applicable. Exchangeable shares are shares which may be exchanged at any time, at the holder’s option, on a one-for-one basis for common stock. Membership or partnership units/interests represent an economic interest in a limited liability company or limited partnership. Market capitalization does not include preferred or convertible preferred stock, participating preferred stock, restricted or redeemable shares, warrants, rights or trust receipts.
Types of Investment Risk
Active or Frequent Trading Risk. The risk of the realization and distribution to shareholders of higher capital gains as compared to a series with less active trading policies. Frequent trading also increases transaction costs, which could detract from the performance.
Asset Allocation Risk. The risk that the selection of the underlying funds and the allocation of the fund’s assets among the various asset classes and market segments will cause the fund to underperform other funds with a similar investment objective.
Call Risk. The risk that the issuer of a security will retire or redeem (“call”) the security with a higher rate of interest before the scheduled maturity date when interest rates have declined.
Correlation Risk. The risk that changes in the value of a hedging instrument or hedging technique will not match those of the asset being hedged (hedging is the use of one investment to offset the possible adverse effects of another investment).
Counterparty Risk. The risk that the counterparty under an agreement will not live up to its obligations.
Credit Risk. The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise not honor a financial obligation.
Currency Risk. The risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the U.S. dollar value of an investment.
Cybersecurity Risk. The risks associated with computer systems, networks and devices to carry out routine business operations. These systems, networks and devices employ a variety of protections that are designed to prevent cyberattacks. Despite the various cyber protections utilized by the funds, the Investment Adviser, a subadviser to the funds, and other service providers, their systems, networks, or devices could potentially be breached. The funds, their shareholders, and the Investment Adviser could be negatively impacted as a result of a cybersecurity breach. The funds cannot control the cybersecurity plans and systems put in place by service providers or any other third parties whose operations may affect the funds.
Default Risk. It is possible that unexpected events could cause the issuer to be unable to pay either principal or interest on its bond. This could cause the bond to go into default and lose value. Some federal agency securities are not backed by the full faith and credit of the United States, so in the event of default, a fund would have to look to the agency issuing the bond for ultimate repayment.
Derivatives Risk. The risk that loss may result from investments in options, forwards, futures, swaps and other derivatives instruments. These instruments may be illiquid, difficult to price and leveraged so that small changes in the value of the underlying instruments may produce disproportionate losses to the fund. Derivatives are also subject to counterparty risk, which is the risk that the other party to the transaction will not fulfill its contractual obligations.
Depository Receipt Risk. Depository receipts, such as ADRs, and global depository receipts ("GDRs"), may be issued in sponsored or un-sponsored programs. In a sponsored program, a security issuer has made arrangements to have its securities traded in the form of depository receipts. In an un-sponsored program, the issuer may not be directly involved in the creation of the program. Depository receipts involve many of the same risks as direct investments in foreign securities. These risks include, but are not limited to. fluctuations in currency exchange rates, which are affected by international balances of payments and other financial conditions; government interventions; and speculation. With respect to certain foreign countries, there is the possibility of expropriation or nationalization of assets, confiscatory taxation, political and social upheaval, and economic instability. Investments in depository receipts that are traded over the counter may also be subject to liquidity risk.
Equity Risk. Equity risk is the risk that securities held will fluctuate in value due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities held by a fund participate, and the circumstances and performance of companies whose securities a fund holds. In addition, while broad market measures of common stocks have historically generated higher average returns than fixed income securities, common stocks have also experienced significantly more volatility in those returns.
ETF Risks. The main risks of investing in ETFs are the same as investing in a portfolio of equity securities comprising the index on which the ETF is based, although lack of liquidity in an ETF could result in it being more volatile than the securities comprising the index. Additionally, the market prices of ETFs will fluctuate in accordance with both changes in the market value of their underlying portfolio securities and due to supply and demand for the instruments on the exchanges on which they are traded (which may result in their trading at a discount or premium to their net asset values). Index-based ETF investments may not replicate exactly the performance of their specific index because of transaction costs and because of the temporary unavailability of certain component securities of the index.
Extension Risk. The risk that an unexpected rise in prevailing interest rates will extend the life of an outstanding mortgage-backed security by reducing the expected number of mortgage prepayments, typically reducing the security’s value.
Foreign Security Risk. Investments in foreign securities involve risks relating to currency fluctuations and to political, social, and economic developments abroad, as well as risks resulting from differences between the regulations to which U.S. and foreign issuers and markets are subject. The investment markets of emerging countries are generally more volatile than markets of developed countries with more mature economies.
Geopolitical and Economic Risk. Geopolitical events may cause market disruptions. For example, the United Kingdom (UK) withdrew from the European Union (EU) on January 31, 2020, following a June 2016 referendum referred to as “Brexit.” There is significant market uncertainty regarding Brexit’s longer term ramifications, and the range of possible political, regulatory, economic and market outcomes are difficult to predict. The uncertainty surrounding the UK’s economy may continue to be a source of instability and cause considerable disruption in securities markets,
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including increased volatility and illiquidity, as well as currency fluctuations in the British pound’s exchange rate against the U.S. dollar. In addition, uncertainties regarding the war between Russia and Ukraine, and the expanding conflict in the Middle East, have contributed to market volatility.
Growth Investing Risk. The risk that stocks with growth characteristics can experience sharp price declines as a result of earnings disappointments, even small ones. Investments in stocks with growth characteristics, will typically experience greater volatility over time than stocks with value characteristics.
Hedging Risk. When a fund hedges an asset it holds (typically by using a derivative contract or derivative security), any gain or loss generated by the hedge should be substantially offset by losses or gains on the hedged asset. Hedging is a useful way to reduce or eliminate risk of loss, but it will also reduce or eliminate the potential for investment gains.
Information Risk. The risk that key information about a security or market is inaccurate or unavailable.
Interest Rate Risk. The risk of declines in market value of an income bearing investment due to changes in prevailing interest rates. With fixed-rate securities, a rise in interest rates typically causes a decline in market values, while a fall in interest rates typically causes an increase in market values.
Interest Rate Policy Risk. Federal Reserve policy changes may expose fixed-income and related markets to heightened volatility and may reduce liquidity for certain fund investments, which could cause the value of a fund’s investments and share price to decline. Until recently, interest rates were historically low, but the Federal Reserve has recently increased interest rates quickly and significantly in an effort to combat inflation. As interest rates rise, the value of fixed-income investments will generally decrease. A fund that invests in derivatives tied to fixed-income markets may be more substantially exposed to these risks than a fund that does not invest in derivatives.
Large Cap Risk. Large capitalization companies may fall out of favor with investors based on market and economic conditions. In addition, larger companies may not be able to attain the high growth rates of successful smaller companies and may be less capable of responding quickly to competitive challenges and industry changes. As a result, the Fund’s value may not rise as much as, or may fall more than, the value of funds that focus on companies with smaller market capitalizations.
Leverage Risk. The risks associated with securities or investment practices that enhance return (or loss) without increasing the amount of investment, such as buying securities on margin or using certain derivative contracts or derivative securities. A fund’s gain or loss on a leveraged position may be greater than the actual market gain or loss in the underlying security or instrument. A fund may also incur additional costs in taking a leveraged position (such as interest on borrowings) that may not be incurred in taking a non-leveraged position.
Liquidity Risk. The risk that certain securities or other investments may be difficult or impossible to sell at the time the fund would like to sell them or at the price the fund values them.
Litigation Risk. The funds may be subject to third-party litigation, which could give rise to legal liability. These matters involving the funds may arise from their activities and investments and could have a materially adverse effect on the funds, including the expense of defending against claims and paying any amounts pursuant to settlements or judgments. There can be no guarantee that these matters will not arise in the normal course of business. If the funds were to be found liable in any suit or proceeding, any associated damages and/or penalties could have a materially adverse effect on the funds’ finances, in addition to being materially damaging to their reputation.
Management Risk. The risk that a strategy used by a fund’s Investment Adviser may fail to produce the intended result. This risk is common to all mutual funds.
Market Risk. The risk that the market value of a security may move up and down, sometimes rapidly and unpredictably, due to factors that have nothing to do with the issuer. This risk is common to all stocks and bonds and the mutual funds that invest in them.
Mid Cap Risk. Investments in midsize companies may entail greater risks than investments in larger, more established companies. Midsize companies tend to have narrower product lines, fewer financial resources. and a more limited trading market for their securities, as compared to larger companies. They may also experience greater price volatility than securities of larger capitalization companies because growth prospects for these companies may be less certain and the market for such securities may be smaller. Some midsize companies may not have established financial histories; may have limited product lines, markets, or financial resources; may depend on a few key personnel for management; and may be susceptible to losses and risks of bankruptcy.
Mortgage-Backed Securities Risk. The risk that mortgage holders prepay principal during a period of falling interest rates, a fund could be exposed to prepayment risk. In that case, a fund would have to reinvest the proceeds at a lower interest rate. The security itself may not increase in value with the corresponding drop in rates since the prepayment acts to shorten the maturity of the security.
Natural Event Risk. The risk of losses attributable to natural disasters, crop failures and similar events.
Non-Investment Grade Security Risk. Issuers of non-investment grade securities (i.e.,junk” bonds) are typically in weak financial health and their ability to pay interest and principal is uncertain. Compared to issuers of investment-grade bonds, they are more likely to encounter financial difficulties and to be materially affected by these difficulties when they do encounter them. “Junk” bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news.
Opportunity Risk. The risk of missing out on an investment opportunity because the assets necessary to take advantage of it are committed to less advantageous investments.
Political Risk. The risk of losses directly attributable to government actions or political events of any sort, including military actions and/or expropriation of assets.
Prepayment Risk. The risk that an unexpected fall in prevailing interest rates will shorten the life of an outstanding mortgage-backed security by increasing the expected number of mortgage prepayments, thereby reducing the security’s return.
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Real Estate Investment Trusts ("REITs") Risk. REITs pool investors’ funds for investment primarily in real estate properties or real estate-related loans. REITs generally derive their income from rents on the underlying properties or interest on the underlying loans, and their value is impacted by changes in the value of the underlying property or changes in interest rates affecting the underlying loans owned by the REITs. REITs are more susceptible to risks associated with the ownership of real estate and the real estate industry in general. These risks can include, but are not limited, fluctuations in the value of underlying properties; defaults by borrowers or tenants; market saturation; changes in general and local economic conditions; decreases in market rates for rents; increases in competition, property taxes, capital expenditures or operating expenses; and other economic, political or regulatory occurrences affecting the real estate industry. In addition, REITs depend upon specialized management skills, may not be diversified (which may increase the price volatility of REITs), may have less trading volume and liquidity, and may be subject to more abrupt or erratic price movements than the overall securities market. REITs are not taxed on income distributed to shareholders provided they comply with several requirements of the Internal Revenue Code of 1986, as amended (the "Code"). REITs are subject to the risk of failing to qualify for favorable tax treatment under the Code.
Small Cap Risk. Investments in small capitalization companies may entail greater risks than investments in larger, more established companies. Small companies tend to have narrower product lines, fewer financial resources and a more limited trading market for their securities, as compared to larger companies. The securities of smaller companies also experience greater price volatility than securities of larger capitalization companies. During certain periods, the liquidity of the securities of small cap companies may shrink or disappear suddenly and without warning as a result of adverse economic or market conditions, or adverse investor perceptions. This liquidity risk could translate into losses for a fund if it has to sell illiquid securities at a disadvantageous time. The costs of purchasing or selling securities of small capitalization companies are often greater than those of more widely traded securities. Securities of smaller capitalization companies can also be difficult to value.
Speculation Risk. Speculation is the assumption of risk in anticipation of gain but recognizing a higher-than-average possibility of loss. To the extent that a derivative contract or derivative security is used speculatively (i.e., not used as a hedge), a fund is directly exposed to the risks of that derivative contract or security. Gains or losses from speculative positions in a derivative contract or security may be substantially greater than the derivative contract or security’s original cost.
Sustainable Investment Risk. Sustainable investing involves investing in companies that embed sustainability in their overall strategy and demonstrate adherence to sustainable business practices. In pursuing such a strategy, a fund may be overweight or underweight in certain industries, or sectors relative to its benchmark index, which may cause the fund's performance to be sensitive to developments affecting those sectors. In addition, since sustainable investing takes into consideration factors beyond traditional financial analysis, the investment opportunities for a fund may be limited at times. As such, a fund may forgo opportunities to gain exposure to certain companies, industries or sectors, and it may choose to sell a security when it might otherwise be disadvantageous to do so. Sustainability related information provided by issuers and third parties, upon which the portfolio managers may rely, continues to develop, and may be incomplete, inaccurate, use different methodologies, or be applied differently across companies and industries. Madison’s framework of sustainable investing will vary from other managers. Further, the regulatory landscape for sustainable investing in the United States is still developing and future rules and regulations may require a fund to modify or alter its investment process. Similarly, government policies incentivizing companies to engage in sustainable practices may fall out of favor, which could potentially limit a fund’s investment universe. There is also a risk that the companies identified through the investment process may fail to adhere to sustainable business practices, which may result in a fund selling a security when it might otherwise be disadvantageous to do so.
Underlying Funds Risk. The risk that investment performance and its ability to achieve its investment goal are directly related to the performance of the underlying funds in which a fund invests. Each underlying fund’s performance, in turn, depends on the particular securities in which that underlying fund invests and the expenses of that underlying fund. Accordingly, the fund is subject to the risks of the underlying funds in direct proportion to the allocation of its assets among the underlying funds.
Valuation Risk. The risk that a fund could not sell a security or other portfolio investment for the market value or fair value established for it at any time. Similarly, the risk that the fair valuation of securities or other portfolio investments may result in greater fluctuation in their value from one day to the next than would be the case if the market values were available.
Value Investing Risk. The risk that “value” stocks are subject to the risk that their perceived intrinsic values may never be realized by the market, and to the risk that, although the stock is believed to be undervalued, it is appropriately priced or overpriced due to unanticipated problems associated with the issuer or industry.
FUND NAMES
The Tax-Free Funds, Income Funds, Dividend Income, Sustainable Equity, Mid Cap, Small Cap and International Stock Funds have names that suggest a focus on a particular industry, group of industries or type of investment. In accordance with the provisions of Rule 35d-1 of the 1940 Act as currently in effect, each of these funds will, under normal circumstances, invest at least 80% of its assets in the particular industry, group of industries, or type of investment of the type suggested by its name (the “80% policy”). For this purpose, “assets” means net assets plus the amount of any borrowings for investment purposes. In addition, in appropriate circumstances, synthetic investments may be included in the 80% basket if they have economic characteristics similar to the other investments included in the basket. Bonds that are subject to the federal alternative minimum tax are not considered “tax-free” for purposes of the requirement of the Tax-Free Funds to invest at least 80% of their assets in securities that generate tax-exempt income.
Except as provided below with regard to the Tax-Free Funds, a fund’s 80% policy is not a “fundamental” one, which means that it may be changed without the vote of a majority of the fund’s outstanding shares as defined in the 1940 Act. Accordingly, the names of these funds may be changed at any time by a vote of the Board of Trustees. As required by Rule 35d-1, shareholders of funds subject to Rule 35d-1 will receive a 60-day written notice of any change to the investment policy describing the type of investment that the name suggests.
With regard to the Tax-Free Funds, the funds’ 80% policy is, in fact, a “fundamental” one, which means that it may not be changed without the vote of a majority of the respective fund’s outstanding shares as defined in the 1940 Act.
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INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to the investment of assets and the activities of each fund. The policies listed below are fundamental and may not be changed for a fund without the approval of the holders of a majority of the outstanding votes of that fund (which for this purpose and under the 1940 Act means the lesser of (i) sixty-seven percent (67%) of the outstanding votes attributable to shares represented at a meeting at which more than fifty percent (50%) of the outstanding votes attributable to shares are represented or (ii) more than fifty percent (50%) of the outstanding votes attributable to shares). Except as noted below, none of the funds within the Trust may:
1.with respect to 75% of the fund’s total assets, purchase securities of an issuer (other than the U.S. Government, its agencies or instrumentalities), if (i) such purchase would cause more than 5% of the fund’s total assets taken at market value to be invested in the securities of such issuer or (ii) such purchase would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the fund;
2.invest 25% or more of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry (excluding the U.S. Government or any of its agencies or instrumentalities); provided that each Allocation Fund may invest more than 25% of its assets in any one underlying affiliated fund;
3.borrow money, except that it may (a) borrow from any lender for temporary purposes in amounts not in excess of 5% of its total assets and (b) borrow from banks in any amount for any purpose, provided that immediately after borrowing from a bank the fund’s aggregate borrowings from any source do not exceed 33 1/3% of the fund’s total assets (including the amount borrowed). If, after borrowing from a bank, a fund’s aggregate borrowings later exceed 33 1/3% of the fund’s total assets, the fund will, within three days after exceeding such limit (not including Sundays or holidays), reduce the amount of its borrowings to meet the limitation. A fund may make additional investments while it has borrowings outstanding. A fund may make other borrowings to the extent permitted by applicable law;
4.make loans, except through (a) the purchase of debt obligations in accordance with the fund’s investment objective and policies, (b) repurchase agreements with banks, brokers, dealers and other financial institutions, and (c) loans of securities as permitted by applicable law;
5.underwrite securities issued by others, except to the extent that the sale of portfolio securities by the fund may be deemed to be an underwriting;
6.purchase, hold or deal in real estate, although a fund may purchase and sell securities that are secured by real estate or interests therein, securities of real estate investment trusts and mortgage-related securities and may hold and sell real estate acquired by a fund as a result of the ownership of securities;
7.invest in commodities or commodity contracts, except that the fund may invest in currency, and financial instruments and contracts that are commodities or commodity contracts; or
8.issue senior securities to the extent such issuance would violate applicable law.
With regard to fundamental policy 2 above, as it relates to the Allocation Funds, Madison looks through to the assets held by affiliated underlying funds for purposes of the industry concentration limit, and for unaffiliated underlying funds, Madison applies the test the same way based on what Madison knows about the underlying fund.
With regard to fundamental policy 8 above, Section 18(f) of the 1940 Act prohibits an investment company from issuing a “senior security” except under certain circumstances. A “senior security” is any security or obligation that creates a priority over any other class to a distribution of assets or payment of a dividend. Permissible “senior securities” include, among other things, a borrowing from a bank where the fund maintains an asset coverage ratio of at least 300% while the borrowing is outstanding.
In addition to the fundamental policies listed above, the investment objective of each fund is a fundamental policy that cannot be changed without the approval of a majority of the fund’s outstanding voting securities.
The following restrictions are not fundamental policies and may be changed without the approval of the shareholders in the affected fund:
1.no fund will sell securities short or maintain a short position, except for short sales against the box;
2.no fund will purchase illiquid securities if more than 15% of the total assets of the fund, taken at market value, would be invested in such securities;
3.with regard to the fundamental policy on industry concentration as it relates to the Tax-Free Funds, (i) in addition to U.S. Government securities, obligations which provide income exempt from federal income taxes are also excluded for purposes of the 25% limitation; (ii) the general obligations of governmental units are not considered related to any industry;1 and (iii) industrial revenue obligations are classified by the industry of the private user;
4.with regard to the Tax-Free Funds and the Core Bond, and High Quality Bond Funds, no such fund will invest more than 5% of the value of its total assets (determined as of the date of purchase) in the securities of any one issuer (other than securities issued or guaranteed by the United States Government or any of its agencies or instrumentalities and excluding bank deposits), and Madison will not purchase, on behalf of any such fund, any securities when, as a result, more than 10% of the voting securities of the issuer would be held by the fund. For purposes of these restrictions, the issuer is deemed to be the specific legal entity having ultimate responsibility for payment of the obligations evidenced by the security and whose assets and revenues principally back the security;
5.with regard to the Tax-Free Funds, to the extent either of the funds invest in fixed income securities, only investment grade fixed income securities shall be purchased, with the lowest rated securities purchased by the Tax-Free Virginia Fund being those rated BBB or Baa;
6.with regard to the High Quality Bond Fund, only investment grade securities shall be purchased; and
7.with regard to the Core Bond Fund, at least 65% of the fund’s assets must be invested in investment grade securities.
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1However, revenue obligations backed by particular projects are considered related to the industry classifications of the associated projects.

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Except for the limitations on borrowing from banks, if the above percentage restrictions, or any restrictions elsewhere in this SAI or in the prospectus covering fund shares, are adhered to at the time of investment, a later increase or decrease in such percentage resulting from a change in values of securities or amount of net assets will not be considered a violation of any of the foregoing restrictions.

Notwithstanding the foregoing investment limitations, the underlying funds in which the Allocation Funds may invest may have adopted certain investment restrictions that may be more or less restrictive than those listed above, thereby permitting an Allocation Fund to engage indirectly in investment strategies that may be prohibited under the investment limitations listed above. The investment restrictions of each underlying fund are set forth in the prospectus and SAI for that underlying fund.
PORTFOLIO TURNOVER
Each fund will trade securities held by it whenever, in the Investment Adviser’s view, changes are appropriate to achieve the stated investment objectives. The Investment Adviser does not anticipate that unusual portfolio turnover will be required and intends to keep such turnover to moderate levels consistent with the objectives of each fund. Although the Investment Adviser makes no assurances, it is expected that the annual portfolio turnover rate for each fund will be generally less than 100%. This would mean that normally less than 100% of the securities held by the fund would be replaced in any one year.
For each of the two fiscal years ended October 31, portfolio turnover for each fund was as follows:
Fund 2023 2022 Fund 2023 2022
Conservative Allocation¹ 53% 84%
Covered Call & Equity Income
102% 99%
Moderate Allocation¹ 67% 95% Dividend Income 26% 33%
Aggressive Allocation¹ 71% 99% Investors 22% 18%
Diversified Income2
118% 32%
Sustainable Equity Fund
34% 12%
Tax-Free Virginia 15% 17% Mid Cap 10% 24%
Tax-Free National 16% 10% Small Cap 39% 41%
High Quality Bond 45% 23%
International Stock
22% 31%
Core Bond 30% 21%
1 Turnover for 2023 was lower than 2022 due to lesser amounts of asset allocation changes made in the portfolio compared to a more volatile market in 2022;
2 Turnover for 2023 was higher than 2022 due to a change in the fund's principal investment strategies on July 31, 2023.

MANAGEMENT OF THE TRUST
Trustees and Officers
The Trust is governed by the Board of Trustees. The Board has the duties and responsibilities set forth under the applicable laws of the State of Delaware, including but not limited to the management and supervision of the funds.
The Board of Trustees, from time to time, may include individuals who may be deemed to be affiliated persons of Madison. At all times, however, a majority of Board members will not be affiliated with Madison or the funds (collectively referred to herein as the “Independent Trustees”). Effective February 2024, the Board of Trustees revised its retirement policy such that under the current policy, a Board member must retire at the end of the calendar year in which he or she attains the age of seventy-six (76), subject to extension by unanimous vote of the remaining Board members of the Trust (including any interested Trustees).
The funds do not hold annual shareholder meetings, but may hold special meetings for such purposes as electing or removing Board members, changing fundamental policies, approving certain management contracts, approving or amending a 12b-1 plan, or as otherwise required by the 1940 Act or the Declaration of Trust.
The address of each Trustee and officer is 550 Science Drive, Madison, Wisconsin 53711.
21


Independent Trustees
 
Name and
Age
Position(s) Held, First Elected and Term of Office1
Principal Occupation(s) During Past Five Years
Portfolios Overseen in Fund Complex by Trustee2
Other Directorships
Held by Trustee
Scott C. Jones
61
Trustee,
since 2019; Indefinite term
Managing Director, Carne Global Financial Services (US) LLC (a provider of independent governance and distribution support for the asset management industry), Chicago, IL, 2013 - Present
Managing Director, Park Agency, Inc., (a family investment office), Chicago, IL, 2020 - Present

16
Madison Covered Call & Equity Strategy Fund ("MCN"), 2021 - Present
XAI Octagon Floating Rate & Alternative Income Term Trust, 2017 - Present;
Manager Directed Portfolios (open-end fund family, 9 portfolios), 2016 - Present and Lead Independent Trustee since 2017;
Guestlogix Inc. (a provider of ancillary-focused technology to the travel industry), 2015 - 2016
Steven P. Riege
69
Trustee,
since 2005; Indefinite term
Ovation Leadership (management consulting), Milwaukee, WI, Owner/President, 2001 – Present
Robert W. Baird & Company (financial services), Milwaukee, WI, Senior Vice President-Marketing and Vice President-Human Resources, 1986 – 2001
34
Ultra Series Fund ("USF") (14), 2005 – Present;
MCN, 2015 - Present
Madison ETFs Trust ("Madison ETFs") (4), June 2023 – Present
Richard E. Struthers
71
Trustee,
since 2004; Indefinite term
Clearwater Capital Management (investment advisory firm), Naples, FL, Chair and Chief Executive Officer, 1998 – Present
Park Nicollet Health Services, Minneapolis, MN, Chairman, Finance and Investment Committee, 2006 – 2012
34
USF (14), 2004 – Present;
MCN, 2017 - Present
Madison ETFs (4), June 2023 – Present

1 Board terms are indefinite, subject to the Board's retirement policy.
2 As of the date of this SAI, the "Fund Complex" consists of Madison Funds with 15 portfolios, the Ultra Series Fund with 14 portfolios, the Madison Covered Call & Equity Strategy Fund (closed end fund), and the Madison ETFs Trust with 4 active portfolios for a grand total of 34 separate portfolios in the Fund Complex. Not every Trustee is a member of the Board of Trustees of every fund in the Fund Complex, as noted above. References to the “Fund Complex” in this SAI have the meaning disclosed in this footnote.
22


Interested Trustees and Officers
Name and
Age
Position(s) Held, Length of Time Served and Term of Office2
Principal Occupation(s) During Past Five Years
Portfolios Overseen in Fund Complex by Trustee3
Other Directorships Held by Trustee
Jill A. Friedow1
59
Trustee, since
2023; Indefinite term
Vice President,
2023 – Present
Madison Investment Holdings, Inc. (“MIH”), Madison Investment Advisors, LLC (“MIA”), and Madison Asset Management, LLC (“Madison”), Chief Technology Officer & Director of Operations, 2019-Present; Vice President & Director of Operations, 2010 - 2019; Vice President & Operations Manager, 2003-2010; Operations Manager, 1999-2003
USF (14), Vice President, 2023 – Present; MCN, Vice President, 2023 – Present
30
USF (14), 2023 – Present;
MCN, 2023 – Present
Patrick F. Ryan
44
President,
2020 - Present
MIH, MIA and Madison, Head of Multi-Asset Solutions and Portfolio Manager, 2018 – Present; Co-Head of Multi-Asset Solutions and Portfolio Manager, 2016 – 2017
USF (14) and MCN, President, March 2020 - Present;
Madison ETFs (4), President, June 2023 – Present
N/A
N/A
Greg D. Hoppe
54
Vice President,
2020 – Present;
Chief Financial Officer, 2019 - Present;
Treasurer, 2009 – 2019
MIH and MIA, Vice President, 1999 - Present; Madison, Vice President, 2009 - Present
USF (14), Vice President, 2020 – Present; Chief Financial Officer, 2019 – Present; Treasurer, 2009 – 2019; MCN, Vice President, 2020 – Present; Chief Financial Officer, 2019 – Present; Treasurer, 2012 - 2019; Madison ETFs (4), Chief Financial Officer, Vice President, Treasurer, June 2023 – Present; Madison Strategic Sector Premium Fund, Treasurer, 2009 - 2018
N/A
N/A
Holly S. Baggot
62
Secretary, 1999 - Present;
Assistant Treasurer,
1999 – 2007 and 2009 – Present; Treasurer, 2008
Anti-Money Laundering Officer, 2019-2020 and 2022 - Present
MIH and MIA, Vice President, 2010 - Present; Madison, Vice President, 2009 - Present; MFD Distributor, LLC (“MFD”) (an affiliated brokerage firm of Madison), Vice President, 2012 - Present
USF (14), Secretary, 1999 - Present and Assistant Treasurer, 2009 - Present; MCN, Secretary and Assistant Treasurer, 2012 - Present; Madison ETFs (4), Secretary and Assistant Treasurer, June 2023 – Present; USF and MCN, Anti-Money Laundering Officer, 2019 - 2020; Madison Strategic Sector Premium Fund, Secretary and Assistant Treasurer, 2010 - 2018
N/A
N/A
Steve J. Fredricks
53
Chief Compliance Officer and Assistant Secretary, 2018 – Present
MIH, MIA and Madison, Chief Legal Officer, 2020 - Present and Chief Compliance Officer, 2018 – Present
USF (14) and MCN, Chief Compliance Officer and Assistant Secretary, 2018 - Present; Madison ETFs (4), Chief Compliance Officer and Assistant Secretary, June 2023 - Present; Madison Strategic Sector Premium Fund, Chief Compliance Officer during 2018.
Jackson National Asset Management, LLC, Senior Vice President and Chief Compliance Officer, 2005 - 2018
N/A
N/A
Terri A. Wilhelm
54
Assistant Secretary,
November 2022 – Present
MIH, MIA and Madison, Senior Compliance Analyst,
September 2022 – Present
USF (14) and MCN, Assistant Secretary, 2022 – Present; Madison ETFs (4), Assistant Secretary, June 2023 – Present
State of Wisconsin Investment Board, Senior Paralegal, 2017 – 2022
N/A N/A
1 "Interested person" as defined in the 1940 Act. Considered an interested Trustee because of the position held with Madison.
2 Board terms are subject to the Board's retirement policy. In addition, officers are elected by the Board of Trustees annually.
3 As of the date of this SAI, the "Fund Complex" consists of Madison Funds with 15 portfolios, the Ultra Series Fund with 14 portfolios, the Madison Covered Call & Equity Strategy Fund (closed end fund), and the Madison ETFs Trust with 4 active portfolios for a grand total of 34 separate portfolios in the Fund Complex. References to the “Fund Complex” in this SAI have the meaning disclosed in this footnote.

23


Trustee Compensation

During the fiscal year ended October 31, 2023, the Trustees were compensated as follows:
Trustee Name Aggregate Compensation from Trust
Total Compensation Fund Complex1
Scott C. Jones $62,000 $74,000
Steven P. Riege $66,900 $123,000
Richard E. Struthers $62,000 $115,000
Jill Friedow2
None None
1 The Trust consists of 15 separate portfolios, and the “Fund Complex” consists of 34 separate portfolios, as described in more detail above. Not every Trustee is a member of the Board of Trustees of every fund in the Fund Complex, as noted above.
2 Non-compensated interested Trustee.
The Fund Complex does not have any sort of pension or retirement plans for the benefit of Trustees. However, as an employee of Madison, Ms. Friedow participates in a profit sharing plan sponsored by Madison for the benefit of its employees. No part of such plan is secured or funded by the Fund Complex. There have been no arrangements or understandings between any Trustee or officer and any other person(s) pursuant to which (s)he was selected as a Trustee or officer.
Board Qualifications
The members of the Board of Trustees each have experience that led fund management to the conclusion that each should serve as a member of the Board, both at the time of the person’s appointment and continuing as of the date of this SAI. Ms. Friedow, the sole member of the Board who is considered an “interested person” under the 1940 Act, has significant management and leadership experience in the asset management industry and currently serves as Chief Technology Officer and Head of Operations for Madison and its affiliated companies. Regarding the Independent Trustees, all three have substantial experience operating and overseeing a business, whether it be the management consulting business (for Mr. Riege), and the investment management business (for Mr. Struthers and Mr. Jones). As a result of this experience, each has unique perspectives regarding the operation and management of the funds and the Board of Trustees’ oversight function. They use this collective experience to oversee the funds for the benefit of fund shareholders. Moreover, each of the Independent Trustees has served as a trustee of one or more mutual funds for many years. They bring substantial and material experience and expertise to their roles as Trustees of the funds.
Board Committees
The Board of Trustees has established two standing committees to help manage the funds, an Audit Committee and a Nominating and Governance Committee. Each such Committee is currently comprised of Messrs. Jones, Riege and Struthers, constituting all of the Trust’s Independent Trustees. The Chair of the Nominating and Governance Committee is Mr. Riege, and the Chair of the Audit Committee is Mr. Struthers.
Audit Committee. The Audit Committee is responsible for reviewing the results of each audit of the funds by the funds’ independent registered public accounting firm and for recommending the selection of independent auditors for the coming year. The Audit Committee meets at least quarterly and more often as necessary. The Committee met four times during the funds’ last fiscal year.
Nominating and Governance Committee. The Nominating and Governance Committee is responsible for nominating trustees and officers to fill vacancies, for evaluating their qualifications. The Nominating and Governance Committee is also responsible for periodically reviewing the effectiveness of the Board of Trustees and its committees. Like the Audit Committee, the Nominating and Governance Committee meets at least quarterly and more often as necessary. The Nominating and Governance Committee met four times during the funds’ last fiscal year. The Nominating and Governance Committee may consider candidates for the Board submitted by shareholders if a vacancy were to exist. Shareholders who wish to recommend a nominee may do so by submitting the appropriate information about the candidate to the Secretary of the Trust at the following address: 550 Science Drive, Madison, Wisconsin 53711.
Leadership Structure of the Board
The Board of Trustees is relatively small (with four members, as noted in the tables above) and operates in a collegial atmosphere.  Although no member is formally charged with acting as Chair, Mr. Ryan, the President of the Trust, generally acts as the Chairperson during meetings.  All Board members are expected to provide their input into establishing the Board’s meeting agenda. Likewise, each Board of Trustees meeting contains a standing agenda item for any Board member to raise new or additional items he or she believes is important in connection with fund governance.  The Board of Trustees has charged Mr. Riege with acting as the Lead Independent Trustee for purposes of communicating with Madison, the Trust's Chief Compliance Officer, counsel to the Independent Trustees and Trust counsel on matters relating to the Board as a whole. The Independent Trustees often meet in executive session without representatives of Madison present (including meetings with counsel, the Chief Compliance Officer and the independent registered public accountant).
As adviser to each series of the Trust, Madison is responsible for the overall risk management for the funds, including supervising their affiliated and third-party service providers and identifying and mitigating possible events that could impact the funds’ business, operations or performance. Risks to the funds include investment, legal, compliance and regulatory risks, as well as the risk of operational failure or lack of business continuity. The Board of Trustees oversees risk management of the funds’ investment programs through the Audit Committee and through oversight by the Board itself. The Trust's Chief Compliance Officer, who reports to the Independent Trustees, provides the Board of Trustees with quarterly updates and a comprehensive annual report regarding the processes and controls in place to address regulatory, compliance, legal and operational risk. The Board of Trustees exercises its oversight in conjunction with Madison, the Chief Compliance Officer, fund counsel and counsel to the Independent Trustees by requesting reports and presentations at regular intervals throughout the year. Additionally, the Audit Committee receives periodic reports from the funds’ independent accountants. The Board’s committee structure requires an Independent Trustee to serve as Chair of the Nominating and Governance and the Audit Committees.
24


Given the small size of the Board of Trustees, its committee structure led by Independent Trustees, the openness of Board meetings to active input by all Board members, its utilization of executive sessions, the role of the Lead Independent Trustee and its quarterly focus on compliance and risk management, the Board of Trustees has determined that its current leadership structure is adequate for the protection of fund investors.
Trustees’ Holdings
Trustees’ holdings in the Fund Complex as of December 31, 2023, was as follows:
Name of Trustee Fund
Dollar Range of Equity Securities in the Trust1,2
Aggregate Dollar Range of Equity Securities in Fund Complex2
Scott C. Jones None None
None
Steven P. Riege
Aggressive Allocation
Mid Cap
Small Cap
$1 - $10,000
$1 - $10,000
$10,001 - $50,000
$10,001 - $50,000
Richard E. Struthers
Covered Call & Equity Strategy Fund
International Stock
$10,001 - $50,000
$50,001 - $100,000
$50,001 - $100,000
Jill Friedow
Core Bond
Covered Call & Equity Income
Investors
Over $100,000
Over $100,000
Over $100,000
Over $100,000
1 Dollar ranges are as follows: none; $1–$10,000; $10,001-$50,000; $50,001-$100,000; and over $100,000.
2 The Trust consists of 15 separate portfolios, and the “Fund Complex” consists of 34 separate portfolios, as described in more detail above. Not every Trustee is a
member of the Board of Trustees of every fund in the Fund Complex, as noted above.
Furthermore, as of December 31, 2023, neither the Independent Trustees, nor members of their immediate families, owned securities beneficially, or of record, in the Adviser, MFD Distributor, LLC (the “Distributor”), or any of their affiliates. During the two most recently completed calendar years, neither the Independent Trustees nor members of their immediate families, had a direct or indirect interest, the value of which exceeds $120,000 in (i) the Adviser, the Distributor or any of their affiliates; (ii) any transaction or relationship in which such entity, the Funds, the Trust, any officer of the Trust, the Adviser, the Distributor, or any of their affiliates was a party; or (iii) any other relationship related to payments for property or services to the Funds, the Trust, any officer of the Trust, the Adviser, the Distributor, or any of their affiliates.
SALES LOAD WAIVERS FOR CERTAIN AFFILIATED PERSONS OF THE TRUST
Class A shares may be offered without front-end sales charges to individuals (and their “immediate family,” as described in the prospectus) who, within the past twelve months, were (i) trustees, directors, officers, or employees of CMFG Life Insurance Company or its subsidiaries and affiliates (collectively referred to herein as “CMFG Life”); (ii) trustees, directors, officers or employees of MIH and/or its subsidiaries or affiliated companies; (iii) members of the Board of Trustees of the Trust or of the board of trustees of the Ultra Series Fund; and (iv) any trust, pension, profit sharing or other benefit plan which beneficially owns shares for these persons. Board members of the Trust and the Ultra Series Fund are offered Class A shares without front-end sales charges as an incentive for them to invest in the funds for which they serve as Trustees.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF THE TRUST’S SECURITIES
Based upon their investments, the Allocation Funds of the Madison Funds and the Ultra Series Fund, an affiliated investment company which is managed by the same investment adviser as the Trust, may own in aggregate more than 25% of certain fund's Class R6 shares, as indicated in the charts below, and may be deemed to control such share class of such funds. In addition, Madison owns 85.70% of the shares (initial seed capital) of the Class Y shares of the Sustainable Equity Fund of the date of this SAI, and is therefore deemed a control person of the respective share class of the fund. Madison is a Wisconsin limited liability company and the investment adviser to the Trust. Until their ownership is diluted by the sale of shares to other shareholders or the redemption of their investments, these shareholders may each be able to significantly influence the outcome of any shareholder vote of such funds and or such share classes of such funds.
The following tables set forth 5% or more beneficial ownership (unless otherwise stated) of shares of each class of each fund, if applicable, as of January 31, 2024.
Class A shares
Shareholder Cons Alloc Mod Alloc Agg Alloc Core Bond Diversified
Income
Cov Call & Eq Inc Dividend Income Investors Mid
Cap
Small
Cap
Int’l
Stock
LPL Financial, San Diego, CA* 42.93% 27.03% 16.48% 34.41% 34.01% 50.72% 26.74% 29.49% 25.08% 27.88% 26.05%
Pershing LLC, Jersey City, NJ* 5.30% 5.83% 11.64% 6.05%
First Community Credit Union, Retirement Health Funding Program, Chesterfield, MO 7.42%
First South Financial Credit Union, 457(B) Plan, Bartlett, TN 7.20%
UMB Bank NA Cust IRA FBO Kenneth L. Dotson, Sterling, VA 5.32%
* Represents ownership of record rather than beneficial ownership.
25


Class C shares
Shareholder Con Alloc Mod Alloc Agg Alloc Diversified
Income
Cov Call & Eq Inc
Dividend Income
LPL Financial, San Diego, CA* 46.13% 56.11% 38.33% 30.85% 25.00% 26.74%
Pershing LLC, Jersey City, NJ* 38.54% 10.03% 35.65% 62.13% 38.48% 6.05%
RBC Capital Markets LLC, Mutual Fund Omnibus Processing, Minneapolis, MN* 6.15%
*Represents ownership of record rather than beneficial ownership.
Class Y shares
Shareholder Tax-Free Nat'l Tax-Free
VA
Core
Bond
High Quality
Bond
Dividend
Income
Cov Call & Eq Inc Investors Sustainable Equity Mid
Cap
Small
Cap
Int’l
Stock
Charles Schwab & Co – Special Custodial Account for Benefit of Customers, San Francisco, CA* 6.18% 6.03% 23.24% 16.10% 41.51% 42.96% 23.70% 14.30% 33.63% 28.32% 12.80%
National Financial Services LLC Exclusive Benefit of our Customers, New York, NY* 6.55% 7.01% 24.37% 26.53% 6.00% 26.42% 9.44%
Morgan Stanley Smith Barney, Jersey City, NJ*
8.53%
UBS WM USA, Weekawken, NJ
8.53%
Richard E. Struthers, Naples, FL 13.23%
Pershing LLC, Jersey City, NJ* 8.54% 18.39% 9.66%
RBC Capital Markets LLC Mutual Fund Omnibus Processing Accounts, Minneapolis, MN* 22.71%
John H Rys Sr & Virginia M Rys JTWROS POA John H Rys Jr, Kansas City, MO 12.56%
Wayne G Johns, Alexandria, VA 31.32%
Matrix Trust Company Cust. FBO Monterey CU 457(B) Plan, Denver, CO 7.02%
Matrix Trust Company Cust. FBO Tarrant County CU 457(B) Plan, Denver, CO 9.62%
Matrix Trust Company Cust. FBO Community First Credit Union 457(B) Plan, Denver, CO 5.35%
Dapp Associates LLC, Pensacola, FL 7.39%
Ingrid Gunther & Claudia Buchinsky & Nina Hassin JTWROS, Reseda, CA 10.12%
Madison Asset Management, LLC, Madison, WI 85.70%
*Represents ownership of record rather than beneficial ownership.
Class I shares
Shareholder High Quality Core Bond Dividend Income Cov Call & Eq Inc Investors Sustainable Equity Mid Cap Small Cap
Charles Schwab & Co – Special Custodial Account for Benefit of Customers, San Francisco, CA* 39.20% 80.56% 26.39% 47.28% 9.87%
Morgan Stanley Smith Barney, Jersey City, NJ* 6.43% 26.99% 21.23%
RBC Capital Markets LLC, Mutual Fund Omnibus Processing, Minneapolis, MN* 13.88% 6.77% 18.77% 23.49%
Wells Fargo Clearing Services LLC, Special Custody Acct for the Exclusive Benefit of Customers, St. Louis, MO* 20.25% 8.59% 43.69%
Pershing LLC, Jersey City, NJ* 5.18% 7.41%
LPL Financial Omnibus Customer Account, San Diego, CA* 45.48% 10.55% 26.60% 22.14% 9.87% 26.29%
American Enterprise Investment SVC, Minneapolis, MN
7.86%
Outrider Foundation, Inc, Madison, WI 36.22%
Sarah G Stevens TTEE &, Kathleen Burgess TTEE, Burgess Grandchildrens Irrevocable Education Trust, Waunakee, WI 6.17%
Maril & Co FBO, c/o Reliance Trust Company, Milwaukee, WI 5.50%
National Financial Services Exclusive Benefit of our Customers, New York, NY 44.80% 5.23% 33.67% 10.33% 7.24% 19.56
First Community Credit Union, Retirement Health Finding Program, Chesterfield, MO
7.10%
SEI Private Trust Company, Oaks, PA
38.37%
*Represents ownership of record rather than beneficial ownership.
26


Class R6 shares
Shareholder Core Bond Dividend Income Cov Call & Eq Inc Investors Mid Cap Small Cap
Madison Conservative Allocation Fund, Madison, WI 13.57% 5.99%
Madison Moderate Allocation Fund, Madison, WI 19.20% 18.86%
Madison Aggressive Allocation Fund, Madison, WI 5.29% 12.53%
Ultra Series Conservative Allocation Fund, Madison, WI 33.25% 21.28% 13.23%
Ultra Series Moderate Allocation Fund, Madison, WI 22.97% 34.71% 22.93%
Ultra Series Aggressive Allocation Fund, Madison, WI 13.99% 9.30%
Charles Schwab & Co – Special Custodial Account for Benefit of Customers, San Francisco, CA* 30.02% 48.32% 8.38% 13.01% 100.00%
Saxon & Co., FBO 40400904099990, Cleveland, OH 22.07%
Saxon & Co., FBO 40400907499991, Cleveland, OH 7.05%
Wells Fargo Bank NA FBO Omnibus Cash Account for Benefit of Customers, Minneapolis, MN* 27.09%
Matrix Trust Co. FBO NW Priority CU 457(b) Plan, Denver, CO 10.49%
Matrix Trust Co. Area Educational Credit Union, Denver, CO 13.77%
Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, FL
5.55%
*Represents ownership of record rather than beneficial ownership.
As of January 31, 2024 the Trust’s trustees and officers, as a group, owned less than one percent of the outstanding voting securities of each fund.
27


PORTFOLIO MANAGEMENT
The investment adviser to the Trust, Madison Asset Management, LLC (“Madison”), is a registered investment adviser located at 550 Science Drive, Madison, WI 53711. Madison is owned by Madison Investment Holdings, Inc. (“MIH”), 550 Science Drive, Madison, WI 53711. Madison shares investment personnel with Madison Investment Advisors, LLC, a wholly owned subsidiary of Madison. MIH was founded in 1974 and currently operates primarily as a holding company. In addition to Madison, the other firm under the MIH umbrella is Madison Investment Advisors, LLC (a registered investment adviser providing portfolio management services to wrap accounts and separately managed accounts), located in Madison, WI, which includes an insurance asset management division, Madison Scottsdale, located in Scottsdale, AZ, and an international equity team located in Toronto, Canada.
Investment Advisory Agreement. Madison has entered into an Investment Advisory Agreement with the Trust that requires Madison to provide continuous professional investment management of the investments of the Trust, including establishing an investment program complying with the investment objectives, policies, and restrictions of each fund. As compensation for its services under the Investment Advisory Agreement, each fund pays Madison on a monthly basis, a management fee computed at an annualized percentage rate of the average daily value of the net assets of each fund.
During each of the three fiscal years ended October 31, the Trust paid the following investment advisory fees to Madison:
Fund
Management Fee1
2023
2022 2021
Conservative Allocation 0.20% $97,497 $119,655 $138,570
Moderate Allocation 0.20% 199,084 236,874 272,445
Aggressive Allocation 0.20% 107,507 121,354 135,605
Diversified Income
0.20%4
847,363 1,144,444 1,151,679
Tax-Free Virginia 0.50% 89,802 96,631 104,663
Tax-Free National 0.40% 71,414 76,041 91,223
High Quality Bond
0.30%2
219,199 279,160 459,325
Core Bond
0.39%3
749,077 712,367 735,447
Covered Call & Equity Income 0.85% 1,709,571 895,715 747,149
Dividend Income
0.70%
1,814,581 2,141,670 2,281,752
Investors
0.70%
2,330,567 2,477,112 2,726,327
Sustainable Equity5
0.70% 61,364 42,013 N/A
Mid Cap
0.75%6
5,561,690 5,072,519 4,927,974
Small Cap
0.89%7
1,592,625 2,001,394 2,610,559
International Stock 1.05% 138,768 151,479 191,990
1    Except for the Conservative Allocation Fund, Moderate Allocation Fund, Aggressive Allocation Fund, Tax-Free Funds, High Quality Bond Fund and Covered Call & Equity Income Fund, each fund’s investment advisory fee will be reduced by 0.05% on assets exceeding $500 million, and by another 0.05% on assets exceeding $1 billion.
2 For the period August 7, 2020 to February 27, 2021, Madison voluntary waived 0.10% of its 0.30% annual management fee, and on February 28, 2021, Madison contractually agreed to the 0.10% waiver until at least February 27, 2022. Fees waived in fiscal years ended 2021 and 2022 were $153,108 and $34,413, respectively. Madison does not have the right to recoup any waived fees. The fee waiver was discontinued effective February 28, 2022.
3 Effective February 28, 2021, the annual management fee was reduced from 0.50% to 0.39%.
4    Effective July 31, 2023, the management fee was reduced from 0.65% to 0.20%.
5 Fees paid for 2021 are not provided, because the fund commenced investment operations on January 3, 2022.
6 Due to investment advisory fee breakpoints, for the fiscal year ended October 31, 2023, the effective management fee was 0.73% and for the fiscal years ended October 31, 2022 and October 31, 2021, the effective management fee rate was 0.74%.
7 Effective February 28, 2021, the management fee was reduced from 1.00% to 0.89%.
The Investment Advisory Agreement was last approved by the Board of Trustees in September 2023, and by the shareholders of each fund in November 2023 (for all but the Covered Call & Equity Income Fund) and January 2024 (for the Covered Call & Equity Income Fund). The Investment Advisory Agreement has an effective date of December 1, 2023 (for all but the Covered Call & Equity Income Fund) and January 29, 2024 (for the Covered Call & Equity Income Fund), and an initial term of two years. After the initial term, the agreement may continue in effect for additional periods of one year, so long as such continuation is approved at least annually by the Board of Trustees, including a majority of the Independent Trustees.
In connection with the Board’s most recent approval of the Investment Advisory Agreement, the Board also approved an Operating Expense Limitation Agreement dated as of December 1, 2023, by and between the Trust, on behalf of each fund, and Madison, pursuant to which Madison contractually agreed to waive its management fees and/or reimburse expenses of each fund to the extent necessary to limit each class of each fund’s total operating expenses to the levels specified in the then-currently effective prospectus for the Funds (exclusive of certain fees and expenses), for a period of no less than two years. The specific expense limits for each fund and share class, as well as the date upon which the agreement will terminate for each fund, is set forth below.
28


Fund
Share Class
Operating Expense Limitation as a Percentage of Average Daily Net Assets1
Date upon which Agreement will Termination
Conservative Allocation Class A 0.70% 11/30/2025
Class C 1.45%
Moderate Allocation
Class A 0.70% 11/30/2025
Class C 1.45%
Aggressive Allocation
Class A 0.70% 11/30/2025
Class C 1.45%
Tax-Free Virginia
Class Y 0.85% 11/30/2025
Tax-Free National
Class Y 0.75% 11/30/2025
High Quality Bond
Class Y 0.49% 11/30/2025
Class I 0.40%
Core Bond
Class A 0.84% 11/30/2025
Class Y 0.59%
Class I 0.49%
Class R6 0.41%
Covered Call & Equity Income
Class A 1.25% 1/28/2026
Class C 2.00%
Class Y 1.00%
Class I 0.95%
Class R6 0.87%
Dividend Income
Class A 1.15% 11/30/2025
Class Y 0.90%
Class I 0.80%
Class R6 0.72%
Investors
Class A 1.15% 11/30/2025
Class Y 0.90%
Class I 0.80%
Class R6 0.72%
Sustainable Equity
Class Y 0.90% 11/30/2025
Class I 0.80%
Mid Cap
Class A 1.40% 11/30/2025
Class Y 0.95%
Class I 0.85%
Class R6 0.77%
Small Cap
Class A 1.34% 11/30/2025
Class Y 1.09%
Class I 0.99%
Class R6 0.91%
International Stock
Class A 1.60% 11/30/2025
Class Y 1.35%
1 For purposes of the Operating Expense Limitation Agreement, the term “operating expenses” is defined to include all expenses necessary or appropriate for the operation of the Funds and each of their share classes, including the Adviser’s investment management fee described in the Investment Advisory Agreement and the service fee described in the Administrative Services Agreement (described below), but does not include any front-end or contingent deferred loads, taxes, leverage (i.e., any expenses incurred in connection with borrowings made by a Fund), interest (including interest incurred in connection with bank and custody overdrafts), brokerage commissions and other transactional expenses, dividends or interest on short positions, acquired fund fees and expenses, extraordinary expenses such as litigation, or other expenses that are “excluded expenses” under the Administrative Services Agreement (described below). “Excluded expenses” include Rule 12b-1 distribution and service fees and Independent Trustee compensation, as described in more detail below, under the heading “Administrative Services Agreement.”
Administrative Services Agreement. In addition to the management fee, the Investment Adviser is entitled to receive an administrative services fee from each fund pursuant to the terms of a separate Administrative Services Agreement. Under this agreement, Madison provides or arranges for each fund to have all of the necessary operational and support services it needs for a fee. Such services include:
Handling bookkeeping and portfolio accounting for the Trust.
Handling telephone inquiries, cash withdrawals and other customer service functions (including monitoring wire transfers).
Providing appropriate supplies, equipment and ancillary services necessary to conduct the Trust’s affairs.
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Arranging for and paying the custodian, fund transfer agent, fund accountant and fund administrator.
Arranging for and paying the Trust’s independent registered public accountants, legal counsel and outside counsel to the Independent Trustees.
Registering the Trust and its shares with the SEC and notifying any applicable state securities commissions of the sale of such shares in their jurisdiction.
Printing and distributing prospectus and periodic financial reports to current shareholders.
Paying for trade association memberships.
Preparing shareholder reports, proxy materials and holding shareholder meetings.
Arranging for the payment of the Independent Trustees’ meeting fees (which are direct fund expenses) and out-of-pocket expenses.
Madison provides all these services for a annual fee calculated as a percentage of each fund’s average daily net assets. This fee is reviewed and approved at least annually by the Board of Trustees and is compared with the fees paid by other mutual funds of similar size and investment objective to determine if it is reasonable. The Board of Trustees considers the reasonableness of administrative services fees when it considers the compensation paid to the Investment Adviser under the Investment Advisory Agreement. As compensation for its services under the Administrative Services Agreement, each fund pays Madison on a monthly basis, an administrative services fee computed at an annualized percentage rate of the average daily value of the net assets of each fund.
During each of the last three fiscal years ended October 31, the Trust paid the following administrative service fees to Madison:
Fund
Administrative Services Fee6
2023
2022 2021
Conservative Allocation 0.25% $121,871 $149,569 $173,213
Moderate Allocation 0.25% 248,855 296,093 340,557
Aggressive Allocation 0.25% 134,382 151,693 169,507
Diversified Income 0.20% 312,232 352,137 354,363
Tax-Free Virginia 0.35% 62,861 67,642 73,264
Tax-Free National 0.35% 62,487 66,536 79,821
High Quality Bond
0.19%2
125,168 173,431 290,906
Core Bond
0.20%1,2,3
153,170 179,576 241,689
Covered Call & Equity Income
0.15%1,2
239,471 152,836 130,944
Dividend Income
0.20%1,2
440,973 524,049 594,122
Investors
0.20%1,2
475,889 501,845 552,995
Sustainable Equity Fund5
0.20%2
8,859 6,076 N/A
Mid Cap
0.40%1,2
1,140,524 1,080,135 1,080,673
Small Cap
0.20%1,2,4
344,367 431,868 595,725
International Stock 0.30% 39,648 43,280 54,854
1 The annual administrative services fee for the fund's Class R6 share is 0.02%.
2 The annual administrative services fee for the fund's Class I shares is 0.10%.
3 Effective February 28, 2021, the annual administrative services fee for the fund's Class A and Y shares was increased from 0.15% to 0.20%.
4    Effective February 28, 2021, the Board of Trustees approved the termination of Madison's contractual agreement to waive 0.04% of the fund's 0.25% annual administrative services fee which commenced August 31, 2019 and was set to expire on August 31, 2021, and the annual administrative services fee was reduced from 0.25% to 0.20%. Fees waived in fiscal year 2021 were $35,536. Madison does not have the right to recoup any waived fees.
5 Fees paid in 2021 are not provided, because the fund commenced investment operations on January 3, 2022.
6 The same fee rate applies to all share classes of each fund, except as otherwise noted.

The Trust remains responsible for (i) transaction-related expenses including, but not limited to, brokerage commissions paid in connection with fund transactions, interest or fees in connection with fund indebtedness or taxes paid in connection with portfolio securities held, (ii) Rule 12b-1 distribution and service fees disclosed in the prospectus of the Trust, (iii) acquired fund fees, if any, and (iv) any extraordinary or non-recurring expenses it incurs and (iv) the Independent Trustee compensation, including Lead Independent Trustee compensation.
Subadvisers
Madison may manage the assets of all of the funds using a “manager of managers” approach under which Madison may manage some or all of the funds’ assets and may allocate some or all of the funds’ assets among one or more specialist subadvisers. Madison selects subadvisers based on a continuing quantitative and qualitative evaluation of their abilities in managing assets pursuant to a particular investment style. While superior performance is the ultimate goal, short-term performance by itself will not be a significant factor in selecting or terminating subadvisers, and Madison does not expect frequent changes in subadvisers. Madison compensates subadvisers out of its own assets.
Madison monitors the performance of each subadviser to the extent it deems appropriate to achieve a fund’s investment objective, reallocates fund assets among its own portfolio management team and individual subadvisers or recommends to the Board of Trustees that a fund employ or terminate particular subadvisers.The Trust and Madison received an exemptive order from the SEC that permits the Board to appoint or change unaffiliated subadvisers without shareholder approval. If there is a new appointment or change in unaffiliated subadviser, you will receive an “information statement” within 90 days after the date of the change. The statement will provide you with relevant information about the reason for the change and information about any new subadviser.
With regard to the funds discussed in this SAI, Madison does not currently use a subadviser.
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PORTFOLIO MANAGERS
Compensation. Madison believes portfolio managers should receive compensation for the performance of the funds they manage, their individual effort, and the overall profitability of the firm. As members of the investment teams, portfolio managers receive a base salary, are included in the investment team’s incentive compensation plan (ICP), and have the potential for equity ownership in the firm. The amount of firm equity any portfolio manager may acquire is at the discretion of the Board of Directors of Madison Investment Holdings, Inc. which considers a variety of factors including, for example, seniority, responsibility, and longevity.
With regard to ICP, portfolio managers receive up to 25% of the annual revenue of their respective investment strategy. Eighty percent (80%) of the ICP pool is paid to the investment team that manages each respective investment strategy and 20% is subjective, based largely on performance against benchmark, with consideration given to team dynamics within each respective investment strategy.
The intention of the 25% revenue model is to focus our portfolio managers on delivering consistent performance which in turn drives long-term assets under management and revenue growth for the firm. Madison believes that taking a long-term approach better aligns the interests of shareholders of the funds, our clients, the investment teams, and our firm.
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, 2023):
Patrick Ryan – Allocation Funds, including Diversified Income 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 8 $576,582,948 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 893 $742,696,500 0 $0
Stuart Dybdahl – Allocation Funds, including Diversified Income 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 8 $576,582,948 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 893 $742,696,500 0 $0
Michael Peters – Tax-Free Funds
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 696 $795,990,531 0 $0
Jeffrey Matthias – Tax-Free Funds
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 7 $196,346,515 0 $0
Chris Nisbet – High Quality Bond 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 $79,384,697 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 1,190 $867,991,861 0 $0
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Allen Olson – Core Bond 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 4 $198,372,155 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 643 $345,528,301 0 $0
Mike Sanders – High Quality Bond and Core Bond Funds
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 5 $277,756,852 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 5,598 $7,022,821,996 0 $0
John Brown – Dividend Income 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 3 $306,154,695 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 101 $164,497,042 0 $0
Drew Justman – Covered Call & Equity Income and Dividend Income Funds
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 5 $537,474,855 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 134 $203,498,525 0 $0
Ray DiBernardo – Covered Call & Equity Income 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 2 $231,320,161 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 0 $0 0 $0
Joe Maginot – 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 $198,349,694 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 749 $3,856,327,057 0 $0
Richard Eisinger – Investors and Mid Cap Funds
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 2 $351,960,628 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 2,671 $7,590,216,350 0 $0
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Haruki Toyama - Investors and Mid Cap Funds
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 2 $351,960,628 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 1,030 $2,397,733,627 0 $0
Maya Bittar – Sustainable Equity 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 493 $626,739,498 0 $0
Dave Geisler – Sustainable Equity 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 361 $537,306,606 0 $0
Andy Romanowich – 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 $153,610,934 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 1027 $2,396,795,854 0 $0
Aaron Garcia – Small 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 4 $27,102,376 0 $0
Faraz Farzam – Small 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 4 $27,102,376 0 $0
Thomas Tibbles – International Stock 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 $19,982,351 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 289 $394,741,431 0 $0
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Patrick Tan – International Stock 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 $19,982,351 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 289 $394,741,431 0 $0
Alyssa Rudakas – International Stock 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 $19,982,351 0 $0
Other Pooled Investment Vehicles 0 $0 0 $0
Other Accounts 289 $394,741,431 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 follows the funds’ cross-trade (Rule 17a-7) policies and procedures when transacting 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 Allocation Funds, Trustees and officers of the 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 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 Allocation Funds believe they have structured these funds to avoid these concerns. However, a situation could conceivably occur where proper action for the 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.


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Fund Ownership: As of December 31, 2023, the portfolio managers’ ownership in fund shares was as follows:
Portfolio Manager Fund
Range1
Patrick Ryan Moderate Allocation $100,001 - $500,000
Stuart Dybdahl Conservative Allocation $100,001 - $500,000
Michael Peters Dividend Income $100,001 - $500,000
Jeffrey Matthias Tax-Free National
Dividend Income
Mid Cap
$10,001 - $50,000
$100,001 - $500,000
$100,001 - $500,000
Chris Nisbet Moderate Allocation
Aggressive Allocation
Core Bond
High Quality Bond
Diversified Income
$100,001 - $500,000
$50,001 - $100,000
$100,001 - $500,000
$50,001 - $100,000
$50,001 - $100,000
Mike Sanders Core Bond
Dividend Income
Mid Cap
$50,001 - $100,000
$50,001 - $100,000
$10,001 - $50,000
Drew Justman Covered Call & Equity Income
Dividend Income
$100,001 - $500,000
$100,001 - $500,000
John Brown Diversified Income
Covered Call & Equity Income
Dividend Income
Investors
Mid Cap
$100,001 - $500,000
$100,001 - $500,000
Over $1 million
$100,001 - $500,000
$100,001 - $500,000
Ray DiBernardo Covered Call & Equity Income $100,001 - $500,000
Allen Olson Core Bond $50,001 - $100,000
Richard Eisinger Investors
Mid Cap
$500,001 - $1 million
Over $1 million
Maya Bittar Sustainable Equity
Mid Cap
Over $1 million
$50,001 - $100,000
Dave Geisler Sustainable Equity $500,001- $1 million
Haruki Toyama Investors
Mid Cap
$100,001 - $500,000
$500,001 - $1 million
Andy Romanowich Mid Cap $100,001 - $500,000
Joe Maginot Investors
Mid Cap
$100,001 - $500,000
$10,001 - $50,000
Aaron Garcia Mid Cap
Small Cap
$100,001 - $500,000
$500,001 - $ 1 million
Faraz Farzam
Small Cap $500,001 - $1 million
Thomas Tibbles None None
Patrick Tan None