DEF 14A: Madison Covered Call & Equity Strategy Fund Considers Advisor Change, New Trustees

Madison Covered Call & Equity Strategy Fund is seeking shareholder approval to transition its investment advisor to XA Investments LLC and elect a new board of trustees.

Summary

• Madison Covered Call & Equity Strategy Fund is holding a special meeting on October 15, 2024, to vote on three proposals.
• The first proposal involves approving a new investment advisory agreement with XA Investments LLC (XAI), where XAI would become the fund's investment advisor and Madison Asset Management, LLC would become the subadviser.
• The second proposal is to approve a new subadvisory agreement among the Fund, XAI, and Madison.
• The third proposal is to elect a newly constituted slate of five trustees to the Fund's board.
• The fund's portfolio management team, investment objectives, principal investment policies, and management fees are expected to remain unchanged.
• The board of trustees has approved all three proposals and recommends shareholders vote in favor.
• If any of the proposals are not approved, all three will be abandoned, and Madison will continue as the investment advisor.
• The transaction is expected to close on or about November 30, 2024.
• XAI plans to grow fund assets through a shelf offering and an at-the-market (ATM) program, issuing new shares into the secondary market when the market price exceeds the net asset value (NAV).
• The fund currently trades at a 2.55% premium to its NAV as of May 31, 2024, and has traded at an average premium of 4.49% over the last three years.
• XAI will implement an investor relations program to increase awareness of the fund and improve secondary market trading.
• The fund's management fee will remain at 0.80% of the average daily value of the fund's managed assets.
• XAI has agreed to extend the fund's existing operating expense limitation for two years following the transaction's closing, capping total operating expenses at 1.08% of managed assets.
• All costs associated with the proxy process, estimated at $250,000, will be borne by XAI and/or Madison, not the fund.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook, emphasizing continuity of management and potential for growth. However, it also acknowledges the need for shareholder approval and the risks associated with the proposed changes.

Positives

• Continuity of the existing portfolio management team is assured, with Madison continuing as the subadviser.
• XAI's expertise in the closed-end fund market and investor relations platform may lead to fund growth and improved secondary market trading.
• The management fee remains unchanged at 0.80%, and the expense limitation of 1.08% will be extended for two years.
• XAI's plans to grow the fund's asset base through a shelf offering and ATM program could lead to economies of scale.
• All costs associated with the proxy process will be borne by XAI and/or Madison, not the fund.

Negatives

• The fund is incurring costs associated with the proxy process, although these are being borne by XAI and Madison.
• Shareholders must approve all three proposals for any of them to take effect; failure to approve one will result in abandoning all three.
• The fund is reliant on XAI's ability to successfully grow the asset base and improve secondary market trading.

Risks

• If shareholders do not approve the proposals, the fund will remain with the current advisor and board, potentially missing out on the anticipated benefits of the transaction.
• The success of XAI's growth strategy is not guaranteed, and the fund may not achieve the anticipated economies of scale.
• There is a risk that the fund's premium to NAV could decrease, impacting the attractiveness of the ATM program.
• The fund is dependent on XAI and Madison to maintain compliance with regulatory requirements.

Future Outlook

The fund anticipates potential growth in its asset base and increased scale efficiencies through XAI's management and planned ATM program. XAI aims to enhance investor relations and secondary market support to improve trading volume and share price.

Management Comments

• The Board of Trustees believes that approval of the Proposals will serve the best interests of the Fund and its shareholders.
• The Current Board selected XAI as the Funds investment adviser because of its plans to grow Fund assets, which should result in economies of scale over time.
• The Current Board selected Madison as the Funds subadviser to ensure continuity in the portfolio management of the Fund and retention of the current investment personnel.

Industry Context

This announcement reflects a trend in the investment management industry where smaller funds seek partnerships with larger firms to achieve economies of scale and improve distribution. XAI's focus on closed-end funds and alternative investment strategies aligns with the growing investor interest in these areas.

Comparison to Industry Standards

• The proposed management fee of 0.80% is within the typical range for actively managed closed-end funds with similar investment strategies.
• The expense limitation of 1.08% is competitive compared to other funds in the covered call equity space.
• XAI's plan to implement an ATM program is a common strategy for closed-end funds to grow their asset base and improve liquidity, similar to strategies employed by Eaton Vance and BlackRock in their closed-end offerings.
• The transition from Madison to XAI mirrors similar advisor changes seen in the industry, such as when Allianz Global Investors took over management of certain funds previously managed by NFJ Investment Group.

Management Changes

Stakeholder Impact

• Shareholders may benefit from potential fund growth, improved secondary market trading, and continued portfolio management expertise.
• Employees of Madison will continue to manage the fund's portfolio as part of the subadvisory agreement.
• Service providers to the fund may change as XAI transitions the fund to its service provider network.

Next Steps

• Shareholders are asked to vote on the proposals by mail, internet, or telephone.
• The special meeting will be held on October 15, 2024, to vote on the proposals.
• If approved, the transaction is expected to close on or about November 30, 2024.
• XAI will implement its investor relations program and pursue the shelf offering and ATM program.

Key Dates

Keywords

investment advisory agreement, subadvisory agreement, board of trustees, XA Investments LLC, Madison Asset Management, closed-end fund, proxy statement, shareholder vote, investment management, managed assets, ATM program, NAV premium