MADISON CORPORATE BOND FUND INVESTMENT STRATEGY LETTER

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1 madisonadv.com madisonfunds.com Q EXCELLENCE IN INVESTMENT MANAGEMENT MADISON CORPORATE BOND FUND INVESTMENT STRATEGY LETTER Market Review With Independence Day fast approaching, fireworks began early with Greece s unexpected call for a July 5th referendum and Puerto Rico s announcement that the territory s debts were not payable. Behind the flash and bang of these proclamations, volatility and market positioning during the quarter has dramatically changed. From consensus thinking that 10- year German rates would drop to negative 20 basis points, thus pulling U.S. Treasury rates lower, German rates reversed from the lows of seven basis points to 76 basis points. Domestic activity steadily improved, labor markets continued to firm, and energy prices moved higher. The Treasury yield curve shifted up and steepened in the second quarter with two year yields rising over eight basis points and 30-year yields rising over 58 basis points. This led to longerterm corporate bonds significantly underperforming shorter-term corporate bonds during the quarter. Investment grade corporate bond spreads experienced some volatility in the second quarter and are currently trading close to the widest levels experienced during the year. Highyield corporate bond spreads also experienced increased volatility during the quarter and ended the quarter slightly wider than 2015 first quarter-end levels but tighter than 2014 yearend levels. Given less widening in spreads and the extra yield, high-yield bonds significantly outperformed investment grade bonds in the second quarter and first half of During the year, the Energy, REIT and Financial sectors have posted the strongest total returns in the investment grade space. The Energy sector has benefited from higher oil prices over the past few months, while the two financial-related sectors benefited from their shorter duration and less event risk than some industrial sectors. Utilities and Communications were the weakest sectors on a total return basis in first half of 2015 in the investment grade space. The Utilities sector was negatively impacted by heavy new debt issuance and the sector s longer duration. The Communications sector was hurt by its longer duration but also by significant spread widening in Time Warner Cable spreads after Comcast terminated its agreement to buy the company. In the high-yield space, the Single-B and CCC rating classes posted the best total returns in the first half of Low-quality high-yield (CC and D rating classes) posted highly negative total returns in the first half of the year. With the widening experienced during the second quarter, corporate bond spreads currently trade close to fair value but there remain some headwinds on the horizon including geopolitical risks, shareholder-friendly activity, activist investor concerns, heavy new debt issuance and illiquidity in the corporate bond market that could result in continued volatility. Paul Lefurgey CFA Head of Fixed Income Industry since 1988 Allen Olson, CFA Portfolio Manager Industry since 1998 Past performance does not predict future results. Please refer to the final two pages of this piece which contain current performance information for the fund, the risks of investing in the fund and a list of the fund s top ten individual portfolio holdings as of quarter end. Individual portfolio holdings are identified to illustrate our approach to investing the fund s portfolio and are not intended to represent a recommendation to buy or sell any such security. 550 Science Drive Madison WI 53711

2 Performance and Positioning Madison Corporate Bond Fund (Class Y) returned -2.29% while its benchmark, the Barclays U. S. Credit Bond Index returned -2.88% in the second quarter. The fund s shorter duration and lower holdings of 30-year securities added to relative performance due to the shift up and steepening of the Treasury curve. In addition, the fund s overweight of the Energy and Financial sectors and underweight of the Utility sector was beneficial to relative performance. The fund s yield to maturity is in line with the Barclays U. S. Credit Index, while having lower interest rate risk due to its shorter duration. We have participated in the corporate bond new issue market to take advantage of better pricing and to try to actively position the portfolio. As volatility increased and corporate spreads widened, we rolled out some shorter-term securities into 10- to 30-year securities to take advantage of higher yields and reduce our significant underweight to that part of the yield curve. However, we still remain conservatively positioned with regards to the longerend of the yield curve and would like to see yields/spreads move higher before significantly decreasing our underweight to the 30-year part of the yield curve. We continue to believe there is a risk of the yield/credit curve shifting up, as the market comes to grips with eventual Federal Reserve (Fed) interest rate increases. This would cause significant losses in longerterm bonds. Outlook Regardless of the resolutions for Greece and Puerto Rico, the global and domestic economy is stronger and better equipped to handle any potential fallout. Domestically, labor markets have healed, with over 3 million jobs created during the last year. Job openings are at a record high. Average hourly earnings are beginning to trend higher. Yearly net changes in household formations have exploded to the upside, which have led to more first time home buyers relative to a year ago. As the benefits of lower energy prices continue, consumers are beginning to spend. Inflation is currently benign, but as the labor markets continue to tighten, wage pressures should begin to mount. This, coupled with continued strength in the housing market, should lead to inflation creeping toward the Fed s 2% goal. It has been over 10 years since the Fed has tightened the money supply. Whether the events of Greece and Puerto Rico defer the Fed s first tightening of monetary policy, we anticipate the Fed to begin increasing interest rates later this year. Given the resiliency of the economy to bounce back from anemic Q1 growth, interest rates and market expectations of where rates should be at year-end appear too low. As reality hits expectations, volatility should increase which in turn will create investment opportunities. 550 Science Drive Madison WI 53711

3 We currently believe investment grade corporate bond spreads offer close to fair value. We remain somewhat cautious with regards to high-yield bonds, as they have outperformed investment grade bonds in the first half of 2015 and could experience price declines if volatility increases. Volatility remains somewhat elevated month to month, which if it continues should allow us a better entry point to add to our corporate bond positions at better levels. We will likely continue to utilize the new issue market when applicable to get better pricing. We remain focused on sectors where relative value is more attractive and event risk is lower. - Paul Lefurgey - Allen Olson This material contains the current opinions of Madison and such opinions are subject to change without notice. Bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bond fall. Long-term bonds are more exposed to interest-rate risk than shortterm bonds. Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the author s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Madison Funds are distributed by MFD Distributor, LLC. July 10, Science Drive Madison WI 53711

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5 1Q madisonfunds.com Q 3Q MADISON CORPORATE BOND FUND Experienced Management Active duration, yield curve, sector, quality and security selection decisions Goal is to find best combination of yield, credit risk and diversification Focus on managing risk The Value of Long-Term Investing - Growth of $10,000 1 Class Y Shares - since inception Paul Lefurgey, CFA Head of Fixed Income Industry since 1988 Allen Olson, CFA Portfolio Manager Industry since 1998 $15, $10,000 Investment Objective: Fund seeks to obtain high total investment returns in the form of income and share price appreciation Inception Exp Class Ticker Date Ratio Average Annual Total Returns 2 (%) Three Months YTD 1 Yr 3 Yr 5 Yr 10 Yr Since Inception Class Y Barclays Credit Bond Index Y COINX 7/1/ % Calendar Year Returns 2 (%) with Downside Performance Highlighted Class Y Barclays Credit Bond Index Growth of $10,000 for the years shown is calculated at NAV and assumes all dividends and capital gain distributions were reinvested. It does not take into account sales charges or the effect of taxes. 2 Average annual total returns and calendar year returns assume all distributions are reinvested and reflect applicable fees and expenses. Index returns reflect broad measures of market performance compared the fund and reflect no deduction for sales charges, account fees, expenses or taxes. You cannot invest directly in an index. Performance data shown represents past performance. Investment returns and principal value will fluctuate, so that fund shares, when redeemed, may be worth more or less than the original cost. Past performance does not guarantee future results and current performance may be lower or higher than the performance data shown. Visit madisonfunds.com or call to obtain performance data current to the most recent month-end.

6 (unless otherwise stated) Top Ten Holdings Distribution Frequency Monthly Risk Measures (5-Year) Standard Deviation 3.5% Downside Capture 84.2% Upside Capture 77.2% Characteristics (years) Effective Duration 6.2 Avg. Maturity 8.9 Yields 30-day SEC Yield 2.52% 30-day Effective Yield 2.68% Total Net Assets $26.5 Million Security Description % GENERAL ELEC CAP CORP 6.75% 15 Mar WELLS FARGO & COMPANY 5.625% 11 Dec BERKSHIRE HATHAWAY FIN 5.4% 15 May SIMON PROPERTY GROUP LP 4.125% 01 Dec US BANCORP 2.2% 15 Nov VALERO ENERGY CORP 6.625% 15 Jun COMCAST CORP 6.45% 15 Mar ORACLE CORP 5.75% 15 Apr AMERICAN EXPRESS CO 6.15% 28 Aug DIRECTV HOLDINGS/FING 5% 01 Mar Portfolio Mix 55.4% Industrials 31.4% Financials 4.1% Utilities 7.3% Other 1.7% Cash Portfolio Turnover 31% Total Number of Holdings 142 Figures are rounded to the nearest 0.1%. Shareholder Services Madison Funds Post Office Box 8390 Boston, MA Consultant and Advisor Services 550 Science Drive Madison, WI madisonfunds.com Standard Deviation measures dispersion from the an average, which, for a mutual fund, depicts how widely the returns varied over a certain period of time. Higher deviation represents higher volatility. Downside Capture Ratio measures a fund s performance in down markets relative to its benchmark. It is calculated by taking the security s downside capture return and dividing it by the benchmark s downside capture return over the time period. Upside Capture Ratio measures a fund s performance in up markets relative to its benchmark. It is calculated by taking the security s upside capture return and dividing it by the benchmark s upside capture return over the time period. Effective Duration provides a measure of a fund s interest-rate sensitivity. The longer a fund s duration, the more sensitive the fund is to shifts in interest rates. Average Maturity is computed by weighting the maturity of each security in the portfolio by the market value of the security, then averaging these weighted figures. SEC 30-day Yield represents net investment income earned by a fund over a 30-day period, expressed as an annual percentage rate based on the fund s share price at the end of the 30-day period. It is calculated based on the standardized formula set forth by the SEC. 30-day Effective Yield is a hypothetical figure that estimates what the yield would be if an investor continued to reinvest dividends at the current 30-day yield for one year. Calculated by annualizing dividends paid during the last 30 days of the period. It assumes that income earned from the fund s investments is reinvested and compounded. Portfolio Turnover is a measure of the trading activity in an investment portfolio how often securities are bought and sold by a portfolio. It is calculated at the fund level and represents the entire fiscal year ending 10/31/2014. An investment in the fund is subject to risk and there can be no assurance that the fund will achieve its investment objective. The risks associated with an investment in the fund can increase during times of significant market volatility. The principal risks of investing in the fund include: interest rate risk, call risk, risk of default, liquidity risk and non-investment grade securitiy risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. More detailed information regarding these risks can be found in the fund s prospectus. For more complete information about Madison Funds, including charges and expenses, obtain a prospectus from your financial adviser, by calling or by visiting madisonfunds.com and clicking on prospectus and reports to view or download a copy. Before investing in the funds, consider the investment objectives, risks, charges and expenses. The prospectus contains this and other information about funds and should be read carefully before investing. Madison Funds are distributed by MFD Distributor, LLC and may be purchased directly from the fund or through your investment professional. Portfolio data is as of the date of this piece unless otherwise noted and holdings are subject to change. Not FDIC Insured No Financial Institution Guarantee May Lose Value MF-COINX