Seeking Alpha
Profile| Send Message| ()  

Madison Strategic Sector Premium Fund, is a closed-end fund trading on the New York Stock Exchange, under the symbol MSP. It is a buy/write fund, which seeks to produce additional income by writing options against its portfolio. I have written about other buy/write funds in the past but this one seems to live up to its mandate. Also, as opposed to other buy/write funds that simply sell Index Calls, MSP actually sells options against specific securities.

As of December 31, 2011, MSG had gross assets of $ 76,783,433 and had written puts and calls totaling $ 3,330,890 or 4.6% of its portfolio. As of March 20, 2012, MSG sold at a 13.38% discount from net asset value, which is also a plus.

MSP has a wide sector allocation, consisting as follows:

Consumer Discretionary 13.0%
Energy 6.9%
Financials 16.2%
Health Care 22.9%
Information Technology 26.8%
Broad Stock Indexes 5.0%
U.S. Treasury Note 1.6%
Cash & Other 7.6%

MSP's 10 largest holdings,as of December 31, 2011, were as follows:

Visa (V) 4.85%
Microsoft (MSFT) 4.08%
Google (GOOG) 3.53%
Gilead Sciences (GILD) 3.35%
State Street Bank (STT) 3.30%
Affiliated Managers group (AMG) 3.28%
Cisco Systems (CSCO) 3.21%
Powershares QQQ Trust 3.05%
Wells Fargo (WFC) 2.82%
Target (TGT) 2.80%

Buy/Write funds do not do well in down markets and MSP was no exception. As of December 31, 2011, MSP had accumulated net realized losses of ($16,494,336) and unrealized losses of ($8,622,501). For a relatively small fund, like MSP, these losses are substantial and probably explain why it trades at a large discount.
The five-year figures are not great either. It appears that MSP had used leverage, much to its detriment. Although it does write a fair amount of options, this has not helped MSP produce income. The five-year ratios, in percentage terms, are as follows:

2011 2010 2009 2008 2007
Net Asset Return (2.80) 9.79 41.21 (31.94) (5.07)
Market Value Return (9.24) 14.01 55.81 (36.18) (16.85)
Operating Expenses 0.98 0.98 1.04 1.07 0.98
Net Income 0.01 (0.20) (0.27) 0.19 1.41
Portfolio Turnover 83 61 25 41 93
In a rising market, MSP should do fairly well and start generating excess income through the writing of options. Obviously we trust that the past will not be a prologue to the future. I do like the discount and MSP seems to now be on course. I do not know if it will use leverage again but do pray it will use it wisely.

Source: Madison Premium Fund: A Buy/Write Fund Worth Owning