Q2 2026 XAI Madison Equity Premium Income Fund Earnings Call

August 12, 2026

Speaker #2: Hello, everyone. This is Kimberly Flynn with XA Investments. Welcome to the MCN webinar. Thank you so much for joining us today. We've got some good updates on the equity market and the performance of MCN for the period ended June 30, 2026.

Kimberly Flynn: Hello, everyone. This is Kimberly Flynn with XAI Investments. Welcome to the MCN webinar. Thank you so much for joining us today. We've got some good updates on the equity market and the performance of MCN for the period ended 30 June 2026. I've got a few disclosures for you before we get into the Q&A with our portfolio managers, Ray and Drew. This presentation is intended to be educational in nature and is not for the purpose of recommending a particular investment. There is past performance information in this presentation. Past performance does not guarantee future results, and current performance may be lower or higher than performance quoted here. We do have some forward-looking statements in the presentation today. Investors should not place undue reliance on forward-looking statements, and actual results could differ materially.

Speaker #2: I've got a few disclosures for you. Before we get into the Q&A with our portfolio managers, Ray and Drew, this presentation is intended to be educational in nature and is not for the purpose of recommending a particular investment.

Speaker #2: Past performance: there is past performance information in this presentation. Past performance does not guarantee future results, and current performance may be lower or higher than performance quoted here.

Speaker #2: We do have some forward-looking statements in the presentation today. Investors should not place undue reliance on forward-looking statements, as actual results could differ materially.

Speaker #2: If you have any questions, always feel free to reach out to XA Investments—to me or to anybody on my team—and we will be happy to address those.

Kimberly Flynn: If you have any questions, always feel free to reach out to XAI Investments, to me, or to anybody on my team, and we will be happy to address those. As we get going, there is an opportunity for you to ask questions on the webinar in the Q&A function. You should see it at the bottom of your screen. So take a moment. You can ask questions anonymously. We would welcome your questions. I know Ray and Drew always like to hear from shareholders. So enter Q&A into that box, and we'll either type the answer or we'll answer it live today on the webinar. There are other resources on the XAI Investments Knowledge Bank, so if you are looking for more information on covered call strategies or on MCN, XAI Investments is a good place to find it.

Speaker #2: As we get going, there is some an opportunity for you to ask questions on the webinar. In the Q&A function, you should see it at the bottom of your screen, so take a moment you can ask questions anonymously.

Speaker #2: We would welcome your questions. I know Ray and Drew always like to hear from shareholders so enter Q&A into that box, and we'll either type the answer or we'll answer it live today on the webinar.

Speaker #2: There are other resources on the XA Investments knowledge bank, so if you are looking for more information on covered call strategies, or on MCN, XA Investments is a And if you can't find it, always reach out to me or members of my team.

Kimberly Flynn: If you can't find it, always reach out to me or members of my team. Today, we're really happy to be joined by Ray DiBernardo and Drew Justman, who are the portfolio managers at Madison Investments responsible for MCN. Ray joined Madison in 2003 and was involved with MCN from the time of its inception in 2004. So we're really pleased to have Ray here with us. Drew joined Madison in 2005 and has been involved with MCN working on covered calls and equity analysis. So we have the experts with us. I'm going to facilitate some prepared Q&A, and we'll get right into what's been going on in the equity market. There's been a lot of volatility in the equity market in June and July, so we'll hear from Ray and Drew and go through some of those key questions.

Speaker #2: Today, we're really happy to be joined by Ray DeBernardo and Drew Jessman, who are the portfolio managers at Madison Investments responsible for MCN. Ray joined Madison in 2003 and was involved with MCN from the time of its inception in 2004.

Speaker #2: So we're really pleased to have Ray here with us, and Drew joined Madison in 2005 and has been involved with MCN, working on covered calls and equity analysis.

Speaker #2: So we have the experts with us. I'm going to facilitate some prepared Q&A, and we'll get right into what's been going on in the equity market.

Speaker #2: There's been a lot of volatility in the equity market in June and July, so we'll hear from Ray and Drew and go through some of those key questions.

Speaker #2: Ray and Drew are supported by a team of 15 research analysts in the Madison Equity Department, and they benefit from the work and insights of that equity team.

Kimberly Flynn: Ray and Drew are supported by a team of 15 research analysts in the Madison equity department, and they benefit from the work and the insights from that equity team. Why don't we get into it? I think you've been hearing from our team now. We started working with the Madison team almost two years ago, and our collaboration, where our firm serves as the advisor of MCN and Madison as the Portfolio Manager and sub-advisor, is a collaboration that we think showcases the best of what Madison does in their covered call strategy. We are here today to talk with you about performance, and we will get right into some of the planned questions that we have. Why don't we go to the first question, which is for you, Ray. Could you discuss the fund's recent performance and the main drivers of performance in Q2?

Speaker #2: So why don't we get into it? I think you've been hearing from our team. We started working with the Madison team almost two years ago, and our collaboration, where our firm serves as the advisor of MCN and Madison as the portfolio manager and sub-advisor, is a collaboration that we think showcases the best of what Madison does in their covered call strategy.

Speaker #2: And so we're here today to talk with you about performance, and we'll get right into some of the planned questions that we have. So why don't we go to the first question, which is for you, Ray.

Speaker #2: Could you discuss the fund's recent performance and the main drivers of performance in Q2?

Speaker #3: Yeah, good morning, Kim. We kind of feel like we've been living in the movie Groundhog Day recently, because what's been happening not just in the second quarter of this year, and in the first quarter, seems to me very, very similar to what happened in 2025.

Ray DiBernardo: Yeah. Good morning, Kim. We kind of feel like we've been living in the movie "Groundhog Day" recently because what's been happening, not just in Q2 of this year and Q1, seems to me very, very similar to what happened in 2025. Just a trip down memory lane, Q1 of last year was a negative quarter for the market, primarily because of tariff fears and the economic impacts, potentially, that they could have on inflation, et cetera. The market went down 4% or 5% in Q1. If you all remember, Liberation Day was supposed to be 2 April, when all these harsh tariff rates were supposed to be implemented. At the very last minute, some calls went out, some tweets were made, and many of the tariffs were either delayed or lowered dramatically.

Speaker #3: And just to trip down memory lane, the first quarter of last year was a negative quarter for the market, primarily because of tariff fears and the potential economic impacts that they could have on inflation, etc.

Speaker #3: And so the market went down 4 or 5 percent in the first quarter, and if you all remember, Liberation Day was supposed to be April 2, when all these harsh tariff rates were supposed to be implemented.

Speaker #3: But at the very last minute, some calls went out, some tweets were made, and many of the tariffs were either delayed or lowered dramatically. The markets essentially said, "Well, this is good, we'll sound the all-clear—tariffs aren't going to be a problem anymore, so let's rally." And the market rallied in the second quarter, a little bit more than 11 percent, I believe.

Ray DiBernardo: The markets essentially said, "Well, this is good. We will sign the all clear. Tariffs are not going to be a problem anymore, so let's rally." The market rallied in Q2, a little bit more than 11%, I believe. We had real concerns in Q1, followed by the all clear and the markets rallying. The markets rallied. It was really a risk-on rally, and it was driven by Magnificent Seven. It was AI-driven by some of the bigger stocks in the market. Now, fast-forward to what's happened this year. Of course, we had the Magnificent Seven stocks not performing great early on in the year. Then we had some concerns. The market was plateauing, and then we had, at the end of February, the Iran conflict began.

Speaker #3: So we had real concerns in the first quarter, followed by the all-clear and the markets rallying. And the markets rallied it was really a risk-on rally, and it was driven by magnificent seven.

Speaker #3: So, it was AI-driven by some of the bigger stocks in the market. Now, fast forward to what's happened this year—of course, we had the Magnificent Seven stocks not performing great early on in the year, and then we had some concerns.

Speaker #3: So the market was plateauing, and then we had, at the end of February, the Iran conflict begin. Oil prices went up dramatically, inflation concerns came to the forefront, and the markets declined.

Ray DiBernardo: Oil prices went up dramatically, inflation concerns came to the forefront, and the markets declined. The market was down 4% plus in Q1. Then, turned on a dime when, actually on 30 March, so the day before the end of Q1, a ceasefire was announced and peace talks began, and the implication was the market believed, okay, this is all behind us. Oil prices will start to come down again, and the all clear has been signaled. We can now focus on something else. Initially in Q2, we had a very strong rebound just because of the Iran conflict seemingly being solved. Now, we all know that not to be the case. We never believed it would be a straight line to having this put behind us, but the market reacted that way.

Speaker #3: So the market was down 4% plus in the first quarter. Then it turned on a dime when, actually on the 30th of March, so the day before the end of the first quarter, a ceasefire was announced.

Speaker #3: And peace talks began, and the implication was the market believed, "Okay, this is all behind us, oil prices will start to come down again, and the all-clear has been signaled. We can now focus on something else." So initially in the second quarter, we had a very strong rebound just because of the Iran conflict seemingly being solved.

Speaker #3: Now, we all know that not to be the case. We never believed it would be a straight line to having this put behind us, but the market reacted that way.

Speaker #3: So we had an immediate 10% or so bounce in the market by the first couple of weeks in April, solely because of that.

Ray DiBernardo: We had an immediate 10% or so bounce in the market by the first couple of weeks in April, solely because of that. The risk-on fever continued to move, and AI drove it from there. This time it was not the Magnificent Seven, it was semiconductor chips and semiconductor equipment manufacturing, because seemingly all of a sudden, there was a shortage of memory chips for use in AI servers, that drove that particular section of the technology group significantly higher. Memory chips are commoditized. We all know DRAM in our personal computers. They are very low-price, low-margin products for companies like Micron Technology and SanDisk and the likes. AI requires significant amount of memory and a chip that they developed called a high-bandwidth memory chip. Not quite as commoditized, but will likely at some point be very much like the other chips, be very commoditized.

Speaker #3: And the risk-on fever continued to move, and AI drove it from there. And this time, it wasn't the Magnificent Seven. It was semiconductor chips and semiconductor equipment manufacturing, because seemingly, all of a sudden, there was a shortage of memory chips for use in AI servers that drove that particular section of the technology group significantly higher.

Speaker #3: Now, memory chips are commoditized. We all know DRAM in our personal computers—they're very low-priced, low-margin products for companies like Micron Technology and SanDisk and the like.

Speaker #3: AI requires significant amount of memory, and a chip that they develop called a high-bandwidth memory chip, not quite as commoditized, but will likely at some point be very much like the other chips, be very commoditized.

Speaker #3: It appeared that there was going to be a shortage of these high-bandwidth chips, so companies like Micron, SanDisk, and SK Telecom—which is the market leader from South Korea—just soared.

Ray DiBernardo: It appeared that there was going to be a shortage of these high-bandwidth chips, so companies like Micron and SanDisk and SK Telecom, which is a market leader from South Korea, just soared. These stocks were up over 200% in the Q2 alone. Because they came out and said, "Well, we may have to build more plants and spend more capital to enhance our production of these chips because there is a shortage," semiconductor equipment manufacturers also soared. So companies like Applied Materials were up significantly. That was the driving force of what kept the market moving to a 15%-plus return in the Q2. Again, very much like what happened last year, started off with a relief rally. Last year was tariffs, this year was Iran, and then was carried forward by a version of the AI story taking hold and moving the markets forward.

Speaker #3: These stocks were up over 200 percent in the second quarter alone. And because they came out and said, "Wow, we may have to build more plants and spend more capital to enhance our production of these chips because there's a shortage," semiconductor equipment manufacturers also soared.

Speaker #3: So companies like Applied Materials were up significantly. And that was the driving force of what kept the market moving to a 15 percent plus return in the second quarter.

Speaker #3: So again, very much like what happened last year. Started off with a relief rally—last year it was tariffs, this year it was Iran—and then was carried forward by a version of the AI story taking hold and moving the markets forward.

Speaker #3: So it was really a blast-off this quarter in semiconductors and semiconductor equipment manufacturing that drove the market. So overall, the technology sector, in total, which is the biggest sector in the S&P 500—roughly a third of the overall index—was up 32 percent, and drove the market’s 15 percent overall return.

Ray DiBernardo: It was really a blast-off this quarter in semiconductor and semiconductor equipment manufacturing that drove the market. Overall, the technology sector in total, which is the biggest sector in the S&P 500, roughly a third of the overall index, was up 32% and drove the market's 15% overall return. No other sector, none of the other 11 sectors were higher than the overall market. The tech sector was the only sector that beat the market in the Q2. Within the tech sector, semiconductors and semi equipment were the drivers of 70% of the technology sector's return. It was really a very narrowly focused rally in one small group that really pushed the whole market higher. Those are the drivers of performance. Now, how we were positioned was very strongly positioned in the Q1 when things got choppy.

Speaker #3: No other sector—none of the other 11 sectors—were higher than the overall market. So, the tech sector was the only sector that beat the market in the second quarter. Within the tech sector, semiconductors and semi-equipment were the drivers of 70% of the technology sector's return.

Speaker #3: So it was really a very, very narrowly focused rally in one small group that really pushed the whole market higher. So that was kind of—those were the drivers of performance.

Speaker #3: Now, how we were positioned was very, very strongly positioned in the first quarter when things got choppy. The fund was overweight energy, which benefited from the spike in oil prices, and we were also overweight in some of the defensive sectors, particularly consumer staples, which benefited as the market got a little bit more fearful.

Ray DiBernardo: The fund was overweight energy, which benefited from the spike in oil prices, and we were also overweight in some of the defensive sectors, particularly consumer staples, which benefited as the market got a little bit more fearful. That completely reversed in the Q2. Not only did consumer staples, it was roughly flat during the quarter, did not help, because people were looking for more risk and looking at the semiconductor space. But the energy sector declined 13% during the quarter because oil prices dropped significantly. That was really the whole story of us being more defensively positioned. The option overlay made us even more defensive in a market that just was a little bit of a runaway train that was focused on just one narrow sector. Now, we have already seen somewhat of a reversal of that so far in the Q3.

Speaker #3: That completely reversed in the second quarter. So not only did consumer staples—which was roughly flat during the quarter—not help because people were looking for more risk and looking at the semiconductor space, but the energy sector declined 13 percent during the quarter because oil prices dropped significantly.

Speaker #3: So, that was really the whole story of us being more defensively positioned. The option overlay made us even more defensive, and in a market that was just a little bit of a runaway train, that was focused on just one narrow sector.

Speaker #3: Now, we've already seen somewhat of a reversal of that so far in the third quarter. A lot of these memory chip companies are down significantly just in the month of July and early August.

Ray DiBernardo: A lot of these memory chip companies are down significantly just in the month of July and early August, and we are gaining ground again. So it has been a very bumpy ride this year. Really well-positioned early in the year, not so much in Q2. But it is starting to come back our way so far in Q3.

Speaker #3: And we're gaining ground again. So it's been a very bumpy ride. This year, we were really well positioned early in the year, not so much in the second quarter, but it's starting to come back our way.

Speaker #3: So far in the third quarter.

Speaker #2: And Ray, could you talk a little bit about the fund's top 10 holdings? And specifically, one of those top holdings is TransOcean, so I love it when you share some of the color informing the overweight positions in the portfolio.

Kimberly Flynn: Ray, could you talk a little bit about the fund's top 10 holdings? Specifically, one of those top holdings is Transocean. So, I love it when you share some of the color informing the overweight positions in the portfolio. So would love to learn a little bit more about the top 10 and Transocean.

Speaker #2: So, I would love to learn a little bit more about the top 10 and TransOcean.

Speaker #1: Yeah, from the end of the first quarter.

Ray DiBernardo: Yeah. From the end of Q1 through the end of Q2, there really was not a significant change in the holdings. We did not have a significant amount of trading. Our overall turnover in Q2 was right around 45%, which for us is relatively low. Typically, you get a lot more trading around option expirations than we did this past quarter. As a result, we did not really have much of a change in most of the top 10 holdings. The only thing I would note there is that one holding that kind of rocketed up the table and became a top five holding was CVS. It was not in the top 10 at the end of March, but I think is the third or fourth largest holding as of the end of June.

Speaker #3: Through the end of the second quarter, there really wasn't a significant change in the holdings. We actually did not have a significant amount of trading. Our overall turnover in the second quarter was right around 45 percent, which for us is relatively low.

Speaker #3: Typically, you get a lot more trading around option expirations than we did this past quarter. So, as a result, we didn't really have much of a change in most of the top ten holdings.

Speaker #3: The only thing I would note there is that one holding that kind of rocketed up the table and became a top five holding was CVS. It was not in the top 10 at the end of March, but I think is the third or fourth largest holding.

Speaker #3: As of the end of June, CVS—of course, we all know CVS, the corner drugstore and pharmacy company—is also a very large player in the pharmacy benefit management space and healthcare benefits, through its ownership of Aetna.

Ray DiBernardo: CVS, of course, we all know CVS, the corner drugstore pharmacy company. It is also a very large player in the pharmacy benefit management space and healthcare benefits through its ownership of Aetna, in the HMO area. So, the driver of performance for CVS, what caused its price to go up, it actually went up 44% during the quarter, and that is the reason it bumped up the waiting table, is that, earlier in the year, the Centers for Medicare & Medicaid Services, CMS, published their projected rates for price increases allowed by HMOs in 2027, and they were very disappointing for the industry. They were barely positive, low single digit, a fraction of a single digit. Then they sent out the final numbers during Q2, and the final numbers were significantly better than the projected numbers earlier on in the year.

Speaker #3: In the HMO area. So the driver of performance for CVS what caused its price to go up, it actually went up 44 percent during the quarter, and that's the reason it bumped up the waiting table is that earlier in the year, the Center for Medicaid or Medicare and Medicaid Services, CMS, published their projected rates for price increases allowed by HMOs in 2027, and they were very disappointing for the industry.

Speaker #3: They were barely positive—low single digit, a low fraction of a single digit. And then they sent out the final numbers during the second quarter, and the final numbers were significantly better than the projected numbers earlier on in the year.

Speaker #3: And that caused the sector to rally, and CVS was a big beneficiary of that. Thirty percent of their revenue comes from healthcare benefits through Aetna.

Ray DiBernardo: That caused the sector to rally, and CVS was a big beneficiary of that. 30% of their revenue comes from healthcare benefits through Aetna. That was a big boost to a thesis that was otherwise a little bit troubled because of the perceived low rates that were initially projected by the CMS. That was the one story that caused a change in the top 10. Transocean Energy you mentioned remains our single largest holding. It was our largest holding last quarter as well. Transocean is an interesting story, and I will run through what attracted us to the company. It is interesting. It has got some very strong macro tailwinds, we believe, and some specific company tailwinds that make it attractive going forward. Transocean is an offshore drilling contractor. It owns and operates drill ships and semi-submersible drill rigs.

Speaker #3: And so, that was a big boost to a thesis that was otherwise a little bit troubled because of the perceived low rates that were initially projected by the CMS.

Speaker #3: So that was kind of the one story that caused a change in the top 10. TransOcean Energy, you mentioned, remains our top, our single largest holding.

Speaker #3: It was their largest holding last quarter as well. So Transocean is an interesting story, and I'll kind of run through what attracted us to the company, and it's interesting.

Speaker #3: It's got some very strong macro headwinds or tailwinds, we believe, and some specific company tailwinds that make it attractive going forward. So, TransOcean is an offshore drilling contractor.

Speaker #3: It owns and operates drillships and semi-submersible drill rigs. And it offers its services to public oil exploration companies such as BP, Chevron, Shell, and Total, as well as national oil companies such as Petrobras in Brazil and Equinor in Norway.

Ray DiBernardo: It offers its services to public oil exploration companies such as BP, Chevron, Shell, TotalEnergies, and also national oil companies such as Petrobras in Brazil and Equinor in Norway. It operates, once one of these exploration companies decides they want to drill on one of their leases offshore, depending on what type of water depth that they have to drill in, they will contract an offshore contractor to actually do the drilling and provide the equipment in either a drill ship or a semi-submersible. Transocean specializes in ultra-deep water drilling through primarily using these massive drill ships, which basically have a drill rig on top of the ship. These ships can operate in water depths of up to 12,000 feet of water, and then drill another 30,000 to 40,000 feet below the surface of the seabed. It is a very, very high-tech, specialized drill ships.

Speaker #3: So, it operates once one of these exploration companies decides they want to drill in one of their leases offshore. Depending on what type of water depth they have to drill in, they will contract an offshore contractor to actually do the drilling.

Speaker #3: And provide the equipment in either a drillship or a semi-submersible. So, Transocean specializes in ultra-deepwater drilling through primarily using these massive drillships, which basically have a drill rig on top of the ship.

Speaker #3: And these ships can operate in water depths of up to 12,000 feet, and then drill another 30,000 to 40,000 feet below the surface of the seabed.

Speaker #3: So, very, very high-tech, specialized drill ships. Semi-submersibles are typically used, at least in TransOcean's experience, in harsh environment waters such as the North Sea and off the west coast of Australia, where the seas are typically very rough all the time.

Ray DiBernardo: Semi-submersibles are typically used, at least in Transocean's experience, in harsh environment waters, such as the North Sea, and off the west coast of Australia, where the seas are typically very rough all the time. These semi-submersibles can be towed out to where they are drilling. They are on big pontoons. The pontoons are then partially sunk, and that provides stability in rough seas in order to maintain the drilling. Harsh environment and ultra-deep water drilling are the key niche markets that Transocean operates in. They are also a premium market, so companies will pay more to avail themselves of Transocean's services and rigs because they are typically in very difficult places to find oil. So higher margin, very specialized. Transocean is the global leader in ultra-deep water and one of the global leaders in harsh environment semi-submersibles. That is kind of the story behind it.

Speaker #3: And these semi-submersibles can be towed out to where they're drilling. They're on big pontoons; the pontoons are then partially sunk, and that provides stability in rough seas in order to maintain the drilling.

Speaker #3: So harsh environment and deep, ultra-deepwater drilling are the key niche markets that TransOcean operates in. They're also premium markets, so companies will pay more to avail themselves of TransOcean's services and rigs because they're typically in very difficult places to find oil.

Speaker #3: So higher margin, very specialized. Transocean is the global leader in ultra-deepwater and one of the global leaders in harsh environment semi-submersibles. So that's kind of the story behind it.

Speaker #3: Now, the reason that it's attractive from a macro perspective is that oil and gas demand, contrary to popular belief in recent years, is going to grow for the foreseeable future.

Ray DiBernardo: The reason that it is attractive from a macro perspective is that oil and gas demand, contrary to popular belief in recent years, is going to grow for the foreseeable future. Global demand for oil will likely grow consistently through at least 2050. So we have got at least 20 plus years of demand growth. In order to service this demand growth, we have to continue to find more sources of supply, and that is getting more and more difficult these days. In recent years, say from 2012 through the present time, the marginal growth in supply has come from US shale, onshore shale. That is topping out. We are not likely going to see much growth, if any, in shale production going forward. Probably going to start to see that decline at some point in the next few years.

Speaker #3: So, global demand for oil will likely grow consistently through at least 2050. So, we've got another at least 20-plus years of demand growth. Now, in order to service this demand growth, we have to continue to find more sources of supply.

Speaker #3: And that's getting more and more difficult these days. In recent years, say from 2012 through the present time, the marginal growth in supply has come from US onshore shale.

Speaker #3: Now, that is topping out. We're not likely going to see much growth, if any, in shale production going forward. We're probably going to start to see that decline at some point in the next few years.

Speaker #3: So it's getting harder and harder to find any new sources of supply anywhere in the world. Therefore, some of these big national oil companies and large public oil exploration companies are looking more and more offshore to find supply.

Ray DiBernardo: It is getting harder and harder to find any new sources of supply anywhere in the world. Therefore, some of these big national oil companies and big public oil exploration companies are looking more and more offshore to find supply. In 2024, of all of the money that was spent on exploration by all of these oil companies, roughly 12% was spent on deep water drilling. By 2030, it is only four years from now, that is expected to be upwards of 20% of total drilling CapEx going to deep water drilling. That is a big tailwind for the market leader in ultra-deep water drilling, which is Transocean. The other big issue is that back in the early 2010s to mid-2015-ish, most of the offshore drillers were spending a ton of money building these massive drill ships.

Speaker #3: In 2024, of all the money that was spent on exploration by all of these oil companies, roughly 12% was spent on deepwater drilling.

Speaker #3: By 2030, which is only four years from now, it is expected that upwards of 20% of total drilling capex will go to deepwater drilling.

Speaker #3: So that's a big tailwind for the market leader in ultra-deepwater drilling, which is Transocean. Now, the other big issue is that back in the early 2010s to around 2015, most of the offshore drillers were spending a ton of money building these massive drill ships.

Speaker #3: One drill ship can cost upwards of $750 million to build, and it could take three to five years to build. So the shipyards were full of these ships being built for drilling.

Ray DiBernardo: One drill ship can cost upwards of $750 million to build, and it could take three to five years to build. The shipyards were full of these ships being built for drilling. Then, that was when the shale revolution took over, and all of a sudden, there was less demand for offshore drilling. A lot of these companies went bankrupt. Essentially, a lot of the offshore drillers filed for bankruptcy by 2019 and 2020. Transocean is the only one of the major drilling companies that did not file for bankruptcy. It had a bunch of ships that were coming along and being built. The last one that came off the shipyard was in 2023. It decided that we are not going to destroy the equity owners of the business.

Speaker #3: But then that was when the shale revolution took over, and all of a sudden there was less demand for offshore drilling. So a lot of these companies went bankrupt.

Speaker #3: Essentially, a lot of the offshore drillers filed for bankruptcy by 2019 and 2020. TransOcean is the only one of the major drilling companies that did not file for bankruptcy.

Speaker #3: Now, it had a bunch of ships that were coming along and being built. The last one that came off the shipyard was in 2023.

Speaker #3: And it decided that we're not going to destroy the equity owners of the business. We are going to we took on a lot of debt to build these ships, and they're going to come on board, and we're going to generate free cash flow from these ships once they start being contracted out.

Ray DiBernardo: We took on a lot of debt to build these ships, and they are going to come on board, and we are going to generate free cash flow from these ships once they start being contracted out, and we are going to pay off our debt doing that. That is really when we started getting interested in the stock. This was after most of the other companies went bankrupt. Transocean stayed in business and had a plan. They ended up with the largest, newest fleet of these high-tech drill ships that are now operational, generating a lot of money at a time when the cycle has turned in favor of ultra-deep water drilling because demand is so high, and there are no more ships being built. There is not a single deep water ship being built in any shipyard in the world right now.

Speaker #3: And we're going to pay off our debt doing that. And that's really when we started getting interested in the stock. This was after most of the other companies went bankrupt.

Speaker #3: TransOcean stayed in business and had a plan. They ended up with the largest, newest fleet of these high-tech drill ships that are now operational and generating a lot of money at a time when the cycle has turned in favor of ultra-deep water drilling.

Speaker #3: Because demand is so high, and there are no more ships being built. There is not a single deep-water ship being built in any shipyard in the world right now.

Speaker #3: So there are limited numbers of ships now, and TransOcean has the youngest fleet and the most high-tech fleet available. So they're in very, very high demand. That simply means that the day rates that a company like BP or Total are willing to pay to contract for having these ships keeps going higher and higher and higher.

Ray DiBernardo: There are limited numbers of ships now, and Transocean has the youngest fleet and the most high-tech fleet available. So they are in very, very high demand. That simply means that the day rates that a company like BP or TotalEnergies are willing to pay to contract for having these ships keeps going higher and higher and higher. That is a huge, huge tailwind for the company going forward. More recently, and this is more company specific, there has been consolidation in the industry, and that also came across with Transocean. Transocean is in the process of merging or getting approval to merge with another fairly large offshore driller called Valaris, and that is likely going to close at the end of the H2. That will create the world's largest high-spec premium fleet because Valaris also has some ultra-deep water vessels and some harsh environment vessels.

Speaker #3: So, that's a huge, huge tailwind for the company going forward. Most recently—and this is more company-specific—there's been consolidation in the industry, and that also came across with Transocean.

Speaker #3: Transocean is in the process of merging, or getting approval to merge, with another fairly large offshore driller called Valaris. That's likely going to close in the second half of the year.

Speaker #3: And that will create the world’s largest high-spec, premium fleet because Volaris also has some ultra-deepwater vessels and some harsh environment vessels. So it’s just pushing their specialty even further and consolidating two very good fleets when the cycle is still in the upcycle phase.

Ray DiBernardo: It is just pushing their specialty even further and consolidating two very good fleets when the cycle is still in the up cycle phase. They are going to have the advantage of better scale, they are going to have some cost synergies, and a little bit of diversification as well. Valaris brings a lot of drilling connections with the Saudis, which Transocean did not have before, so there is some diversification of client bases as well. We view that as positive. The other thing is Valaris was one of those companies that declared bankruptcy in 2019. They came out of bankruptcy with a much better balance sheet. Just as Transocean is repairing its balance sheet now, it is merging with a company with a much stronger balance sheet. The new entity will have sped up the transformation into a very solid, financially sound company.

Speaker #3: So they're going to have the advantage of better scale. They're going to have some cost synergies, and a little bit of diversification as well.

Speaker #3: Volaris brings a lot of drilling connections with the Saudis, which TransOcean did not have before. So there's some diversification of client bases as well.

Speaker #3: Positive. The other thing is, Volaris was one of those companies that declared bankruptcy in 2019. They came out of bankruptcy with a much better balance sheet.

Speaker #3: And just as Transocean is repairing its balance sheet now, it's merging with a company with a much stronger balance sheet. And so the new entity will have sped up the transformation into a very solid, financially sound company.

Speaker #3: So, a lot of good things going on at TransOcean—we like it a lot. It does get kicked around a little bit with oil prices.

Ray DiBernardo: A lot of good things going on at Transocean. We like it a lot. It does get kicked around a little bit with oil prices, not nearly as much as an exploration company, because the vast majority of their ships are already contracted out, so there is not a huge fluctuation in the prices that they are receiving. It is tied to the oil and gas sector, so it is going to have some volatility there. By and large, we look past that, and we see fundamentally a very strong company in an industry that has got a lot of runway ahead of it.

Speaker #3: Not nearly as much as an exploration company, because the vast majority of their ships are already contracted out. So there's not a huge fluctuation in the prices that they're receiving.

Speaker #3: But it is tied to the oil and gas sector, so it is going to have some volatility there. But, by and large, we look past that.

Speaker #3: And we see, fundamentally, a very, very strong company in an industry that has a lot of runway ahead of it.

Speaker #1: Well, it makes sense that it's the top holding. Drew, why don't we talk a little bit more about energy? I know the fund's top sector this quarter was energy.

Kimberly Flynn: Well, it makes sense that it is a top holding. Drew, why do not we talk a little bit more about energy? I know the fund's top sector this quarter was energy. Anything you would add? I know we did a deep dive on Transocean, but other themes specific to the energy sector that you would draw out.

Speaker #1: Is there anything you would add? I know we did a deep dive on TransOcean, but are there other themes specific to the energy sector that you would draw out?

Speaker #2: Yeah, thanks, Kim. I guess I'd like to highlight that energy had a pretty tough second quarter. It was the worst-performing sector, down, I think, almost 14%.

Drew Justman: Yeah. Thanks, Kim. I guess I would like to highlight that energy had a pretty tough Q2. It was the worst-performing sector, down, I think, almost 14%. Our view is that is the short-term pullback. We have been overweight energy for a while. Energy was the best-performing sector in Q1, and it is back to being the best-performing sector year-to-date after a very strong start this quarter. We are very positive on energy, as Ray talked about a little bit. What we really like about it is we think the fundamentals are the healthiest they have been in the sector in many years, if not a couple of decades. Specifically, there is industry-wide discipline in production volumes, so there is not too much supply that keeps oil prices stable. The companies have strong and improved balance sheets, as Ray was mentioning with Transocean.

Speaker #2: Our view is that it was a short-term pullback. We've been overweight energy for a while. Energy was the best performing sector in the first quarter.

Speaker #2: And it's back to being the best performing sector year to date after a very strong start this quarter. So, we're very positive on energy, as Ray talked about a little bit.

Speaker #2: And what we really like about it is we think the fundamentals are the healthiest they've been in the sector in many years, if not a couple of decades.

Speaker #2: Specifically, there's industry-wide discipline in production volumes, so there's not too much supply; that keeps oil prices stable. The companies have strong and improved balance sheets, as Ray was mentioning with TransOcean.

Speaker #2: And what we really like is that cash is getting returned to shareholders through regular dividends, special dividends, and share buybacks, at a time when valuations are really attractive across the sector, especially after the second-quarter pullback.

Drew Justman: Cash is getting returned to shareholders through regular dividends, special dividends, and share buybacks at a time when valuations are really attractive across the sector, especially after the Q2 pullback. Taking a longer-term view, which is what we really emphasize, we think we're early in a multi-year energy bull market. As it shows on slide 10, we had almost 12% of the portfolio invested in energy, while the S&P 500 was only 3%. We think the 3% weighting in the S&P 500 for energy is likely to grow north of 5% or higher over the next few years. If that happens, we're very well-positioned, and the strategy should do pretty well. That's a quick synopsis on our energy positioning and viewpoint.

Speaker #2: Taking a longer-term view, which is what we really emphasize, we think we're early in a multi-year energy bull market. As it shows on slide 10, we had almost 12% of the portfolio invested in energy, while the S&P 500 was only 3%.

Speaker #2: We think the 3% weighting in the S&P 500 for energy is likely to grow north of 5% or higher over the next few years.

Speaker #2: And so if that happens, we're very well positioned, and the strategy should do pretty well. So that's a quick synopsis on our energy positioning and viewpoint.

Speaker #1: Thank you, Drew. Ray, let's talk a little bit about consumer staples, where you're also overweight, and then information technology, where the fund has an underweight.

Kimberly Flynn: Thank you, Drew. Ray, let's talk a little bit about consumer staples, where you're also overweight, and then information technology, where the fund has an underweight.

Speaker #3: Yeah. Consumer staples are typically a much lower beta sector, so much more defensive than the technology sector, for sure. And we've been fairly timely, so we've taken the opportunity to build that weighting for quite a number of quarters now.

Ray DiBernardo: Well, consumer staples, typically a much lower beta sector, so much more defensive than the technology sector for sure. We've been fairly defensive in our positioning for quite some time. So we've taken the opportunity to build that weighting for quite a number of quarters now. We do have a meaningful overweight there, really for defensive purposes. The companies we own there are very high-quality, global brand name companies, such as Colgate-Palmolive, Pepsi, Procter & Gamble, Archer-Daniels-Midland. So high-quality companies. They all pay very attractive dividends and provide a level of protection when markets get choppy. Clearly in the Q2, nobody wanted protection. They wanted to participate in the strong upmarket. So that's where technology came into play, and everybody was kind of flocking to the tech sector and kind of left the staples behind. So staples were flattish during the quarter.

Speaker #3: So, we do have a meaningful overweight there, really for defensive purposes. I mean, these are the companies we own. They are very, very high quality.

Speaker #3: Global brand-name companies, such as Colgate, Palmolive, Pepsi, Procter & Gamble, and Archer Daniels Midland—so high quality companies—they all pay very attractive dividends.

Speaker #3: And provide a level of protection when markets get choppy. Now, clearly in the second quarter, nobody wanted protection; they wanted to participate in the strong up market.

Speaker #3: So that's where technology came into play, and everybody was kind of flocking to the tech sector and kind of left the staples behind. So staples were flattish during the quarter.

Speaker #3: And technology, as I mentioned earlier, was up significantly—up almost 32%. So, it was just one of those quarters where our sector weightings were kind of counter to what was happening in the market.

Ray DiBernardo: Technology, as I mentioned earlier, was up significantly, up almost 32%. So it was just one of those quarters where our sector weightings were kind of counter to what was happening in the market, as opposed to the Q1 where we were benefiting from it. Our tech weighting, we actually allowed a number of stocks to get called away during the quarter because many of them were performing so well, kind of being dragged up by the memory chip market. So Microchip Technology, we allowed to get called away at a pretty strong, solid gain. Qualcomm as well. Broadcom, we had actually let it get called away, but then we bought it back on a dip. So we still do have some money in technology, but nowhere near a third of the portfolio like the S&P index has.

Speaker #3: As opposed to the first quarter, where we were benefiting from it. And our tech weighting, we actually allowed a number of stocks to get called away during the quarter because many of them were performing so well, kind of being dragged up by the memory chip market.

Speaker #3: So, Microchip Technologies—we allowed to get called away at a pretty solid gain. Qualcomm as well. And Broadcom, we had actually let it get called away, but then we bought it back on a dip. So, we still do have some money in technology, but nowhere near a third of the portfolio like the S&P index has.

Speaker #1: Yeah, understood. Well, you talked about covered calls, so why don't we shift a little bit in terms of the webinar to talk about the goal of a covered call strategy in terms of generating option premium income, supporting distribution. And so, Ray, I want to turn to you in terms of just talking about the fund, the history of consistent distributions to shareholders, and delivering on the fund's objective of being able to pay out cash flow, and your thoughts on that.

Kimberly Flynn: Well, you talked about covered calls, so why don't we shift a little bit in terms of the webinar to talk about the goal of a covered call strategy in terms of generating option premium income, supporting distribution. Dre, I want to turn to you in terms of just talking about the fund, the history of consistent distributions to shareholders, and delivering on the fund's objective of being able to pay out cash flow, and your thoughts on that.

Speaker #2: Yeah. Income generation is, we think, one of the most important reasons people own the fund. We pay a high distribution rate, and most important to us is the consistency.

Drew Justman: Yeah. Income generation is, we think, one of the most important reasons people own the fund. We pay a high distribution rate. Most importantly to us is the consistency. As it shows on slide 11, we've had a consistent dividend policy since 2010, and then we recently moved to a monthly distribution policy. We think consistent monthly distributions are really important for investors. They allow predictable cash flow, so this can help if you're a retiree, you can get retirement income, or if you want to pay off recurring monthly expenses, you can use the income generated from MCN to help do that. We think consistency is absolutely critical, and it's something we really work hard to generate and meet. We're going to keep doing that going forward.

Speaker #2: As it shows on slide 11, we've had a consistent dividend policy since 2010. And then we recently moved to a monthly distribution policy. We think consistent monthly distributions are really important for investors.

Speaker #2: They allow predictable cash flow. So, this can help if you're a retiree—you can get retirement income—or, if you want to pay off recurring monthly expenses, you can use the income generated from MCN to help do that.

Speaker #2: So 'we' is absolutely critical, and it's something we really work hard to generate and meet, and we're going to keep doing that going forward.

Speaker #1: Thanks, Drew. Okay. So, Ray, in recent quarters, you talked about some of the short-term volatility swings that we've seen in the market. So, how do you manage MCN when you've got a more volatile period, or a volatile environment?

Kimberly Flynn: Thanks, Drew. Ray, in recent quarters, you talked about some of the volatility, short-term volatility swings that we've seen in the market. How do you manage MCN when you've got a more volatile period or volatile environment?

Speaker #3: Yeah, certainly, it has been an issue recently. A way to look at volatility is that there's always going to be volatility in the market—kind of standard volatility—because volatility is based on the reflection of what is expected uncertainty in an expected risk.

Ray DiBernardo: Yeah. Certainly has been an issue recently. A way to look at volatility is that there's always going to be volatility in the market, kind of standard volatility, because volatility is based on the reflection of what is expected uncertainty and an expected risk. There's always risk and uncertainty in the market looking forward. You have expectations, and you hope that they get fulfilled, but there's a chance that they don't. There's that kind of volatility that's always there, and that's what generally options trade on volatility. There's always going to be a level of volatility out there. Periodically, there's going to be levels of higher volatility, what would be called idiosyncratic volatility or something specific or unique to a company or an event around a company, such as an earnings announcement.

Speaker #3: There's always risk and uncertainty in the market looking forward. You have expectations, and you hope that they get fulfilled, but there's a chance that they don't.

Speaker #3: So there's that kind of volatility. It's always there. And that's what—generally—options trade on: volatility. So there's always going to be a level of volatility out there.

Speaker #3: Periodically, there's going to be levels of higher volatility—what would be called idiosyncratic volatility, or something specific or unique to a company or an event around a company.

Speaker #3: Such as an earnings announcement. So, typically, for an option that is coming due somewhere around an earnings announcement or is covering an earnings announcement, volatility for that particular option could be higher because there’s more uncertainty than normal based on people's expectations of what the earnings could be or what the forecast could be when the company actually talks to investors.

Ray DiBernardo: Typically, for an option that is coming due somewhere around an earnings announcement or is covering an earnings announcement, volatility for that particular option could be higher because there is more uncertainty than normal based on people have expectations of what the earnings could be or what the forecast could be when the company actually talks to investors. There could be movements around exceeding expectations or not exceeding expectations. There is a typical higher level of expected volatility around those types of events. Those are things that you can plan for. We always know that volatility will be slightly higher around an earnings announcement. If we are selling volatility as we are selling a call option, we can take advantage of that periodically, with advance notice, because we know when earnings announcements are going to be.

Speaker #3: And there could be movements around exceeding expectations or not exceeding expectations. So there's a typically higher level of expected volatility around those types of events.

Speaker #3: And those are things that you can plan for. I mean, we always know that volatility will be slightly higher around an earnings announcement. So, if we're selling volatility—as we're selling a call option—we can take advantage of that periodically with advance notice, because we know when earnings announcements are going to be.

Speaker #3: The other kind of volatility, which is not idiosyncratic, but I call it idiosyncratic, is just when things come out of the blue. And things that you cannot plan for that are just that just happen and they cause very, very large short-term market reactions and these are based on rumors, hearsay, tweets, you name it.

Ray DiBernardo: The other kind of volatility, which is not idiosyncratic, but I call it idiot syncratic, is just when things come out of the blue. Things that you cannot plan for, that just happen, and they cause very large short-term market reactions. These are based on rumors, hearsay, tweets, you name it. They tend to move the markets and then tend to reverse very quickly. We have had a lot of those in recent years, right? I talked about the tariff issues last year, when all of a sudden we expected the worst, and then all of a sudden everything got better. That happened this quarter when we expected the war to continue, and then all of a sudden we had a ceasefire. Even though we all knew that this was going to be a long process, and clearly that has played out.

Speaker #3: They tend to move the markets and then tend to reverse very quickly. And we've had a lot of those in recent years, right? I talked about the tariff issues last year when all of a sudden we expected the worst, and then all of a sudden everything got better.

Speaker #3: That happened this quarter when we expected the war to continue, and then all of a sudden we had a ceasefire. And even though we all knew that this was going to be a long process—and clearly that's played out—we're well into many months of this peace process already.

Ray DiBernardo: We are well many months into this peace process already, and it does not seem to be getting much further. But it has an immediate impact on the price of, say, crude oil. When that peace agreement was announced, crude oil plummeted, the markets went up, and now crude oil is much higher than it was before, because the uncertainty never went away, really. The market just was reacting to a rumor or a short-term event. These are really unpredictable. They are dangerous to hedge. There is a very big potential to be whipsawed in something like that. We typically take the stance when you have this idiot syncratic volatility, that we just stay the course, and we just focus on our longer-term thesis, whether it is on the overall portfolio or on an individual stock. We will look to take advantage potentially.

Speaker #3: And it doesn't seem to be getting much further. But it hasn't had an immediate impact on the price of, say, crude oil. When that peace agreement was announced, crude oil plummeted.

Speaker #3: The markets went up, and now crude oil is much higher than it was before. Because the uncertainty never went away, really, the market was just reacting to a rumor or a short-term event.

Speaker #3: And these are really unpredictable. They're dangerous to hedge. There's a very big potential to be whipsawed in something like that. So we typically take the stance, when you have this idiosyncratic volatility, that we just stay the course.

Speaker #3: And we just focus on our longer-term thesis, whether it's on the overall portfolio or on an individual stock. And we'll look to take advantage, potentially, if—for example—oil prices drop dramatically. We took advantage to add to a couple of our energy names when oil got down to $60 a barrel, because we just didn't believe it was going to stay there very long.

Ray DiBernardo: If, for example, oil prices, when they dropped dramatically, we took advantage to add to a couple of our energy names when oil got down to $60 a barrel because we just did not believe it was going to stay there very long. Here we are back closer to 90 on Brent Crude six, seven weeks later. We are going to take advantage where we can, but by and large, we are not going to make massive portfolio shifts based on these short-term market events. Looking at the energy sector again, we were very positive energy before the Iran conflict occurred. In our view, the Iran conflict just strengthens our energy thesis even after it gets resolved, and eventually it will get resolved. When the Strait of Hormuz opens up and everything gets normalized, we still think that energy thesis is where it was. It is actually stronger than where it was.

Speaker #3: And here we are back closer to $90 on Brent crude, six or seven weeks later. So we're going to take advantage where we can, but by and large, we're not going to make massive portfolio shifts based on these short-term market events.

Speaker #3: Looking at the energy sector again, we were very positive on energy before the Iran conflict occurred. In our view, the Iran conflict just strengthens our energy thesis, even after it gets resolved.

Speaker #3: And eventually, it'll get resolved. And when the Strait of Hormuz opens up and everything gets normalized, we still think that energy thesis is where it was.

Speaker #3: It's actually stronger than where it was. So, trying to time the ups and downs of these changes based on a tweet of "We're going to stop bombing," and then, "We're going to start bombing," etc.

Ray DiBernardo: Trying to time the ups and downs of these changes based on a tweet of, "We're going to stop bombing, and then we're going to start bombing," et cetera, is not very practical. You're never going to get that right all the time. We're just going to work through it and stay the course, and I think that's when you have this kind of short-term rumor-based volatility. It's best to just maintain your discipline and let the market play through this very ultra short-term volatility. That's what we've been trying to do.

Speaker #3: It's not very practical. You're never going to get that right all the time. So we're just going to work through it and stay the course.

Speaker #3: And I think that's when you have this kind of short-term, rumor-based volatility, it's best to just maintain your discipline and let the market play through this very, very ultra-short-term volatility.

Speaker #3: So, that's what we've been trying to do.

Speaker #1: Yeah, that makes sense. So, Drew, let's talk about the rationale for covered call strategies. In the current environment, as Ray was describing, can you think of some reasons that investors may look to covered call strategies in terms of what role they are playing in investors' portfolios?

Kimberly Flynn: Yeah, that makes sense. Drew, let's talk about the rationale for covered call strategies. In the current environment, as Ray was describing, can you think of some reasons that investors may look to covered call strategies in terms of what role are they playing in investors' portfolios?

Speaker #2: Yeah, thanks for the question. I mentioned that portfolio income is probably the most important thing for many covered call investors, and that's something that we take pride in.

Drew Justman: Yeah. Thanks for the question. I mentioned that portfolio income is probably the most important thing for many covered call investors, and that's something that we take pride in. But we also want to participate in a portion of the equity market with less volatility, while also providing some downside risk. When we write options, we get premium income, and that can help cushion on the downside. Covered call strategies also help with portfolio diversification if you add it to either an equity, pure equity or fixed income portfolio allocation. In the current market environment, which I would describe as a volatile market environment, option premiums are higher due to the elevated volatility, and that gives us higher income potential. I'd also like to add that S&P 500 valuations are near their all-time highs, I believe, around 20 times earnings.

Speaker #2: But we also want to participate in a portion of the equity market with less volatility, while also providing some downside risk protection. When we write options, we get premium income, and that can help cushion on the downside.

Speaker #2: Covered call strategies also help with portfolio diversification if you add them to either an equity, pure equity, or fixed income portfolio allocation. And then in the current market environment, which I would describe as a volatile market environment, option premiums are higher due to the elevated volatility.

Speaker #2: And that gives us higher income potential. I'd also like to add that S&P 500 valuations are near their all-time highs—I believe around 20 times earnings.

Speaker #2: They've been a little higher than that, but that's at the high end of the range. And so we think it's important to have a portfolio that offers some downside protection in case valuations compress and there's a market correction.

Drew Justman: They've been a little higher than that, but that's at the high end of the range. We think it's important to have a portfolio that offers some downside protection in case valuations compress and there's a market correction. We're taking advantage of the elevated volatility while also trying to provide income and downside protection.

Speaker #2: So we're taking advantage of the elevated volatility while also trying to provide income and downside protection.

Speaker #1: Well, Drew, investors have a number of different choices when it comes to covered call strategies. How would you describe Madison's approach to managing covered calls, and how does that differ from others in the marketplace?

Kimberly Flynn: Well, Drew, investors have a number of different choices when it comes to covered call strategies. How would you describe Madison, your approach to managing covered calls and how that can differ from others in the marketplace, and specifically why your approach, you think, has its own advantages relative to others?

Speaker #1: And specifically, why do you think your approach has its own advantages relative to others?

Speaker #2: Yeah. We employ what's called an active-active strategy, and we think this is different than the vast majority of other covered call strategies that will own stocks within, write index options.

Drew Justman: Yeah. We employ what is called an active-active strategy, and we think this is different than the vast majority of other covered call strategies that will own stocks, but then write index options. We do not do that. We have an active stock portfolio and active option overlay. We think this is very helpful because it allows us to own individual stocks, and then we can write those company stock options against the underlying holdings. What this allows us to do is individual stock option premiums are meaningfully higher than index options. So it allows us to earn more income, which helps us meet our distribution goals. We can also tailor the option characteristic to the underlying stock price. If we are very bullish about a company, we might write further out of the money or a longer-term option.

Speaker #2: We don't do that. We have an active stock portfolio and an active option overlay. We think this is very helpful because it allows us to own individual stocks, and then we can write those company stock options against the underlying holdings.

Speaker #2: And what this allows us to do is—individual stock option premiums are meaningfully higher than index options. So it allows us to earn more income, which helps us meet our distribution goals.

Speaker #2: And we can also tailor the option characteristics to the underlying stock price. If we're very bullish about a company, we might write further out-of-the-money or longer-term options.

Speaker #2: And so we really like the ability to tailor the option characteristics to our underlying view of the stock. There are a couple of trade-offs we make to do the active-active approach.

Drew Justman: We really like the ability to tailor the option characteristic to our underlying view of the stock. There are a couple of trade-offs we make to do the active-active approach. It is a little bit labor-intensive, where we have to write options on almost all the stocks in the portfolio, which takes a little bit of time, and it can be a little bit less tax efficient depending on the portfolio turnover rate. But we think those trade-offs are worth it, and our active-active approach really helps us generate the income that many investors like to receive.

Speaker #2: It's a little bit labor-intensive, where we have to write options on almost all the stocks in the portfolio, which takes a little bit of time.

Speaker #2: And it can be a little bit less tax-efficient, depending on the portfolio turnover rates. But we think those trade-offs are worth it. And our active-active approach really helps us generate the income that many investors like to receive.

Speaker #1: Yeah, I agree with that. And I think you're delivering on the objective, and that's what investors do want to see. Ray, speaking to the coverage percentage, it looks like as of the end of the quarter, MCN was roughly 86% covered by call options.

Kimberly Flynn: Yeah. I agree with that, and I think you are delivering on the objective, and that is what investors do want to see. Ray, speaking to the coverage percentage, it looks like as of the end of the quarter, MCN was roughly 86% covered by call options. Which sectors are most covered by call options, and what factors will contribute to deciding which stocks in the portfolio are covered or not covered, or maybe you have been called away in certain stocks?

Speaker #1: So, which sectors are most covered by call options? And what factors will contribute to deciding which stocks in the portfolio are covered or not covered, or maybe you've been called away in certain stocks?

Speaker #3: Yeah, 86% is a relatively high level of coverage. We've been quite high for a number of quarters now. We're trying to get as much protection as we possibly can.

Ray DiBernardo: Yeah, 86% is a relatively high level of coverage. We have been quite high for a number of quarters now. We are trying to get as much protection as we possibly can. Clearly, that wasn't needed in Q2. I think overall, again, looking through our view for the full year, I think it is going to work out positively. Again, as you noted, that 86% is a snapshot at the end of the quarter. The one sector that wasn't as covered, pretty much every sector was almost completely covered, with the exception of the energy sector. The energy sector had some options expire during the month of June, which we did not immediately roll over and recover.

Speaker #3: Clearly, that wasn't needed in the second quarter, but I think, overall, again, looking through our view for the full year, I think it's going to work out positively.

Speaker #3: Again, as you noted, that 86% is a snapshot at the end of the quarter. And the one sector that wasn't as covered—and pretty much every sector was almost completely covered with the exception of the energy sector.

Speaker #3: Now, the energy sector had some options expire in during the month of June, which we did not immediately roll over and recover. And the reason for that is that we had just in the month of June alone, the price of oil go from the kind of the mid-80s down to, I think by the end of June, it was actually slightly below $70.

Ray DiBernardo: The reason for that is that we had just in the month of June alone, the price of oil go from the mid 80s down to, I think by the end of June, it was actually slightly below $70. It was in the 60s. So we had a significant drop-off in June in the price of crude oil. The options that we had written on the energy names that had expired in June expired out of the money, so we kept all of the premium that we had previously received. We didn't feel compelled after such a steep drop in oil prices to rewrite immediately, and we wanted to see a recovery because we believed that we were pretty much down at the low point of crude at that point. Obviously, since then, we have had a pretty big upswing in crude prices.

Speaker #3: It was in the 60s, so we had a significant drop-off in June in the price of crude oil. The options that we had written on the energy names that expired in June expired out of the money.

Speaker #3: So, we kept all of the premium that we had previously received, but we didn’t feel compelled, after such a steep drop in oil prices, to rewrite immediately.

Speaker #3: And we wanted to see a recovery because we believed that we were pretty much down at the low point of crude at that point.

Speaker #3: And obviously, since then, we've had a pretty big upswing in crude prices that kind of peaked out by mid to late July, above $90 again.

Ray DiBernardo: It peaked out by mid to late July above $90 again. Again, a move from 70 to 90, and then we have started to write again. As of the end of June, we had allowed those energy holdings to not get recovered and then recovered them later on when it was a little more opportunistic to do so. By and large, though, we are trying to cover the vast majority of the portfolio. We are sticking to the discipline that this is a covered writing strategy. Our objective is to remain mostly covered most of the time. We are not going to make massive swings where we go down to 30% or 40% covered in order to try and participate more in an upmarket, and then try and get the timing right and get more completely covered later on to provide more defensive positions.

Speaker #3: So again, a move from 70 to 90. And then we've started to write again. So as of the end of June, we had allowed those energy holdings to not get recovered.

Speaker #3: And then recovered them later on when it was a little more opportunistic to do so. By and large, though, we're trying to cover the vast majority of the portfolio.

Speaker #3: We're very—we're sticking to the discipline that this is a covered writing strategy. Our objective is to remain mostly covered, most of the time.

Speaker #3: So we're not going to make massive swings where we go down to 30 or 40 percent covered in order to try and participate more in an up market, and then try and get the timing right and get more completely covered later on to provide a more defensive position.

Speaker #3: Typically, you're not going to get that timing right very often. So our objective, and what we've told investors we do in the whole tenure of this fund, is that we're going to be a covered writing strategy — not just partially covered some of the time.

Ray DiBernardo: Typically, you are not going to get that timing right very often. Our objective and what we have told investors we do in the whole tenure of this fund is that we are going to be a covered writing strategy, not just partially covered some of the time. So 80% or plus is normal for us. As we get closer to 90%, up closer to 100%, that means we are getting even more defensive than we normally are, and that is where we sit today. With the exception of some timing issues around when we think it is more advantageous to actually sell a call option, as was the case with the energy stocks at the end of June.

Speaker #3: So, 80% or higher is normal for us. As we get closer to 90%, even up to 100%, that means we're getting even more defensive than we normally are.

Speaker #3: And that's kind of where we sit today, with the exception of some timing issues around when we think it's more advantageous to actually sell a call option, as was the case with the energy stocks at the end of June.

Speaker #1: Makes sense. Well, Ray and Drew, we don't have any audience questions at this point, so I'd like to just turn to your market outlook for the second half of the year.

Kimberly Flynn: Well, Ray and Drew, we don't have any audience questions at this point, so I'd like to just turn to your market outlook for the H2 of the year.

Speaker #3: Yeah. Honestly, even though we've had just kind of a blowout second quarter, it hasn't changed a whole lot, and in fact, it's gotten a little bit more concerning. Drew mentioned that we still believe the market is expensively valued.

Ray DiBernardo: Yeah. Honestly, even though we've had a below Q2, it hasn't changed a whole lot. In fact, it's gotten a little bit more concerning. Drew mentioned that we still believe the market is expensively valued, so there's more risk to the downside than there is risk of missing much more to the upside, in our view. So we want to be defensively positioned. Just as a reminder that coming into this year, the general expectation out there was that inflation would be coming down and interest rates would therefore be allowed to come down. That was what the driving force was early on in the market. Inflation obviously has remained very sticky and is likely to remain sticky for the foreseeable future. Interest rates, at least the 10-year Treasury rate, is meaningfully higher than it was at the beginning of the year.

Speaker #3: So there's more risk to the downside than there is risk of missing much more to the upside, in our view. So we want to be defensively positioned.

Speaker #3: Just as a reminder, coming into this year the general expectation was that inflation would be coming down and, therefore, interest rates would be allowed to come down as well.

Speaker #3: And that was what the driving force was early on in the market. Inflation, obviously, has remained very sticky and is likely to remain sticky for the foreseeable future.

Speaker #3: And interest rates—at least the 10-year Treasury rate—are meaningfully higher than they were at the beginning of the year. Rates were close to 4.7% on the 10-year Treasury as we get closer to 5%.

Ray DiBernardo: Rates, we're close to 4.7% on the 10-year Treasury. As we get closer to 5%, that becomes a problem for the market. Our assumption, our expectation is that there's going to be more downside risk as the year progresses, that a lot of these would've been driving the market recently is going to come back down to Earth. We've already started to see that happen, even just in the month of July and early August. It's interesting, just little data points that we come across. Micron Technology, I mentioned, this big memory supplier, had really, really good results in late March and had these awesome projections that we're selling out of our memory chips.

Speaker #3: That becomes a problem for the market. And so, our assumption—our expectation—is that there's going to be more downside risk as the year progresses.

Speaker #3: That a lot of these, which have been driving the market recently, are going to come back down to earth. We've already started to see that happen, even just in the month of July and early August.

Speaker #3: It's interesting, just the kind of little data points that we come across. Micron Technology, I mentioned, is this big memory supplier. They had really, really good results in late March.

Speaker #3: And had these awesome projections that we were selling out of our memory chips. And despite these pretty stunning results, their shares dropped significantly on the earnings announcement because there was a reflection that investors were fearful that we’re already nearing the peak of the memory cycle.

Ray DiBernardo: Despite these pretty stunning results, their shares dropped significantly on the earnings announcement because there was a reflection that investors were fearful that we're already nearing the peak of the memory cycle. So we always have to remember that, especially if the market's being driven by a highly cyclical sector like memory chips and like semiconductor equipment, these things can change very quickly. Even as they're continuing to go up. The fundamentals look good. Investors are looking past the current time and looking to when is the peak of the cycle and you want to be out before the peak starts to roll over. In fact, if you look back to the tech and telecom bubble bursting in the early 2000s, it was this sector that continued to boom as the market was tipping over. They were the last ones.

Speaker #3: So we always have to remember that, especially if the market's being driven by a highly cyclical sector like memory chips and semiconductor equipment, these things can change very quickly.

Speaker #3: Even as they're continuing to go up and the fundamentals look good, investors are looking past the current time and looking into when is the peak of the cycle and when is it going to— you want to be out before the peak starts to roll over.

Speaker #3: And in fact, if you look back to the tech and telecom bubble bursting in the early 2000s, it was this sector that continued to boom as the market was tipping over.

Speaker #3: And they were kind of the last ones, as it was finally realized that the cycle was rolling over. Then these stocks started to collapse.

Ray DiBernardo: As it was finally realized that the cycle was rolling over, then these stocks started to collapse. We are not putting a lot of stock into the fact that because these stocks did so well in Q2, that it is going to continue. We think there is a lot more risk that we see a reversal in that. We are very cautious about that. I think the fundamentals with inflation and interest rates are going to continue to weigh on the market going forward. Again, at higher valuations, there is just more risk inherent in investing in the overall market. Our defensive position is going to remain where it is right now, highly covered, more focused on defensive sectors, and taking advantage of areas where we think there is a lot of tailwinds, such as the energy sector, going forward.

Speaker #3: So, we're not putting a lot of stock into the fact that, because these stocks did so well in the second quarter, that's going to continue.

Speaker #3: We think there's a lot more risk that we'll see a reversal in that, so we're very cautious about it. And I think the fundamentals with inflation and interest rates are going to continue to weigh on the market going forward.

Speaker #3: And again, at higher valuations, there's just more risk inherent in investing in the overall market. So our defensive position is going to remain where it is right now.

Speaker #3: Highly covered, more focused on defensive sectors, and taking advantage of areas where we think there's a lot of tailwinds, such as the energy sector.

Speaker #3: Going forward, I think we're not really changing our outlook significantly from where it was.

Ray DiBernardo: I think we are not really changing our outlook significantly from where it was.

Speaker #1: Yeah, I think given your outlook, your positioning absolutely makes sense. For MCN, in terms of delivering on the objective of distributing cash flow to shareholders, you've done that.

Kimberly Flynn: Yeah, I think, given your outlook, your positioning absolutely makes sense for MCN and delivering on the objective of distributing cash flow to shareholders. You have done that. You will continue to do that. Ray and Drew, we look forward to having you back on next quarter, and we can update shareholders on everything going on in the equity market and your new market outlook at that point. Thank you so much, everyone, for joining us today. We really appreciate it. If you did not have a chance to ask your question on the webinar, please feel free to reach out to me by email. That is kflynn@xaiinvestments.com. Thank you, Lauren, on my team for organizing today, and thank you to Ray and Drew. Hope everyone is well. Bye-bye.

Kimberly Flynn: Yeah, I think, given your outlook, your positioning absolutely makes sense for MCN and delivering on the objective of distributing cash flow to shareholders. You have done that. You will continue to do that. Ray and Drew, we look forward to having you back on next quarter, and we can update shareholders on everything going on in the equity market and your new market outlook at that point. Thank you so much, everyone, for joining us today. We really appreciate it. If you did not have a chance to ask your question on the webinar, please feel free to reach out to me by email. That is kflynn@xainvestments.com. Thank you, Lauren, on my team for organizing today, and thank you to Ray and Drew. Hope everyone is well. Bye-bye.

Speaker #1: You'll continue to do that. And Ray and Drew, we look forward to having you back on next quarter, and we can update shareholders on everything going on in the equity market and your new market outlook at that point.

Speaker #1: Thank you so much, everyone, for joining us today. We really appreciate it. If you didn't have a chance to ask your question on the webinar, please feel free to reach out to me by email.

Speaker #1: That's Caitlin at XA Investments.com. Thank you, Lauren, on my team for organizing today. And thank you to Ray and Drew. Hope everyone is well.

Speaker #1: Bye-bye.

Operator 2: Goodbye

Operator: Goodbye