XAI Madison Equity Premium Income Fund (MCN) Q3 FY2025 Earnings Call Transcript & Summary

Hello, everyone, and welcome to the XAI Madison Equity Premium Income Fund Third Quarter Webinar. Thank you for joining us today. Before we get started, I do have some disclosures. We may reference performance throughout the presentation. Certainly, past performance does not guarantee future results, and current performance may be higher or lower than the performance quoted. Additionally, the materials or discussion may contain forward-looking statements. Investors should not place undue reliance on forward-looking statements. Before we begin, we do want to hear from you. If you have any questions about the fund, please enter them into the Q&A box below and we will do our best to address them at the end of the presentation. Lastly, please check out our website at xainvestments.com for more information about XA Investments and MCN. I'm excited to introduce you to today's speakers, Ray Di Bernardo is a portfolio manager and analyst on MCN. He joined Madison Investments in 2003 and has managed MCN since its inception in 2004. He is also responsible for managing all other option-related mandates at Madison Investments. Kimberly Flynn is the President of XA Investments and is responsible for all product and business development activities at the firm. This includes the firm's proprietary fund platform and consulting practice. My name is Jared Hagen, and I'm a Vice President at XA Investments focusing on product management and development for our proprietary fund platform. The fund is managed by Ray Di Bernardo and Drew Justman. As mentioned previously, Ray has managed the fund since its inception in 2004, and Drew has been with Madison since 2005. MCN recently celebrated its 20-year anniversary this past year and was one of the first covered call strategy funds in the market. The portfolio management team is supported by over 15 equity research analysts that span market caps and sectors. As a quick reminder, XA Investments took over as the adviser to MCN in December of 2024. Madison Investments continues to manage the portfolio as the fund sub-adviser. The fund's strategy and objective remain the same, and the fund continues to trade on the New York Stock Exchange under the ticker MCN. Turning to the current market landscape. Equity markets are being shaped by several key macro forces, including the Fed's -- Federal Reserve balancing act between inflation control and economic growth, including rate cuts in September and October, ongoing geopolitical tensions impacting supply chains, a federal government shutdown adding uncertainty to the policy outlook and an AI-driven tech rally now facing valuation scrutiny. Meanwhile, resilient U.S. economic data has continued to defy recession expectations even as corporate earnings remain under pressure from elevated costs. This environment has created a more selective market where active management, stock selection and sector positioning are increasingly critical to performance.

Ray, with that broader backdrop, if we dive into the fund's performance in this past quarter, what were some of those drivers that you saw?

Well, Jared, it was a quarter that was very similar to what we experienced in the second quarter, at least once we got through the first week of the second quarter. So since the so-called Liberation day in early April when there was a lot of angst over the tariff regimes that turned out to be more draconian than expected, that quickly kind of went away when many of those tariff levels were brought down or delayed. And I think the impact of tariffs since then has been minimal. And I think going forward, any kind of noise around tariffs will continue to be minimal because of the expectation that they'll get resolved relatively quickly after a phone call or 2. So since that April low, the market has rallied significantly and has had very little in the way of any kind of correction. The market is up 35% since that first week of April through the end of September. So it's been a very uninterrupted move higher. And it's been driven by some of the factors that you mentioned, Fed cut in September and most recently, just in late October. Interestingly enough, those cuts have not had much of an impact on longer-term rates. The 10-year treasury is actually higher now than it was at the time of either of those cuts. So we're not having an across-the-board decline in rates as many had expected. A couple of other data points during the quarter that drove returns and particularly within the fund, gold was up 17% during the third quarter and oil was down 4%. And I might touch on that a little bit later, but those impacted some holdings in the fund. The key driver in our view was the focus on -- again, we talked about this for quite a long time now, the mega cap growth stocks, which are really impacted mainly via the AI revolution. And that really was the key driver in our view that have been pushing markets to high valuations and driving the overall market returns, whereas we're seeing in many of the underlying stocks, much lesser returns. the Magnificent 7 stocks, the large growth -- mega cap growth stocks out there, they did reasonably well. Not all of them did well in the third quarter, but they continue to be an important driver of returns. Tesla is up 40%. Google is up 38%, Apple 24%; NVIDIA up 18%. So these clearly had a big impact on overall performance. The market was up 8%, just a little over 8%, the S&P 500. But others such as Microsoft, which was only up 4%, Meta, Amazon, which were flat. So not all of the mega caps contributed, but they had enough of a contribution to make a significant difference. Overall, the style breakdown was that high beta stocks significantly outperformed most other styles and high-risk stocks, in other words, stocks with no earnings or -- and/or a high short interest also outperformed. So it's clearly been a risk on market, and I think we could have said the same for most of the second quarter as well. So it's really been more of the same as the markets continue to make new highs through the end of September. And we've only just in recent weeks in October, starting to see some shakiness come out because valuations have gotten so high. So some concerns about valuation risk are starting to permeate through the market now. But those were the key drivers. From a fund perspective, the fund did reasonably well in such an environment where a hedged equity fund utilizing covered writing wouldn't be expected to keep up in such a raging bull market. But the fund was up 4.8% in a market that was up 8.1%. So we participated in approximately 60% of the upside. Our primary benchmark is the S&P BuyWrite Index, the BXM index, and that was up 3.5%. So we outperformed that benchmark in the third quarter, and that's the third consecutive quarter that we've been able to do that. So relative to that benchmark, we're performing quite well. Overall, with the market, it's been more challenging as we are giving up some of the upside in the portfolio in order to provide more downside protection. Sector allocation has been a headwind for the fund because the leading sectors, again, are the sectors that hold these mega cap growth funds, so the tech sector, communication services, consumer discretionary, they all vastly outperformed. And those 3 sectors alone made up 81% of that S&P 500 return. So all of the other 8 sectors combined only made up 19% of the return. So if you weren't in those sectors and overweight, you really had a hard time keeping up even if you were long only. On the flip side, the laggards were some of the more defensive sectors out there, as you would imagine, consumer staples was the only sector that was negative. And then laggards such as health care, materials, real estate, more traditionally defensive areas that one would expect to lag in such a strong market. So we have been underweight from a fund perspective in those high flying higher-risk sectors. And that was one of the reasons we weren't able to keep up with the overall market. Obviously, holding any cash in the fund causes a bit of a drag when markets are going up so much. The option overlay was the biggest drag on the fund, which is typical in a strongly rising market. And the stock selection was quite positive. It was quite a significant positive contributor during the quarter to offset some of those headwinds. So overall, we're quite pleased with the way the fund performed from an NAV basis. And we continue to be positioned for what we think is going to continue to be a very volatile period going forward.

Very, very helpful. Moving maybe a little bit into kind of some of those specific holdings and maybe looking at the top 10 holdings here. Can you kind of describe your conviction in the top 10? Obviously, the portfolio is relatively concentrated on the equity side with 40 total holdings, equity holdings and the top 10 accounting for 33% of the portfolio. So I think it might be good to describe to investors what positions -- what makes these positions attractive to MCN strategy? And then if there were any notable additions or removals from the top 10 this quarter?

Yes. The top 10, clearly for us, we operate on a conviction basis with larger positions being our most -- the areas where we have the greatest conviction. And this conviction stems from a number of underlying factors, market leadership, free cash flow generation, strong balance sheets and valuation. So in all of these cases, those are the commonalities between many of these holdings, even though they may operate in various sectors of the economy. So the majority of the top 10 -- now I should mention that in this kind of strategy where we do have option assignments occurring on a regular basis month-to-month, you'll see a lot more movement around the top 10 than you would in a long-only fund where you can simply just buy and hold individual holdings. So you'll see a little bit more movement. But by and large, the companies that are -- that were in the top 10 at the end of the last quarter, the top 5 in particular, are the same or very, very similar with Las Vegas Sands, AES, the utility company, Danaher, American Tower and Conoco remaining in the top 10 compared to the June quarter. There are a few change -- there were a few changes over the quarter and particularly the bottom half of the top 10 usually gets moved around a little bit more because you have some stocks that perform well in a quarter, and they get bumped into the top 10 and others may lag a little and get bumped out. So you have some small movement there. So for example, Hershey was up 14% during the quarter, and it edged up into the top 10. Agilent, the health care company, was up almost 10%. It edged up into the top 10. And we had a few that moved down. Matador Resources, Permian oil and gas, E&P company moved down. As I mentioned earlier, oil prices were down during the quarter, 4%, and it affected most of the energy complex. So it moved out of the top 10. And then we have others where we're adding to existing positions that may not have been in the top 10 that move into the top 10. And examples of that during the quarter would be Pepsi, which we added to our position in September. We think it's a terrific globally branded company and the valuations have come down to a level where we feel very comfortable adding to it for future growth, and it bumped into the top 10 as well as Honeywell. A portion of our Honeywell position was called away in July at $230 a share. By September, the stock had weakened down to around $210, and we bought back not only the shares, the amount of shares that we had previously, but we added more to it. So our position in Honeywell actually increased at a lower price, and we bumped that into the top 10 as well. You always have some stocks that get called away completely. In our case, Barrick Mining was our second largest holding in the fund at the end of June. During the quarter, with gold prices rising significantly, Barrick Mining was up 55% in the quarter, and it got called away in 2 separate transactions, one in July and one in September. So that's no longer in the portfolio. And on the flip side, we added CME as a new name, a new holding to the portfolio. It's a name we've owned many times in the past, but we re-added it during the quarter. CME is in the financial sector. It's an index, essentially a derivative index company. They own Chicago Mercantile Exchange, the New York Mercantile Exchange, the Chicago Board of Trade, the COMEX, the Commodity Exchange, and they're the most active player in the interest rate and commodity futures market. And it tends to do well in volatile environments. So it's a stock that we would expect as volatility continues, more players out in the market, not only speculators, but industry players are looking to hedge and particularly with the volatility as related to tariffs. Hedging activities have increased and CME benefits from that kind of environment. So even in a volatile environment, we expect CME to hold up very well. So that was added and that new addition brought it into the top 10. So those are the changes. But generally, our larger positions have remained there, and our conviction levels remain very high there.

Thank you, Ray. Maybe just talking a little bit about valuations. You mentioned it in your -- as you were talking about your conviction levels and kind of the underweight to some of those high-flying sectors. Obviously, valuations are near historic highs and the S&P 500 is highly concentrated in those largest stocks, very top heavy compared to historical numbers and kind of weights in those -- in that top -- those top holdings in the S&P 500. Do these market dynamics concern you? And how does that shape your outlook for covered call strategies heading into 2026?

Yes, it is quite concerning, both the valuation levels and the concentration levels that are really unprecedented at the current time. Valuations right now in the market, looking at a 12-month forward-looking earnings projections is near the levels that we saw at the peak of the dot-com bubble back in 1999. Not quite there. It's within 4% or 5%. It's very, very high. I think the peak was somewhere around 24 -- a little over 24x. We're right now just under 23x forward earnings on the S&P. So that's -- there are a number of similarities that are starting to creep in about comparing the dot-com bubble with the current AI, I guess, call it a bubble, if you will. And that's one of them. One of them is that market valuations have been driven to historically high levels, primarily by these large companies. So not just on that measure, but on almost other -- every other quantitative measure, we're at or above all-time highs currently. Price to sales, for example, which was really elevated back in the dot-com bubble, we're 60% higher now than we were at the peak of the dot-com bubble. Operating margins are at or near all-time highs. There just doesn't seem to be a lot more that can be squeezed out of the market in terms of getting higher and higher valuations. Now that doesn't mean that valuations can't remain high for a while. But at some point, the risk reward or the balance between risk reward, in our view, has to be shifted toward protecting at these levels. So if you -- if we get to peak valuations, maybe there's another 5% until we get there. Maybe we go a little bit higher than peak valuations, but there's just not a lot of room. However, if we go back to just valuations, if we look into the early 2000s when the market sold off after the dot-com bubble blew up, the market started trading back toward 14 -- 13x or 14x earnings from that 23x earnings level. So that compression in valuation, if that similar thing would happen -- were to happen now, that would be a 40% decline just based on valuation. Even if we get back to a 17x or 18x multiple, which is still -- it's an average level multiple. We're looking at a 20% to 25% decline as a result of PE compression. And that's assuming earnings levels stay the same or earnings projections stay the same. If you have earnings [ degradating ] at the same time, it could be worse than that. So when you have a little bit of upside potential, but significant downside, we think it makes sense, at least for part of investors' portfolios to start getting a little more cautious and start thinking about protecting all of the money that they've earned in recent years and start protecting in case we do have some sort of valuation correction. So that really is concerning. The thing that makes it worse in our mind is the concentration. And there are so many different measures. We see them almost every day. The 3 largest stocks in the S&P 500 make up over 22% of the index. That's NVIDIA, Microsoft and Apple, just those 3 stocks alone. At the dot-com peak, the 3 largest stocks made up 12% of the market. So we're almost double that level now. And back then, interestingly enough, Microsoft was one of the top 3 back then as well, Microsoft, Cisco and General Electric. The largest 10 holdings in the S&P right now make up 41% of the market relative to back in the dot-com area, the maximum was 26%. So the level of concentration at the top end is extraordinary. We all know that the tech sector alone makes up over 34% of the S&P 500. That's a record high. During the third quarter alone, just 3 stocks represented half of the S&P return, Apple, Google and NVIDIA. So of that 8.1% move in the market, half of it was attributed to just those 3 stocks. So it works really well for investors when these stocks are doing well, but the reverse will happen if we have some sort of hiccup in the AI environment that causes a correction, not necessarily blowing up the AI as a technology and the future potential, but just from a valuation perspective, and you're starting to see some concerns creep in now that if this -- if we do see some sort of negative impact with valuations, then the concentration will start working against everyone. So while we're starting to see much of the S&P 500 hasn't performed nearly as well as the market, those stocks may continue to hold up reasonably well, but the ones that have been driving performance may underperform dramatically. And that's what we want to protect against. And that's why we have been underinvested in those. So we've missed some upside. There's no question, but our job here is managing a defensive strategy is to always be looking for what could hurt on the downside. So concentration really is making the overall environment much riskier than it otherwise would be.

Thank you, Ray. Yes, it certainly seems to be in historic times in terms of that concentration in those top names, 40% in the top 10 of the S&P 500 is very concentrated, and I think there's a lot of scrutiny there in terms of how sustainable that is on a going basis. And to your point about AI, seems like there's a circle, there's a web of payments being promised between both private and public companies on future AI usage and data centers that is really interesting, especially since some of those companies aren't making any profit yet, right? How can you make guarantees for hundreds of millions or billions of dollars when you don't have any revenue. So definitely something we'll keep an eye on. Maybe switching to a holding highlight. Let's talk about Las Vegas Sands. It's been a top 10 holding for some time. Can you explain why this holding has been such a large part of MCN and why you guys like the name?

Yes. Las Vegas Sands was a unique situation. We have followed the name for many, many years, but we really started to get interested when they sold their Las Vegas property. And I believe that was in 2020. And so Las Vegas Sands, it has nothing to do with Las Vegas anymore, essentially. And they focused their operations on the Asian gaming market. So they -- not only by doing that, they brought in a significant amount of money to basically shore up their balance sheet, which had been a little on the risky side, but when they sold the Las Vegas property, their balance sheet improved dramatically because most of that money went to pay down debt. So the balance sheet was fixed to a large extent. And they then focused on Macau and Singapore as their 2 primary markets. And they've always had a very large presence in both of those markets. In fact, they've been in Macau for over 20 years, and they spent upwards of $15 billion over the years in building properties and expanding and renovating properties. They're the largest player individually in Macau. Macau is the largest Asian gaming center. So they've got a market leadership position in the largest market in Asia. And they have multiple brands within that market. So they have The Londoner, The Venetian, The Parisian, The Four Seasons, The Sands Macao. And underneath The Londoner, they have The St. Regis, the Conrad, various other Londoner brands. They used to have the Sheraton and that was just renovated last year and just finished earlier this year, that was renovated, and the name was changed to the Londoner Grand. So they have been spending us some money in renovating and upgrading their current hotel spaces and their gaming properties. And they're just competing very, very well as a market leader in that market. They also are the single largest gaming operation in Singapore with their ownership of the Marina Bay Sands. They have -- and Singapore is the second largest gaming market in Asia. So they are the -- they have 60% market share in Singapore in gaming, so dominant market share there. If anybody knows anything about Singapore, if they're a Formula One fan and they watch the Singapore Grand Prix, the huge triple tower in right downtown Singapore, where the race is raced around it that is connected at the top with restaurants and swimming pools and whatnot, that's the Marina Bay Sands complex. So it's quite an impressive property. It's not only hotel and gaming, but shopping and other retail as well. So it's really the kind of the center of the universe in terms of tourism in Singapore. The problem that the gaming market had not only in Asia but around the world was COVID. It basically shut everything down. Now that's when we started looking at Las Vegas Sands, and we started taking a position in mid-2021. And clearly, with a strong balance sheet, they had the ability to withstand being shut down for a period of time. As we were starting to look at everything reopening, North America and Europe reopened earlier than Asia. So there was a delay in reopening, particularly China. Singapore opened first and then China opened about 9 months to a year later. And -- so the thesis around all of this was we have a market leader with tremendous properties that isn't currently making much money. They were -- had negative free cash flow because they weren't able to service any customers. That was going to change once the markets opened up. And that was kind of our initial premise for starting a position in Las Vegas Sands. And it's been a bit of a choppy ride because there were always some delays in fully opening up. Singapore opened up, but then Singapore, approximately 25% to 30% of their gaming patrons are Chinese and Chinese couldn't -- we were not allowed to exit the country for another 9 months to a year. So it took a while for the opening to started opening in Singapore. And then when Macau opened, it really started to gather steam. And it's really been quite nice to see the return of gaming in those markets. And what we had hoped would happen with free cash flow coming back has happened. And the company is operating very, very well. It's been bumpy because it is based on the Asian and the Chinese economy. So whenever there's a concern about the Chinese economy slowing, it does impact virtually every other Chinese-related company. So there's been a little bumpy along the way. But generally, the trend has been very, very positive. And -- and particularly after the most recent earnings release, the stock is trading near its highs, and it's been a very -- quite a profitable investment for the fund. We continue to believe that it's going to continue to move higher. The free cash flow is growing by the quarter. The balance sheet looks good. The vast majority of the renovations that they were undertaking have been completed. So there's not a lot of capital requirements going forward. And it just ticks off all the boxes in terms of what we like to look at. They're returning a lot of money through share buybacks and dividend increases. They only just reintroduced the dividend in 2023, and they've been increasing it significantly since then. The most recent quarter, just 20% increase in the dividend. So -- it's operating right now quite well after obviously a difficult time, but we felt very comfortable back then investing in a market leader, which had this kind of potential bottled up, but just needed the markets to fully open up. So that's been the story with Las Vegas Sands. It's been a very good holding for the fund, and I think it's going to continue that for the foreseeable future.

Ray, yes, I totally agree. It's a great story. I think it just goes to show in many aspects, your guys' diligence that you do on these holdings, identifying kind of that entry point and your thesis and seeing the long-term vision in the stock and taking that opportunity and being willing to hold it throughout that time period, not short-term investors in that sense. And I think that's appreciated by investors. Kim, maybe switching to you. The fund changed its distribution policy in April of this year from quarterly to monthly distributions. As distributions continue to be an important factor for many closed-end fund investors, can you describe how this change in the distribution frequency has benefited investors?

Sure. So this may be old news for some, but it's really important because the listed closed-end fund market is really an income buyer-focused marketplace and having a monthly distribution really supports potential demand generation in the secondary market. And what we're looking for is the opportunity to get in front of new potential investors in MCN and a monthly payout really opens this fund up to a broader audience of potential income buyers, income investors. And the listed closed-end fund marketplace because of this strong preference for monthly cash flows has really shifted. It used to be that there were more quarterly pay, but most listed closed-end funds are now monthly pay, and we plan to continue with that monthly declaration and monthly payment.

Thank you, Kim. Yes, very helpful. And I think it's been a positive development, obviously, helping with investors' cash flow needs, having that more frequent cash flow. Ray, turning back to you. With tariff downturns in early Q2 that really tanked the market for a short stint there and now strong equity performance in Q3 if that market volatility were to change meaningfully in either direction, how might that change your option writing strategy and equity exposures?

Yes. I think a lot of it depends on the events that causes volatility to change. Over the past year or so, if we look at the VIX index as a kind of a general view of market volatility, for the majority of the time, it's been between 15 and 20 that level. Right now, as of today, it's right around the upper end of that range because we've had some choppiness in the last few weeks. But not long ago, just a few weeks ago, it was at 15. And for most of the third quarter, the VIX was quite low in the 15 area. Back in April, when we had the tariff concerns, as you noted, the VIX spiked above 50. But that was very, very short-lived because the event was very short-lived. The market started recovering within a week or so. So a lot depends on what causes volatility to go up. If volatility were to go down from here, it would mean that the market is probably continuing to move higher. So we would not change our stance in any significant way because we're already very defensively positioned. We have a high level of option coverage right now. For a number of quarters, we've been in that 90% coverage neighborhood. We're already defensively positioned from a sector standpoint. So we're prepared for more volatility. And if it doesn't come, we're just -- right now prepared to continue holding the fort, waiting for something to break in the market. So from our perspective, the only thing that could change that would be an event of some sort that would cause volatility to spike, but that event would be longer lived, such as we saw after the dot-com bubble where we had a good 2.5 years of markets steadily declining or just a prolonged period of decline. In 2022, it was 10 months, for example. So it's very -- we really, in April, we saw the market corrects, we didn't get immediately bullish because our feeling was that, that could have been the beginning of a much more significant correction. That didn't happen. Now we've had the market rebound significantly, and we're still concerned about some sort of negative reaction. So we're more concerned about a volatility spike in the market going down. If that were to happen, then we would perform quite well in that environment. We would protect well on the downside. The portfolio is defensively postured. We very well covered. And then at some point during that period, if we have more of a prolonged event in the market, then it really depends on where valuations sink down to at a certain point, we feel more comfortable reentering the market and getting more aggressive with our underlying sector allocations, for example, we would begin moving out of those defensive sectors more into some of those higher beta sectors like discretionary and technology, for example, where we've been underweight for quite some time. So that would be dependent on what happens within those sectors and what valuations look like as the market corrects. And at that time, in all likelihood, volatility will still be relatively high, and we'll be able to write further out of the money at reasonable option premiums. So we'd be able to buy stocks lower, still participate if they rebound in more of the upside than we otherwise could do in a low volatility environment. So that would be really a terrific environment for us to be able to buy stocks cheaper, get a little bit more aggressive with our underlying stock selection and sector allocation and then continue writing possibly not in the 90% neighborhood, bring that back down to what we typically view as average is around 80%. So get more upside participation and write further out of the money because volatility will remain stickier for longer if we have a longer downturn. So that's kind of the way we approach things. Most of what we do is driven by our -- how we position the underlying portfolio. So when we make those shifts, it's all about comfort levels with the underlying holdings and their valuation levels at that time. And that's typically why we're not chasing stocks at these high valuation levels because we just don't have that comfort level.

Thank you, Ray. Very helpful as always. Kim, shifting to you. Looking at the current market environment kind of as Ray was talking, can you describe some of the reasons that investors may look to covered call strategies?

Yes. I'm going to quote Ray here, who's our expert, which is that for equity investors, it may be the time now to start protecting. And a lot of equity investors have benefited from the run-up in equity prices over the last few months. So I think covered call strategies for equity investors are basically allowing you to participate in that growth, but you're also generating cash flow from option premiums, which is, I think, for folks that are sort of growing concern, this is a good way, a lower risk way to approach equity investing. And we think that there's a lot of benefits, especially for retirees or income-oriented investors who haven't -- who are concerned about current pricing in the market. I think when Ray spoke about the concentration in the S&P 500, it is quite surprising. And so we're deviating from historical norms. And I think that's why investors like what covered calls have been able to do in various market environments. And MCN has over a 20-year track record, and Ray has been involved from the beginning. And so that consistent approach is, I think, helpful in the context of a manager who's seen a lot of different cycles. So that's why we think there's a natural appeal for covered call strategies. And Jared, we saw it in 2022, 2023 after both stocks and bonds didn't work the way they were supposed to in 2022, we saw a huge increase in demand for hedged equity strategies and covered call strategies were among those. So I think that's why it's worth considering how covered call strategies can be incorporated into the portfolio and potentially play a role where we are today in the market. I think there's a compelling case.

Thanks, Kim. Yes, I totally agree. And maybe we dive in a little bit on Madison's approach to managing covered call strategies. Kim, could you just briefly describe how MCN's active management approach, both on the active option, active equity selection side is differentiated from some of the other options in the market?

Yes. I think you said it, it's active, active, active both on stock selection, active on single-stock option selection. And so that's always been Madison Investments approach in MCN. And over the last 20 years, there's been quite a new hedged equity strategies that have come to market, many of which are not highly transparent. So when you look at the schedule of investments, there are derivatives, you're unsure of what's going on. So we like the active stock and the active option approach because we have that transparency exactly what the portfolio management team is doing. And I think it adds value to a covered call portfolio to take this approach. And it's -- I think in an age now where there's a lot of different options or choices among different hedged equity strategies, investors should be mindful of some of the differences between these product sets. So we like the approach that Madison Investments takes here in terms of the active thesis development on the underlying stocks. And then they're able to set strike prices in line with where they think full value is in that particular stock. So they're able to be much more precise in terms of the execution of their thesis and as you hear Ray talk about Las Vegas Sands, that's just one example in a diversified portfolio where he's able to express a view in both the underlying option -- or excuse me, the underlying stock and then the option that fits how he's thinking about that stock in the portfolio. So that's why we like the approach that they take.

Thank you, Kim. Ray, as Kim started to describe there, Madison is very active on ensuring the equity portfolio is covered by call options. Could you just discuss maybe a little bit the portfolio is 88% covered. Do you think this appropriately reflects your views on the equity market today? And how do you determine when to adjust the amount of the portfolio that's covered and the benefit it might provide?

Yes. We start off from the stance that we are a covered call writing strategy. And so we should be maintaining that discipline. So rather than moving around significantly and being 40% or 50% covered when we think the markets are going to go up and then 80% or 90% covered when we think the markets are fully valued. We've always believed that we're being paid to be a defensive hedged equity, income-oriented strategy, and we have to maintain that discipline. So on average, I think we're going to be -- we're very comfortable being approximately 80% covered, give or take, in kind of a neutral market environment. We may go slightly below that if we feel the markets are attractively valued so that we can get more upside. And then as I noted earlier, in the current environment where we think the markets are overvalued, we would move as close to 100% as we can get. And we -- I get asked a lot, well, why aren't you at 100%? And there are always individual reasons for -- with individual holdings that we may not want to write on every name or fully write on every name. And an example is one of our biggest holdings is AES, the utility. AES is a combined regulated utility and an unregulated wind and solar utility or power generator. And there has been for a couple of months now, some talk that because the stock is so fairly valued and is very attractive with its holdings, it's the second largest alternative energy wind and solar generator in the country that there have been some infrastructure funds like BlackRock and Brookfield that have been sniffing around in terms of potentially buying the company. And so if that's the case, and we think they are -- we think those are actually reliable so-called rumors, I suppose, then we want to be able to participate in that. We're already getting paid a pretty nice dividend on the stock. And if we were to have some sort of bid come in, we would like to participate as much as we can. So we're not fully covered on AES at the moment. So that's one of the reasons why we're not into the -- well into the 90% range. So there's always going to be 1 or 2 of those kind of situations that we don't necessarily want to be fully covered on everything. But being around 90% covered is well more -- is much more defensive than we typically are. And that's just a reflection of how concerned we are with valuations. And we'd rather be early in being defensive than being late. As Kim mentioned, on when markets correct, they become -- there's a lot of interest in hedged equity funds. Well, the interest should be before markets correct because once they correct, it's kind of late to be jumping into a hedged equity fund unless you really believe the markets will go significantly lower. So we're kind of in the same mindset. We want to be defensive before the markets correct rather than try and catch up, take the brunt of the downside initially and then try and get more hedged later. So we're staying relatively higher level of coverage and a level of coverage that's closer to the money with each option, which simply means that the deltas are higher the hedge value of each option is higher, and we're getting more downside protection and collecting more option premium as a result. So that's how we kind of manipulate the option portfolio to our view of the underlying stocks. If we think there's more upside in the stock, then we'll try and write further out of the money or not write fully on the position like the AES position. If we think the stock is getting more fully valued and we're prepared to trim or sell a stock, we will write very close to the money, collect a bigger premium and then let the stock get called away or a portion of it get called away because we were likely going to want to trim it anyway at the higher valuations. So most of the sell discipline that we have, we utilize options as our selling vehicle and assignments as the selling vehicle. So that's how we're managing the active portion of the options. Ultimately, everything starts with the foundation of the portfolio, which are the individual holdings. That's where you can protect the most by owning high-quality companies that are not going to blow up when the market doesn't do well. And so you have to start out with that solid foundation. The options provide the next level of protection and then we can change the level of protection depending on our view of each individual holding.

Thank you, Ray. Very helpful. [Operator Instructions] I know we're coming close on time. Kim, I do have another question for you, and it's regarding kind of the secondary market dynamics. The fund has relinquished its premium this year, but it does continue to trade well compared to its peers. Can you describe a little bit on how XA Investments works to promote a strong secondary trading market with its listed closed-end funds?

Yes. So I think what we're trying to do is make information available to research analysts, to advisers and then ultimately to the income buyers themselves in terms of allowing you to speak with Ray, who has been the long-time portfolio manager is really an opportunity that's not typical for most listed closed-end funds. And so we're trying to drive awareness for MCN in the secondary marketplace. We're -- I'd say we're okay with how things are trading in the secondary market. MCN typically trades differently than its peer group, which is not too surprising, I guess, given its long history. The market-wide average discount, if you're looking at all listed closed-end funds, which is a mixed bag of different asset classes, it's about negative 4.5%. And so MCN is in line with that market-wide average discount. And so through our proactive secondary marketing, we're trying to drive volume in the secondary marketplace. And maybe, Jared, if you could just show Slide 21, I just wanted to comment on the trading in the secondary market over the last year. On the right-hand side, you'll see we note that in the last -- in 12 months, we've seen average daily trading volume of about 70,000 shares per day. And that's in contrast to last year in 2024, where that volume was about 50,000 shares per day. And this is what we want to see. We're coming up on the 1-year anniversary of the collaboration between XA Investments and Madison Investments. And what we wanted to do was support the fund in the secondary market, help drive demand in the secondary market and a healthy level of trading volume is really important for the overall health and wellness of a listed closed-end fund. And so I think that if we will continue to monitor what's going on in the secondary, the volume is -- if it's a high level of volume, that means people can buy shares, but it also means people can exit their position. And in a listed closed-end fund, most of these listed closed-end funds trade like small cap stocks because they have relatively modest market capitalizations. So it's really important that this volume is there for investors to be able to come and go as they see fit. So we will continue to work on this. We will continue to support the secondary market, and we appreciate feedback and questions. So please do be in touch with me and Jared to the extent that you want to hear more from Madison or if there's -- I know we're working on a white paper too, Jared, that we're going to be publishing soon, which is going to further educate investors. I think the people who've already been long-time shareholders, appreciate the thesis of a covered call strategy. But what we're trying to do is expand the knowledge to a broader base of potential investors.

Absolutely, Kim. Yes, definitely be on the lookout for that white paper. You can always sign up on our website, xainvestments.com to get those updates, and we will make sure you get it also reaching out to [email protected], that e-mail address will get you right in touch with Kim or I. One last question, Ray, for you and maybe looking into the future a little bit here. Equity markets have performed strongly in Q3, as we've discussed. What's your outlook for the last quarter of 2025? Obviously, we're a little bit over a month into the fourth quarter, but also into 2026?

Yes. I'll keep it brief because we're running up against time, but it's -- the strategy, we're comfortable sitting where we are. Again, we've been very defensive, and it's caused us to lag the overall market but perform well against our benchmark. We're going to continue to stay where we are because in our view, there will be, at some point, a crack in valuation. And I could go on and on about AI and some of the concerns out there, but we're starting to hear more and more of them almost on a daily basis, just even this morning and yesterday, there were -- there's some -- a lot of people within the industry, Sam Altman at OpenAI, Jeff Bezos have come out and said, yes, there's a bubble in AI right now. It doesn't mean the whole thing is going to blow up or the technology isn't transformational, but valuations have gotten well ahead of themselves. And the market seems to be react -- starting to react to that. How this evolves, we'll see. But we are concerned that valuations have gotten too high. So from our perspective, it's kind of like starting a roller coaster ride when you're going up that first big, big climb. And the closer you get to the top, the more white knuckle you get, you grab on tighter, and you prepare yourself for what you know is coming. And we've got white knuckles right now. We're holding on tight, and we're going to continue to maintain our defensive posturing because we think that we're going to see some pretty significant ups and downs and volatility. Whether it happens in the fourth quarter of this year, we slide into 2026, we fear that it's in front of us, and we just want to make sure that we're prepared for it now rather than trying to catch up later. So we're trying to be realists about all of this. And we've all been through cycles before. I know I have over 35 years in the market. You have to remember that there are cycles and that sometimes it doesn't take a lot when you're near the top to cause the cycle to turn. And we just want to -- it's incumbent on us to maintain our discipline and maintain that defensive structure, particularly now. And I think we're just going to maintain that. So our outlook is be prepared, and we certainly are. And I think nothing changes from our perspective for now.

Thank you, Ray, and thank you, Kim, and everyone, for joining us on the call for the third quarter 2025 MCN webinar. If you have any questions about the fund or XA Investments, please don't hesitate to reach out to Kim or myself. As always, for more information on MCN, please visit xainvestments.com. Thank you and have a great day.