Calamos Investments

Our portfolio construction process combines our insights about economic conditions and broader investment themes with our analysis of individual securities. We use a proprietary, integrated research and monitoring process that leverages our years of experience and application, as well as long-standing principles and current academic research. This process is applied to all of our strategies, within the specific parameters of each investment strategy.

We believe that it is impossible to manage returns, but only the risk taken to achieve results. Accordingly, risk management is integrated fully throughout all aspects of our investment approach. Through active management, we believe we can help guard against unforeseen events and the potential risks of an unpredictable market.

Our investment process incorporates top-down analysis of the global macroeconomic environment, sectors and (as appropriate) regions and countries. We also identify long-term secular themes that we believe will influence opportunities for decades to come. Our experience has shown that these secular themes provide a powerful tailwind to select companies, particularly during periods of slower economic growth and less hospitable business environments. Our chief investment officers, drawing upon the insights of our senior strategy analysts, define the top-down themes and macro views that guide our portfolio construction process.

Our top-down analysis is paired with our comprehensive security research. We first determine the intrinsic value of the company, and then utilize quantitative and qualitative inputs to value the various securities within its capital structure. We believe the thorough understanding of a company from both a debt and equity security perspective allows us to gain a truer understanding of a company's potential and its risks. (Please refer to previous page for additional details.) Security analysis is carried out by our research team, with ongoing participation from our co-chief investment officers.

As in our top-down analysis and security research, risk management remains a principal consideration in our construction process. Portfolio construction guidelines are established at the highest level, by our chief investment officers.

Before we invest, we consider the security's impact on the portfolio's industry and sector allocation ensuring that the intended diversification is maintained across themes and sectors. We also structure the portfolio to reference our thematic emphases. Our construction process considers the following: position size (generally not exceeding 5% at the company level), sector and industry weightings, region and country weightings, and cash allocation (typically 0-5%, as we generally remain fully invested).

Many members of our team monitor each portfolio on an ongoing basis, including our research analysts, traders and dedicated risk oversight team. Monitoring and risk supervision includes scenario, risk/reward, attribution and liquidity analysis, as well as the careful tracking of portfolio characteristics.

Investment candidates emerge from the intersection of top-down and bottom-up analysis. These securities are vetted more extensively within the context of the overall portfolio. Continual monitoring and risk management analysis ensure that each portfolio maintains appropriate diversification and risk/reward characteristics.

Credit analysis has been entrenched in the Calamos investment process since the firm started managing convertible portfolios more than 30 years ago. In-depth credit analysis is required when analyzing convertibles to determine the appropriate discount rate for calculating the security's straight bond value. The convertible universe's longer-term historical exposure to non-investment grade credits, which is above 50%, has required us to remain continually credit focused. But our credit analysis is equally important when we evaluate investment grade bonds, high yield corporate bonds, and equities.

The historical analysis begins with a review of traditional credit ratios, such as the current ratio, debt-service coverage ratio and debt to total capital ratio.

This helps to provide an initial understanding of a company's balance sheet and cash flow coverage, as well as offering a relative peer group perspective. Basic credit ratios help when evaluating historical trends, relative positioning and performance among industry peers, and management's risk tolerance. More specifically, ratio analysis can help assess profitability, liquidity of assets, interest coverage or debt servicing capabilities, cash flow, capital structure leverage, off-balance sheet liabilities, cyclicality of the business, industry competitiveness, and more.

The flaw in historical ratio analysis is that it is backward-looking and can be updated only a few times a year. Historical ratios ignore the valuable information available in current equity and debt market prices. Markets are open 250 days a year and provide meaningful feedback. We view market signals, such as prices in equity and debt markets, as reflecting the collective knowledge of all participants, which is updated constantly and responds immediately to the changing market environment.

Both historical and forward-looking approaches are valuable to gain a solid understanding of a company's risks, but have flaws when used in isolation. To improve the overall credit analysis process and achieve a better understanding of the underlying business, we meld the historical and future analyses with numerous qualitative factors that cannot be easily modeled in any software system and that require the knowledge and experience of our research team. The more we know about the underlying business than the average market participant, the better we can exploit market inefficiencies in our goal to produce alpha.

Once we believe we understand a company's risk, we still must determine how to price the credit risk and decide if we are being compensated for taking on those risks. We take several different approaches to pricing. we conduct a recovery analysis on the debt by examining the balance sheet assets and factor in a partial loss of principal in a bankruptcy liquidation. We further analyze recoveries by assessing potential going-concern firm valuations by reviewing multiples of sales numbers or EBITDA (earnings before interest, taxes, depreciation and amortization). The analysis includes an assessment of EBITDA and sales quality as well as sustainability, priority of claims in the capital structure, and current market conditions.