Bright Prospects for Convertibles in 2024

Jon Vacko, CFA, and Joe Wysocki, CFA

Summary Points:

• We believe continued economic growth, a broadening of equity market leadership and a more normal interest rate environment will drive healthy convertible issuance in 2024, including a greater number of investment-grade issuers.
• The fund continues to emphasize balanced convertibles offering an attractive combination of upside equity participation and downside resilience.

Markets ended 2023 on a high note with risk assets benefiting from a perceived US central bank policy pivot toward a more balanced monetary approach. Heading into 2024, we are cautiously optimistic that the Fed’s inflation-fighting efforts have largely achieved its goal, and the economy remains on a solid footing. We believe this most likely sets up a soft landing scenario that can provide a further tailwind for risk assets.

That said, we will continue to monitor conditions closely as soft landings have been historically difficult to achieve, and investors have recently been quick to overshoot to both the up and down, which can contribute to heightened volatility in markets. Additionally, the New Year carries unique risks, including what will likely be a contentious US presidential election that could impact fiscal policies for years to come.

Given the macro backdrop, we remain vigilant as we actively manage the risk/reward tradeoffs within Calamos Convertible Fund (CICVX). A broadening of equity market leadership could be particularly beneficial to small and mid cap growth companies, which are well represented in the convertible universe. We believe balanced convertibles—those that provide a favorable asymmetric payoff profile by offering attractive levels of upside equity participation with less exposure to downside moves—offer the most attractive way to gain exposure to this segment of the market.

Technology, health care and consumer discretionary are CICVX’s largest sector allocations. Reflecting our strong focus on bottom-up company analysis, we favor companies that are executing well despite macro uncertainties, with improving margins and free cash flow, accelerating returns on invested capital and attractive equity valuations. We also focus on identifying innovative companies positioned to benefit from cyclical and secular themes that can serve as a beacon in uncertain times. These include companies advantageously positioned as businesses seek solutions to higher labor, manufacturing, and interest costs in the current economic environment as well as trends such as artificial intelligence, productivity enhancement, cybersecurity, and electric vehicle adoption. We expect the convertible market will provide opportunities to participate in these fast-growing trends for years to come.

We are excited to see convertible new issuance accelerated to longer-term historical trends in 2023. Investment-grade companies were particularly active and came to the convertible market at a more rapid pace than we have seen in many years. We believe the issuer base in the convertible market will broaden in 2024 as a sizable amount of bonds in traditional debt markets mature in the coming years. Much of this debt carries low coupons and companies will face higher refinancing costs given increased interest rates across the curve. We believe the stage is set for win-win scenarios because issuers can benefit from lower borrowing costs by issuing convertibles instead of traditional bonds, and investors can benefit from more normal coupon rates and lower conversion premiums.