CONVERTIBLE SECURITIES
Structures, Valuation, Market Environment, and Asset Allocation
By John P. Calamos, Sr. Chairman, CEO and Global Co-CIO, Calamos Investments
with contributions from Eli Pars, CFA, Senior Co-Portfolio Manager

Table of Contents

  • 1. Introduction to Convertible Securities

  • 2. Factors Driving Convertible Issuance

  • 3. A History of the Convertible Market

  • 4. Valuing a Convertible Bond

CONTACT YOUR CALAMOS INVESTMENTS CONSULTANT AT 800-582-6959 FOR THE FULL CONVERTIBLE SECURITIES BOOK

Performance of Convertibles in Various Environments

How have convertibles historically performed versus equities and corporate bonds?

Convertibles have consistently participated in a substantial measure of equity upside, with less risk as measured by standard deviation. They have also outperformed corporate bonds. Figures 5.1 and 5.2 show the performance of convertibles versus stocks and bonds over the past 10- and 25-year periods. As seen in the 10-year period, convertibles have actually outperformed equities with less volatility as measured by standard deviation. Typically, however, the convertible market has captured a significant measure of the equity upside, with less downside risk as seen in the 25-year period. Additionally, over rolling five-year periods (Figure 5.3), convertibles have also demonstrated significant upside with downside resilience.

Figure 5.1. Asset Class Relative Performance and Risk Summary, 2005–2015
ANNUAL RETURN STANDARD DEVIATION
Convertibles 8.68% 11.26%
Equities 8.01 14.76
Long-Term Corporate Bonds 7.42 10.45
Intermediate Corporate Bonds 5.34 4.75
10-Year data from 3/31/2005 to 3/31/2015. Past performance is no guarantee of future results. Source: Morningstar. The asset classes are represented by: convertibles, BofA ML All U.S. Convertibles Index (VXA0); equities, S&P 500 Index; long-term corporate bonds, Barclays U.S. Long Corporate Index; intermediate corporate bonds, Barclays U.S. Intermediate Corporate Index.
Figure 5.2. Asset Class Relative Performance and Risk Summary, 1990–2015
ANNUAL RETURN STANDARD DEVIATION
Convertibles 9.64% 11.36%
Equities 9.90 14.57
Long-Term Corporate Bonds 8.50 8.63
Intermediate Corporate Bonds 6.83 4.25
Data from 2/1/1990 to 3/31/2015. Past performance is no guarantee of future results. Source: Morningstar. The asset classes are represented by: convertibles, BofA ML All U.S. Convertibles Index (VXA0); equities, S&P 500 Index; long-term corporate bonds, Barclays U.S. Long Corporate Index; intermediate corporate bonds, Barclays U.S. Intermediate Corporate Index. Data shown since the earliest mutual inception date of the indexes shown.
Figure 5.3. Risk and Return for 5-Year Increments, 1990–2014
Data from 1/1/1990 to 12/31/2014. Past performance is no guarantee of future results. Source: Morningstar. The asset classes are represented by: convertibles, BofA ML All U.S. Convertibles Index (VXA0); equities, S&P 500 Index; long-term corporate bonds, Barclays U.S. Long Corporate Index; intermediate corporate bonds, Barclays U.S. Intermediate Corporate Index. Data shown since the first five-year increment since the earliest mutual inception date of more than one index shown.

How have convertibles performed in up and down markets?

The benefits of convertibles’ hybrid characteristics are illustrated in Figure 5.4. Convertibles captured more upside in bull markets than downside in bear markets.

Figure 5.4. Convertibles Offered Equity-Like Returns with Downside Protection During Market Cycles
Past performance is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Source: Morningstar Direct; 20-year data from 4/1/1995 through 3/31/2015. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Indexes are unmanaged, do not reflect fees or expenses and are not available for direct investment.

How has the performance of investment-grade and speculative-grade convertibles differed over time?

Speculative-grade credits have tended to demonstrate sharper swings in performance (Figure 5.5). Consequently, considerable care is required when assessing lower-rated issues, as these securities may fall short in maximizing the potential downside protection the convertible structure can offer.

Figure 5.5. Convertible Universe Performance by Quality
Past performance is no guarantee of future results.
Source: BofA ML Convertible Research, VXA1 Index, VXA2 Index.

John P. Calamos, Sr., Author
Chairman, Chief Executive Officer and Global Co-Chief Investment Officer

John P. Calamos, Sr. founded Calamos Investments in 1977. With origins as an institutional convertible bond manager, the firm has grown into a global asset management firm. Mr. Calamos has established research and investment processes centered around a team-based approach designed to deliver superior risk-adjusted performance over full market cycles. With 45 years of industry experience, Mr. Calamos is often quoted as an authority on riskmanaged investment strategies, markets and the economy, and he has authored two books on convertible securities: Investing in Convertible Securities: Your Complete Guide to the Risks and Rewards and Convertible Securities: the Latest Instruments, Portfolio Strategies, and Valuation Analysis.

Mr. Calamos received his B.A. in Economics and an M.B.A. in Finance from the Illinois Institute of Technology. He joined the United States Air Force after graduation where he served as a combat pilot during the Vietnam War and ultimately earned the rank of Major.

Eli Pars, CFA, Contributor
Senior Vice President,
Senior Co-Portfolio Manager

Eli Pars is responsible for portfolio management and investment research and brings more than 25 years of industry experience. Mr. Pars has extensive research and portfolio management experience in global convertible securities and convertible arbitrage strategies. Previously, he was a portfolio manager at Chicago Fundamental Investment Partners and held senior roles at Mulligan Partners LLC, Ritchie Capital and SAM Investments/The Hampshire Company. He received a B.A. in English Literature from the University of Illinois and an M.B.A. with a specialization in Finance from the University of Chicago Graduate School of Business.