Answers To Your Clients’ Top Questions
About Rising Interest Rates

In mid-December, the Federal Reserve raised short-term interest rates by 0.25%, ending months of “will they or won’t they” speculation. Bonds haven’t typically performed well when interest rates go up, leading many investors to wonder about how to best structure a well-diversified portfolio.

We sat down with John P. Calamos, Sr. for his perspective on rising interest rates and the possible implications for asset allocation. John founded Calamos Investments during the difficult financial markets of the 1970s and serves as the firm’s CEO and Global Co-CIO.

What’s your view of the Fed’s decision to raise interest rates?

John Calamos: I view it as a positive for the economy and markets. The Fed has been very deliberate and data-driven in its approach to monetary policy. In my opinion, this modest increase in short-term rates indicates the U.S. economy is positioned for continued slow growth and a recession is not imminent. Because the Fed also considers the global economic environment and its potential ripple impacts on the U.S., a move to raise rates suggests that the global economy is sufficiently strong, as well.

Also, I believe a more normal rate environment will encourage banks to lend more to smaller businesses. When interest rates are higher, banks may be able to profit more from their lending activities, assuming the economy is also expanding. Small businesses are an important engine of job growth in the U.S., as they are globally, so an expanding small business sector can be an important driver of economic health.

What should investors do in response to Fed rate changes?

John Calamos: I’ve spoken to many investors and financial advisors over recent months and I understand how concerned people are about rising interest rates. Rising rates have always been a concern for investors. In fact, I’ve been having conversations with investors on the topic for more than 40 years!

One of the most important things to remember is that asset allocation should be viewed with a long-term lens. Of course, Fed policy can have far-reaching effects but it is just one factor to consider. You have to stay focused on your long-term goals, risk tolerance and the global landscape as a whole—including why the Fed is making the choices that it is. You can’t let yourself be whipsawed into a reactionary mindset. A financial advisor can be extremely valuable in helping you understand the impacts of economic factors on your personal asset allocation.

How should investors approach asset allocation in this environment?

John Calamos: I believe rising rates do create significant headwinds for traditional fixed-income securities such as government bonds and investment grade corporate bonds (see charts below). In contrast, I see a strong case for stocks, especially growth-oriented stocks. Historically, stocks have tended to do well during periods of rising interest rates because rising rates are typically a signal of economic health. And among the different types of stocks, I am most constructive on growth-oriented stocks. While I expect the economy to continue expanding, the pace isn’t likely to be robust. Growth stocks have tended to do well in periods of slow economic expansion.

But what about stock market volatility?

John Calamos: I expect elevated stock market volatility over these next months—not only because of monetary policy but also because key elections are approaching, not only in the U.S. but also globally. Uncertainty about government policies, especially those related to business regulation and taxes, are likely to keep markets unsettled.

The good news is that there are ways to diversify an asset allocation beyond stocks and bonds. One way is through strategies that seek to participate in stock market upside with less exposure to the downside. Over the past 40 years, I’ve found convertible securities to be quite useful in this regard because they combine attributes of stocks and bonds. They have also outperformed bonds during periods of rising interest rates (see chart below). Also, investors can further diversify their allocations with liquid alternative funds, such as long-short equity and market neutral strategies. A financial advisor can help determine what types of liquid alternatives would be best suited to an individual’s asset allocation.

In rising interest rate environments, the case for convertibles has been strong
During the eight rising interest periods of the past 20 years:
Past performance is no guarantee of future results. Rising rate periods are those in which the 10-year U.S. Treasury yield rose more than 100 basis points from peak to trough over the period from January 1996 to December 2013. Most recent data is as of September 30, 2015. Stocks are represented by the S&P 500 Index, bonds by the Barclays U.S. Aggregate Bond Index and convertibles by the BofA Merrill Lynch All U.S. Convertibles Index. Please see the back cover for additional information. Sources: Morningstar and Bloomberg.

Do you have any closing thoughts?

John Calamos: As a new year approaches, it’s a perfect opportunity for investors to check in with their financial advisors—to discuss not only the interest rate environment but any changes to their own personal circumstances.

RELATED RESOURCES

HISTORICAL RESULTS DURING PERIODS OF RISING RATES

Several Calamos strategies have demonstrated notable outperformance in the face of rate increases. The following charts show how over the past 20 years a number of our funds have performed versus the broad asset classes when 10-Year Treasury bond yields have risen more than 100 basis points.

July 2012 -
December 2013

Interest rate move: 157 basis points

Source: Morningstar and Bloomberg.

October 2010 -
February 2011

Interest rate move: 134 basis points

Source: Morningstar and Bloomberg.

December 2008 -
June 2009

Interest rate move: 187 basis points

Source: Morningstar and Bloomberg.

June 2005 -
June 2006

Interest rate move: 134 basis points

Source: Morningstar and Bloomberg.

June 2003 -
June 2004

Interest rate move: 176 basis points

Source: Morningstar and Bloomberg.

November 2001 -
April 2002

Interest rate move: 122 basis points

Source: Morningstar and Bloomberg.

October 1998 -
January 2000

Interest rate move: 263 basis points

Source: Morningstar and Bloomberg.

January 1996 -
June 1996

Interest rate move: 150 basis points

Source: Morningstar and Bloomberg.

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. There is no assurance the Fund will achieve or maintain its investment objective.

Source: Morningstar and Bloomberg

Data as of 6/30/15. Rising rate environment periods from troughs to peak from January 1996 to December 2013.

10-Year Treasury Yields represented by the 10-Year Treasury Constant Maturity Rate. U.S. corporate investment grade bonds represented by the BofA Merrill Lynch U.S. Corporate Master Index. U.S. aggregate bonds represented by the Barclays U.S. Aggregate Bond Index. Government/ credit represented by the Barclays U.S. Government/Credit Index. Mortgages represented by the Barclays U.S. MBS Index. Treasurys and Government credits are obligations of the U.S. Government and may decline in price during periods of rising interest rates. Investment grade corpo- rate securities are subject to credit risk including risk of default. Mortgage securities are subject to credit risk and prepayment risk.

Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average. All performance shown assumes reinvestment of dividends and capital gains distributions. Performance shown is for Class A (or equivalent) shares at net asset value and do not take into account any sales loads. Performance would have been reduced had such loads been included. The Funds offer multiple other share classes, the performance of which may vary.

The standardized performance as of 9/30/15 for the Growth and Income Fund A-shares for YTD, 1, 3, 5, 10, and since inception is -3.97%, -0.54%, -5.19%, -7.01%, 5.36% and 10.90% respectively. A-Shares load-waived performance for 1, 3, 5, 10, and since inception is -7.95%, -5.28%, 4.48%, 5.97%, 4.85% and 10.70% respectively.

The standardized performance as of 9/30/15 for the Global Growth and Income Fund A-shares for YTD, 1, 3, 5, 10, and since inception is -3.56%, -3.54%, 3.54%, 4.40%, 4.82% and 7.77% respectively. A-Shares load-waived performance for 1, 3, 5, 10, and since inception is -8.14%, -8.14%, 1.87%, 3.39%, 4.31% and 7.49% respectively.

The standardized performance as of 9/30/15 for the Convertible Fund A-shares for YTD, 1, 3, 5, 10, and since inception is -5.96%, -4.55%, 6.01%, 4.97%, 4.85% and 8.95% respectively. A-Shares load-waived performance for 1, 3, 5, 10, and since inception is -10.41%, -9.08%, 4.31%, 3.95%, 4.35% and 8.77% respectively.

The standardized performance as of 9/30/15 for the Market Neutral Income Fund A-shares for YTD, 1, 3, 5, 10, and since inception is -0.82%, -0.43%, 2.07%, 3.66%, 3.24% and 6.44% respectively. A-Shares load-waived performance for 1, 3, 5, 10, and since inception is -5.55%, -5.14%, 0.42%, 2.66%, 2.74% and 6.23% respectively.

The standardized performance as of 9/30/15 for the High Income Fund A-shares for YTD, 1, 3, 5, 10, and since inception is -2.94%, -4.95%, 2.13%, 4.23%, 4.98% and 5.00% respectively. A-Shares load-waived performance for 1, 3, 5, 10, and since inception is -7.56%, -9.47%, 0.50%, 3.22%, 4.47% and 5.68% respectively.

RELATED RESOURCES

Other Calamos Resources

CVTRX

Growth & Income Fund

Core U.S. Equity

More Info

CVLOX

Global Growth & Income

Core Global Equity

More Info

CCVIX

Convertible

Core U.S. Equity

More Info

CVSIX

Market Neutral Income

Convertible Arb/Covered Call

More Info

CHYDX

Fixed Income

Total Return and High Income

More Info

Blog

Convertible

Convertibles Address Multiple Investor Needs

Read

Overview

In his latest blog post, John P. Calamos discusses convertibles as an alternative to traditional fixed income investments.

Author

John P. Calamos, Sr.

Blog

Convertible

Why Higher Quality May Mean Higher Risk

Read

Overview

Co-Portfolio Manager Eli Pars, CFA, discusses issuance trends in the convertible marketplace. He also speaks to the potential advantages of investing in convertibles with a range of credit qualities.

Author

Eli Pars, CFA