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Lower-Volatility Equity Strategies: The Core of an Equity Allocation

John P. Calamos, Sr., Founder, Chairman and Global CIO

We have long discussed the futility of predicting volatility. In short, volatility is not a valid reason to stay out of the markets. What matters is not volatility itself, but rather how an investor responds to volatility. Therefore, what we need are asset allocation strategies that address this reality and focus on leveraging the opportunities that arise from continuing volatility. As a result, we believe that a properly diversified asset allocation must continue to include a core equity participation.

The objective of lower-volatility equity strategies is to outperform the equity market with less risk than a comparative pure-stock portfolio. [In this guide, equity indexes are represented by the S&P 500 Index and the MSCI World Index.] They seek to provide an asymmetrical risk profile by participating in a greater portion of equity upside than downside over a full market cycle.

Our lower-volatility equity strategies seek to provide upside participation in equity markets with less exposure to downside than a pure-equity fund by investing in equities and equity-sensitive securities (convertible bonds and convertible preferred stocks). This is not simply an asset allocation between types of securities, i.e., “a balanced strategy,” but rather a risk-managed approach designed to maintain an acceptable risk posture throughout the market cycle. The objective is to manage risk so that the strategy remains as a lower volatility position at the core of the asset allocation program throughout the market cycle.

Our lower-volatility equity strategies seek to provide upside participation in equity markets with less exposure to downside than a pure-equity fund by investing in equities and equity-sensitive securities (convertible bonds and convertible preferred stocks). This is not simply an asset allocation between types of securities, i.e., “a balanced strategy,” but rather a risk-managed approach designed to maintain an acceptable risk posture throughout the market cycle. The objective is to manage risk so that the strategy remains as a lower volatility position at the core of the asset allocation program throughout the market cycle.

We believe that the favorable risk/reward profiles of lower-volatility equity strategies make them appropriate for use as “core” holdings. Of course, the percentage of lower-volatility equity investments in a given allocation varies based on the investor’s specific risk profile, but we believe that many investors may wish to consider investing a portion of their equity allocations in such strategies. Growth of principal is a central consideration in asset allocation for most investors. However, it is not the only key consideration in establishing the core of an asset allocation strategy. As the 2008-2009 downturn showed, a strong, risk-managed foundation is also essential.

A lower-volatility equity asset allocation can offer investors time in the market at a comfort level that neither stocks nor bonds alone can provide. Such strategies may be particularly attractive for investors who have a constructive view of the equity markets, but remain concerned about the potential for continued downside volatility.

A lower-volatility equity strategy mitigates the need to make the “equity timing decision.” As a result, investors can avoid the potential of being “whipsawed”—i.e., buying just before prices fall and selling just before prices rise. Further, short maturity convertibles can act as a put in the event that stock prices decline.

It’s our view that lower-volatility equity strategies may solve the dilemma of how to simultaneously pursue growth and manage risk. The equity characteristics of convertibles can further enhance opportunities for growth, while their fixed income features can provide downside protection.

Containing Equity Risk Without Giving Away Equity Opportunity

We have always believed that risk control will be the key to wealth creation. We closely consider a strategy’s participation in up and down markets in order to keep risk/reward at an acceptable and consistent level, even as equity markets fluctuate.

The primary goal of our risk management is to contain equity risk without giving away equity opportunity. Ours is not a market-timing strategy that cycles in and out of cash. Instead, our lower-volatility equity strategies are fully invested portfolios that utilize a range of risk management strategies to maintain a consistent and acceptable risk posture.

Investing in both equities and convertibles provides us greater flexibility to both manage risk within the portfolio and keep risk at our predetermined level over the course of a market cycle. Because of their fixed-income characteristics (e.g., bond value and coupon income), convertibles can provide a measure of protection against downward equity market volatility.

It is not simply the inclusion of the convertibles that lowers the risk profile, but rather how we utilize the convertibles in conjunction with the equities. Convertibles can be more equity-sensitive or fixed income-like, and the characteristics of individual convertible securities can change over time. We continually monitor each convertible both independently and within the context of the portfolio as a whole.

We are able to use convertibles with varying degrees of equity sensitivity or fixed income characteristics to tailor the risk/reward profile of each position or industry group within a portfolio. We do not make overall asset allocation calls between equity and convertibles. Instead, our investment team seeks to identify the best equity risk/reward opportunities for a company or a sector. The overall portfolio composition is a result of our guiding macroeconomic outlook and rigorous bottom-up research.

Excerpted from Lower-Volatility Equity Funds: Crafting an Asset Allocation Core, October 2011, by John P. Calamos, Sr.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information or call 1-800- 582-6959. Read it carefully before investing.

Disclosure

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Past performance is no guarantee of future results.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The S&P 500 Index is considered generally representative of the U.S. stock market. Indexes are unmanaged, do not entail fees or expenses and are not available for direct investment.

MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe, and Asia/Pacific region.

BofA ML All U.S. Convertibles Index (VXA0) is comprised of approximately 700 issues of only convertible bonds and preferreds of all qualities.

The Barclays U.S. Aggregate Bond Index covers the U.S.- te, taxable bond m denominated, investment-grade, fixed-ra arket of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

The MSCI EAFE Index is an arithmetic, market value-weighted average of the performance of securities listed on the stock exchanges of selected countries in Europe, the Far East and Australia.

The MSCI Emerging Markets Index represents large and mid cap companies in emerging markets countries.

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*-- excluding the United States.

The HFRI Equity Hedge Index consists of funds where portfolio managers maintain long and short positions in primarily equity and derivative securities.

The Nasdaq Index is the market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.

The Russell 2000 Index measures U.S. small-cap stocks.

The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

Important Risk Information.An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s).There can be no assurance that the Fund(s) will achieve its investment objective

Investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. More detailed information regarding these risks can be found in the Fund’s prospectus.

Some of the risks associated with investing in alternatives may include hedging risk, derivative risk, short sale risk, interest rate risk, credit risk, liquidity risk, non-U.S. government obligation risk and portfolio selection risk. Alternative investments may not be suitable for all investors.

The principal risks of investing in the Fund(s) include:

Focus Growth Fund: equity securities risk, growth stock risk, value stock risk, foreign securities risk and portfolio selection risk.

Convertible Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, equity securities risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Discovery Growth Fund: equity securities risk, small and mid-sized company stock risk, growth stock risk, foreign securities risk and portfolio selection risk.

Dividend Growth Fund: declining equity values; losses from MLPs related to lack of portfolio diversification, changes in tax laws, lack of liquidity, declining equity values, and conflicts over control rights; incorrect selection or judgments on portfolio holdings by the investment advisor; increased transaction costs because of frequent turnover; losses from currency fluctuations; lack of liquidity or correlation to underlying securities in the options market; and potential illiquidity of securities purchased privately under Rule 144A.

Emerging Market Equity Fund: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, currency risk, geographic concentration risk, American depository receipts, mid-size company risk, small company risk, portfolio turnover risk and portfolio selection risk.

Evolving World Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, convertible securities risk and portfolio selection risk.

Global Equity Fund: equity securities risk, growth stock risk, value stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Global Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Growth Fund: equity securities risk, growth stock risk, mid-sized company risk, foreign securities risk and portfolio selection risk.

Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, equity securities risk, growth stock risk, small and mid-sized company risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

High Income Fund: high yield risk, convertible securities risk, synthetic convertible instruments risk, interest rate risk, credit risk, liquidity risk and portfolio selection risk.

International Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Long/Short Fund: equities securities risk, short sale risk, options risk, portfolio selection risk, liquidity risk, convertible securities risk, synthetic convertible instruments risk, leveraging risk, portfolio turnover risk, foreign securities risk, growth stock risk, small and midsized company risk, emerging markets risk, derivative risks, futures and forward contracts risk, interest rate risk, credit risk, and cash holdings risk.

Market Neutral Income Fund: convertible securities risk, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk and portfolio selection risk.

Mid Cap Growth Fund: declining equity values; higher volatility from growth and mid-cap companies to changes in the economic; incorrect selection or judgments on portfolio holdings by the investment advisor; increased transaction costs because of frequent turnover; losses from currency fluctuations; lack of liquidity or correlation to underlying securities in the options market; and potential illiquidity of securities purchased privately under Rule 144A.

Total Return Bond Fund: interest rate risk, credit risk, high yield risk, liquidity risk, mortgage-related and other asset-back securities risk, including extension risk and prepayment risk, U.S. Government security risk, foreign securities risk, non-U.S. Government obligation risk and portfolio selection risk.

Opportunistic Value Fund: equity securities risk, value stock risk, small and mid-sized company risk, foreign securities risk and portfolio selection risk.

Hedged Equity Income Fund: covered call writing, options, equity securities, correlation, mid-sized company, short sale, interest rate, credit, liquidity, portfolio selection, portfolio turnover, foreign securities, American depository receipts, and REITS.

Global Convertible Fund: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk.

Calamos Phineus Long/Short Fund: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.