Commentary

Tax Selling Returns Following 2006 Absence

After taking a hiatus in 2006, tax-loss selling returned with a vengeance in 2007 and was, we believe, the main culprit behind the fourth quarter sell-off, although it was aided by the ongoing fear of more fallout from the subprime mortgage mess and the growing influence of "professional investors" who—because of market volatility—were forced to liquidate securities.

We are by no means discounting the events in the credit markets that negatively impacted many closed-end funds and continue to dull investors' appetites for the funds. However, because we believe this recent move down in share prices is more related to year-end tax-selling, investors should view this downturn as a potential window to opportunities not seen in nearly two years.

A Tale of Two Halves

Looking at issuance for the year does not tell the full story that unfolded in 2007. The closed-end fund industry posted its second highest year in terms of IPO issuance with just under $28 billion raised in 41 separate offerings. While more diverse than the offerings in 2006, most of the deals in 2007 tended to be global in scope. Additionally, these offerings continued to have an equity bias. In fact, this marked the fourth consecutive year that equity-based deals led market issuance (see Figure 1).

Figure 1: 2007 IPO Assets
Source: Edgar filings, Company press releases

The old saying "It's not where you start, it's where you finish" couldn't have rang more true for the closed-end fund industry in 2007—albeit with an ironic twist. "Stark contrast" probably best describes the general start and finish for closed-end funds in 2007. After a strong, gangbuster start to the year, the closed-end fund market limped across the finish line at year-end in a scene somewhat reminiscent of 2005. However, the main difference in 2007 was that the market received "one-two" combination punches from the credit debacle and tax selling (third and fourth quarters), which left secondary investors dazed and confused.

Figure 2 illustrates just how difficult the market became for investors during the second half of the year. (The chart includes data going back to 2005 in order to provide some historical reference.) Note the striking difference between 2007 and the previous downturn experienced in 2005.

Figure 2: Closed-End Fund Industry Premium/Discount History 2005 through 2007
Source: Lipper, Inc. and Bloomberg

The First Half

In the first two quarters of 2007, the closed-end fund market seemed to have the wind at its back as the secondary market thrived and the IPO market posted near-record issuance in only the first six months.

A large measure of this success can be credited to the fact that the high demand for closed-end funds toward the end of 2006 essentially cancelled out the typical dampening effects of fourth-quarter tax selling that year and kept the tide of confidence at a much higher level heading into the first quarter of 2007. In fact, at year-end 2006, the average discount for the entire industry stood at less than 1% (0.80%).

The premium/discount relationship for the funds, as illustrated in Figure 3 shows that despite the high IPO issuance numbers, from a premium/discount perspective, the overall closed-end fund market was showing tremendous strength and digesting the new issuance with what many thought to be "new" money. Figure 4, along with the aforementioned premium/discount chart, provides evidence that this was true.

Figure 3: Closed-End Fund Industry Premium Discount Relationships
Source: Edgar filings, Company press releases

Figure 4: 2007 Monthly IPO Assets
Source: Edgar filings, Company press releases

The Second Half

The second half of 2007 started out on the same high note as the first half, yet the feeling on the Street was things were about to change. These shifting undercurrents were not only passing through the general markets, they were also being felt in the closed-end fund market. Investor appetite for new offerings was waning and cannibalization of the secondary market to pay for IPO purchases was increasing.

Just as the closed-end fund market was beginning to stumble, the SEC repealed Rule 10a-1 which governed how a security may be shorted. Rule 10a-1 was adopted in 1938 to help control the impact of short-selling in a declining market. Elimination of this rule put the closed-end fund market, which up to this point was retail-investor driven, in the crosshairs of professional investors. This was evident in several IPOs which occurred early third quarter and in trading events that marked the week of August 13, 2007. During this time, it is believed that professional investors purposely attempted to push prices down by "selling short" into an already spooked retail market. These short sales, including "naked shorts¹", had the effect of increasing retail investor anxiety. This, in turn, caused an even larger wave of selling by true retail investors. In the end, this activity allowed institutions to cover their shorts at lower prices resulting in attractive short-term returns.

Following the events of August, the market was able to snap back and recover part of the losses before heading into the fourth quarter. Unfortunately, August would not be the only lowlight of the second half.

While many expected that fourth quarter to be a trying time for the closed-end fund market, few expected to see the depth of selling which ensued. The average fund premium/discount to net asset value nearly doubled moving from an average of (5.62%) at the end of the third quarter to a weekly fourth-quarter low of (10.07%) on November 23. Just when investors were hoping for calmer waters in early December, closed-end funds were hit with yet another wave of selling. Funds finished the year near their collective lows on both premium/discount and share price.

2007 Calamos Closed-End Funds Performance

Calamos closed-end funds did not end the year unscathed. Despite each fund posting positive net asset value performance for 2007, our funds were caught in the general downdraft, which led to negative returns on share prices.

While we are concerned about the recent pressure in the share price of our closed-end funds, we will continue to risk manage our closed-end funds for our long-term investors. Periods in the market, like the one we witnessed in 2007, reinforce the importance of applying risk management to protect the underlying net asset value. We share investors concerns about weak share prices, but we also believe that once the markets right themselves, the strength of the underlying net asset value performance will lend support to a stronger long-term share price.

During these volatile times, we would encourage investors to take advantage of our fund Dividend Reinvestment Program. The program offers investors the chance to reinvest monthly income that they may not currently need into additional shares of the fund. Dividend reinvestment is a smart way to dollar cost average your current holdings in a fund without having to commit additional capital. Enrollment is easy. To find out more, visit us on the web at www.calamos.com or contact your financial advisor.

Calamos Closed-End Funds Performance as of 12/31/07
Click on each Fund's name to view detailed performance information.