Commentary

Riding Out the Volatility in Closed-End Funds

The recent downturn in the closed-end fund market was triggered by the fallout in the subprime market, with the most damaging impact on institutions that utilize speculative-grade, high-yield debt. Experts have suggested this upheaval would have a domino effect throughout the mortgage and fixed-income securities markets, but this appears to be focused squarely on the high-risk segment of the market.

According to the Comptroller of the Currency, subprime mortgage loan originations accounted for 20% of all mortgages over the past two years, while these loans accounted for only 8% of total originations in 2003. Many of the larger national banks, which comprise the foundation of our financial system, have not been major players in the subprime lending category. For instance, national banks originated only 10% of subprime loans in 2006, with the delinquency of these loans falling well below the national average. Among the advantages of the larger financial institutions are the diversification of both business type and product portfolios, which are also supported by ample long-term funding.

Calamos says...

We continue to overweight higher-grade balance sheets and superior credit-quality companies relative to the market benchmarks. We have previously discussed our concerns with speculative investments and lower-quality and less-sustainable growth companies, and have positioned our portfolios accordingly.

Our Second Quarter Review and Outlook further details our views on the more speculative segments of the market, and discusses how we anticipated the credit risk storm and positioned our portfolios to weather the adversity.

The following are excerpts from the Q2 Review and Outlook:

"We expect recent increased volatility in the debt and equity markets to continue. This has played well into our positioning and we will maintain our bias toward more stable, growth-oriented issues with solid balance sheets."

"While we believe real estate values should hold overall, we sense that conditions in the sub-prime lending market offer more significant cause for concern. Although sub-prime loans represent a small portion of the overall debt, we believe the current collapse will at least help rationalize higher risk premiums, and of course, tighter lending standards."

Continued Focus on Quality

At Calamos, our closed-end fund products use high-yield bonds in differing degrees. The Calamos portfolio managers have underweighted the funds' exposure for some time to the lowest-quality credits, which recently had been the market's best performers until the downturn. Instead, we continued to focus on healthy fundamentals. Although the funds' share prices have been caught up in the general high-yield downdraft, we believe our rigorous credit work and bottom-up analysis will be of even greater importance in the current volatile market environment.

We continue to see our strong portfolio fundamentals, including diversifying our closed-end fund investment base into separate asset classes as a sound long-term strategy. Furthermore, with the flexibility to invest in equities (CHW, CSQ and CGO), convertible securities and higher-yielding bonds, Calamos' portfolio managers seek the best returns in any market environment. This dynamic asset allocation seeks to enable the investment team to better manage risk.

Added Flexibility of Convertibles

Calamos is a recognized pioneer in using convertible securities to manage risk and pursue wealth. We believe convertible securities are particularly compelling when blended with other asset classes, which is why we use convertibles in combination with other asset classes in each of our closed-end fund portfolios. In our enhanced-income portfolios (CHI, CHY and CHW), we employ convertibles as a more aggressive fixed-income alternative. In our defensive-equity portfolios (CSQ and CGO), convertibles offer a means to capture the upside potential of equities while providing the potential for a high degree of downside protection.

The Potential Opportunity

While investors are understandably dismayed by the decrease in closed-end fund market prices—and while we cannot predict how the perceived credit crunch will continue to affect closed-end funds—we believe that we have solid underlying fundamentals, a time-tested investment process and attractive yields. As of July 31, 2007, two of our closed-end funds have yields that are near or above 10% and another two closed-end funds that have yields near or above 8%.