Our portfolios benefited during the quarter from the alignment between our strategic positioning and the market's recognition of the ongoing economic expansion.
Overall Economic Assessment—A review of why things aren't as bad as the press would have you believe, why the bull market should remain strong, and why you should stay the course.
Economic Factors—We discuss how major economic factors are affecting the direction of the economy and markets: monetary policy, trade, housing and the price of oil to name a few.
Overall Market Assessment—We believe there is good news on the horizon, because when the Fed stops raising rates (and it appears the day is at hand), the market has the potential to rally significantly.
Equities—Calamos has positioned portfolios for the mid and late cycles of the economy, with some cyclical exposure to take advantage of the wave of capital expenditure on infrastructure.
High-Yield and Enhanced Fixed Income—In terms of high-yield and enhanced fixed-income strategies, Calamos is favoring higher-yielding convertibles that offer potential gains resulting from rising equities and a further narrowing of the valuation gap.
Convertibles—The Calamos team believes there will be additional opportunities for returns throughout 2006, as equities show continued strength and the valuation gap narrows.
Global Markets—The global equity markets, in our opinion, still afford ample opportunities. Europe and especially Japan appear to be gaining traction in their recoveries, and will be welcome contributors to global expansion.
Market Overview
During the first quarter of 2006, the strengthening underlying economy fueled stock market gains while the fear of inflation drove interest rates higher, causing the investment-grade bond market to decline. Calamos Investments' equity strategies performed well during the quarter, led by the Growth and International Growth strategies, outperforming the S&P 500 Index1, which also posted strong performance. Although the investment-grade bond market had a tough quarter, our enhanced fixed-income strategies utilizing high-yield and convertible securities performed well. We tend to use these strategies as an alternative to traditional fixed-income investments, and this was another quarter during which this approach proved valuable. For example, our market neutral portfolios, which utilize convertible arbitrage, struggled in previous quarters but bounced back nicely during the first quarter. This low-volatility strategy has proved valuable in protecting capital. Our convertible strategies produced good returns, reflecting the tendency of convertibles to exhibit upside potential from their equity characteristics. The positive performance of convertibles was also a result of the narrowing gap between the asset category's extreme undervaluation and fair value, a situation we have discussed during the past year. In addition, our asset allocation to foreign markets was positive for the quarter as those markets continued to perform well.
Market Outlook
Our outlook remains constructive and we are positioned for the mid-cycle growth phase of economic expansion that should continue to fuel earnings, productivity and global development. What's more, this mid-cycle growth phase can last for years barring policy mistakes such as the Federal Reserve Board raising rates too high or Congress not extending the tax treatment of capital gains and dividend income.
For many quarters now, we've been making the case for a growing economy and the importance of remaining positioned for a rising market. Our portfolios benefited from this positioning during the quarter, as many of our strategies outpaced broad market measures, reflecting the alignment between our positioning and the market's recognition of the ongoing economic expansion. We also saw the benefit of tilting our portfolios toward greater international exposure, an adjustment that we noted in previous outlooks. We remain optimistic on investment opportunities abroad, especially now that we are seeing more signs of growth in a number of countries besides the United States and China.
Here at home, we believe the economic backdrop remains favorable. Business spending continues and may increase. Consumer sentiment remains strong, as household net worth continues to climb. Should the housing market slow, appreciation in financial assets and wage increases have the potential to sustain consumer activity. Meanwhile, the unemployment rate stands below 5%—one of many economic statistics that further demonstrates the underlying strength and resiliency of the economy. It's worth noting that all of this good news has occurred despite the headwinds of higher energy costs and rising interest rates, neither of which derailed the economy.
Looking ahead, we believe that there is the potential for more positive returns, particularly since we expect the Fed to complete its round of rate hikes and believe the global expansion will continue.
Index Definitions:
1 The S&P 500 Index is an unmanaged index generally considered representative of the U.S. stock market.
2 Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $664.9 million; the median market capitalization was approximately $539.5 million. The largest company in the index had an approximate market capitalization of $1.8 billion.
3 Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. As of the latest reconstitution, the average market capitalization was approximately $4.7 billion; the median market capitalization was approximately $3.6 billion. The largest company in the index had an approximate market capitalization of $13.7 billion.
4 Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.
5 Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.
6 The CSFB High Yield Index is an unmanaged index of high yield debt securities.
7 The Merrill Lynch All U.S. Convertibles Index (VXA0) is comprised of approximately 500 issues of convertible bonds and preferred stock of all qualities.
8 The Merrill Lynch All Investment Grade Convertible Index (VXA1) is comprised of approximately 200 issues of only investment-grade convertible bonds and preferreds.
9 The Merrill Lynch All Speculative Grade Convertible Index (VXA2) is comprised of approximately 300 issues of only speculative-grade convertible bonds and preferreds.
Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. It is not possible to invest directly into an index.
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 views and opinions expressed by John P. Calamos and Nick P. Calamos are as of the date of the article, and are subject to change at any time based upon market or other conditions. The material contained herein is for informational purposes only and should not be considered investment advice.
For more information:
Calamos Advisors LLC is a federally registered investment advisor. Part II of Form ADV, which provides background information about the firm and its business practices, is available upon written request to:
CALAMOS ADVISORS LLC
2020 Calamos Court
Naperville, IL 60563-2787
Attn: Compliance Officer
2274 1Q06 First Quarter 2006