Commentary

Portfolio Managers

John P. Calamos, Sr.
since inception (9/4/90)

Nick P. Calamos
since inception (9/4/90)

John P. Calamos, Jr.
since inception (9/1/94)

Calamos Growth Fund was recognized by Forbes in September, based on an assessment of its performance in both up and down markets. How do you account for the Fund's high marks in different market environments?

We are pleased with the recognition for our performance during both up and down markets, and will continue to strive to deliver exceptional performance going forward. We have a dedicated and hardworking investment team that takes pride in its performance and its commitment to our clients. Although some may think that our success is a result of doing things differently depending on the market's direction, we actually believe our success is the result of doing things the same way, regardless of short-term market gyrations.

Our investment team utilizes a very disciplined investment process that focuses on maintaining a consistent balance between risk and reward over the course of the market cycle. Over time, we have learned that sticking to our discipline helps us to both stay focused on long-term results and to avoid chasing near-term market movements. From a macro view, we do attempt to look six to 18 months out to determine what areas of the economy may be strengthening and weakening, and adjust our portfolio weightings, typically gradually. From a bottom-up perspective, we assess both the upside and downside potential of a given security, based on the likelihood of various scenarios. Throughout this process, the team views their primary role as that of a risk-manager: That's because you can't manage your portfolio's returns but you can manage its risk.

Back to top >>

Has your investment process changed over the years?

We continue to challenge our investment process, improve our knowledge base, and add to our experience in the investment arena, but we wouldn't call that a "change," since that's how we've always operated. We still use the team approach, it's just that our team has gotten larger over the years.

Back to top >>

What type of opportunities are you finding in the market today?

We manage the Fund with an emphasis on opportunity and risk management without setting limits to our universe. Coming into the year we had the Fund positioned for continued economic strength with some deceleration in earnings growth in the market overall. We thus have been favoring health care stocks, high-end retail and certain areas of the technology sector. We also remain invested in internet retail and media because of the rapid change and opportunity in these industry groups as well as the rapid acceptance of the distribution and retail platforms they offer consumers. Although the internet media and retail stocks have not helped performance for the year so far, we feel that over the longer term the growth and investment opportunities are still very good for the internet retail industry. For example, the market appeared to agree with us in July, when the stock prices of eBay and Amazon both rebounded significantly*—we believe there is more upside here.

Although we are still finding ample exciting opportunities in the mid-cap arena, we have also increased the large-cap exposure in the portfolio as changes in the marketplace have pointed us to more opportunities in the large-cap arena. The large-cap growth stock universe has lagged the mid-cap and small-cap growth stocks for some time now as indicated in the following charts (courtesy of The Leuthold Group).

The other outlier that worries investors is of course the high cost of oil. We are not convinced that the lack of new U.S. refineries nor the high pace of growth in China are the drivers of the near-term spike in prices: both these factors have been recognized and priced into the oil market for years. Instead, we believe the oil market is being driven by less anticipated situations such as the collapse of hopes for a more capitalistic Russia and the attendant development of its oil fields, the decline of the U.S. dollar (the currency for international oil transactions), and the political situation in the Middle East, where a number of regimes have no interest in seeing the U.S. expand democracy and thus diminish their power. Since oil prices are driven not by a free market but by geopolitical events, we typically do not make large bets in this arena, but we do aim to participate at or near market weights to maintain an appropriate risk/reward balance.

^{* As of 9/30/05, Amazon made up 3.5%, and eBay, Inc. 2.8%, respectively, of the portfolio of Calamos Growth Fund. The portfolio is actively managed. Holdings and weightings are subject to change daily.}

Back to top >>

Large-caps have lagged small-caps and mid-caps since 1999. Is it time for a leadership change?

The performance gap has become as wide as it has been in a generation or more, so the relative cost of growth is cheapest in the large-cap universe. Secondly, the earnings growth rate in the economy overall is decelerating and as this occurs larger cap growth stocks tend to perform best. Finally, risk premiums are very low in the market place today. We believe risk premiums on equity and debt markets are low, indicating to us that we should reduce our risk. Large-cap growth stocks present some interesting opportunities to position the portfolio on a risk-reward basis that makes sense to us.

It's important to note that as investment managers, we prefer as much flexibility as possible. We manage the Fund with a goal of capital appreciation and choose not to limit the investment arena because that would arbitrarily limit our opportunity set and flexibility to manage the Fund's risk-reward profile. Incidentally, our investment team and management has always had a substantial amount of their capital in the Calamos Growth Fund and we feel strongly about maximizing its opportunity set.

Back to top >>

Value stocks have outperformed growth stocks for some time now. Do you think this will continue?

It's true that large-cap growth has also significantly lagged large-cap value over the past five years. So as investors shift back into large-cap growth, we think the asset class has the potential to close the performance gap, adding to our reasoning to increase the large-cap growth exposure in the Fund.

We generally look to overweight the portfolio in growth companies that are not subject to heavy swings in commodity prices or the economic environment. Typically, when the economy is growing, cyclical stocks are considered growth stocks; when the economy is contracting they are once again considered cyclical stocks. In contrast, the Calamos Growth Fund has built strong performance over the years in growth stocks that are good businesses in all phases of the market. We observe that cyclical stocks have significantly outperformed growth stocks since 2000. As for the status of growth stocks in the future, we believe that as it becomes clearer that we are in the mid-phase of the economic cycle, large cap growth names could regain market leadership, as more cyclical value opportunities wane.

Also, we believe that we are near the end of the Fed's tightening, which we believe will also spur a transition to growth over value.

Back to top >>

Calamos Growth Fund has gotten larger over the years, thanks to both inflows and capital appreciation. Do you think you will close the Fund?

We monitor the fund size and its potential impact on performance. Since we are not having any problem finding opportunities and staying invested, we feel the fund size is not a concern. In the past we have closed mutual funds that we felt we could not leave open because of a lack of potential investment opportunities and/or the ability to manage the risk exposure. Although getting significant small-cap exposure in the Fund at this size would be difficult, the Fund has never been a small-cap growth product and we have traditionally kept the core of the portfolio in the mid-cap market. For example, as of 9/30/05, Calamos Growth Fund had 57% of its assets in stocks with a market capitalization between $1 billion and $12 billion. Moreover, the equity markets are so diverse that a $17 billion fund in a $17 trillion domestic equity market is not an issue. We have increased the number of holdings in the portfolio and we also need to find more opportunities as the portfolio has grown, but this is a process we have followed since the inception of the fund. We are always searching for more opportunities and improving our process, as well as an understanding of the markets and the business environment.

Back to top >>

A word about risk

Equity investments are subject to greater fluctuations in market value than other asset classes as a result of such factors as a company's business performance, investor perceptions, stock market trends and general economic conditions.

In addition, this Fund invests in small and mid-cap company stocks, which have historically presented greater risks than larger more established companies.

You should also know that the Fund may invest up to 25% of its assets in the securities of foreign issuers. 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.

You should consider the Fund's investment objectives, risks, charges and expenses carefully before investing. For this and other important information, please obtain a fund prospectus by calling Calamos Financial Services LLC, the Fund's distributor, at 800.582.6959 and read it carefully before investing or sending money.