Commentary

I am considering taking up sailing this summer. I have been an avid boater and water skier for 25 years; the speed, beauty and excitement these activities offer always invigorate me and put a smile on my face.

Until this year, I had no interest in going "sans motor" at a slow speed. Sailing looked like a lot of extra work and seemed necessary only if the motor failed. But, I'm growing to appreciate projects that provide a divergence from the business world. So when a friend of mine, who is an avid sailor, suggested I take sailing lessons, I was interested. He reasoned that I love boating, and that the change and serenity would suit me. Soon after, a book on sailing arrived.

As I read, I was reminded of the similarities between long-term investing and sailing. (Somehow, everything for me relates to investing!) When you sail, you may find yourself working with or against the wind and waves. Catch the wind with your sails and you can reach your destination quickly. Other times, you may need to sail or tack against the wind with short zigzag maneuvers, making forward progress a more difficult task. Similarly, in investing, it's preferable to have the secular forces at your back. Fighting prevailing winds in declining or slow-growing industries requires considerable tacking against secular waves.

At Calamos Investments, we believe growth investing is always enhanced by finding investments in industry groups with secular growth opportunities—"the wind in our sails." A secular trend, or at least a multi-cycle trend, helps minimize errors and enhance the prospects for a successful long-term investment. Not overpaying for the stock is still very important, of course; but if one invests along a secular theme, the risk of being really wrong decreases and the possibility of being correct improves. The constant wind blowing in the sails should ultimately help lift a stock to higher thresholds.

For an investor, the ideal scenario is identifying a secular theme before it becomes obvious to most market participants. Clearly, the secular decline in interest rates and inflation around the globe could have been a very profitable trend to identify at its turning point a few decades ago. That said, even investing alongside the trend more recently—15, 10 or five years ago—could have provided great opportunities. So, catching a secular trend along the way works, too. The move to an information-based economy, the growth in global financial markets and the aging baby boomers are ongoing secular themes that we believe will have profound impact on the economy and investment opportunities.

The Virtue of Pairing Secular Themes with Valuation Discipline

In our growth strategies, we emphasize investments with secular winds in the sails. (Of course, we may also "tack against the wind" here and there to ensure appropriate diversification.) We balance this emphasis on secular growth with valuation discipline. We have never had a shortage of global secular trends to follow; but sometimes stock valuations already incorporate most of a secular trend. It's important to know when to raise the sail on the mast and catch the full force of the wind and when to accept a slower, more measured pace.

When you traverse the investing seas, price and expected return discipline are as important as a sturdy keel and experience. The importance of a stock price discipline is critical because many secular trends exhibit bubble-like mania as growth looks to be accelerating. Over the years, we've seen trends get priced ahead of the opportunity, and at times well below the opportunity. Our job is to identify the trend, form a thoughtful opinion as to the length and persistence in the trend, and determine if stock prices offer significant upside.

The importance of a stock price discipline is critical because many secular trends exhibit bubble-like manias as growth looks to be accelerating.

The obvious example of a fully priced secular opportunity was the Internet and technology bubble of the late 1990s. For a huge number of companies, a decade of growth with very high returns on capital was priced into the stocks. No doubt, the Internet was here to stay and the innovation of technology would continue, so the secular trend was intact. But, the investment valuations reflected the trend and even greater opportunities for many companies that did not survive. Investing in technology in 1999 and 2000 was like sailing a 30-foot boat without a ballast. You could sail, but with a little disturbance, the going got tough really quickly.

History gives us many such examples. Among them, the bubble in emerging markets occurred only a few years after the Cold War and the opening up of the eastern bloc countries. We all saw the world moving towards democracy. Coming from such a low base, the emerging markets had the most to gain from the opening of trade. The markets quickly responded and the theme became a stock market bubble. The railroad bubble in the mid- to late-1800s correctly anticipated the huge longterm opportunity in railroads and priced the growth opportunity into stocks only a few years into the trend. The opportunity to make money in railroad stocks was limited to a few years of a 40-year trend.

We believe a disciplined approach—guided by secular trend opportunities—is an optimal strategy for keeping a growth portfolio sailing to its end goal.

At CALAMOS INVESTMENTS, we apply a price and minimum-expected-return discipline that works in concert with our identification of secular growth stocks. Over the past 25 years, we were drawn to some of our best performers for the secular theme in which we hoped they would participate. But it was the identification of specific companies through comprehensive bottom-up research that ultimately fuelled our success. In fact, most of our 10 baggers (Peter Lynch's name for stocks that rise 10 times their initial purchase prices) resulted from secular trend opportunity and buying right.

Secular Themes May Mitigate Reversion to the Mean

Growth companies should sustain growth for an extended period of time. At times, secular investment themes will mitigate the tendency of a company's return on capital to revert to a lower, "normal business" level. A great growth company fights this reversion to the mean and exhibits growth persistence. This often means the rate of growth in revenue can be sustained by growth in demand, innovation and reinvestment back into the organization all of which are enhanced by the secular growth trend. Since many growth stocks exhibit high P/E ratios and often remain high for an extended period of time, the opportunities to purchase great growth stocks cheaply are few and far between. (Recent years have presented opportunities which we believe are unusually attractive. See our 2006 Review and 2007 Market Outlook for more on this topic.) Therefore, we seek secular investment themes that may provide a higher degree of success for the growth stock and sustain its growth well into the future.

Secular Trends for Long-Term Growth

Because growth and persistence in growth are critical considerations for the long-term success of a growth portfolio, we focus on several factors, including:

1. products, and potential for future innovation
2. balance sheet strength, flexibility and reinvestment rate
3. secular trend opportunity

Below, we outline some of the secular growth opportunities reflected in our portfolios. We've invested in some for many years; others are recent additions. We believe these trends may provide for smoother long-term growth investing, even if the waves get high and the storm clouds build during a given quarter. We've also highlighted our view of the strength of, and potential risks to, each trend.

THEME #1:
The World is Starved for Entertainment and Information

Media content is a valuable asset, but distribution is changing. Consumers are demanding content in many formats, at many price points.

Potential Beneficiaries Media, Internet, telecommunications, cable and satellite, gaming, vacation and resort companies Current Trend Very pronounced Risk to Trend Violation of private property rights, content restrictions in various markets, trade restrictions

Source: PricewaterhouseCoopers Global Entertainment and Media Outlook, 2005-2009. Use of this data does not indicate an endorsement of CALAMOS INVESTMENTS by PricewaterhouseCoopers.

THEME #2:
People Want Access to Everything, Anywhere, Anytime

THEME #3:
Global Competition and the Global Marketplace

THEME #4:
Demographic Shifts

THEME #5:
U.S. Infrastructure Rebuild

THEME #6:
Global Savings and Investment Shifts

THEME #7:
Energy and Environmental Fears

THEME #8:
Global War on Terror

THEME #9:
Democracy and Freedom March on, Globally

THEME #10:
Consumers Gaining Better Product Information and Knowledge

THEME #11:
Nanotech, Biotech and Genetics

Closing Thoughts

When setting off on a sailing trip, you can't always count on good weather and calm waters. Similarly, the markets can deliver their share of choppiness. Yet, at Calamos Investments, we are looking forward to the journey ahead. Guided by our long-term secular themes and time-tested discipline, we believe we are well positioned to sail toward the growth stock opportunities on the horizon.