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How One Advisor Prepares His Clients for Market Shocks

The opinions and views of third parties do not represent the opinions or views of Calamos Investments LLC.

Financial advisors know better than to be lulled into complacency over today’s markets.

Here’s how one advisor, Gregg T. Abella, describes the challenge: “We are concerned that with the low volatility currently on both the equity side and in the fixed income side, [the market] doesn’t seem to be pricing in any sort of shock…

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“We’re worried,” says the Co-Principal and Portfolio Manager at Investment Partners Asset Management in Metuchen, NJ, “that in a very rapid rising rate environment you could have a correction where traditional fixed income bonds and equities—which have historically moved in opposite directions from one another—could actually be correlated more highly.”

Abella’s plan for risk mitigation and capital preservation is cash, core fixed income and some alternatives and strategic satellites including Calamos Market Neutral Income Fund (CMNIX). He elaborates on his approach and his expectations in a December 28, Wall Street Transcript (download PDF).

Some of his clients are worrying, he says, that the market is in a 1999 or a 2007 scenario, requiring their portfolios to be protected against the downside but nonetheless want some exposure to traditional asset classes. Acknowledging the strength of the market and some “mania” (e.g., Bitcoin), Abella says the Fed may need to raise rates not just because of inflation but to cool off asset prices.

“And if that were to occur, I think that we’re going to have to adjust ourselves to a reality that we haven’t had to deal with in a number of years, which is very modest returns for equities going forward” and the need to produce return from other types of strategies.

CMNIX: A Diversified Alternative

MNI Ticker Expense Ratio

Abella says he’s using CMNIX as “diversified alternative” because he’s concerned about rising rates and that equity prices may not provide the same level of return in the next 12 months as in the previous. The fund’s convertible arbitrage strategy is used to hedge equity risk, and covered call writing helps with income. He calls CMNIX “maybe not the main event but a good flavor-enhancer.”

In the event of even a minor correction, Abella expects CMNIX to contribute to a diversified portfolio by being less vulnerable to duration and credit risk in a rising rate environment. Historically, CMNIX has outperformed investment grade bonds during rising rates and demonstrated more resilience than high yield, he says (also see CMNIX No Matter What).

Abella also comments on the value he provides as an advisor who keeps his clients diversified. “It can be frustrating when you see a year like [2017] in the S&P and clients feel like, ‘Well, if I had just been all in on equities this year I would have had a phenomenal return and I wouldn’t have to be diversified across a lot of different things or worry about income.’”

“The flipside of that, obviously, is that no one rings a bell when the market is going to go the other way,” says Abella. “And so, the reason that you stay diversified and you stay disciplined is that a number of things anywhere in the world geopolitically could happen and suddenly equity prices retreat...I think we stay diversified and you stay disciplined because you really don’t know when you might go back to more historical valuations of 15 times earnings down from 20, which would mean a significant correction.”

Abella’s goal, he says, is to remind clients that wealth can be destroyed a lot quicker than it is created.

Advisors, we’re always eager to hear your stories of how you’re putting Calamos funds to work. If you have a story to share or if you’d like more information about CMNIX, contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.




Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information or call 1-800-582-6959. Read it carefully before investing.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Alternative investments are not suitable for all investors.

The principal risks of investing in the Market Neutral Income Fund include: equity securities risk consisting of market prices declining in general, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk, portfolio selection risk, and portfolio turnover risk.

Covered Call Writing: As the writer of a covered call option on a security, the fund foregoes, during the option’s life, the opportunity to profit from increases in the market value of the security, covering the call option above the sum of the premium and the exercise price of the call.

Convertible Securities Risk: The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also, may have an effect on the convertible security’s investment value.

Convertible Arbitrage Risk: If the market price of the underlying common stock increases above the conversion price on a convertible security, the price of the convertible security will increase. The fund’s increased liability on any outstanding short position would, in whole or in part, reduce this gain.

Data as of 9/30/17

cmnix average annual returns

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 principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load of 2.25%. Had it been included, the Fund’s return would have been lower. For the most recent month-end fund performance information visit www.calamos.com.

Citigroup 30-Day T-Bill Index is generally considered representative of the performance of short-term money market instruments. Morningstar Market Neutral Category represent funds that attempt to eliminate the risks of the market by holding 50% of assets in long positions in stocks and 50% of assets in short positions.

Bloomberg Barclays U.S. Government/Credit Index comprises long-term government and investment grade corporate debt securities and is generally considered representative of the performance of the broad U.S. bond market. Unlike convertible bonds, U.S. Treasury bills are backed by the full faith and credit of the U.S. government and offer a guarantee as to the timely repayment of principal and interest.

Morningstar Market Neutral Category represent funds that attempt to eliminate the risks of the market by holding 50% of assets in long positions in stocks and 50% of assets in short positions.

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