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Why It’s Time for a Balanced Fund Alternative

Financial advisors, what were your balanced funds doing during the wild ride that was the first quarter?

A typical balanced fund with stock and bond exposure would have struggled along with the S&P 500, which finished the quarter 0.76% down, and the Bloomberg Barclays U.S. Aggregate Bond Index with a -1.46% return. A portfolio of 60% stocks (with stocks represented by the S&P) and 40% bonds (with bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index) would have lost -1.04%. The Morningstar Allocation Category which includes balanced funds with 70% to 85% equity slipped -0.94%. 

Those modestly negative returns belie the dramatic swings that took place in the quarter. Here’s the story of how Calamos Growth & Income Fund (CGIIX)—which distinguishes itself from balanced funds by its use of convertible securities—stepped through a volatile Q1 2018.

q1 returns belie intra quarter drama

“The first quarter was a microcosm of what we’re trying to accomplish throughout market cycles,” explains Scott Becker, Calamos Senior Vice President, Head of Portfolio Specialists. “Where pricing and opportunity present itself, we utilize a range of securities to manage the fund’s risk reward. Long term, we want to provide equity-like returns with less risk. That’s how we can help client portfolios weather choppy markets and build long-term wealth.”

Up, Down, Down and Almost Back to Even

january 2018 calendar

January 1-26, 2018: The year started out with equities on a tear, with the S&P 500 climbing to 7.55% by January 26. CGIIX was right alongside it, with a 7.53% return.

The portfolio management team used cheap short-term volatility in 2017 to buy calls as well as puts with the goal of enhancing the risk/reward dynamics of the convertible securities that we blend with the equities in the portfolio. The CBOE Volatility Index (VIX) was regularly 10 or below in the second half of 2017, which was low even by the standards of recent years.

volatility broke bad after quiet 2017

This enabled our risk-conscious fund to participate almost fully in the rising equity market.

Compare this to high quality bonds, which are the traditional offset to equity in a balanced approach. During this same period, the Bloomberg Barclays U.S. Aggregate Bond Index declined -0.95%.

february 2018 calendar

January 27-February 8, 2018: When the equity market corrected, dropping 10.10% in 11 days, CGIIX fell -8.33% (or 82.5% of the S&P decline). The put side of the earlier trade demonstrated its value. Once again, the fund’s use of market opportunities to manage the portfolio’s overall market sensitivity enabled a better path for investors.

march 2018 calendar

February 9-March 31, 2018: The market continued up and down for the rest of the quarter including a nerve-racking 5% dip in March. The fund’s upside/downside participation in the choppy market was typical of its long-term track record.

As you can see, the use of cheap short-term volatility was an effective way for the team to actively manage risk/reward of the convertibles and the overall portfolio. Vol has now “spiked” back to more normal levels.

Today longer-term vol (what convertibles have in their pricing) is more attractively priced than it was previously, and CGIIX’s equity and convertible mix offers what the team believes to be the right entry to equity markets, Becker says.

And There’s More

growth and income morningstar ticker symbols

In addition to CGIIX’s management of volatility, its sector allocations and issue selection contributed to outperformance against both the S&P and a traditional 60/40 portfolio in the first quarter.

At the close of the quarter, the fund favored high growth (mainly technology) as well as cyclical growth (financials, industrials and some consumer areas) and was less enthusiastic about more defensive sectors (staples, utilities, REITS). For more information, see our commentary (PDF).

Advisors, how confident are you that the bond portion of your balanced funds will contribute as fixed income has in the past? What are your expectations about volatility—are your clients prepared for the return of normal volatility such as what’s occurred to date this year?

When you’re ready to learn more about CGIIX, the alternative to balanced funds, your Calamos Investment Consultant is ready when you are—call 888-571-2567 or email

    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 which can be obtained by calling 1-800-582-6959. Read it carefully before investing.

    Data as of 3/31/18

    calamos growth and income average annual returns 3/31/18

    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. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

    Active management does not guarantee investment returns or eliminate the risk of loss.

    The principal risks of investing in the Calamos Growth and Income Fund include: 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 consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, equity securities risk, growth stock risk, small and midsized company risk, interest rate risk, credit risk, liquidity risk, high yield risk, forward foreign currency contract risk and portfolio selection risk.

    Convertible securities consist of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payment.

    Note there are differences between a fixed income fund that invests primarily in debt or bonds and an income fund that also invests in convertible securities. Like bonds, convertibles provide income and potential downside protection in declining markets. A convertible security is a bond that can be exchanged or converted into a specific number of shares of the issuer’s common stock, which represent the potential for upside appreciation in rising equity markets and less sensitivity to rising interest rates. Convertibles bonds are senior to common equity but not to most other forms of debt, and do entail default risk.

    Indexes are unmanaged, do not entail fees or expenses and are not available for direct investment.

    Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

    S&P 500 Index is generally considered representative of the U.S. stock market.

    The ICE BofAML All U.S. Convertibles ex Mandatory Index (V0A0) represents the U.S. convertible market excluding mandatory convertibles.

    The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

    Morningstar Allocation—70% to 85% Equity funds seek to provide both income and capital appreciation by investing in multiple asset classes, including stocks, bonds and cash. These portfolios are dominated by domestic holdings and have equity exposures between 70% and 85%.

    801099 4/18


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