CGIIX Positioned for Less Robust But Still Positive Growth—and More Volatility: Hillenbrand

While the positive impacts of COVID-related fiscal and monetary policies and the initial vaccination rollout have begun to wane, they’re being replaced by more traditional, sustainable but less robust growth drivers.

“Economic growth is going to be driven by higher consumer spending levels, supported by strong balance sheets, improving employment and wages, as well as higher corporate capex spending and inventory—which is supported by increased productivity and profitability,” said John Hillenbrand, CPA, Co-CIO, Head of Multi-Asset Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager, on the Aug. 11 CIO Conference Call. (To listen to the call, go to www.calamos.com/CIOequities-8-11.)

“Corporations are in very strong shape, with ample liquidity and more streamlined cost structures to appropriately address the increased demand, related input inflation, as well as the near-term supply shortages,” he said. “We also see some increased levels of mergers and acquisitions, which should help provide opportunities for revenue and cost synergies.”

Volatility to be Expected

The transition from a higher growth period to a more moderate growth period will be characterized by volatility, according to Hillenbrand.

“But we’re going to end up with a more sustainable equilibrium as we find labor and goods markets settle down. That should result in more realistic and sustainable inflation and interest rates,” he said.

The recent COVID resurgence and slowing pace of vaccinations also will be a source of economic and equity market volatility in the short term, Hillenbrand said.

“Many had thought that there was going to be a straight-line improvement in COVID cases once vaccinations were prevalent here in the U.S. It turns out the mutated virus is proving a little bit more difficult to mitigate, especially among the unvaccinated. Over the intermediate term, which we think is post-fall, post-winter, things look a lot better.”

An increased number of cases and hospitalizations should have a minor to moderate impact on economic activity, he said.

“Those areas where we see potential weakness are going to be focused on the usual suspects—travel, some level of consumer services, some businesses that are tied to people returning to work in the fall. Those are smaller parts of the economy but they can be impacted a little bit more significantly. It won’t derail this economic growth engine that we have into 2022,” according to Hillenbrand.

Possible risks to the outlook, he said, include “further slowing in growth, low vaccination in some geographies, slowdown in goods consumption. We still have some sustained supply chain issues and overly aggressive increases in taxation and regulation.” But he called these risks “modest detractors.”

Infrastructure and Budget Reconciliation

Hillenbrand also commented on the potential impact of the Biden administration’s infrastructure legislation—which he considers a “moderate positive”—and the budget reconciliation bill.

“We needed an infrastructure bill. We haven’t done one for the last five to 10 years. It’s important to spend on those for the long term…,” he said. “I think that bill’s pretty straightforward, pretty decent policy.”

Hillenbrand is less positive on the reconciliation bill, which he referred to as a mixed bag that comes with “some positives and some negatives.”

“Many of the social programs that they look to implement seem like generally reasonable things to do. But they’re not going to have a significant payoff. Yes, having free community college, that’s great. But it’s going to take time for those people to go through, get better skills, come out into the economy, be more productive in the economy. There’s a multi-year payoff to that. 

“We’ll see how it plays out,” continued Hillenbrand. “But I think the view would be that much of that spending is going to be offset by a higher tax rate on corporations and higher income people.”

The impacts of the tax rate increases happen immediately, he noted, as opposed to the delay in the payoffs that result from the spending.

CGIIX Positioning

Hillenbrand, whose responsibilities include Calamos Growth and Income Fund (CGIIX), said he isn’t looking for equity returns in the next 12 months to match the previous 12 months. Further, he expects the transition from early to mid-cycle to usher in an investment regime change.

“We should see market leadership transition away from some higher risk areas—both on the cyclical side and some of the high growth areas—and more toward a focus on companies that have high returns on capital, improving margins, and less volatile cash flows. That kind of quality bias should play out generally better when you see growth that’s still positive but decelerating,” he said.

Hillenbrand continues to be positive on Consumer Discretionary, Industrials, and Technology sectors, where CGIIX is overweight. However, he said, the composition within those sectors has been adjusted some, now to favor retail and services as improved employment, wages, and strong balance sheets should still favor consumer spending.

Allocations to travel and leisure holdings continue despite their underperformance recently. “There’s still a case to be made with a little bit longer term investment horizon. Those are areas that have a lot of pent-up demand and a supply constraint. That should be a good dynamic once we get past this Delta variant issue.”

Hillenbrand and the CGIIX team see plenty of opportunities in Industrials and Materials, especially with the infrastructure bill, “whether that’s rebuilding inventory or spending on capex to ramp up some capacity constraints within the supply chain.”

Technology, and specifically productivity-enhancers, is another focus and overweight for the fund. “If we have supply chain issues, and we get back to closer to full employment, with demand being stronger, and wages being stronger, there’s definitely a need for productivity-enhancers both at consumer companies, as well as industrial and materials companies. We’re looking for companies that can provide technology and improve productivity at a lower cost. We find plenty of areas to be able to do that,” said Hillenbrand.

Recent portfolio adjustments have been aimed at upgrading in terms of quality and higher returns on capital.

While the multi-asset class fund currently favors equities, Hillenbrand also commented on fixed income opportunities.

Historically, the fund relied on fixed income because of Treasuries’ negative correlation to equities. “Because yields are so low, we don’t really expect that negative correlation to be very strong,” he said.

He expects the 10-year Treasury to climb to 1.4% or even 1.6%. “Treasuries might be a good place to go if you’re worried about return of capital, but you’re going to get low return at best from a total return standpoint,” he noted.

On the team’s use of convertible bonds this year, Hillenbrand said, “We’ve been a little bit more selective, in part because many of the converts (businesses) were a little bit higher risk with more variable cash flows.” The preference has been for those with more attractive underlying businesses and more favorable structures.

Regarding other available options on the credit side “where we’re going to get paid to take on risk,” Hillenbrand mentioned bank loans and selected parts of high yield “where we think that they can take a bit of a rate increase and still benefit with a bit of spread contraction.”

Investment professionals, for more information on perspective or CGIIX, please talk to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.