For a more recent look at the Half Caff, please see Revisiting the Half Caff Alternative Allocation in a Dramatically Different Environment
Some people drink coffee for the caffeine—the jolt it provides. Others like the taste but don't like the jumpiness that accompanies coffee drinking. For them, the solution is a blend: a half caffeinated, half decaf coffee beverage. They get their coffee taste, an energy boost within limits they can tolerate, and many find themselves ultimately drinking more coffee.
Here’s an idea for a “half caff” portfolio for your clients who are otherwise made jumpy by volatile markets: a Twenty 50/50 alternative blend that historically has offered reduced volatility and improved returns.
The benefits of portfolio diversification come from adding assets that have lower correlations to one another to reduce risk concentration. That’s the underlying premise of using alternative mutual funds (also known as liquid alternatives) that deviate some way from a traditional stock and bond portfolio.
But some alternative allocations are more efficient than others. In our view, alternatives used to diversify a portfolio should better shield it from market volatility, ultimately leading to more favorable risk-adjusted returns.
In fact, that’s the result when you combine one of our oldest Calamos alternative funds Calamos Market Neutral Income Fund (CMNIX) with our newest Calamos Phineus Long/Short Fund (CPLIX). Below we detail the historical results of a hypothetical illustration.
The performance results date back to the Calamos Phineus Long/Short Fund’s inception date, May 1, 2002.
CMNIX diversified the fixed income component. Over the last few years, bonds have been a significant contributor to the performance of the 60/40 portfolio. However, we don’t expect fixed income to provide the level of returns they have in the past, even if rates stay low.
Adding a fixed income alternative can provide diversification against fixed income exposures, such as duration and credit risk, while providing returns and risk profile consistent with the characteristics of an intermediate-term bond fund.
This alternative blend improved performance during periods of rising interest rates.
Equity risk is the dominant risk in most portfolios. During periods of market stress especially, correlations between asset classes increase—which exposes the portfolio to potentially large drawdowns.
CPLIX can be used to address the market risk from long-only equity strategies because it has the ability to benefit from both stocks that are appreciating in price (the long book) and from those that are declining (the short book). Hedged equity strategies can help clients stay the course during heightened volatility. This alternative blend matched performance during equity bear markets.
The low to negative excess returns between CMNIX and CPLIX and the blend of CMNIX/CPLIX suggest that adding this pair of funds to a traditional 60/40 portfolio can be additive as these funds earned their excess returns during different market periods. A recent example was in 2015, when the blend of CMNIX/CPLIX outperformed the flat market in both equities and fixed income.
Adding CPLIX and CMNIX to a traditional portfolio created more favorable risk-adjusted returns over full market cycles. The combination improved both the Sharpe ratio and Sortino ratio, constructing a more efficient allocation.
The non-normal return distributions of the underlying alternative strategies used in the funds provide an innovative solution seeking to provide greater upside participation while protecting on the downside. These characteristics aim to create an asymmetrical up/down capture profile that leads to greater upside as the lower losses captured by these strategies often lead to greater gains due to the shorter road to recovery.
Digging deeper into the return distributions of this blend indicates that it can provide a higher probability of favorable outcomes supported by the below metrics:
Our Half Caff blend for less volatility and better returns has the potential to keep your clients invested and satisfied that their investment plans are progressing, despite volatile markets. Advisors, for more information on this analysis, please ask 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 which can be obtained by calling 1-866-363-9219. Read it carefully before investing.
The performance shown for periods prior to 4/6/16 is the performance of a predecessor investment vehicle (the “Predecessor Fund”). The Predecessor Fund was reorganized into the Fund on 4/6/16, the date upon which the Fund commenced operations. On 10/1/15 the parent company of Calamos Advisors, purchased Phineus Partners LP, the prior investment adviser to the Predecessor Fund (“Phineus”), and Calamos Advisors served as the Predecessor Fund’s investment adviser between 10/1/15 until it was reorganized into the Fund. Phineus and Calamos Advisors managed the Predecessor Fund using investment policies, objectives, guidelines and restrictions that were in all material respects equivalent to those of the Fund. Phineus and Calamos Advisors managed the Predecessor Fund in this manner either directly or indirectly by investing all of the Predecessor Fund’s assets in a master fund structure. The Predecessor Fund performance information has been adjusted to reflect Class A and I shares expenses. However, the Predecessor Fund was not a registered mutual fund and thus was not subject to the same investment and tax restrictions as the Fund. If it had been, the Predecessor Fund’s performance may have been lower.
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.
The performance shown in this post is hypothetical in nature and does not represent the performance and/or investment risk characteristics of any specific client. While the performance listed for each respective Investment Professional is based on actual performance, the aggregate portfolio performance, allocations listed and account comparisons shown are hypothetical in nature, as no actual clients are invested in these blended strategies. Hypothetical performance results have many inherent limitations, including those described below:
There are distinct differences between hypothetical performance results and the actual results subsequently achieved by a particular investment portfolio. No representation is being made that an account will or is likely to achieve profits or losses similar to those shown, and any investment may result in loss of principal.
As with any hypothetical illustration there can be additional unforeseen factors that cannot be accounted for within the illustrations included herein.
Hypothetical performance and index returns presented assume reinvestment of any and all earnings/distributions.
Some of the risks associated with investing in alternatives may include hedging risk–hedging activities can reduce investment performance through added costs; derivative risk–derivatives may experience greater price volatility than the underlying securities; short sale risk - investments may incur a loss without limit as a result of a short sale if the market value of the security increases; interest rate risk–loss of value for income securities as interest rates rise; credit risk–risk of the borrower to miss payments; liquidity risk–low trading volume may lead to increased volatility in certain securities; non-U.S. government obligation risk–non-U.S. government obligations may be subject to increased credit risk; portfolio selection risk – investment managers may select securities that fare worse than the overall market. Alternative investments may not be suitable for all investors.
Class I shares are offered primarily for direct investment by investors through certain tax-exempt retirement plans (including 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non-qualified deferred compensation plans) and by institutional clients, provided such plans or clients have assets of at least $1 million. Class I shares may also be offered to certain other entities or programs, including, but not limited to, investment companies, under certain circumstances.
An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
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 hedging 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.
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.
The principal risks of investing in the Calamos Phineus Long/Short Fund include: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk.
Citigroup 30-Day T-Bill Index is generally considered representative of the performance of short-term money market instruments.
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.
S&P 500 Index is generally considered representative of the U.S. stock market.
MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of 21 developed market countries in North America, Europe, and the Asia/Pacific region. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.
Beta is a historic measure of a fund’s relative volatility, which is one of the measures of risk; a beta of 0.5 reflects 1/2 the market’s volatility as represented by the Fund’s primary benchmark, while a beta of 2.0 reflects twice the volatility.
Correlation is a statistical measure that shows how two securities move in relation to each other. A correlation of 1 implies that if one security moves up or down, the other security will move in lockstep, in the same direction. Alternatively, a correlation of 1 means that if one security moves in either direction, the other security will do the exact opposite.
Alpha is a historical measure of risk-adjusted performance. Alpha measures how much of a portfolio’s performance is attributable to investment-specific factors versus broad market trends. A positive alpha suggests that the performance of a portfolio was higher than expected given the level of risk in the portfolio. A negative alpha suggests that the performance was less than expected given the risk.
Sharpe ratio is a measure of risk-adjusted performance, where higher values are indicative of better investment decisions rather than the result of taking on a higher level of risk. Sharpe ratio is calculated by the difference between a portfolio’s return and a risk-free rate, often that of the 10-year Treasury bond, and dividing the result by the portfolio’s standard deviation.
Short-only equity: The strategy may incur a loss without limit as a result of a short sale if the market value of the security increases.
Short sale risk: The Fund may incur a loss (without limit) as a result of a short sale if the market value of the borrowed security increases between the date of the short sale and the date the Fund replaces the security. The Fund may be unable to repurchase the borrowed security at a particular time or at an acceptable price.
Interest rate risk: The value of fixed-income securities generally decreases in periods when interest rates are rising. In addition, interest rate changes typically have a greater effect on prices of longer-term fixed-income securities than shorter-term fixed-income securities. Recent events in the fixed-income market may expose the Fund to heightened interest rate risk and volatility.
Standard deviation measures the overall risk of a fund.
Credit ratings is a measure of a company’s credit worthiness and ability to service its debt. Ratings are relative, subjective and not absolute standards of quality. Ratings are measured using a scale that typically ranges from AAA (highest) to D (lowest). The security’s credit rating does not eliminate risk.
Duration is a measure of interest rate sensitivity.
Kurtosis is a statistical measure that's used to describe the distribution, or skewness, of observed data around the mean, sometimes referred to as the volatility of volatility.
Sortino ratio is the excess return over the risk-free rate divided by the downside semi-variance, and so it measures the return to "bad" volatility. (Volatility caused by negative returns is considered bad or undesirable by an investor, while volatility caused by positive returns is good or acceptable.)
Upside deviation measures only deviations above a specified benchmark.
Downside deviation measures only deviations below a specified benchmark.
Up-capture ratio is the statistical measure of an investment manager's overall performance in up-markets.
Down-capture ratio is a statistical measure of an investment manager's overall performance in down-markets.
Active management does not guarantee investment returns or eliminate the risk of loss.
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. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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.
Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end performance information, please CLICK HERE. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was 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.
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. 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.
Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end fund performance information visit www.calamos.com. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was 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.
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. Had it been included, the Fund’s return would have been lower.
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