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Our Recommendations for Diversifying Within an International Allocation

Financial advisors frequently spread an international equity allocation across more than one fund, in pursuit of a combination that balances risk and reward.

When asked to evaluate thousands of advisors’ asset allocations and models, our Product Management and Analytics group looks at a wide range of metrics to improve an allocation, including risk/return statistics and qualitative factors such as sectors and countries.

“Often,” says Shawn Park, Director of Product Management and Analytics, “the allocations reviewed are exposed to risks that advisors may not be aware of, but we are able to offer potential solutions to improve the outcome.”

Ultimately, advisors want to help their clients reach their goals and that’s usually through a targeted return objective based on various risk tolerances. Our group helps by reviewing an allocation to see where it can be improved.

“Typically we talk about traditional correlations, which really applies to building a portfolio as a whole and combining different asset classes, such as equities and bonds or equities and commodities,” says Park. “They tend to have negative correlations, which historically has minimized the impact of one specific asset class.”

However, performance within asset classes—a value manager and a growth manager within international equities, for example—tends to be highly correlated. The different portfolios can move together, regardless of their style.

“In other words, if the international markets are positive for the year, in most cases, one would expect all international funds to be positive for the year, despite whatever factor they are exposed to—value, growth or momentum,” he says.

How is this addressed when considering international allocations, or any allocations for that matter? “Our preference, at the asset class level,” Park explains, “is to combine two managers expected to outperform in different market cycles. That’s how we can diversify an allocation.”

Excess Return Correlations

What Park’s group recommends: To diversify by combining funds with low excess return correlations relative to a benchmark index.

Consider the comparison between Calamos International Growth Fund (CIGIX) and another prominent fund from the Morningstar Foreign Large Blend Category that we’ll call “Fund A.”

correlation matrix

As shown in the correlation matrix above, the excess returns generated by these two funds were not highly correlated. They have delivered different outcomes in different markets—in other words, when one of them zigged, the other one typically zagged. The result was an allocation that helped smooth out the variances in index performance.

Performance correlation is just one dimension the group considers. Others include the correlation of factor exposures, such as sector, country, size, growth/value orientation, momentum and other portfolio traits.

Here again, analysis shows that CIGIX and Fund A differ significantly in specific sector weightings, as shown below.

Data as of 6/30/18

gics sectors

Here’s how the dynamic plays out over time. The historical result of combining the two is that the paired funds have taken turns outperforming the benchmark index (and one another). The boxed areas in the chart below indicate rolling periods when CIGIX outperformed, picking up the slack when the index (and the paired fund) lagged.

rolling excess returns

“Over time,” Park says, “structuring allocations in this way can help deliver more consistent excess returns relative to the index while maintaining desirable risk/reward outcomes.”

Financial advisors, for more about CIGIX and how it could contribute to your international allocations, talk to a Calamos Investment Consultant at 888-571-2567 or email 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 1-800-582-6959. Read it carefully before investing.

Data as of 6/30/18

average annual returns IGF 6-30-18

    Important Risk Information. 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 Calamos International Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk. 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. Before investing carefully consider the fund’s investment objectives, risks, charges and expenses.

    The MSCI ACWI ex U.S. Growth Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets excluding the U.S., and emerging markets.

    The MSCI EAFE Growth Index measures developed market growth equity performance (excluding the U.S. and Canada). Unmanaged index returns assume reinvestment of any and all distributions and, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.

    The Morningstar Foreign Large Growth Category is comprised of funds that seek capital appreciation by investing in large international stocks that are growth-oriented. Large-cap foreign stocks have market capitalizations greater than 5 billion. Growth is defined based on high price/book and price/cash flow ratios, relative to the MSCI EAFE Index. These funds typically will have less than 20% of assets invested in U.S. stocks.

    ©2018 Calamos Investments LLC. All Rights Reserved. Calamos® and Calamos Investments® are registered trademarks of Calamos Investments LLC.

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    Last Use: 09/2019


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