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Expect the Pullback to Continue into April—How CPLIX Has Shielded Investors from Drawdowns to Date

The market’s correction is not complete, Calamos Co-CIO and Senior Portfolio Manager Michael Grant told a group of investment professionals last week. Historically, pullbacks during ongoing expansions have been sharp but short in duration—“three to four months rather than the six- to 12-month affairs associated with profit recessions.”

He looks for the relapse to conclude by the end of April, with 5% further downside as investors explore what he described as “the frontier of the correction zone.”

Grant attributed the latest volatility to rising rates, as he said the investment consensus has finally understood the secular trend reversal in U.S. debt markets and Central Bank intervention.

However, he said, “There is a window where corporate fundamentals can overcome higher rates.” Based upon his team’s analyses of rate levels, the “zone of disruption” for equities, he said, is a 3.2% to 3.5% 10-year Treasury yield. This tension between earnings and rates will characterize the remainder of the bull market.

While the pace of global economic growth will climax by the middle of this year, Grant sees little U.S. recession risk until 2020 or 2021. The correction of 2018 is not a replay of the deflation anxiety that became so familiar post-2008.

The Battle for Equity Leadership

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Instead, Grant argued that the central question for clients is “How to turn defensive when interest rates are now the enemy?” The striking feature of this pullback, he said, is that the traditional defensive sectors did not outperform.

This conundrum is equally apparent as investors sense the turn against the high momentum technology stocks. “Growth momentum is the longest duration asset within equities,” said Grant, so it is unsurprising that higher rates would create anxiety among these leaders.

Grant sees the correction as a leadership battle and watches “for the incipient shift toward higher quality, more secure growth as a sign the correction is maturing.”

Grant continues to be positive about the United States. “What other economic region can compete with the U.S. fiscal initiatives to replace the tired monetary accommodations that are being unwound globally?” he asked.

The good news, he said, is that the monetary tide is turning very slowly, inflation is not a concern and there is no prospect of genuinely restrictive policy anytime soon. Even so, Grant described the recent equity turbulence as a “foretaste of greater upheavals to come.”

Trump, Trade and Tariffs

On the subject of trade and tariffs advanced by the Trump administration, Grant said, “Trump believes it is better for some Americans to have jobs even if other Americans have to pay more for imports.”

Grant envisages a long period of “conflictual re-negotiation” of U.S. trading relationships and of the U.S.-China relationship, in particular. He said Trump’s objective is to end China’s manipulation of trade and investment in the interests of its great power agenda. And Beijing is “much more constrained in its ability to retaliate than most realize.”

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The world economy has become excessively dependent upon the American consumer of last resort, according to Grant. He went on to predict that China will agree to some compromise that will prevent the escalation into an outright trade war. China Premier Li’s quick concession this week promising no mandatory technology transfers in China’s manufacturing sector is revealing, Grant said. “It will confirm Trump’s instincts that America, as the ultimate buyer of goods, has leverage,” he added.

Trump’s secondary goal is to address Europe’s huge trade surplus with the U.S., which is “a debate for the entire European region.”

Investors should not focus on the details of the tariff squabbles, partly because the odds of an authentic trade war are low as “both sides have vested interests that would be damaged.” In Grant’s view, the historical judgment is clear: “In any generalized trade dispute, a diversified economy with a large deficit holds all the best cards.”

Equally important, he said, much of the Eurocracy recognizes that there is substance to Trump’s complaints.

Grant believes that “capital flows will respond to perceptions of the new Trump policy regime, which would be very positive for the U.S. economy.”

In contrast, he thinks Europe faces a “reckoning” and will retain a political risk premium for some time. According to Grant, Brexit implies the Euro project will become “more French” in coming years: more protectionist, more technocratic and more statist. “And what kind of future is that for investors?” he asked.

CPLIX Update

In a Calamos Phineus Long/Short Fund (CPLIX) update, Grant said the fund has done what a risk-managed long/short global equity fund is expected to do during market volatility.

The fund declined less than 2% during two tests—from January 26 to February 8 and from March 15 to March 23, as shown below. This bested both the S&P 500 and the fund’s peer group, the Morningstar Long/Short Funds category.

cplix is two for two

Throughout the period, Grant and team have been actively:

  • Reducing short exposure after the first pullback, resulting in an increase in delta-adjusted exposure from 13% (21% on a cash basis) at December 31, 2017, to 36% as of February 28.
  • Addressing sector weightings, including trimming the long Technology exposure. Financials remain the largest sector long exposure as of February 28.

Full portfolio analytics will be provided in the upcoming quarter-end performance update and commentary, to be published in April. Advisors, for more information about CPLIX, talk to a Calamos Investment Consultant at 888-571-2567 or

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.

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.

pls average annual returns 02-18

Data as of 12/31/17

pls average annual returns 12-17

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.

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.

Alternative investments may not be suitable for all investors, and the risks of alternative investments vary based on the underlying strategies used. Many alternative investments are highly illiquid, meaning that you may not be able to sell your investment when you wish to.

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

Unmanaged index returns assume reinvestment of any and all distributions and do not reflect any fees, expenses, or sales charges. Investors cannot invest directly in an index.

S&P 500 Index is a market weighted index and is widely regarded as the standard for measuring U.S. stock market performance.

HFRI Equity Hedge Index consists of funds where portfolio managers maintain long and short positions in primarily equity and derivative securities.

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. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Morningstar U.S. Funds Long/Short Category: Long-short portfolios hold sizable stakes in both long and short positions in equities and related derivatives. Some funds that fall into this category will shift their exposure to long and short positions depending on their macro outlook or the opportunities they uncover through bottom-up research. Some funds may simply hedge long stock positions through exchange-traded funds or derivatives. At least 75% of the assets are in equity securities or derivatives.

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