The following post was written by Robert Bush, Calamos Senior Vice President and Director of Closed-End Fund Products.
What did it take for Calamos Phineus Long/Short Fund (CPLIX) to return 12.49% in the first quarter—more than twice as much as the returns of the S&P 500, the MSCI World Index and the Morningstar Long-Short Category average?
Below we’ll unpack the drivers of the fund’s most recent performance, a feat achieved with a delta-adjusted net exposure of approximately 56% over the period, which was far less than long-only alternatives that delivered less returns.
High absolute and relative exposure. Since he went on record March 25, 2020—near what would prove to be the market’s pandemic-related low point—CPLIX Senior Co-Portfolio Manager Michael Grant has been optimistic about equities. “For the first time in years, the math for equity investors makes sense…Investors stand to be paid to engage equity risk once again,” Grant said at the time (see post).
The team began increasing the portfolio exposure, and continued to maintain both high absolute and relative levels, averaging in the mid-50% level on a delta-adjusted basis, in the first quarter.
Positioning. Expecting that the markets’ ultimate recovery would not be as synchronized as its steep decline, Grant structured the portfolio in a “barbell format” to allow optimal participation in a relatively disjointed recovery. While he believed that sectors that were especially susceptible to the pandemic would recover, he expected defensive quality growth names would continue to perform well.
On one side of the barbell were quality growth and lower risk names (examples: Facebook and Alphabet), representing approximately one-third of the long portfolio as of 02/28/21. On the other side were more cyclical and recovery positions (examples: Air Lease Corp and Las Vegas Sands), representing about two-thirds of the portfolio as of 02/28/21.
The fund’s general market hedging, and shorting of “stay at home” stocks and “theme” holdings, is also reflected in its positioning and performance.
U.S.-centric focus. While emerging markets had a stellar performance in 2020, they have underperformed relative to the U.S. in the first quarter (S&P 500 6.17% vs. MSCI Emerging Markets Index 2.34%). Although Grant is keeping an open mind to the consensus that EM should perform well this year, he is not compelled at this time to meaningfully take on exposure.
Factors that typically drive EM returns, such as relatively lower U.S. bond yields and lower U.S. growth rates, are not factors at this point. In addition, the influence of both U.S. fiscal and monetary policy continue to propel domestic markets by offering low rates and plenty of liquidity. This should help U.S. equity markets. While the portfolio does have exposure to Europe, the primarily UK holdings in the region are based on expected benefits post-Brexit.
Conviction. The first quarter presents another illustration of Grant’s conviction. January brought concerns regarding the ability of the vaccine to be broadly distributed, thereby potentially slowing the process of the world returning to a greater sense of “normalization.” As a consequence, the market sold off in those sectors best positioned to benefit from an economic reopening. This negatively impacted the fund’s performance for the month.
However, in February as the outlook for vaccination brightened and the prospects of a reopening of the economy gained traction, those “recovery” sectors that CPLIX had overweighted more than made up for their January declines.
Grant is unequivocal in his enthusiasm for U.S. equities, calling 2021 “one of the best backdrops for sustained equity upside” modern-day investors have seen.
Here’s how he frames the months ahead:
The team’s equity targets assume a U.S. 10-year yield of up to 2% (versus current levels of around 1.75%). This will be largely benign to equity markets, according to Grant, as long as yields are rising in anticipation of better economic activity.
The CPLIX base case S&P 500 price range is 4,000 to 4,400, with heightened risk beyond May. This backdrop could remain constructive in the second half of 2021, but the market will have priced in a full recovery.
Morningstar Overall RatingTM Among 179 Long-Short Equity funds. The Fund's risk-adjusted returns based on load-waived Class I Shares had 4 stars for 3 years and 4 stars for 5 years out of 179 and 157 Long-Short Equity Funds, respectively, for the period ended 9/30/2021.
Investment professionals, for more information about CPLIX, contact your Calamos Investment Consultant at 888-571-2567 or firstname.lastname@example.org.
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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 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. 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.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The S&P 500 Index is generally considered representative of the U.S. stock market.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The index is calculated on a total return basis, which includes reinvestment of gross dividends before deduction of withholding taxes.
Morningstar Long/Short Equity Category funds take a net long stock position, meaning the total market risk from the long positions is not completely offset by the market risk of the short positions. Total return, therefore, is a combination of the return from market exposure (beta) plus any value-added from stock-picking or market-timing (alpha).
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