Investing in convertible securities via a closed-end fund is the focus of a recent Closed-End Fund Association (CEFA) podcast featuring Eli Pars, Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies and Bob Bush, Senior Vice President and Director of Closed-End Fund Products.
While Calamos believes convertibles should be a core allocation, Pars commented on the argument today for being tactical with convertibles. Investment professionals may be looking for a way to get their clients equity exposure with less risk, in light of the market’s recent pullback.
“Convertibles, first and foremost, are a bond,” explained Pars. “They're typically issued at par with a five-year term and redeemable at par, but they also have embedded in them the option to convert into the company's stock—and it's your option, so it really only comes into play when the stock moves up.
“The combination of the two, the option and the bond, gives you the ability to get equity exposure when things are going well for the company. However, the bond component offers downside risk mitigation in a more defensive environment. The end result you get when you actually manage these bond and stock aspects in a portfolio is equity-like returns over a full market cycle with less volatility.”
Convertibles are a way to help clients “sleep at night,” making them less inclined to sell during market declines because they are less susceptible to steep market sell-offs than general equities, he noted.
Pars further commented on the income-producing advantage of using closed-end funds that invest in convertibles, including the six convertible-using Calamos closed-end funds. “In a levered vehicle like a closed-end fund,” he said, “the convert's ability to manage volatility protects you a little bit and takes a little of the edge off the leverage. And the leverage in the portfolio, while it's pretty modest—20%-30%—does allow you to get a little bit of extra return in the portfolio and produce some income that's attractive to certain investors in the market.
“The spread between our cost of leverage vs. our reinvestment rate,” he continued, “has been favorable over time, resulting in leverage being generally accretive to the operations of the portfolio.”
As reported in the most recent month-end Calamos Closed-End Fund Snapshot, current distribution rates on the funds have provided more income than stock and bond alternatives.
Also on the podcast, Pars provides his update on the US and global convertible market (and also see this recent market update). For regular market updates including performance, issuance, credit quality and more, subscribe to the Calamos US Convertible Market Snapshot or Calamos Global Convertible Market Snapshot.
Investment professionals, to discuss convertibles or closed-end funds, please contact your Calamos Investment Consultant at 888-571-2567 or firstname.lastname@example.org.
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