Now Explains Why Convertibles Require Active Management

Convertibles are in a portfolio because, Calamos Convertible Fund (CICVX) Co-Portfolio Manager Jon Vacko commented in January, “No one really knows what’s going to happen in the stock market.” (See Positive about 2020? Even More Reason to Hedge Equity Risk with Calamos Convertible Fund.)

Their function—because they’ve historically provided comparable equity returns with less volatility—is to help keep clients invested and moving forward.

It was two years ago, on the 10^th anniversary of the Great Financial crisis, when Joe Wysocki, Co-Portfolio Manager, reminisced about how convertibles provided downside risk mitigation for clients in 2008-2009 (see The Complexities of Investing in Convertibles: What Every Advisor Should Know).

As shown below, the S&P 500 declined -55% peak to trough. The ICE BofA All U.S. Convertibles Index (VXA0) fell -42%. And, as you can see, CICVX fell -30%.

This muted drop, as Wysocki said, was a direct result of the active management of the portfolio. By holding up better and rebalancing risk, the fund was able to fully recover by early 2010—that was two years ahead of the broader equity market.

But in the fall of 2018, Wysocki expressed concern that investors turning to broad use of convertibles were inadvertently taking on more risk.

In a passive strategy, “What happens when equities’ market value increases?” Wysocki asked. “The convertible equity sensitivity increases and equity-sensitive convertibles would potentially be larger positions...In the absence of rebalancing, investors could be holding an equity portfolio (such as in 2000) or, conversely, could be holding a straight bond portfolio (as in 2008) at the exact wrong time.”

Memories may have dimmed the value of an actively managed strategy, Wysocki worried at the time.

But now here we are, fresh off a -34% decline in the S&P 500, and CICVX is once again pulling away. The fund has outperformed the VXAO on the downside (during the market’s swoon between February 20 and March 23) and on the upside (during its snapback through yesterday).

Obviously, convertibles weren’t exempt from the sell-off. Underlying equities were pressured while credit spreads widened simultaneously.

But, as Wysocki wrote in this month’s U.S. Convertible Market Snapshot, “The flipside is that such volatility can create opportunities. The seemingly indiscriminate selling has pushed convertible theoretical valuations to discounts that we have rarely seen over the past few decades.”

With cheap converts and a reset of equity valuations and credit spreads, a “trifecta” could be setting up, resulting in compelling returns as fear subsides, he wrote.

“Being able to actively capitalize on opportunities such as these when they present themselves serves as a reminder that it is not simply the convertibles that make a strategy work,” Wysocki says, “rather how convertibles are managed to achieve a particular investment objective.”

For more on the trifecta, read Tactical Opportunity in the Convertible Market: Convertible Trifecta.

Investment professionals, to learn more about actively managed convertibles now, register for our May 7 Adding Convertibles to Your Playbook webcast. You’ll hear from Wysocki along with the recognized pioneer in convertible investing, Founder, Chairman and Global Chief Investment Officer John P. Calamos, Sr., and Eli Pars, CFA, Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager.

For more information at any time, reach out to a Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.