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Today’s Volatility Offers Prime Opportunity to ‘Make Hay’ for New ESG Fund

Fifteen years from now, will the Calamos Global Sustainable Equities Fund (CGSIX) portfolio management team look back at today and say now was a great time to launch? That’s how Calamos Chief Distribution Officer and Executive Vice President Robert F. Behan teed up this week’s CIO call with Co-Portfolio Managers Tony Tursich and Jim Madden. (Listen to the call in its entirety here.)

It hasn’t been the friendliest market since the fund launched on December 17, 2021. As Madden said, “We’re a quality core manager with a bias toward growth. What you’re seeing out there in the market today is both quality and growth taking a beating.” And he added, with Energy up 17% year-to-date, the fund’s fossil-free status doesn’t help with near-term performance.

Fishing in a Pool of 1,000 Quality Companies

The CGSIX team will look anywhere around the globe for quality.

But after applying minimum standards for liquidity and market cap, “you probably get down to about 1,000 quality companies in the world,” said Madden. “And, quality is a very persistent attribute. So that set of 1,000 does not change all that much. That’s the pool from which we fish.”

Based on the team’s more than two decades of experience in scoring companies for their ESG universe, 360 companies have been qualified by the proprietary process. The CGSIX portfolio includes 125 of those.

Over the long term, the team believes the value of the process plays out over business cycles, over regulatory cycles, environmental cycles. As a result, turnover in the team’s sustainable strategies (see the older Sustainable Equities strategies) has been consistently 10%-15%.

But Madden said the team—which brought its pioneering ESG experience to Calamos in August—looks forward to “using the volatility to find ways to strengthen” its portfolio. “This has historically been the way that we’ve managed. We are long-term investors, and there hasn’t been much volatility, frankly, in the last number of years. So, this, while it doesn’t feel great at the time, is really the time where you can make some hay for the future.”

Tursich elaborated on how the team is pursuing opportunities with stocks positioned to benefit from higher interest rates, as well as with companies believed to have resilient profit margins and pricing power amid accelerating wage inflation and commodity price volatility.

“The obvious choice for us has been to overweight banks globally, especially those banks with a low cost of funding. As interest rates move higher and lending spreads improve, these banks make more money,” he said.

Already, according to Tursich, this is working in Central and South America, where central banks have been more aggressive fighting inflation. The team has also been allocating to stocks in regions where inflation is more moderate and central banks are taking a wait-and-see approach.

The European Central Bank, for example, has been less aggressive, and inflation is lower in Europe. He described the Chinese central bank as in an accommodative mode.

The team is also heightening exposure to “companies that offer value-added products and services that their customers can’t do without. These companies have really been able to increase prices in response to higher input costs and maintain those profit margins. Ingredient companies, industrial gas companies, sustainable building materials companies are examples of firms with strong pricing power today,” he said.

The Two Approaches to ESG Integration

The call touched on investment professionals’ challenge in understanding how investment managers evaluate ESG integration, and included Tursich’ s explanation of two basic approaches:

  • In a ratings-based approach, a manager will rely on ESG rating agencies to identify companies based on the ESG scores assigned.

    “Here’s the problem with the ratings-based approach,” said Tursich. “First off, ESG data and rankings are not standardized. Secondly, the methodologies employed by these rating agencies is a black box.

    “Nobody knows the process or the inputs that these firms use to arrive at their ESG scores,” he continued. “And finally, there’s substantial disagreement between these ESG ratings providers. The correlation coefficient among these rating providers rankings is low. It’s below 0.5. So, you can’t rely on MSCI, Sustainalytics, S&P, ISF to tell you whether a company has the strongest ESG characteristics.”

    According to Tursich, companies are also learning how to game the rating agencies to generate favorable ratings on their companies. “Realize that these companies often are clients of the rating agencies that are motivated to maintain good working relationships with these clients,” he said.
  • Evaluation of a company’s ESG profile based on proprietary in-house framework—which is the Calamos approach, as honed by Tursich and Madden over the years.

    “Here a manager does the work to evaluate ESG risk and opportunity in the same way they would evaluate investment risk and return according to modern portfolio theory. The key,” Tursich explained, “is to evaluate how a company interacts with the environment, with society at large, and ultimately its shareholders. Companies need to be addressing their key impact areas to gain competitive advantage and protect shareholder capital. Companies also need to have a vision and a plan to be more efficient in how they interact with the world.”

    “If companies don’t manage their ESG risk and opportunities well,” he said, “they won’t keep up with their competitors, and they’re more likely to underperform. Firms that don’t adapt to rising environmental constraints and changing consumer preferences with subtle shifts are going to face significant challenges. They’re going to have problems raising capital, attracting talent, and maintaining a positive brand image.”

    The team believes that companies with strong ESG management and oversight are “less likely to experience disruptions to their growth trajectory, to their cashflows, and earnings visibility. These are all inputs that determine a company’s valuation of stock price.”

Madden offered this illustration of the difference between the two approaches, citing a recent Bloomberg article on MSCI, the ratings leader.

“The article uncovered the fact that one of the factors that goes into the MSCI rating ultimately is water stress. But the way that it’s incorporated is, hey, if your chemical company comes to town and it has enough water in the community to run its factories, it gets a lower water stress score."

But Madden said, “We would take the complete opposite approach. We would ask, is this company coming in and stressing the local water supply? Is it polluting the local water supply? These are the risks of the company that we would be interested in.

“It’s a different way of looking at the world.”

Investment professionals, for more about CGSIX and our Sustainable Equities team and capability, see our landing page or contact your Calamos Investment Consultant at 888-571-2567 or 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.

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. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

The principal risks of investing in the Calamos Global Sustainable Equities 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, value stock risk, foreign securities risk, forward foreign currency contract 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.

The Fund’s ESG policy could cause it to perform differently compared to similar funds that do not have such a policy. The application of the social and environmental standards of Calamos Advisors may affect the Fund’s exposure to certain issuers, industries, sectors, and factors that may impact the relative financial performance of the Fund—positively or negatively—depending on whether such investments are in or out of favor.

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