Well Ahead of Index and Peers YTD, Here’s How CGIIX Is Pursuing Growth While the World Waits for a Vaccine

The U.S. economy in September 2020 is in a transitional phase. Having sharply rebounded from the onset of the COVID-19 crisis and the resulting shutdown, from here the economy will grow at a modest pace until there’s widespread distribution of a vaccine, likely in the second half of next year.

Economies in the U.S. and globally have re-opened to the “living without a vaccine stage,” Calamos Co-CIO John Hillenbrand told investment professionals on Tuesday’s CIO conference call. (Listen to replay here.)

“In this stage, we can expect slower growth, uneven improvement in economic activity shaped by the variable path of the virus’s spread, a slowing in physical location openings, a winding down of fiscal stimulus programs that have not been renewed, and a higher level of unemployment, bankruptcies and restructurings,” said Hillenbrand, Head of Multi-Asset Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager.

Equity-Like Returns with Lower Volatility

With that as a backdrop, Hillenbrand reviewed how he’s positioned Calamos Growth and Income Fund (CGIIX), an equity-oriented multi-asset class strategy whose goal is to generate equity-like returns with a lower volatility profile than the S&P 500. The fund has easily outperformed the S&P and its peers in Morningstar’s Allocation—70% to 85% Equity category through August 31, and has a long-term record of matching or beating the S&P with less volatility while providing attractive income.

The team maintains a positive view on equities—although, Hillenbrand qualified, “Equities and convertibles can do well, but the winners going forward might be different over the next six to 12 months than the winners of the last six to 12 months.”

Included in the stock portfolio are growth companies the team believes to have sustainable growth prospects.

“We have become more selective in part because of valuations and in part because of the potential for decelerating growth in 2021. Growth equities perform better in an accelerating growth environment than in a decelerating environment,” he said.

CGIIX also has its share of cyclical exposure. “It’s easy to say that that cyclicals are the place to be,” Hillenbrand said, but here too expressed the need to be selective. “You could look at some of the travel names but those really rely on having a vaccine, or you could can look at energy names but they require everyone to start traveling again.”

The team’s approach has been to ladder cyclicals, starting with those that are starting to rebound today, those that expected to improve in the next three months to six months and those expected to perform post-vaccine.

Turning to more secular growth stories, CGIIX bottom-up analysts are focused on distinguishing between companies whose growth is sustainably accelerating and those whose demand has just been pulled forward.

Hillenbrand included ecommerce and payments innovations as examples of accelerating trends that are enabling consumers and businesses. On the other hand, demand for home office-related or home entertainment purchases may have just been pulled forward.

Managing the Volatility

With convertibles, an important instrument in the fund, Hillenbrand values the fixed income base and the optionality. Convertibles are used both to access growth companies that are higher volatility than he likes to have in the portfolio and cyclical companies, as well. Convertibles in the travel and leisure industry, for example, offer an asymmetrical risk/reward and a considerable coupon that pays while an investor waits until the economy improves post-vaccine.

With volatility declining, Hillenbrand said, the team also has been selectively using calls and puts to create synthetic convertibles, as a means of further managing the downside while providing opportunities for upside.

The portfolio includes very little traditional fixed income, a marked change from a year ago. “We just don't see the value there,” he said, “and would rather use either converts or an option strategy or high quality companies with free cash flow margins to bring down the volatility of the portfolio.”

3 Risks

Hillenbrand named three risks to investors:

• Vaccine availability and effectiveness: This outlook is predicated on a vaccine, he said. “The big risk is that the vaccines don’t turn out the way we want them to. A relatively low risk is that we don’t get any vaccine but that’s something to look out for.”
• Election outcome: “Our view is still a divided government,” said Hillenbrand, “but it’s a little close to call depending on where the economy is in the next six weeks and depending on views on the economy.”
• China: The U.S. and China are at odds on technology and militarization. “On a lot of fronts China is moving to exercise their view of the world, with the U.S. and other countries pushing back,” noted Hillenbrand.

Investment professionals, for more information on our equity perspective or CGIIX, please talk to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.