By this point in the year, most of us are focused on the new year that lies ahead—12 months of unlimited possibilities. And yet it’s very common for a client to bring new money into a financial advisor’s office in December. Year-end bonuses have been given at holiday parties, insurers have paid year-end settlements, relatives have surprised with large cash gifts.
Where do you go now with that new money? To most financial advisors, the answer is a no-brainer, almost reflexive: It belongs in the stock market, where it can be exposed to the growth potential of equities. Your client will evaluate your investment expertise over their money's long-term progress.
But now? At this point in the market? This December some advisors are choosing to hedge how they put new money to work, given the near-term market risks.
Morningstar Overall RatingTM Among 121 Options-based funds. The Fund's load-waived Class I Shares had 5 stars for 3 years and 5 stars for 5 years out of 121 and 69 Options-based Funds, respectively, for the period ended 5/31/2020.
At any given time, the market has three possible next moves: to rise, to fall or to trade within a narrow range. The particular precariousness of this December relates to the market’s current level (the S&P 500 is up 27% through the end of November), ongoing trade policy anxiety, reduced corporate earnings, reduced economic growth, heightened political debate and even memories of last December’s rout.
All of which explains why advisors are turning to Calamos Hedged Equity Fund (CIHEX) with their new money. The fund's options-based strategy can provide upside participation in equity markets while seeking downside risk mitigation.
Three recent years provide a ready illustration of how CIHEX has performed in three possible scenarios, any of which could be ahead in the immediate future for the client who turns up at your door with new money. We’ll look at each over a 13-month horizon, starting with an investment on December 1 and then for the next full year.
Scenario 1: Invest the new money and the market declines. This is what advisors most want to avoid with new money. An all-equity investor in December 2017 had a volatile 13 months ahead, including three 5% or more drawdowns. With half the standard deviation (7.40 versus 14.74 for the S&P 500 for the period), CIHEX investors participated in 48% of the upside and just 37% of the downside.
Scenario 2: Invest the new money, and anything and everything happens. The investor in December 2015 was tested early in the period. An all-equity investor had taken a 14.5% loss by February 10 before the market rebounded, set a new all-time high and ended the year with a 9.37% return. CIHEX finished the 13-month period with about half the return of the S&P. Compare CIHEX’s standard deviation of 4.94 to the S&P’s of 10.15.
Scenario 3: Invest the new money, and the market gains. An all-equity investment in December 2016 drifted upward for the first nine months. It then kicked into higher gear to finish 2017—a year distinguished by its low volatility—strong with a 22% return.
To be sure, this is the most desirable outcome for clients who go all-in this December, and it’s possible, too.
But, if you as their advisor have any trepidation about the next 13 months, there’s an alternative to taking the chance of being all-in or sitting in cash. In this example of a year when equities generally just climbed, CIHEX participated in the equity upside and returned 8.62%. Compare that to the 0.78% return on a U.S. Treasury bill.
Advisors, please contact your Calamos Investment Consultant at 888-571-2567 or email@example.com for specific ideas on how to put new money to work now using CIHEX. Financial advisor support and investment performance results that met advisors' expectations have helped Calamos climb to third on the list of the industry’s largest managers of liquid alts assets.
Click here to view CIHEX's standardized performance.
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.
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Please refer to Important Risk Information. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund's maximum front-end sales load of 4.75%. Had it been included, the Fund's return would have been lower. For the most recent month-end fund performance information visit www.calamos.com.
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. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
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 Hedged Equity Fund include: covered call writing risk, options risk (see definition below), equity securities risk, correlation risk, mid-sized company risk, interest rate risk, credit risk, liquidity risk, portfolio turnover risk, portfolio selection risk, foreign securities risk, American depository receipts, and REITs risks.
Options Risk—the Fund’s ability to close out its position as a purchaser or seller of an over-the-counter or exchange-listed put of call option is dependent, in part, upon the liquidity of the options market. There are significant differences between the securities and options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. The Fund’s ability to utilize options successfully will depend on the ability of the Fund’s investment advisor to predict pertinent market movements, which cannot be assured.
Alternative investments are not suitable for all investors.
Morningstar Options-based Category funds use options as a significant and consistent part of their overall investment strategy. Trading options may introduce asymmetric return properties to an equity investment portfolio. These investments may use a variety of strategies, including but not limited to: put writing, covered call writing, option spread, options-based hedged equity, and collar strategies. In addition, option writing funds may seek to generate a portion of their returns, either indirectly or directly, from the volatility risk premium associated with options trading strategies.
The S&P 500 Index is generally considered representative of the U.S. stock market.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
Standard deviation is a measure of volatility.