With Soaring Global Convertible Issuance as the Backdrop, CXGCX Outperformed Equity and Convertible Markets

Portions of this commentary previously published in thought leadership by Founder, Chairman, and Global CIO John P. Calamos, Sr. and Co-CIO Eli Pars.

Global convertible issuance has soared since the equity market correction in March as companies have sought to access capital in order to shore up liquidity. Global companies have brought nearly $92 billion in convertible issues to market through June, including a surge of more than $70 billion since the end of the first quarter. In June alone, global companies issued more than $27 billion.

Convertible issuers represent a very diverse group of companies. The convertible market is typically dominated by companies in growth-oriented sectors, but the recent flurry of issuance has also included larger consumer companies and cyclicals. Recent issuers include many household names, and many deals have come to market with favorable terms and very attractive pricing. Year-to-date, the U.S. has led global issuance, but Europe and Asia ex-Japan have produced strong issuance markets as well.

Overall, global convertible assets totaled $388 billion as of June 30—higher than at any point since 2010.

The Convertible Edge

For investors in these uncertain times, convertibles can provide unique advantages thanks to their hybrid features. An embedded long-dated option provides upside equity participation, while the convertible’s bond value provides potential risk mitigation during equity market drawdowns. However, it’s not simply convertible securities that make a strategy work: What matters is how convertibles are managed to achieve a particular investment objective.

This year, for example, as anxiety about the coronavirus roiled risk assets, the Calamos Global Convertible Fund (CXGCX) benefited from active risk management and fundamental security selection to strongly outperform both the broad global convertible and equity markets.

The Dynamic Convertible Market

Active and ongoing management is paramount because these characteristics are not static. Below you can see how convertible characteristics change alongside market conditions, using the U.S. market as an example.

The convertible market demonstrated a much higher degree of equity sensitivity in March of 2000, against the backdrop of a peaking equity market and technology bubble. By February of 2009, the pendulum had swung to the other extreme. As the markets troughed in the liquidity crisis, more than two-thirds of convertible markets were trading as “credit-sensitive.” The characteristics of the convertible market can also shift quickly, due to market conditions, issuance, or both. In March of 2020, the market was dominated by issues with fixed income characteristics, but by the end of May, total return issues represented the lion’s share.

The Challenges Ahead

Although recent new issuance activity has produced issues with attractive structures, the CXGCX team emphasizes that not all convertibles represent compelling long-term opportunities. Selectivity will remain key during this volatile period, particularly as rising U.S. election uncertainty adds to coronavirus and economic concerns.

In this environment, the CXGCX team is emphasizing higher-quality technology names, as well as communication services and health care. Exposure includes positions that can benefit from a cyclical recovery, such as industrial names, as well as issues in the travel industry that came to market with unusually good terms. The fund is overweight the U.S. market, where the team has found many issues that offer the desired balanced risk/reward attributes. Conversely, CXGCX is underweight the European market.

Investment professionals, for more information on diversifying your clients’ portfolios with CXGCX, contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.

For a monthly update on the global convertible market, subscribe to the Calamos Global Convertible Market Snapshot.