Over recent weeks, we’ve spoken to many people who wonder if they should retreat from the markets and wait for better days. While market conditions are unprecedented, difficult, and likely to remain volatile, from an investment standpoint, there are reasons for cautious optimism as I look out longer term. We’ve seen massive programs put into place by governments and central banks around the world. Also, markets can turn quickly, which supports the case for staying invested—especially as many securities are now trading at prices we believe represent attractive buying opportunities.
However, we understand that many people may be concerned about the level of risk in their asset allocations. There are variety of ways to potentially reduce the equity exposures in a portfolio without going to cash—for example, by including risk-managed liquid alternative and convertible security strategies.
The Covid-19 pandemic has created unprecedented uncertainty for investors. Although we cannot predict the exact timeline, we are confident that both the economy and markets will recover. Throughout history, the global economy and markets have demonstrated resilience through many crises that seemed insurmountable at the time.
Countries around the world have responded to the pandemic with unprecedented global monetary and fiscal policy responses. In the U.S., the Federal Reserve and federal government have acted swiftly, increasing the likelihood for a relatively faster recovery. With programs for individuals, small businesses and larger corporations, the CARES Act is an extraordinarily expansive response, and the speed of its passage contrasts favorably with the response in 2008 and 2009.
Only time will tell if we have already seen a bottom in the markets, and we expect volatility to remain very high, due to the pandemic, economic shocks, U.S. elections and geopolitical unknowns. However, we caution investors against making panicked moves or trying to time the markets. Over the quarter, many securities regained ground, but investors who gave into panic likely missed the chance to benefit.
The economy and markets are unlikely to recover at the same pace. Markets are typically forward looking and have often turned the corner not when problems were fully solved but when things looked “less bad.” We expect better market conditions before the pandemic is resolved and before the economy is fully up and running.
We believe many securities have been oversold and represent compelling long-term opportunities. Across asset classes, our teams are focused on identifying the companies, sectors and investment themes that provide attractive compensation for their potential risks.
In the equity markets, the opportunity set includes higher quality companies that are better able to withstand the current economic shocks and those with business models that capitalize on disruption (e.g., businesses that can benefit from the work-from-home paradigm, localization of supply chains, and evolving health care needs). As we re-engage risk selectively, we also see opportunities in cyclical growth companies.
In fixed income, the Federal Reserve and government have implemented measures designed to stabilize many sectors of the market, and we are also seeing a number of new corporate bonds come to market with very favorable terms. Finally, we see opportunities among a growing list of “fallen angels”—companies that have seen their debt downgraded from investment-grade to below-investment-grade status over recent weeks. Selectivity remains key, as not all companies are positioned to weather the storm, but our teams are using a bond-by-bond approach to identify those securities that meet our criteria for being well compensated for the risks undertaken. As the dispersion of spread and yield opportunities among issuers with similar credit ratings and within similar industries has grown, we believe our team is well positioned to add value through security selection.
For those who have grown more worried about volatility over recent weeks, there are a number of ways investors can potentially “take some risk off the table”—without going to cash. Over the decades, we have developed many strategies to help investors cope with volatile markets. For example, in the difficult financial markets of the 1970s, we pioneered the use of convertible securities to provide potentially lower volatility equity exposure at a time when convertibles were not widely used and were essentially an alternative asset class. Building on this foundational capability, we have introduced a range of liquid alternative strategies that manage risk and returns.
In these highly volatile and uncertain times, the Calamos liquid alternative strategies may be beneficial for managing risk and enhancing diversification. They can be included in a variety of ways, depending on the client’s unique asset allocation needs. Equity liquid alternatives— such as the Calamos Hedged Equity Fund (CIHEX) or Calamos Phineus Long/Short Fund (CPLIX)—can capitalize on both upward and downward moves. These strategies can provide equity exposure, with more tools for managing risks.
On the fixed income side of an asset allocation, our Calamos Market Neutral Income Fund (CMNIX) may be a welcome choice for a volatility dampener. With a history that traces back to 1990, our market neutral income approach is one of the oldest of its kind and may be a compelling choice for investors seeking income, and the potential for steady performance with less exposure to equity drawdowns.
Additionally, as we noted, with active management, convertible securities can provide potentially lower volatility equity market participation. Convertibles can be included in an asset allocation in a dedicated strategy, like our Calamos Convertible Fund (CICVX), or in combination with equities, as in Calamos Growth and Income Fund (CGIIX). We believe convertibles represent an especially compelling opportunity today, due to a combination of wide credit spreads, oversold equities, and a wide convertible valuation gap that is unlikely to last. When one or more of these conditions reverse, many convertibles are likely to benefit. (We discuss this at greater length in a recent post on the “convertible trifecta.” )
Also, although markets have been volatile, issuance in the convertible market has been strong as companies seek access to capital. Issuers have included household names that are taking advantage of the opportunity to shore up their balance sheets, and we’re seeing many issues with favorable terms.
Given our expectation of continued equity market volatility, we see a strong case for maintaining allocations to risk-managed fixed income strategies. Calamos High Income Opportunities Fund (CIHYX) is focused on higher-yielding investments in the below-investment-grade segment of the market, while Calamos Total Return Bond Fund (CTRIX) follows a “core-plus” strategy, with active allocation across the bond market.
As always, and especially during these extraordinary times, we thank the investors and financial advisors who have placed their trust in us. In these uncertain times, we believe our experienced approach will allow us to help investors achieve their long-term goals.
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.
The opinions referenced are as of the date of the publication, are subject to change due to changes in the market or economic conditions, and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.
Convertible bonds entail interest rate risk and credit risk. High yield bonds are subject to increased credit and liquidity risks, as well as interest rate risk.
Asset allocation and diversification do not guarantee a profit or protect against a loss.
There can be no assurance that the Fund will achieve its investment objective. Asset allocation and diversification do not guarantee profit or eliminate the risk of loss.
Important Fund Risk Information. An investment in the Fund is subject to risks, and you could lose money on your investment in the Fund. There can be no assurance that the Fund will achieve its investment objective. Your investment in the Fund 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 principal risks of investing in the Calamos Market Neutral Income Fund include: equity securities risk consisting of market prices declining in general, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk, portfolio selection risk, and portfolio turnover risk.
The principal risks of investing in the Calamos Hedged Equity Fund include: covered call writing risk, options risk, 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. The risks associated with an investment in the Fund can increase during times of significant market volatility. The writer of a covered call may be forced to sell the stock to the buyer of the covered call and be precluded from benefiting from potential gains above the strike price.
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 or 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 adviser to predict pertinent market movements, which cannot be assured.
Convertible Arbitrage Risk: If the market price of the underlying common stock increases above the conversion price on a convertible security, the price of the convertible security will increase. The fund’s increased liability on any outstanding short position would, in whole or in part, reduce this gain.
The principal risks of investing in the Calamos Phineus Long/Short Fund include: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk. As a result of å countries.
Alternative investments may not be suitable for all investors. The fund takes long positions in companies that are expected to outperform the equity markets, while taking short positions in companies that are expected to underperform the equity markets and for hedging purposes. The fund may lose money should the securities the fund is long decline in value or if the securities the fund has shorted increase in value, but the ultimate goal is to realize returns in both rising and falling equity markets while providing a degree of insulation from increased market volatility.
The principal risks of investing in the Calamos Convertible Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, equity securities risk, interest rate risk, credit risk, high yield risk, portfolio selection risk and liquidity 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 principal risks of investing in the Calamos Growth and Income Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, equity securities risk, growth stock risk, small and mid-sized company risk, interest rate risk, credit risk, liquidity risk, high yield risk, forward foreign currency contract risk and portfolio selection risk.
The principal risks of investing in the Calamos High Income Opportunities Fund include: high yield risk consisting of increased credit and liquidity risks, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk, interest rate risk, credit risk, liquidity risk, portfolio selection risk, foreign securities risk and liquidity risk.
The principal risks of investing in the Calamos Total Return Bond Fund include: interest rate risk consisting of loss of value for income securities as interest rates rise, credit risk consisting of the risk of the borrower to miss payments, high yield risk, liquidity risk, mortgage-related and other asset-back securities risk, including extension risk and prepayment risk, U.S. Government security risk, foreign securities risk, non-U.S. Government obligation 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.
About Class I shares: Class I shares are offered primarily for direct investment by investors through certain tax-exempt retirement plans (including 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans and non-qualified deferred compensation plans) and by institutional clients, provided such plans or clients have assets of at least $1 million. Class I shares may also be offered to certain other entities or programs, including, but not limited to, investment companies, under certain circumstances.
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