Jon Vacko, CFA, and Joe Wysocki, CFA
Market volatility continued through the first quarter as the United States and Europe experienced notable banking stresses while continuing to raise interest rates to combat persistently high inflation. Slowing economic growth will likely linger through tighter lending standards and higher capital cost, contributing to heightened uncertainty and recessionary probabilities. However, provided the hot US job market can be cooled but not derailed and further banking dislocations can be contained, a recession is not imminent. With inflation peaking, supply chains normalizing, a resilient consumer, and a Federal Reserve close to ending rate hikes, a bullish case remains for equities—and convertible securities.
Given the macro backdrop, our focus continues to be on actively managing the risk/reward tradeoffs within Calamos Convertible Fund (CICVX). As we have discussed in the past, the characteristics of convertible securities vary. Some are more bond-like, some are more equity-like and others offer a balance. To take advantage of equity valuation resets, we have maintained a preference for the balanced portion of the convertible market. Balanced convertibles provide a favorable asymmetric payoff profile by offering attractive levels of upside equity participation with less exposure to downside moves. We also see opportunities within the bond-like segment of the convertible market in issues that can benefit from spread compression while offering attractive yields and good structural risk mitigation from further equity market weakness. Within this segment of the convertible market, most issuers retain strong cash balances along with minimal near-term refinancing risk. We are avoiding the group’s most distressed names.
Technology and health care remain the largest sector allocations in CICVX. Reflecting our strong focus on bottom-up company analysis, we favor companies that are executing well despite macro uncertainties; those that are best-in-class; and long-term winners benefiting from lasting secular themes such as cybersecurity, automation, and productivity enhancement. These long-term themes serve as a beacon in turbulent times such as now and help us identify innovative firms whose valuations are most likely to be rewarded over time. Many of these are growth firms that have shifted focus from growth at all costs to improving margins, generating free cash flow and increasing profitability, which should prove advantageous as higher quality growth becomes scarce as the era of free money ends. Financials and REITs are the largest relative underweight in the fund. In our view, the risk/reward characteristics in this space are generally unfavorable, and many issuers are susceptible to the negative impact of higher rates. Also, in our view, the financial names in CICVX do not share the same deposit risk seen in other currently stressed financials.
Convertible new issuance was subdued in 2022 but has improved in 2023 with higher coupons and lower conversion premiums that are more favorable to investors. For the first quarter of 2023, global convertible issuance totaled $19.7 billion, more than double the $7.9 billion issued during the first quarter of 2022. We are optimistic about issuance prospects going forward. We believe the pace will accelerate once macro uncertainty subsides and as companies increasingly recognize the benefits of issuing lower-coupon convertibles rather than traditional bonds in an environment of higher interest rates.
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.
Diversification and asset allocation do not guarantee a profit or protect against a loss. Alternative strategies entail added risks and may not be appropriate for all investors. Indexes are unmanaged, not available for direct investment and do not include fees and expenses.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. 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.
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 Convertible Fund include a potential decline in the value of convertible securities during periods of rising interest rates and the possibility of the borrower missing payments. The credit standing of the issuer and other factors may also affect a convertible security’s investment value. Synthetic convertible instruments may fluctuate and perform inconsistently with an actual convertible security, and components of a synthetic convertible can expire worthless. The Fund may also be subject to foreign securities risk, equity securities risk, credit risk, high yield risk, portfolio selection risk and liquidity risk.
Foreign security risk (all funds excluding Calamos Hedged Equity Fund, Calamos Total Return Bond Fund, and Calamos Growth and Income Fund): 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.