Even When the Macro is Murky, Global Convertibles Offer Clear Opportunities

Eli Pars, CFA

Summary Points:

• Calamos Global Convertible Fund advanced in line with the FTSE Global Convertibles Index during the quarter and leads for the year-to-date and one-year periods.
• Election and geopolitical unknowns set the stage for continued short-term turbulence in equity markets; global convertibles can remain an attractive choice for participating in the upside while mitigating risk to the downside.
• Bottom-up security selection drives portfolio positioning; sector and country weights are the end results, not starting points.
• While we would not describe our positioning as defensive, we are highly intentional with the risks we are taking.

Calamos Global Convertible Fund: YTD, 1-Year Outperformance versus Global Convertible Market

Source: Morningstar.
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 2.25%. Had it been included, the Fund’s return would have been lower. All performance shown assumes reinvestment of dividends and capital gains distributions. As of the prospectus dated 3/1/2024, CXGCX’s gross expense ratio is 1.09%.

Political uncertainty remains high and goes beyond who will win the US presidential election. Even if we had a crystal ball to see that election outcome, how the market would respond would still be anyone’s guess. In the short term, we may well see a relief pop in the equity market if there is a clear winner, no matter who it is. But even with a decisive outcome, fiscal policy uncertainty isn’t going away anytime soon.

Over recent years, “never before seen” has become the norm on the political side, and there’s every reason to expect it to continue. That makes it hard to quantify the risks. We believe the best approach is to be especially deliberate in our positioning. We would not describe our stance as defensive, but we are committed to avoiding unwanted risk. For example, convertibles vary in equity and fixed-income sensitivity levels, and we are staying in the middle ground. Our emphasis on balanced convertibles provides us with the opportunity to participate in a healthy degree of equity market upside with the goal of shielding us from the worst of the downside, should markets tumble.

Through the third quarter, global convertible issuance has remained healthy, although it has settled into a more measured pace as the year has progressed. During the third quarter, companies issued $22 billion in convertibles, bringing year-to-date issuance to $82 billion, led by the US at $52 billion. These totals compare with $61 billion and $41 billion, respectively, at this same point last year.

We continue to see plenty of issues coming to market with attractive risk/reward characteristics. (For more, see “Convertible Market Trends: Looking Under the Hood.”) From a regional standpoint, Asia ex-Japan issuance has been strong this year, especially in the first quarter. We’ve seen billion-dollar-plus deals with favorable terms, and we’ve been happy to participate. In contrast, issuance coming out of European companies has been sluggish.

Global Convertible Issuance Continues to Provide an Ample Hunting Ground

Source: ICE BofA Global Research. Data as of September 30, 2024.

Even with the Fed moving to cut rates, there’s still an incentive for companies to issue convertibles to lower borrowing costs, and we expect many companies will refinance maturing convertible paper with new issues. If the equity market sees a relief rally after the US election, that could also drive a wave of new convertible issuance.

As at the start of the quarter, the fund’s largest allocations at quarter-end were to companies in the consumer discretionary sector, followed by information technology. Our consumer discretionary allocation is significantly higher than the FTSE Global Convertible Index. Meanwhile, our largest country allocations are to the United States, followed by China. The fund is modestly underweight to the United States and overweight to China, with several tech-oriented and consumer-facing Chinese companies among our largest positions. On the face of it, this may prompt some to think we are bulled-up on China and Chinese consumer plays, but our positioning reflects bottom-up considerations and the structures of individual issuers. In other words, we’re bullish on the names we hold rather than making a bullish call on China.