Finding Convertible Opportunities Amid Volatility

Jon Vacko, CFA, and Joe Wysocki, CFA

Key Points:

• Markets often over-emphasize the negative headlines and overlook the positives; the potential positives we see on the horizon include tailwinds from lower taxes and easing regulations.
• We believe many convertible issuers are positioned for growth as greater macroeconomic and policy clarity emerges.
• Calamos Convertible Fund continues to emphasize companies positioned to benefit from resilient secular and cyclical growth themes.
• Our focus remains on convertibles with favorable risk-reward asymmetry—that is, attractive levels of upside equity participation and downside risk mitigation.

In the first quarter of 2025, markets entered a period of elevated volatility driven by uncertainties surrounding tariffs, immigration, inflation, and fiscal policies. The potential impact of swift policy changes on the economy and broader equity markets heightened concerns and created a challenging investment landscape, with risk assets underperforming.

As the market balances evolving policy dynamics, uncertainty could continue and, if prolonged, lead to more cautious behavior from consumers and businesses. However, experience also tells us that the market can disproportionally focus on the latest negative headlines and miss the longer-term positives. In the current environment, we believe the potential positives include tailwinds from lower taxes, easing regulation, a more efficient government, increased domestic investment and onshoring, fairer trade, and greater stability in Eastern Europe.

We also have long believed that for investors who look beyond the very short term, the flipside of volatility is opportunity. Corporations remain well-capitalized, and while there will be winners and losers, many companies are advantageously positioned for growth as macro clarity emerges. Further, if needed, monetary policy provides flexibility to adapt and support evolving macroeconomic conditions.

Despite broader market uncertainty, the convertible new issue market has proven resilient with $22.8 billion issued globally through the first quarter. We expect convertible issuance to remain robust as companies seek to manage their cost of capital in a higher interest rate environment while positioning themselves for emerging growth opportunities. (In exchange for their conversion feature, convertible bonds offer modestly lower coupons than comparable traditional debt.)

Calamos Convertible Fund (CICVX) is strategically focused on capitalizing on opportunities arising from market volatility across well-established and emerging growth trends in both the new issue and secondary market. Our approach continues to emphasize bottom-up company selection and securities with attractive structural risk-reward characteristics that offer potential upside equity participation while maintaining downside risk-mitigation features. We believe our strategy of focusing on asymmetric payoff profiles is particularly well-suited for the current environment.

The fund’s largest allocations remain in the technology and consumer discretionary sectors. Within these sectors, we favor companies that can perform well in a variety of market conditions, with strong execution capabilities, improving margins and free cash flow, and accelerating returns on invested capital—all while growing their intrinsic value.

The fund maintains exposure to cyclical growth themes, including companies offering solutions to ongoing business challenges such as higher labor, manufacturing, and interest costs. Further, we continue to focus on long-term secular themes that remain relevant despite market uncertainties, such as artificial intelligence, productivity enhancements, and cybersecurity. This approach has historically enhanced our ability to navigate turbulent market conditions.

We believe the convertible market’s hybrid nature—combining equity-like upside potential with fixed-income risk mitigation characteristics—favorably positions it to navigate various policy outcomes. However, we believe active management remains essential because each convertible security offers unique risk-reward characteristics that can change over time. With our team’s selective approach and long-term view, we see solid potential for convertibles to deliver attractive risk-adjusted returns while providing important portfolio diversification benefits as we move through 2025.