Taking Some Chips Off the Table Paid Off in 3Q

Eli Pars, CFA

Summary Points:

• After double-digit gains in the second quarter, the global convertible market gave back some ground, with the FTSE Global Convertible Index returning -4.6%.
• Calamos Global Convertible Fund (CXGCX) was much more resilient than the market during the quarter, returning -1.3%; performance benefited from our ongoing rebalancing away from the most equity-sensitive names.
• Convertible issuance stayed strong over the quarter; year-to-date issuance pushed past the $200 billion mark—a new record for a calendar year with three months left to go.

As we noted in our last commentary, the global convertible market shot the lights out during the second quarter, delivering in three months what we’d be happy to see in a year. But those sorts of quarters are few and far between—and it’s important to know when to leave the party.

Many times over the years, we’ve written about how convertibles don’t typically outperform equities. A lot of investors have avoided that truth this year and gotten caught up in the excitement of the high-flying AI companies coming to the convertible market.

What convertibles bring to the table is the opportunity for upside participation with a level of downside mitigation when equity markets fall. But getting those benefits requires active management. Convertibles vary in their levels of equity sensitivity, and, as we’ve discussed in the past, the greater the equity sensitivity, the greater the convertible’s exposure to the upside and downside of its underlying equity.

In our approach, we focus on convertibles that offer attractive risk-reward skew—we want to capture positive equity moves, but not to the extent that we give up all the downside cushion. During the quarter, Calamos Global Convertible Fund proved far more resilient than the global convertible market because our rebalancing paid off. While we weren’t able to completely sidestep the damage (especially in July), we believe that we avoided the worst of it. We actively sold off high-delta names that were trading close to their equities and replaced them with new issues that offered a better risk-reward skew. 

Global Convertible Issuance: Breaking Records

During the third quarter, global convertible new issuance topped $66 billion. Issuance fell short of the second quarter’s nearly $84 billion, but it was nothing to sneeze at and more than enough to push global calendar-year issuance past the $200 billion mark, a new record. We’re optimistic that healthy issuance will continue, especially given the rise in interest rates, which provides an incentive for companies to issue attractively structured convertibles instead of non-convertible bonds. (In exchange for upside equity participation, investors will typically accept lower coupons.) How the anticipated IPOs of Anthropic and OpenAI play out is a bit of a wildcard—if they perform well, that should bolster sentiment around AI and AI convertibles more broadly. And, on the other hand, if they don’t perform well, that’s a good reason to own AI converts versus AI equities. 

New Heights: Year-to-date issuance tops $200 billion

Source: BofA Global Research. Year to date through 9/30/2026.

We’ll keep doing what we’ve been doing

We’re sticking to our selective approach, staying mindful of position size and equity sensitivity. Although there’s been a lot going on under the hood due to our rebalancing, our largest sector and regional allocations are quite similar to where they were at the start of the quarter. Information technology issues make up roughly one-third of the portfolio, followed by consumer discretionary, with industrials, health care and communication services rounding out the top five sectors. Regionally, US issues make up about two-thirds of the fund, followed by Emerging Asia at a bit over one-sixth.

From a macro standpoint, there’s a lot of cloudiness on the horizon. US midterms are approaching fast, and there’s no shortage of geopolitical turmoil, but the US equity market is just a bit off all-time highs. The P/Es of large-cap firms aren’t unreasonable, but there’s still fuzziness in the “E.” Add to that a Fed raising rates—likely in part to slow down the equity market—and it’s hard to predict what the events will be, much less the outcomes of those events. Periods like this can last for a long time, which makes the case for using convertibles for lower-volatility equity participation.