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The Unprecedented Challenges We Face Today Call for Long-term Perspective

John P. Calamos, Sr.

Key Points:

  • The global economic and market environment will remain challenging, but panicked selling and market timing are not the answer.
  • The economy and markets have withstood many unprecedented crises, including capital market meltdowns, wars, terrorism, and natural disasters.
  • Markets are forward-looking, which means we may see a turn before the coronavirus outbreak is fully contained.
  • Since our founding more than 40 years ago, risk management has been part of the Calamos DNA; our teams are focused on preserving capital, while also positioning our strategies to take advantage of the positive inflection points that we believe will eventually come.
  • We are already seeing compelling pockets of opportunity emerge as prices decline beyond what we believe fundamentals warrant.
  • From an asset allocation standpoint, risk-managed liquid alternatives are compelling choices for investors who wish to de-risk.
  • Convertible securities offer attractive prospects for the long-term investor, with the potential for a “Convertible Trifecta” when markets stabilize.

In these difficult times, long-term perspective is your ally

We are truly in the midst of extraordinary times. I’ve been in the investment industry for 50 years, and before that I was proud to serve in the military as a combat pilot during the Vietnam War, but this is a new frontier. However, what I’ve learned from my experiences—as an investor, a businessman, and in the service of my country—is that with discipline, determination, and long-term perspective, we can navigate unprecedented challenges.

I know that many of our clients are tremendously worried about what is going on in the world and the markets. There is no quick fix for the challenges that we are facing. In addition to coronavirus, markets will also be grappling with rising election uncertainty, which may increase anxiety about the longer-term direction of fiscal policy.

But now more than ever, I encourage you to focus on the long term. There will be more bad days in the market from here, but this is not the time to panic and liquidate positions. It’s impossible to time the market, and at this point, investors are far too likely to get whipsawed—catching the downside and missing the upside. In the midst of the recent selloff, there have been up days, as well. 

Historically, markets have been forward-looking, anticipating and projecting ahead of actual turns. I believe that the markets may reach an inflection point well before the COVID outbreak is fully contained.

Volatility Creates Opportunity for Active, Risk Managed Approaches

Our investment committee and portfolio managers are working diligently to manage the assets that our clients have entrusted us with. We are focused on preserving capital, while also positioning our strategies to take advantage of the inflection point that we believe will come, even if we cannot predict exactly when it will occur. In many areas of the market, we are seeing compelling prospects emerge as prices decline beyond what we believe fundamentals warrant.

Liquid Alternatives: A Choice for Investors Seeking to De-risk

I have always said there are opportunities in all markets, and that the flipside of volatility is opportunity. Even in this challenging period, I still believe this to be true. One area of the market where we see opportunities is in risk-managed alternative strategies, such as our Calamos Market Neutral Income Fund (CMNIX) and Calamos Hedged Equity Fund (CIHEX). To learn about how these funds have performed through volatility, visit our Alternatives section.

The Convertible Trifecta

We also believe that actively managed convertible securities are extremely compelling in this volatile environment. Three conditions are in place that could support what we call the “Convertible Trifecta,” a concept we introduced in 2016. The factors that set the stage for the Trifecta are (1) widening spreads, (2) declining underlying equity prices, and (3) cheapening convertible valuations. As we observed in 2016, “because of its stock and bond characteristics, a convertible’s valuation can be influenced by forces in both the credit and equity markets, as well as by dynamics that are specific to the convertible market.” As a result, “a reversal in any one of these factors could provide a tailwind to convertibles, and if all three reverse, convertibles may be poised for a potentially powerful trifecta.”

We are seeing these conditions today, and while the past cannot predict the future, history can provide a lens for evaluating potential opportunities, given our view that conditions will ultimately stabilize.

  1. High yield spreads are historically wide; convertibles can benefit from an eventual tightening. High yield bond market conditions have historically been useful in evaluating the convertible market, since most convertibles are unrated or carry below investment grade credit ratings. According to Barclays, the average high-yield credit spread has widened to 928 basis points over comparable U.S. Treasury bonds. Looking back over the past 20 years, spreads have exceeded 800 basis points just four times. On each of these occasions, the forward one-year return for the high yield asset class was positive.1
  2. Underlying equity prices of convertibles have fallen tremendously.Smaller-cap and growth-oriented names are well represented among convertible issuers. The common stocks underlying the U.S. convertible market have fallen 42% on average from the market peak in February through March 18, versus -29% for the S&P 500 Index and -37% for the Russell 2500 Growth Index. As liquidity conditions and market sentiment stabilize, we believe investors will return to oversold names, including many of the equities underlying convertibles. These improvements would make the embedded option of the convertible more valuable.
  3. Convertible valuations have cheapened meaningfully. The U.S. convertible market is currently 3.35% cheap while the global market is currently 2.29% cheap.2 With the U.S. fair value range being roughly +1.5% rich to 2.5% cheap, 3.35% is significant, in our view.

Conclusion

Since I founded Calamos Investments in the difficult financial markets of the 1970s, we have been dedicated to providing risk-managed investment solutions, including strategies that seek lower volatility equity participation. We believe our risk management DNA will give us a real advantage in navigating this environment. We look forward to providing you with continued insights about what we are seeing in the market in our blog, and how we are positioning portfolios to balance the near-term risks and long-term opportunities. Financial advisors can also access replays of our conference call series for additional thoughts from our portfolio management teams.

On behalf of all of us at Calamos, we thank you for your trust.

Past performance is no guarantee of future results.

1Source: Morningstar, 20 years ending March 18. One-year period following the first day of the month following spreads crossing the 800 basis point mark. High yield bonds are represented by the Bloomberg Barclays U.S. Corporate High Yield Index.

2Source: Bank of America

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.

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.

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.

The S&P 500 Index is a measure of the performance of the U.S. stock market. The Russell 2500 Growth Index measures the performance of the small to mid-cap growth segment of the U.S. equity universe. The Bloomberg Barclays U.S. Corporate High Yield Index measures the USD denominated, high yield, fixed rate corporate bond market. Indexes are unmanaged, do not include fees and expenses and are not available for direct investment.

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