Jon Vacko, CFA, and Joe Wysocki, CFA
Summary Points:
Equity markets continued their upward trajectory in the third quarter, overcoming a sharp pullback in August to finish near record highs again. US economic data continues to normalize, with growth remaining resilient and inflation trending lower. Additionally, the Federal Reserve lowered interest rates for the first time this cycle, sending a strong message to the market with a 50 basis points cut.
We are pleased to see these developments and are optimistic they can sustain the positive trajectory for risk assets. However, we also believe it is prudent for investors to anticipate continued short-term volatility, as evidenced by the recent spike in the Cboe Volatility Index (VIX) to levels that are typically only seen during extreme market stress. Markets will closely scrutinize each incoming data point and quickly adjust to the latest economic indicators. Moreover, we are only a few weeks away from a contentious US presidential election that will have far-reaching implications for many areas of the economy.
Given this backdrop, we believe the strategic case for convertibles remains strong. Within the Calamos Convertible Fund (CICVX), we emphasize convertibles that offer attractive structural risk/reward characteristics that can provide the potential for upside equity participation with downside risk mitigation.
Historically, lower interest rates have been a tailwind for small and mid-cap companies, which are well-represented in the convertible universe. We are positioning the fund to benefit from a potential broadening of equity market leadership beyond mega-cap names, which could be particularly beneficial for these convertible issuers. At the same time, we have also increased our allocation to higher-credit-quality convertibles.
Technology and consumer discretionary are CICVX’s largest sector allocations. We favor companies that can execute well through a variety of market environments, with improving margins and free cash flow, accelerating returns on invested capital, and growing their intrinsic value. We also see opportunities tied to cyclical and secular themes that can serve as tailwinds to individual corporate performance. These include companies advantageously positioned as businesses seek solutions to higher labor, manufacturing, and interest costs in the current economic environment. We are also investing in companies exposed to artificial intelligence, productivity enhancements, and cybersecurity trends, where we see opportunities in existing convertibles and expect more to come.
Convertible new issuance remains robust, with year-to-date global volumes of $82 already surpassing last year’s total, even with three months remaining in 2024. We are encouraged by the more favorable terms compared to prior years, including higher coupons, lower conversion premiums, and a greater proportion of investment-grade credits entering the market. (See “Convertible Market Trends: Looking Under the Hood” for more information on the convertible market.)
As a significant amount of debt matures across all bond markets in coming years, and with the potential of a prolonged higher interest rate environment compared to prior cycles, convertibles present a compelling cost-saving advantage for a broad set of companies. Additionally, convertibles have historically provided essential growth capital for leading small- and mid-cap companies throughout the business cycle. Although there may be a seasonal slowdown in the fourth quarter as companies seek clarity on the US fiscal situation, we believe these factors will contribute to strong issuance trends into next year and beyond.
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 1-866-363-9219. 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.
The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options
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.
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 the potential for greater economic and political instability in less developed countries.
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