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There’s an Alternative to Cash: Market Neutral
September 12, 2017First published: October 27, 2016
Many investors believe that the overall success of their portfolios depends upon the forward motion of equity and fixed income markets. But when there’s volatility
in the markets or even uncertainty? The default move has been to escape to cash.
Figure 1 shows how retail investors allocated their investment portfolios as of year-end 2016.
Allocations of as much as 15% of assets reflect investors’ discomfort with the stock market, in particular. However, to allocate such a high percentage of a portfolio
earmarked for long term plans such as home purchases, college or retirement planning to cash is not in investors’ best interests.
Cash has no potential to grow over time. In fact, the investor who goes to cash on the belief that he or she is reducing the risk of portfolio loss is mistaken. The longer
cash is held in a portfolio, the more it loses value. Figure 2 shows the inflation-adjusted value of cash since the start of 2009.
Instead of helping grow assets, cash in a portfolio becomes a drag on it.
In this example, the holder of cash would have suffered a $1,322 in value in the period shown.
To be sure, some clients belong in cash. They can be content knowing that their risk is limited to loss of purchasing power (inflation). There’s a reason for them to be in cash as opposed to investments that are subject to an array of risks, including inflation (see below for an expansion on the risks relevant to this investment idea).
Hedging Equities to Produce Total Return
Investing is not an either/or decision: the investor has more options than to be invested in fixed income or long equities or not to be invested. Options include alternative
investments that enable the investor to continue to be exposed to the growth potential of the markets—although with some protection in place designed to minimize the effect of sudden downturns.
One alternative is to rely on the hedging of equities in an attempt to produce absolute, total return over varying market cycles—market neutral in other words.
The Calamos Market Neutral Income Fund (CMNIX)
uses strategies including covered call writing and convertible arbitrage that seek to capitalize on market volatility and produce steady returns—potentially providing both
return and stability to a portfolio in a way that an allocation to cash does not.
Over 10 years, CMNIX has provided consistent positive returns, with only two rolling three-year periods in negative territory.
Since its inception in 1990, the fund has provided protection against the downside, helping investors feel more comfortable about staying in the market.
Figure 4 compares the performance of the fund vs. the Standard & Poor’s 500 during periods of high and low volatility.
Advisors, there's an alternative for your clients who cling to high cash balances. Instead of losing 13.22% with cash since 2009 an investor in Calamos Market Neutral Income Fund would have enjoyed a 5.32% return.
Please see the fund profiles for more information or talk to your Calamos Investment Consultant at 888-571-2567 or [email protected].
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. 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. For the most recent month-end fund performance information visit www.calamos.com.
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 or call 1-800-582-6959. Read it carefully before investing.
Alternative investments may not be suitable for all investors, and the risks of alternative investments vary based on the underlying strategies used. Many alternative investments are highly illiquid, meaning that you may not be able to sell your investment when you wish to.
Some of the risks associated with investing in alternatives may include hedging risk – hedging activities can reduce investment performance through added costs; derivative risk- derivatives may experience greater price volatility than the underlying securities; short sale risk - investments may incur a loss without limit as a result of a short sale if the market value of the security increases; interest rate risk – loss of value for income securities as interest rates rise; credit risk – risk of the borrower to miss payments; liquidity risk – low trading volume may lead to increased volatility in certain securities; non-US government obligation risk – non-US government obligations may be subject to increased credit risk; portfolio selection risk – investment managers may select securities that fare worse than the overall market. Alternative investments may not be suitable for all investors.
+ Morningstar ratings shown are for load-waived shares that do not include any front-end sales load. Not all investors have access to or may invest in the load-waived share class shown. Other share classes with front-end or back-end sales charges may have different ratings than the ratings shown. Additionally, some A-share mutual funds for which Morningstar calculates a load-waived A-share star rating may not waive their front-end sales load. There can be no assurance that the Fund(s) will achieve its investment objective.
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.
Covered Call Writing: As the writer of a covered call option on a security, the fund foregoes, during the option’s life, the opportunity to profit from increases in the market value of the security, covering the call option above the sum of the premium and the exercise price of the call.
Convertible Securities Risk: The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also, may have an effect on the convertible security’s investment value.
Convertible Hedging 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.
Convertible Securities Risk: The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value.
The principal risks of investing in the 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.
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 potential for greater economic and political instability in less developed countries.
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.
Citigroup 30-Day T-Bill Index is generally considered representative of the performance of short-term money market instruments. Morningstar Market Neutral Category represent funds that attempt to eliminate the risks of the market by holding 50% of assets in long positions in stocks and 50% of assets in short positions.
Bloomberg Barclays U.S. Government/Credit Index comprises long-term government and investment grade corporate debt securities and is generally considered representative of the performance of the broad U.S. bond market. Unlike convertible bonds, U.S. Treasury bills are backed by the full faith and credit of the U.S. government and offer a guarantee as to the timely repayment of principal and interest.
Morningstar Market Neutral Category represent funds that attempt to eliminate the risks of the market by holding 50% of assets in long positions in stocks and 50% of assets in short positions.
S&P 500 Index is generally considered representative of the U.S. stock market.
Beta is a historic measure of a fund’s relative volatility, which is one of the measures of risk; a beta of 0.5 reflects 1/2 the market’s volatility as represented by the Fund’s primary benchmark, while a beta of 2.0 reflects twice the volatility.