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Using Convertibles to Manage Technology Risk

Investors gravitate to growth stocks for their potential to produce substantial returns that can exceed 100%.

And yet, the first concern, according to Calamos Senior Vice President and Co-Portfolio Manager Joseph Wysocki, centers on volatility. “Investors say they can’t invest knowing they could lose one-third of their money overnight,” he says.

There’s also the price to play. Growth can be expensive, he acknowledges—“I have yet to see a truly cheap growth stock. They’re expensive for a reason.”

All of which is a prelude to how Wysocki likes to illustrate the benefit of using convertible bonds to manage the risk of investing in technology, as an example.

4 Real-Life Examples

Below are snapshots showing the daily price of four technology companies. All represent exposure to what Calamos considers an attractive, fast-growing market theme. Wysocki cites these as real-life recent examples of the sharp corrections that can occur over relatively short periods of time—one month to 18 months. Miss on earnings, and a stock can “blow up.”

high growth stocks have been subject to sharp corrections

Now let’s look at the prices of the convertible bonds of three of four of these companies over the same time period. As you can see, convertibles lost about 10 cents on the dollar.

convertible securities offered a way  to manage risk

These are examples of downside protection afforded by convertibles, while still providing exposure to growth.

As far as the convertible on the fourth example, Wysocki offers it as an object lesson. High delta equity-sensitive converts can be expected to perform in line with the underlying equity—when the bottom falls out of the stock, the same can happen to the convert. That’s what occurred with this company earlier in the year.

what can happen

More broadly, Wysocki says, this illustrates the risk investors run with “closet equity funds” masquerading as convertible funds. The investment portfolio that includes a convertible allocation needs to be able to count on convertibles limiting the downside. The Calamos team’s goal is to capture as much as possible of the equity upside while maintaining the discipline that financial advisors expect.

Investing in today’s innovators that can turn into tomorrow’s market leaders can be very rewarding. Convertibles, when managed appropriately, can be a powerful tool to provide upside participation while protecting against what is also understood to be a very real downside risk.

Advisors, for more information about Calamos’ pioneering 40 years of experience investing in convertibles and our convertible-using funds, talk to a Calamos Investment Consultant at 888-571-2567 or [email protected].

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.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. The opinions and views of third parties do not represent the opinions or views of Calamos Investments LLC. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. 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.

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 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.

©2018 Calamos Investments LLC. All Rights Reserved. Calamos® and Calamos Investments® are registered trademarks of Calamos Investments LLC.

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