Watch: How Active Management Makes a Difference When Investing in Convertibles
April 15, 2019
Convertible bonds have been the top performing fixed income asset class for five of the last 10 years and second to the top for two years (see our interactive asset class quilt). But not all financial advisors are familiar with using convertibles to manage risk in portfolios.
In this video Q&A series, Joe Wysocki, CFA, Senior Vice President, Co-Portfolio Manager of Calamos Convertible Fund (CICVX), answers a range of questions that are frequently asked. CICVX was named among the top bond funds for 2019 by Investor’s Business Daily.
What’s happening in the convertible market today?
Below, Wysocki provides an overview of the convertible marketplace, with particular emphasis on how strong new issuance of convertibles is contributing to “a market that is full of balanced convertibles with plenty of opportunities to give us the asymmetric risk/reward profile that we think is the sweet spot of convertible investing.”
What kinds of companies issue convertible securities?
Below, Wysocki looks at why convertibles often make sense for smaller, mid-cap companies with an established growth niche, and also for a certain type of growth company seeking capital for future growth, such as software/technology firms.
These companies may have a proven business model, but in terms of hard assets they don’t fit the mold that a traditional loan officer or rating agency would expect. That may explain in part why they’ll turn to convertibles to help finance growth.
What explains the predominance of below-investment grade securities in the convertible market?
A convertible issuer’s below-investment grade rating—or no rating at all—is not the negative signal that an uninformed investor might expect, Wysocki explains below. In fact, he says, issuers justifiably bypass the credit rating process to save time and money. With their experience in assessing the risk of both the fixed income and equity characteristics of convertibles, Calamos’ analysts have proven expertise in identifying opportunities without needing to rely on third-party ratings, Wysocki says.
Why have convertibles proven to be an effective way to invest in technology?
Wysocki observes below that technology companies are typically growth companies, often with healthy valuations. When the expected growth materializes, it’s not uncommon to see significant returns on the equity.
Of course, if growth does not materialize or if sharp equity corrections occur, a stock investor may see a significant capital loss. An investor in a tech company’s convertible, however, may be shielded from much of the downside (see four real-life examples in Using Convertibles to Manage Technology Risk).
What do convertibles contribute to an overall portfolio?
Wysocki points out below that convertibles have historically produced positive total returns during rising rate environments that traditional fixed income has struggled with. “Convertibles have historically proven to have equity market-like returns—or better—through full market cycles, with lower volatility.”
Why is active management critical when investing in convertible securities?
In a strong equity market, some convertibles can have a high degree of participation, but can also “leave one exposed to significant downside risks that you may not have with a balanced convertible.” In the video below, Wysocki explains how active management helps “create a portfolio that has the optimal risk/reward throughout the full market cycles.”
To learn more about how convertible securities can fit into a client’s portfolio, talk to your Calamos Investment Consultant at 888-571-2567 or [email protected].
Calamos is the fourth largest alternatives manager by assets under management (Morningstar data, 3/31/19) and #1 in alternative flows for 2018 (Morningstar data, 12/31/18).
Videos recorded 03/21/19.
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. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
Active management does not guarantee investment returns or eliminate the risk of loss. It should not be assumed that any securities mentioned in this recording will be profitable or experience equal performance in the future.
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