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.
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.”
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.
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.
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).
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.”
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 caminfo@calamos.com.
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).
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.
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.
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.
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: 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 consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, equity securities risk, interest rate 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 potential for greater economic and political instability in less developed countries.
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Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end performance information, please CLICK HERE. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was 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.
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. 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.
Archived material may contain dated performance, risk and other information. Current performance may be lower or higher than the performance quoted in the archived material. For the most recent month-end fund performance information visit www.calamos.com. Archived material may contain dated opinions and estimates based on our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions at the time of publishing. We believed the information provided here was 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.
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. Had it been included, the Fund’s return would have been lower.
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