Calamos Market Neutral Income Fund: Reflections on 30 Years of Innovation

For 30 years, Calamos Market Neutral Income Fund has provided investors with an innovative approach that seeks to provide steady performance over market cycles, while serving as an alternative to traditional fixed income allocations. For perspective on this milestone, we sat down with John P. Calamos, Sr., who launched the fund in 1990, and Eli Pars, CFA, who leads the fund’s investment management team today.

Q. John, what does this milestone mean for you?

John Calamos: I’m deeply appreciative that so many investors and investment professionals have chosen Calamos Market Neutral Income Fund throughout the years. Over its 30-year history, the fund has invested through many different interest rate environments, economic cycles, bull and bear markets, market shocks and extended periods of uncertainty and volatility. To have provided investors with a fund that has stood the test of time the way Calamos Market Neutral Income Fund has—one that has provided generations of investors with asset allocation benefits—well, it means a great deal to me.

Q. Eli, what about you?

Eli Pars: We’re very thankful to have such a loyal investor base. We think that’s a result of the fund having historically done what it says it will. Calamos Market Neutral Income Fund isn’t a sports car—but we like to think of it as a car that always starts.

John P. Calamos, Sr.

“The fund gave retail investors the opportunity to include investment strategies that otherwise were generally reserved for hedge funds and institutional investors.”

Q. When you launched the fund in 1990, did you ever expect that it would grow to more than $10 billion in assets?

John Calamos: Frankly, no. I never thought the fund would grow this large. At the time, my goal in launching the fund was to give investors access to strategies that I believed could help them achieve their financial goals.

Q. When you founded Calamos Investments in the 1970s, you were pioneering strategies that used convertible securities. How did the launch of Calamos Market Neutral Income Fund build on that?

John Calamos: When I first began my career, the potential benefits of convertible securities were not broadly recognized. For all intents and purposes, they were an alternative asset class, although of course, that pre-dated the concept of alternative mutual funds. I was very intrigued by the convertible structure and the different ways convertibles could be actively managed to enhance the risk/reward profiles of my clients’ portfolios.

Calamos Market Neutral Income Fund was built on this expertise in convertible securities and options. The fund gave retail investors the opportunity to include investment strategies that otherwise were generally reserved for hedge funds and institutional investors.

Q. In a sense, the fund challenged the status quo, didn’t it?

John Calamos: Yes, it was one of the first liquid alternative funds. Now, alternative investments are very popular and there’s a much wider recognition of their benefits, but then, there wasn’t even a framework for having liquid alternatives in a retail investor’s asset allocation. The choices investors had back then typically didn’t go beyond U.S. stock funds, bond funds, and maybe some global funds. So, we were definitely doing something new. I’m glad it’s worked out so well!

Q. What led you to branch off in this different direction?

John Calamos: My first experience investing was when I was a teenager, when my parents’ entrusted me with our family’s nest egg. It was not a large sum by any means, but it was an important sum to our family. I think that personal background I have as an individual investor has had a big influence on the way Calamos Investments has grown through the years. From the very start, I understood the importance of seeking capital preservation and steady performance. I also saw that there were tools and approaches that the institutions and hedge funds were using that could really benefit individual investors as well. Calamos Market Neutral Income Fund is definitely a reflection of that.

Eli Pars, CFA

“John often describes managing portfolios for investors as an honor and a responsibility—we all share that view.”

Eli Pars, CFA
Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies, Senior Co-Portfolio Manager

Q. Why do you believe Calamos Market Neutral Income Fund has stood the test of time so well?

John Calamos: I believe the fund’s longevity is the result of our pursuit of steady performance over time, and our emphasis on capital preservation.

These days, Wall Street, investment bankers and institutional investors focus on relative performance versus a benchmark index. And of course that’s important, but relative performance doesn’t support you in retirement. If the index is down 20% and a fund is down 15%, the fund may have outperformed, but the investor has still lost ground. Calamos Market Neutral Income Fund is managed with a recognition that absolute returns matter.

And, I believe this will be just as important in the future. Right now, we’re in a market environment that is extremely uncertain, and Calamos Market Neutral Income Fund is designed to help investors stay in the market and avoid the temptation to make timing decisions in the face of short-term volatility.

Q. Eli, what are your thoughts on the fund’s longevity?

Eli Pars: Definitely, I’d echo what John said—the Fund’s historical consistency over time really sets it apart. Also, it offers a unique way to get bond-like returns without a lot of interest rate risk. This has become particularly attractive over the past 10-plus years, as lower interest rates have made traditional bonds both less attractive and more risky.

Another reason that Calamos Market Neutral Income Fund has been successful is our investment organization’s culture. John built our firm on the belief that team structures are the best for leveraging talent, and by extension serving investors. Teamwork also gives us stability and consistency.

While the fund’s unique strategy is one of the reasons that the fund has stood the test of time, it doesn’t matter how innovative a strategy is if we fall short in execution. Convertible arbitrage in particular is a complicated strategy. I’m very blessed to work with the people I do—our group has a lot of experience, and we’ve worked together for many years. John often describes managing portfolios for investors as an honor and a responsibility—we all share that view.

Q: If you look back at the history of the fund, is there a period that exemplifies the benefits of Calamos Market Neutral Income Fund?

Eli Pars: While there are many periods in the fund’s history I believe have been impressive, I believe the fund’s greatest accomplishment has been its historical consistency in delivering positive returns. The fund has only had three down years in its 30-year history.

Q. How has the investment environment changed over the years, specifically as it relates to the fund’s attributes?

Eli Pars: The biggest change we’ve seen is the dramatic move lower in overnight interest rates. This is a bit of a two-edged sword for us. While it makes traditional fixed income less attractive, it also lowers the absolute returns of convert arbitrage. It nets out to help us, but we do have investors that long for the days of double-digit returns in Calamos Market Neutral Income Fund.

Q. What are the potential tailwinds and headwinds that could influence the fund in the future?

Eli Pars: Calamos Market Neutral Income Fund employs two primary strategies—convertible arbitrage and hedged equity. We adjust the allocation to each based on our view of market conditions, with the goal of being prepared for as many possible outcomes as possible. This year, companies have issued $126 billion in convertibles through the end of the third quarter, with the U.S. bringing more than $88 billion to market. This wave of convertible issuance has helped cement the role of the asset class as a key part of the U.S. capital markets. This should be a nice tailwind for the asset class and for the fund.

One potential tailwind for the fund is that it seeks to derive returns by “monetizing volatility” in the equity markets, which means that elevated volatility can create a favorable backdrop for our approach. And, we are certainly in a period where we could see this elevated volatility.

Historically, the fund has demonstrated a lower correlation to traditional fixed income asset classes with similar risk/return attributes. So, we believe the fund can be a compelling choice for investors seeking a stable ballast from potential storms in the equity market.

Many investors are embracing longer duration bonds to “enhance yield,” which means that a small interest rate increase may result in a large negative bond price return. Other investors may be moving lower in credit quality to pursue yield in a Covid-19 world that may very well see increased default rates. Historically, high yield bonds have experienced a materially higher default rate than convertible securities.

The biggest potential headwind would be a return to a more normalized yield curve—for example, a 4% federal funds rate and a 6% yield on the 10-year Treasury. While this would not be a headwind for the fund itself, it would make traditional fixed income more attractive. But, this scenario seems far away.

Q. Do you have any closing thoughts for investors and investment professionals?

John Calamos: We’re looking forward to the next 30 years! While we are proud of Calamos Market Neutral Income Fund’s long-term record and its role in the alternative category, we’re not going to rest on our laurels. We’re as dedicated as ever to positioning the fund to help investors pursue steady returns over time.

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.

As of prospectus dated 2/28/20, the total expense ratio for Class I shares is 1.01%, and 1.26% for Class A shares. The Adjusted Expense Ratio, which reflects the total expense ratio excluding the dividend and interest expense on short sales, is as follows: Class A: 1.08%, Class I: 0.83%. “Dividend and Interest Expense on Short Sales” reflect interest expense and dividends paid on borrowed securities. Interest expenses result from the Fund’s use of prime brokerage arrangements to execute short sales. Dividends paid on borrowed securities are an expense of short sales. Such expenses are required to be treated as a Fund expense for accounting purposes and are not payable to Calamos Advisors LLC. Any interest expense amount or dividends paid on securities sold short will vary based on the Fund’s use of those investments as an investment strategy best suited to seek the objective of the Fund.

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 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.

Convertible Arbitrage Principal Risks: 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.

Covered Call Writing Principal Risks: 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.

Short Sale Risk: The Fund may incur a loss (without limit) as a result of a short sale if the market value of the borrowed security increases between the date of the short sale and the date the Fund replaces the security. The Fund may be unable to repurchase the borrowed security at a particular time or at an acceptable price.

Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the inception date. If fees had not been waived, performance would have been less favorable.

Indexes are unmanaged, do not include fees or expenses and are not available for direct investment. The FTSE 30-Day Treasury Bill Index is an unmanaged index generally considered representative of the performance of short-term money market instruments. U.S. Treasury Bills are backed by the full faith and credit of the U.S. government and offer a guarantee as to the repayment of principal and interest at maturity. The Bloomberg Barclays Capital U.S. Government/Credit Bond Index is composed of long-term government and investment-grade corporate debt securities and is generally considered representative of the performance of the broad U.S. bond market.

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.

Not FDIC Insured | May Lose Value | No Bank Guarantee

Calamos Financial Services LLC, Distributor
2020 Calamos Court | Naperville, IL 60563-2787
800.582.6959 | www.calamos.com | caminfo@calamos.com
© 2020 Calamos Investments LLC. All Rights Reserved.

Calamos® and Calamos Investments® are registered trademarks of Calamos Investments LLC.

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