Sat, 9 Mar 2013
Despite their complexities, investing in convertible securities and market-neutral strategies makes sense amid heightened volatility and uncertainty, says Calamos Investments' John Calamos.
Josh Charney: Hi, my name is Josh Charney, and I am a fund analyst here at Morningstar. Joining with me today, I have John Calamos, global co-CIO and CEO of Calamos Investments.
Thank you for joining with us today, John.
John Calamos: It's a pleasure to be here, Josh.
Charney: So, John, can you tell us exactly what is a convertible security?
Calamos: Well, a convertible security is very complex. Investors confuse it a lot because it is a fixed-income security with options. At one point, it's fixed income, at the other point, it's equity. So, it's very confusing from that point of view. It's really an equity-linked type of security.
Charney: For convertibles as an asset class, what should investors be made aware of?
Calamos: Well, convertibles really became an asset class really coming out of the 1970s, [when there was] a very volatile market. The bond market cratered. Convertibles were the best-performing asset class in 1970s. It led a lot of interest in convertible investing in volatile markets. So, we think it's still a very viable asset class, especially with the volatility that we've been seeing in the markets.
Charney: What are the different of offerings that Calamos offers investors to access this asset class?
Calamos: Again, it's a complex security. So, the important fact about convertibles when people look at it, it's not the convertible securities that make a strategy work, it's how you use to achieve a specific investment objective. So, convertible securities can be a low-volatility equity strategy. There we're looking specifically for convertibles that have those attributes. It can also enhance fixed income sort of like high yield. So, we use what they call "busted converts" in that strategy, and we also blend convertibles with equities to create other low-volatility equity strategies both in the U.S. markets and global.
Charney: Calamos also employs convertible arbitrage in some of its funds. Can you elaborate on exactly what is convertible arbitrage?
Calamos: Again, it's how we use the convertible there. With convertible arbitrage, you're long the convertible security, and to hedge away the equity risk, you short the stock in various amounts there. And that gives you a much more market-neutral type of strategy. That's a strategy that we actually started in our fund back in 1990, and I had been doing convertible arbitrage in the 1970s and 1980s. It's as very good strategy.
Charney: You mentioned the Calamos Market Neutral Income fund. Can you elaborate exactly what is it that fund does?
Calamos: Yes. What we're doing is we're doing convertible arbitrage. It started as a convertible-arbitrage fund, but we're always looking at ways to enhance it. So, we did add a covered call in this strategy some years ago. We're now going to add a sleeve of long-short in there, as well. We think those three strategies will continue to add value. So, what we've really done is really adapt to a changing market environment. Convertible arbitrage, one of the key attributes there is it can derive income. In a very low-interest environment, the income flow is no longer there in convertible arbitrage, so we've had to adapt to other strategies to secure our returns.
Charney: Most funds in this space are equity-related funds. Is there an advantage of using convertible securities in a market-neutral fund?
Calamos: Well, a convertible is an equity-linked security. We like if we can control the risk much better in our view utilizing convertibles as an equity-linked security, not just equities by themselves. But we do use equities. We do covered call. So we will utilize some of those.
Charney: John, what do you see on the horizon in terms of market-neutral funds as a strategy?
Calamos: Well, I think with the uncertainties in the market for many investors, as we all know, the one certainty is volatility and uncertainty. And market-neutral strategies as part of an investors' asset allocation we think makes a lot of sense. It's kind of a quasi between enhanced fixed income and low-volatility equity. It doesn't have the interest-rate risk that bond investors have. So, we think as long as these markets are going to have the kind of uncertainty and the volatility, having an asset allocation be in alternative investments makes a lot of sense to us.
Charney: Well, John, thank you for joining us, today.
Calamos: Josh, it's been a pleasure. Thank you very much.
Charney: Thank you for tuning in.