Jason Stipp: I'm Jason Stipp for Morningstar.
The markets have generally continued their good cheer into 2011, but there are some worry signs out there that are concerning investors.
John Calamos, he is the CEO and Co-CIO and Calamos Investments, sees some risk out there, but he is also seeing opportunity. He's here to talk about that with us today.
Thanks for joining me, John.
John P. Calamos Sr.: Nice to be here, Jason.
Stipp: So, I just wanted to talk about some of the yellow flags or some of the worry signs that are out there today among investors, and I think one that's been talked about for a while is inflation. For a long time it seemed that folks were agreeing that inflation was a problem in the long term, but deflation might be the bigger issue today.
However, in the last few weeks, we have seen some signs of inflation among commodities at the gas pump, for example. Is inflation a more immediate risk today than maybe it had been earlier?
Calamos: Well, I'll discuss that. One point I have to make because you've talked about people worrying about the market. We have to remember that every good market climbs a wall of worry, and we have plenty to worry about, so inflation is definitely one of those things that we have to worry about, and we are concerned about that.
More so, I think the concern would be among bond investors because how that inflation problem gets resolved, because of the high debt of the states and the government, that's the fear of inflation. But really the fear comes out: what happens to interest rates as they try to resolve? Will we have, as we've had in Europe, will we have a sovereign debt crisis, which could have an interest rate rise?
One of the fears and one of the mistaken notions I think investors have is somehow, they will be able to get in front of that. But just like when the tech bubble blew up, a lot of people were predicting that for three or four years, and when it happened, it surprised everyone. And we're fearful of the same thing happening here, because if something happens, we could see 300-400 basis point increase in interest rates, in two to three weeks.
Stipp: So it can be a rapid when it comes.
Calamos: It could be rapid. Everybody has talked about it; we've talked about it. And when it occurs, everybody is going to be surprised and shocked. So, obviously, as investors, our job is to get in front of the event, not behind the event.
So, for example, what does that mean for bond investors in our bond portfolios? Very short duration. You don't get paid anything for the extra risk of trying to get a little bit more income. So we're very short duration-oriented in the bond portfolios.
If it occurs, if inflation comes back, like the Fed hopes, and really, that's what QE2 is all about is, "OK, how do we get the consumer out there spending?" They want to create inflation, and their solution is, "well, rates go up, but we can always raise rates to lower it." So, I think it bodes well for the equity markets. So, I am more fearful on the bond side.
One of the problems, there, Jason, is lot of the individual investors are fearful of the markets. So, they've gone into "safe heaven" in the bond market. It reminds a lot when I first started investing professionally in 1970s, and people look at that decade, the bond market just got cratered as inflation went up and interest rates went up. So, it's not the safe haven than people might think it's going to be.
Stipp: They tend to think bonds don't lose money; that's where park money that I won't lose. But in a rising interest rate environment, and if it's a rapidly rising interest rate environment, they may see losses.
Calamos: How do the bonds go up here? Where would interest rates have to go for bonds to go up? I mean that period in the '70s, the normal rates were 4% or 5% or 6%; everybody now would say, "Oh my God! That's a high rate." But in this environment where do they go? How do bonds go up at these levels of interest rates?
Stipp: So, a quick follow-up question for you: You said you're keeping relatively short durations as one way to get ahead of this. What about on the credit quality side? Are you finding any opportunities where you can pick up a little bit of extra yield by taking on a little bit more risk on the credit spectrum?
Calamos: Yes. One of our strategies in funds that we run is a high-yield fund. And we are seeing opportunities in high yield. The spreads have narrowed a bit there. So, we need to be careful there. It's the same notion. You don't want to, for 100 basis points or 1% or 1.5%, you don't want to go so far down the quality table that you are vulnerable. But there is still are opportunities in the high-yield market.
The way we've adjusted the high-yield portfolio, at this point, is to real be... remember high yield is below investment grade. So, we're at the higher tier of below investment grade. The BBs, the BB+s, and high yield is ... not about bond portfolios as it is about individual companies. The way we run the high yield is, we want to feel comfortable with the company and what they are doing. Bonds tend to be – all bonds are the same if they are rated the same. In high yield and below investment grade, it's all about the company.
Stipp: That fundamental research very important.
Calamos: Fundamental research.
Stipp: Important to be selective there as well.
Calamos: You need to be selective there. So, sometimes, we look like the market and sometimes we don't look like the market. This past year we don't look like the market because we are not going down. We're not reaching down for 1% or 2% more yield and then taking a lot of credit risk.