04/08/2021 | News release | Distributed by Public on 04/08/2021 15:15

Calamos Investment Team Outlooks, April 2021

Calamos Investment Team Outlooks, April 2021

Introduction from John P. Calamos, Sr., Founder, Chairman and Global Chief Investment Officer

Vaccination rollouts, positive economic data, fiscal stimulus and accommodative monetary policy gave market participants reasons for optimism during the first quarter. Stocks and convertible securities extended their advances, albeit with considerable volatility. As investors contemplated the strength of the economy, rising interest rates and inflation pressures, market leadership rotated from growth stocks to cyclical and value names. Small caps surged and oil prices soared. The yield of the 10-year U.S. Treasury bond climbed sharply, rising from 0.93% on December 31, 2020 to close the quarter at 1.74%.

Past performance is no guarantee of future results. Source: Morningstar. Data shown in USD, unless otherwise noted.

There will be many opportunities through this phase of the cycle, but security selection and active management will be absolutely essential. Market volatility is likely to remain high. We are prepared for ongoing rotation and leadership shifts as the economy accelerates and ultimately settles into a new post-pandemic normal. As I discussed in my March post, 'As Long-Term Interest Rates Rise, Here's What Investors Should Be Thinking About':

• Fiscal policy uncertainties-including the potential for tax increases and more regulation-are likely to fuel market turbulence. As always, fiscal policy will have a significant impact on the longer-term growth trajectory of the economy as a whole.
• Inflationary pressures may be unnerving to some investors but are not surprising given the combination of low base effects, economic re-opening and a release of pent-up consumer demand. It's important to remember that inflation is still trending well below the Fed's target and not soaring to the double-digit levels of past decades.
• While it's understandable that investors are worried about rising rates, what we've seen so far reflects a return to growth. Although the yield of the 10-year Treasury has risen quickly, it is still low if we look back over decades. Additionally, we believe the Fed's accommodative stance, and its attentiveness to financial conditions overall, can help prevent unchecked steepening of the yield curve.
• Value stocks have rallied strongly, but growth stocks are an asset allocation cornerstone, and thinking of growth and value as an 'either/or' proposition is a mistake.
• From an asset allocation standpoint, we believe the case is strong for maintaining broad diversification-by asset class, investment style, market capitalization, and geography. In particular, many investors may be under-allocated to small caps and emerging markets, areas that have tended to perform well during recovery periods.
• Alternative strategies can provide enhanced tools for navigating the rotational and volatile equity market we expect will continue.
• In rising rate environments, traditional bonds face added headwinds. However, actively managed convertible securities, high yield bonds and fixed income alternative strategies have been less vulnerable to rising rates and can provide compelling asset allocation benefits.

In this environment, our investment teams are relying on their time-tested approaches and long-term perspective to identify opportunities and navigate risks. Below, they share their outlooks and discuss how they are positioning the funds they manage. We'll be adding more commentaries and perspectives over coming days.

Calamos Market Neutral Income Fund (CMNIX), Calamos Hedged Equity Fund (CIHEX):
Positioning Update

Eli Pars, CFA, Co-CIO and Senior Co-Portfolio Manager

As rising interest rates put pressure on traditional bond strategies, we believe Calamos Market Neutral Income Fund (CMNIX) can provide especially compelling benefits as a fixed income alternative. The fund employs two complementary strategies-convertible arbitrage and hedged equity-to pursue absolute returns and income that is not dependent on interest rates.

The allocation to each strategy reflects our view of relative opportunities and market conditions. As of the end of the quarter, the convertible arbitrage strategy stood at 56% versus 60% as of December 31, 2020. Although the weighting of the convertible arbitrage strategy has declined modestly from levels in 2020, it is still at the high end of our historical range. This sizable allocation reflects the abundant bottom-up convertible opportunities available today. With U.S. companies bringing $40 billion in new convertibles to market during the first quarter, 2021's issuance has run ahead of 2020's torrid pace, providing a good hunting ground for our arbitrage activities.

Although we have been active in the new issue market and a number of the fund's in-the-money convertibles have been refinanced by their issuers, the weighted average delta of the convertible arbitrage strategy continues to hover at the high end of its historical range. This is due to the appreciation of many convertible positions, including Covid recovery names and several technology names.

Calamos Market Neutral Income Fund's hedged equity strategy continues to be positioned with a higher-than-typical hedge ratio. As we discussed in January, throughout most of 2020 and into 2021, implied volatility levels have been generally higher, especially relative to realized volatility. As a result, it's difficult to create skew, although we continue to look to add trades that improve the risk/reward profile. We have opportunistically kept a higher call-write percentage because of the elevated implied volatility.

While Calamos Market Neutral Income Fund is intended to serve as a fixed income alternative, Calamos Hedged Equity Fund (CIHEX) is an equity alternative designed to help investors dampen the impact of equity market volatility and drawdowns. Similar to the hedged equity sleeve of Calamos Market Neutral Income Fund, Calamos Hedged Equity Fund's hedge also continues to be at the high end of its targeted range. As we noted, the current option implied volatility environment and the strength in the equity market create added challenges in getting skew. Option implied volatility is somewhat elevated in our view, considering equities are near highs and realized volatility has been materially lower for a while, apart from some recent spurts. Looking ahead, we expect volatility will pull back to a degree as the vaccine rollout continues.

Should equity markets advance, the fund's options positioning is poised to allow upside participation while also providing an enhanced income stream from call spreads and equity dividends. Conversely, should the markets retreat, the dividend income stream and the puts used in the fund will serve to provide potential downside mitigation.

Calamos Convertible Fund (CICVX):
Abundant new issuance supports active management, rebalancing

Jon Vacko, CFA, SVP and Senior Co-Portfolio Manager

Joe Wysocki, CFA, SVP and Senior Co-Portfolio Manager

The convertible security market is off to a very active start in 2021 with $58 billion of global new issuance coming to market, $40 billion of which was from U.S. companies. This high issuance is well ahead of the typical pace for this time of year, and we're excited to see the market grow so strongly, with numerous first-time issuers. While coupons on new deals have been trending lower and conversion premiums higher versus a year ago, many issues still offer attractive structures. Although the pace of issuance may decelerate from current levels, we expect it to remain healthy as companies seek capital for growth, expansion, mergers, and innovation through increased research and development.

New balanced issues have allowed us to rebalance structural risk/reward in areas where rising underlying equities have increased the equity sensitivity of existing convertibles. In addition, we are positive on the fundamental backdrop of many of the new companies and believe the broadening out of the issuer base can help provide opportunities to actively manage our convertible portfolios for years to come.

Our team continues to expect a strong economic recovery to unfold this year as significant fiscal stimulus, accommodative monetary policy and continued progress on Covid vaccinations all combine to provide a powerful cyclical backdrop. We do see the potential for heightened volatility, however. The transition may be choppy in the short term, which could result in periods of uncertainty and market rotations, as markets experienced in the first quarter. Fiscal stimulus and monetary policy have been key to stabilizing financial markets and driving recovery, and we may see more volatility as the specific details of new fiscal policies become clearer. At some point, we may be debating the implications of an eventual withdrawal of liquidity provided by monetary policy.

Our current focus is on evaluating both the abundant opportunities that have come to market recently as well as existing convertibles with profiles that may have changed due to recent market rotations. We are seeking ways to optimize the risk/reward profile of Calamos Convertible Fund (CICVX) while positioning it to benefit from companies that can capitalize on cyclical growth opportunities created by the reopening of the economy. These span multiple industries, including airlines, cruise lines, retail, entertainment, and semiconductors. We also believe there are long-term opportunities within secular growth areas such as cloud computing, internet security, e-payments, e-commerce and many other 'at-home' trends that accelerated during the pandemic. Overall, the fund's largest absolute allocations remain to the information technology and consumer discretionary sectors. The fund's largest relative underweight exposure is to more defensive areas such as the financial sector where we believe convertible structures are less favorable.

Looking out over the next 12 months, we remain optimistic on an economic recovery but see the potential for continued heightened volatility in financial markets. With that backdrop, we believe the strategic case for our actively managed convertible approach remains strong, as we position Calamos Convertible Fund for further upside participation in equities while managing downside risk.

Calamos Global Convertible Fund (CXGCX):
We expect the global convertible market to resume its advance

Eli Pars, CFA, Co-CIO and Senior Co-Portfolio Manager

We maintain a positive outlook for the global convertible market, as the Federal Reserve's accommodative stance and vaccination progress provide powerful tailwinds. Headline inflation may increase over the near term, but we do not expect a sustained ramp-up.

Vaccines in the United States are likely to go from scarce to abundant as early as mid-April. With more than 100 million people having received at least one dose already, and three million more getting vaccinated every day, the U.S. is making meaningful progress in its fight against the virus. Against this backdrop, we expect travel and leisure industries (airlines, cruise ships, Las Vegas) to be in much better shape by the third quarter, which in turn will drive economic growth and employment gains. These continued improvements, combined with very loose fiscal and monetary policies, should propel equities higher, offsetting the likely headwinds of rising taxes and more regulations.

We actively rebalance Calamos Global Convertible Fund (CXGCX) with the goal of providing more exposure to global equity market upside than potential downside. Through the end of the first quarter, global convertible issuance has remained robust, totaling $58 billion. With these high levels of issuance, the equity sensitivity of the global convertible market has come down, as measured by the Refinitiv Global Convertible Bond Index. Over the course of the quarter, the fund's overall level of equity sensitivity has also come down and now stands roughly neutral to the global convertible market.

Source: BofA Global Research. Data as of March 31, 2021.

Much of our rebalancing has focused on the technology sector, which is the fund's largest overweight and absolute weight. We also have been active in rebalancing Covid-recovery names, such as cruise ships and airlines. In January, we noted that we were paring the fund's overweight to Covid-recovery names as many companies had begun to price in a full recovery. Throughout the quarter, we continued to reduce the fund's exposure to a roughly neutral weighting.

From a geographic standpoint, Calamos Global Convertible Fund has maintained a neutral weighting to the United States and is underweight Europe. The portfolio's weighting to Europe remains driven by bottom-up considerations rather than a macro call.

We believe the fundamentals of the global convertible market remain strong and caution against reading too much into the market's recent retreat. Some of the pullback is attributable to the rotation out of growth companies, which are well represented in the convertible market. Heavy issuance also contributed to softness, particularly in early March. We continue to monitor both situations and note that the softness in the convertible market has already started to reverse over the last few days of the quarter.

We see many attractive pockets of opportunity in fixed income

Matt Freund, CFA, Co-CIO, Senior Co-Portfolio Manager

Christian Brobst, VP, Co-Portfolio Manager

Chuck Carmody, CFA, VP, Co-Portfolio Manager

We believe:

• Inflation will move substantially higher in Q2 and Q3, as low base effects from 2020 contribute to sharp increases, with some level of normalization beginning in Q4 and extending through 2022.
• We have been surprised at the amount of fiscal support that has made it through a 50/50 Senate. Unconstrained expansions in federal spending create the possibility for substantially higher rates in coming months, but we expect the long-term trend for interest rates will return to trading ranges close to those of the current market.
• Credit markets, including high yield and investment grade bonds and bank loans, will remain stable in tight trading ranges driven by ongoing fiscal and monetary support. We expect more modest returns going forward given the impact of higher Treasury rates.

Our team is taking the Fed at its word that overnight borrowing rates will be on hold near-zero for the entirety of 2021 and 2022. In our most aggressive scenario, the Fed begins to taper its purchases of Treasury and mortgage-backed securities early next year.

Multiple factors supported the continued Q4 recovery in the first few months of 2021, including high levels of stimulus through Fed monetary policy, record fiscal stimulus from Congress and accelerating vaccination progress. Each of these factors is contributing to strengthening consumer and business leader confidence. At the same time, economic fundamentals are improving on both the labor and activity fronts, despite the heavy impact of unusual winter weather conditions on several large local economies in the South.

We continue to view bank loans as an attractive way to help manage overall interest rate duration as part of a barbelled portfolio construction approach. Additionally, we are identifying more pockets of opportunity in BB-rated credits, which underperformed the broad high yield market in the first quarter and may have more room to appreciate now. As always, we apply our active, bond-by-bond approach to take risk when we believe our shareholders are being well compensated.

Calamos High Income Opportunities Fund (CIHYX). Declines in new COVID-19 infections and deaths from recent peaks indicate that vaccinations are working, which should lead to improvement in face-to-face, service-related industries in coming quarters. While the reopening of businesses that require close human contact is good news for economic growth and employment participation, high yield industries tend to focus more on manufacturing and energy. This sector composition has helped drive positive returns in high yield during the first quarter, despite headwinds from higher interest rates on intermediate and long-maturity Treasuries. However, it means that security selection will be even more important in coming quarters, which we believe will favor our idiosyncratic approach.

The new issue market continues to trade strongly. Consistently high volumes of new debt have been met with healthy demand, due in large measure to the liquidity conditions driven by Fed, as well as fiscal activity. Even during periods when first quarter holidays have typically brought slower markets, new issue activity remained robust in 2021. The technical backdrop for high yield continues to be favorable, in our view. Just as last year's supply-demand technical environment was heavily influenced by 'fallen angels' (bonds that joined the high yield market as a result of downgrade), we expect many issuers to exit the market as 'rising stars' (bonds that are upgraded to investment grade status). The resulting shrinking of the market size should further support the strong technicals.

Calamos Total Return Bond Fund (CTRIX) and Calamos Short-Term Bond Fund (CSTIX). Our positioning seeks to provide an income advantage to respective benchmarks. Reflecting this, each fund remains overweight to corporate bonds and asset-backed securities. Similar to the high yield market, the corporate bond and asset-backed security markets are benefiting from heavy demand, which is supporting a tight spread trading environment.

Our outlook is that we could see higher long maturity rates in the interim, resulting in a steeper yield curve. As such, Calamos Total Return Bond Fund is positioned with a shorter duration than its benchmark, particularly through an underweight to securities with a duration of 10 years or greater. Given our confidence in the Fed's guidance for near-zero overnight borrowing costs in coming quarters, we maintain a neutral benchmark duration stance in Calamos Short-Term Bond Fund.

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