Video Blog: Opportunity Potential in Technology Sector

By Nick P. Calamos, Co-Chief Investment Officer and President of Investments

Earlier this month, I was a guest on Bloomberg TV’s “Street Smart.” After the broadcast wrapped up, I recorded some additional thoughts on the technology sector.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Investing involves risk, including potential loss of principal. Diversification does not insure against market loss. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities. There also can be special risks associated with technology companies, given their potential for volatility.

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Video Blog: Today’s markets require global perspective

By Nick P. Calamos, Co-Chief Investment Officer and President of Investments

Following my CNBC “Squawk Box” appearance on January 7, 2010, I recorded some additional comments on the opportunity we’re seeing in the global markets.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Investing involves risk, including potential loss of principal. Diversification does not insure against market loss. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities.

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Markets rebound, but remain in a sideways-moving pattern

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

Credit conditions have improved, and banks have resumed some lending activity (albeit at a measured pace). There’s been solid new issuance in the convertible and traditional debt markets. We’ve seen encouraging merger-and-acquisition activity, with capital moving from weak hands to stronger ones. Many companies have posted good earnings, including technology companies and other growth names.

Although global governments have flooded the world’s financial system with cash, inflation has been kept at bay (so far). Positive third-quarter GDP growth in the U.S. provided a counterbalance to continued weakness in employment data. Consumer activity remains muted, but has been rekindled. Low interest rates and government incentives for first-time homebuyers have given a boost to the mortgage and housing markets.

We continue to believe that the days ahead will remain volatile, but that good investment opportunities can be found even in slower economic growth and sideways-moving markets. This has led us to favor companies with cleaner balance sheets, high returns on invested capital, good cash flows and globally diverse revenue streams. Cyclical exposure may also be beneficial for the early stages of economic recovery.

We have invested in companies involved in cyclical industries, rather than purchasing highly volatile commodities. We’ve underweighted the financial sector and are avoiding the banking sector in favor of areas such as asset management. We remain concerned about the fundamentals of many banking companies, particularly given the unknowns associated with increased government regulation. In terms of credit quality, we’ve favored higher credit qualities over the most speculative issues because we believe they may be particularly vulnerable in a slow-growth environment. We’ve also found many attractive investments in non-U.S. markets. In fact, globalization offers the most exciting landscape we’ve seen in decades and extends beyond the developed markets to select companies in emerging markets such as China, India and Brazil.

Dow Jones Industrial Average (12/31/08-11/27/09)

After plummeting early in ‘09, the Dow, like many market benchmarks, has made up for lost ground. Markets now appear to be in a sideways moving pattern, with frequent dips and gains.
 

Source: finance.yahoo.com. The Dow Jones Industrial Average is an unmanaged pool of 30 large-cap U.S. stocks, often cited as a gauge of the U.S. stock market. The average is unmanaged, does not entail fees and expenses and is not available for direct investment.

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Lessons From the 1970s, Updated for the Global Economy

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

One of the things I learned in the 1970s and 1980s is that you don’t sit around on your hands waiting for everything to be alright. There was a lot of opportunity in the 1970s and there is a lot of potential opportunity now. You just need to be careful and selective.

There are a lot of people doing very opportunistic development, even when the economy is very soft. If you wait until everything is okay–when all the ducks are in align, when all the stars are in align–that’s typically called the top of the market, not the bottom of the market. So, you do have to look for the opportunities.

We’re thinking more globally than ever before. Globalization is really the difference between now and the 1970s and the 1980s. In the 1970s and the 1980s, you did not have the opportunity to really invest anywhere else. You were really kind of stuck if the U.S. was not working; it was difficult to invest outside of the United States. Today, it’s easy to invest outside of the United States.

Domestic investments can also participate in this non-U.S. opportunity. Many of the companies we invest in today have almost half their revenues coming from outside of the United States and we think that’s positive.

Another piece of good news related to globalization: it can provide a check on bad government policy. If our government makes a policy mistake, money is going to flow out of the United States. As the saying goes, “money goes to where it is best treated.”

A number of countries in the evolving world—including China, India and Brazil—they’re really embracing capitalism. The middle class in these countries are growing. They’re a bit more volatile, but they’re no longer an “emerging markets.” They’re powerful forces in the global economy. We would rather term them as being part of the “evolving world” rather than as emerging markets.

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Did anyone say September would be a challenging month?

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

September has the stigma of being a difficult month for equities, but heightened levels of investor confidence led the equity market this September to register the seventh consecutive monthly gain. U.S. equities returned 3.73%, as measured by the S&P 500 Index. Underpinning the streak of positive returns has been the perception that the global economy is stabilizing, supported by corporate profits surpassing near-term expectations. Specific market action has been typical of the early stages of a cyclical recovery: leadership has gravitated toward the industrial and materials sectors, growth investing has outperformed value investing; and small- and mid-cap stocks have performed better than their larger-cap brethren. Although this market dynamic has benefited Calamos’ portfolios in the near term, we stress that our investment approach is much longer-term focused.

When stock prices move higher, especially over a protracted period, the tendency to become more risk tolerant is quite common. Investors focus more heavily on positive aspects of a company, an industry or the economy as a whole. Rewards may become greater, but only at the expense of greater risks. Eventually reality catches up, and the reverse happens, leading to risk aversion. In the current environment, mounting consumer debt, a challenging employment situation and large and surging budget deficits constitute major headwinds for the market. We believe that intense volatility, rather than prolonged bear or bull market moves may be the distinguishing characteristic of equity markets over the foreseeable future. The approach we advocate and apply while constructing and maintaining portfolios is to adhere to a constant risk/reward posture throughout entire business cycles. This posture may vary from investor to investor, but we are convinced that disciplined risk management is very effective in helping our clients meet their long-term investment goals.

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Convertibles and Asset Allocation

By John P. Calamos, Sr., Chairman, Chief Executive Officer and Co-Chief Investment Officer

Coming out of last year’s sell off, convertibles have enjoyed a surge of renewed interest as investors have returned their attention to more defensive investments and to rebalancing. I’m heartened by this shift, having long believed (for 30-plus years, in fact) that convertibles can fill many vital strategic roles in portfolios—including as defensive equity, enhanced fixed income and market neutral allocations. Recently, I had the opportunity to write an article on this subject for Investment News, (“Vehicle Offers a Way to Control Risk,” September 13, 2009. ) You can read it by visiting investmentnews.com, and searching under “Calamos convertibles”. This article is a shortened form of my recent paper, “Convertible Securities and Asset Allocation Considerations”.

Key take-aways:

• Long-term investors who are concerned about participating in an uncertain market environment may want to consider convertibles as a potential way to buy time while seeking to lower risk. (The coupon feature of convertibles means that investors are essentially “paid to wait” for rising equity markets.) Of course, investors do need to keep in mind that convertible bonds are not without risks—including default risk and interest rate risk.
• In my experience, convertibles are best utilized as a part of a long-term plan, not a temporary tactic. Convertibles are extremely versatile—most definitely not a one-size-fits-all solution. With hybrid characteristics, convertibles lend themselves to be used in a variety of ways, with varying risk levels.
• Active management is essential. Without active management and rigorous valuation of the equity and bond characteristics of the portfolio, a pure convertible strategy can easily stray from the original objective (that is, fluctuating from fixed-income-like to equity-like depending on the phase of the current market and/or economic cycles).

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