Ready for Choppier Waters

Eli Pars, CFA

Summary Points:

• We expect choppier markets in 2H 2024, which supports the case for lower-volatility global equity participation.
• In this environment, we focus on convertibles that offer a healthy balance of upside participation and downside risk mitigation.
• Our experience positions us to understand and capitalize on the vicissitudes of a diverse convertible market.
• A robust new issuance market gives us much to cheer about.

Although it was a slow quarter for the global convertible market and the fund, Calamos Global Convertible Fund generated solid return of 3.72% through the first half of the year, well ahead of the FTSE Global Convertible Bond Index 1.40% return. This continued a streak of outperformance since the start of 2023.

Calamos Global Convertible Fund versus the Global Convertible Market

Source: Morningstar.
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Please refer to Important Risk Information. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load of 2.25%. Had it been included, the Fund’s return would have been lower. All performance shown assumes reinvestment of dividends and capital gains distributions. As of the prospectus dated 3/1/2024, CXGCX’s gross expense ratio is 1.09%.

We believe that our experience and depth of knowledge have been key to the fund’s performance over time. We’re using Calamos’ time-tested approach and capital structure research to identify compelling bottom-up growth opportunities benefiting from long-term secular trends. This has led us to a wide array of growth opportunities, including convertibles issued by companies participating in niches within the global AI ecosystem as well as those at the forefront of country-specific trends. For example, we have a core holding in a convertible issued by a leader in India’s tourism industry, which is well-positioned to capitalize on favorable demographics.

The global convertible market has always been characterized by a high degree of innovation, with structures evolving to serve the needs of investors and issuers alike. While it is a truly global market, there are differences from country to country. Our depth of experience helps us navigate and capitalize on these nuances—some might call them quirks—of the global convertible market. For example, over the past quarter, we redeployed assets from two companies that had served the fund well. One, a Japanese semiconductor equipment manufacturer, was approaching its first call date. Japanese issuers generally don’t call convertible bonds issued in Japan and are more likely to call bonds issued in the offshore or euro market, as in this instance. With the call approaching, and the bulk of the issue getting converted by other holders, we sold the position.

We also sold the fund’s position in an Indian mobile phone operator, an issuer offering the high-quality fundamentals and exposure to secular growth tailwinds that we like. Although the issue was not callable in the manner that US investors are familiar with, it was subject to a “clean-up call” popular in Europe and Asia ex-Japan. This clause allows an issuer to call a bond if less than 15% of the issues remain outstanding. Over time, the performance of the underlying equity and the convertible structure resulted in the issue being slowly converted away by investors seeking to lock in gains. We decided to have control over our exit timing and sold at what we saw to be a good price.

Our Outlook

We believe that the global convertible market will continue to provide an attractive way to access the growth potential of innovative companies. As we discussed in our previous commentary, the resilience of the US economy has been somewhat surprising to us, and there’s likely more downside risk than many investors realize. Normalizing inflation and economic data give the Fed more air cover to begin rate cuts, which should provide tailwinds for risk assets. However, economic data is softening, there’s geopolitical risk around the world, and no one has a crystal ball when it comes to the Fed. In terms of the presidential election, the biggest surprise would be no surprises. All in all, there’s every reason to favor lower-volatility approaches.

New Issuance Provides a Breadth of Choices

Moreover, we continue to be excited about the prospects offered by a growing new issue calendar. The second quarter saw more than $34 billion in global issuance, bringing the year’s first-half total to $60.2 billion.

Global Convertible Issuance Gives Us a Breadth of Choice

Source: BofA Global Research. Data as of June 30, 2024.

Over the past year, we have written extensively about the maturity walls in investment-grade and high-yield debt providing fuel to the convertible new issue market as companies seek to refinance debt at the lower borrowing costs associated with issuing convertibles instead of nonconvertible debt. We are seeing this play out, albeit at a modest pace. Part of our thesis has been that we would see an uptick in investment-grade convertible issuance as well, given a higher interest rate backdrop. This is also happening, with investment-grade issuers accounting for almost one-third of the second quarter’s issuance. This included a $5 billion new issue for an A-rated Chinese online retailer, one of the largest convertible bond issues we have ever seen.

Positioning Highlights

Calamos Global Convertible Fund continues to emphasize balanced convertibles that offer attractive levels of upside equity market participation and downside risk mitigation. We’ve remained active in the new issuance market and also locked in gains from well-performing names.

The consumer discretionary, information technology and health care sectors are among the fund’s largest allocations as of the end of the quarter. From a regional standpoint, the fund’s largest allocations are to the United States and Emerging Asia. We are underweight to the former and overweight to the latter. The fund also maintains its long-standing underweight to European convertibles, which reflects our concerns about geopolitics (most notably the war in Ukraine), inflation, and overall economic conditions.