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Stock Picking Matters!!!
July 5, 2024
Brandon Nelson, CFA
Summary Points:
- Companies with strong fundamental momentum are enjoying greater market recognition, which sets up well for our time-tested approach.
- We’re excited about the upside potential of the funds’ portfolios, which include exposure to fundamental growth themes as well as to more niche and one-off opportunities.
- With the Fed increasingly likely to cut rates, we see a catch-up trade for small-caps on the horizon.
Stocks were mixed during the second quarter. At the index level, large cap growth stocks rose sharply, and everything else fell. However, at the stock-specific level, many individual stocks up and down the market-cap spectrum performed spectacularly. In a refreshing turn of events, this quarter and the year-to-date have been less about rotation relating to macro factors like interest rates and more about stock picking driven by company-specific fundamentals.
One area of fundamental strength relates to increased data center spend. Governments and large companies are spending billions of dollars to build data center infrastructure to enable generative AI (Gen-AI). Since last spring, we have been investing in companies receiving that spend, including companies with exposure to Gen-AI servers, power/thermal management equipment, and construction site data center development.
Another area of fundamental strength relates to commercial aerospace replacement parts (i.e., aftermarket parts). Passenger miles are in a strong uptrend, but manufacturing constraints are delaying new airplane construction, which means older planes must fly for longer. This additional wear-and-tear increases demand for aftermarket parts—at healthy profit margins for the companies selling them.
These are just two of the exciting themes within the Calamos Timpani Small Cap Growth Fund (CTSIX) and Calamos Timpani SMID Growth Fund (CTIGX). We have uncovered several additional fundamental themes as well as other, one-off exciting individual stocks.
What’s especially encouraging is that the market is finally embracing our flavor of stocks again—companies with strong fundamental momentum (i.e., fast and underestimated growth). We believe these tailwinds have legs and that we are in the early stages of a multi-year upcycle for our particular investment style.
Calamos Timpani Funds: Security Selection Fuels Year-to-Date Performance
Year-to-date return through 6/30/2024
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 Funds’ maximum front-end sales load of 4.75%. Had it been included, the Funds’ return would have been lower. All performance shown assumes reinvestment of dividends and capital gains distributions. As of the prospectus dated 3/1/2024, CTSIX’s gross expense ratio is 1.12% and CTIGX’s gross expense ratio is 1.73%.
Zooming out, we’re also excited about the prospects for small caps overall. It’s been well documented that small caps have lagged large caps for several years despite having compelling growth fundamentals. This is reflected in valuation metrics of small caps versus large caps (currently in the 10th percentile).* The US Federal Reserve is increasingly likely to cut interest rates in the coming months, which we see as a powerful catalyst to trigger small cap outperformance. A catch-up trade for the asset class may soon be on the horizon, further increasing our optimism.
*Source: Jefferies, as of June 30, 2024, valuations of small caps versus large caps, lower percentiles indicate more favorable relative valuations for small caps.
Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.
Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average. All performance shown assumes reinvestment of dividends and capital gains distributions. Returns of more than one year are annualized
The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000® companies with higher price-to-value ratios and higher forecasted growth values. TheRussell 2500® Growth Index measures the performance of the small to midcap growth segment of the US equity universe. It includes those Russell 2500 companies with higher growth earning potential. Unmanaged index returns, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.
Diversification and asset allocation do not guarantee a profit or protect against a loss. Alternative strategies entail added risks and may not be appropriate for all investors. Indexes are unmanaged, not available for direct investment and do not include fees and expenses.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
Important Risk Information. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
The principal risks of investing in the Calamos Timpani Small Cap Growth Fund and Calamos Timpani SMID Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of the potential increased volatility due to securities trading at higher multiples, and portfolio selection risk. The Fund invests in small capitalization companies, which are often more volatile and less liquid than investments in larger companies.
Foreign security risk: As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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