US Convertible Securities: Harnessing the Tailwinds of Normalizing Economic Data and Issuance

Jon Vacko, CFA, and Joe Wysocki, CFA

Summary Points:

• We believe the economic environment and issuance trends will provide a favorable backdrop for the US convertible market and Calamos Convertible Fund during the second half of the year.
• Our positioning favors balanced convertibles offering favorably asymmetric risk profiles with more upside equity participation than downside exposure.
• The fund invests in innovative companies positioned to benefit from secular and cyclical growth tailwinds, including AI, productivity enhancements, and cybersecurity.

Equity markets extended year-to-date gains during the second quarter of 2024 and finished the first half of the year with a strong advance. The S&P 500 Index continues to reach new all-time highs, helped by a backdrop of stable economic growth, a lack of a sustained resurgence of inflationary pressures, and monetary policy indicating the Fed’s desire to reduce interest rates for the first time this cycle.

Although we would not be surprised to see variability in economic data in the coming months, we remain optimistic that the overall economic growth, inflation, and monetary policy trends will continue normalizing along their current trajectories. This normalization can provide a further tailwind for risk assets, including the potential for a broadening of equity market leadership. However, as we enter the back half of the year, we are keeping a close eye on the potential for increased volatility around a contentious US presidential election that will likely have fiscal policy implications for years to come.

Within Calamos Convertible Fund (CICVX), our overall focus remains on bottom-up company selection and actively managing security-specific risk/reward tradeoffs. Broadening of equity market leadership could be particularly beneficial for small-cap and mid-cap growth companies, which are well-represented in the convertible universe. We maintain our preference for balanced convertible structures that provide favorable asymmetric payoff profiles by offering potentially attractive levels of upside equity participation with less exposure to downside moves.

Technology, consumer discretionary, and health care are CICVX’s largest sector allocations. As we have discussed, we favor companies that are executing well despite macro uncertainties, with improving margins and free cash flow, accelerating returns on invested capital, and attractive equity valuations. We also focus on identifying innovative companies positioned to benefit from cyclical and secular themes that can serve as tailwinds to individual corporate performance. These include companies advantageously positioned as businesses seek solutions to higher labor, manufacturing, and interest costs in the current economic environment. We also are investing in companies exposed to artificial intelligence, productivity enhancements, and cybersecurity trends. We expect the convertible market will provide opportunities to participate in these fast-growing trends for years to come.

The convertible new-issue market was strong in the first half of the year, with global issuance up approximately 50% relative to the same period in 2023. We continue to see deal terms that carry higher coupons and lower conversion premiums compared to last year’s issuance, as well as a higher percentage of investment-grade credits. A significant amount of this year’s issuance has been brought to market to refinance existing debt, a trend that we believe can benefit a broad subset of issuers.

We remain optimistic about issuance prospects going forward as companies increasingly recognize the lower borrowing cost benefits of convertibles in lieu of traditional bonds in an environment of higher interest rates. We believe the combination of a sizable amount of debt maturing in 2025 and 2026 across bond markets, the possibility of a higher-for-longer interest rate scenario, and the fact that convertibles have served as growth capital for leading small and mid-cap companies throughout the full business cycle should serve as accelerants for continued solid issuance.