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Investment Flexibility in Volatile Markets

CEFA was joined by Bob Bush, Senior Vice President with Calamos, to discuss 1) the benefits of investment flexibility and active management in volatile markets; 2) convertibles as a risk-managed way to invest in equity markets and; 3) evaluating closed-end funds for your portfolio.

The following Q&A recaps the conversation that originally took place as part of CEFA’s podcast series which can be heard here.

Bob Bush

CEFA: Hi, and welcome to the latest podcast in the Closed-End Fund Association’s continued series Investment Insights. Joining us on today’s podcast is Bob Bush, Senior Vice President at Calamos Investments. Hi Bob, thanks for being with us today.

BB: Hi Diane, thanks for having me.

CEFA: Thanks so much. You know, Bob, several of the Calamos closed-end funds allocate among different asset classes. In the current market environment, how does that allow you to balance risk and return, and how does Calamos view that balance in this market?

BB: Sure, that’s a great question. One of the things that I think is a hallmark of our closed-end funds is that we have quite a bit of flexibility, quite a bit of a wide berth in which we can deploy our assets. So, although we have funds that focus on many different things—convertibles, global equities, domestic equities, global fixed income, and so on—we’re not hemmed in with big percentages of specific investment types that we need to adhere to.

We can use common stock, we can use fixed income, and above all else, we can use convertibles, which I think clearly sets us apart, because of our capabilities, our experience, and our reputation in that field. That’s something that can give us a leg up on many of our competitors, with respect to the use of that asset class in our closed-end funds.

CEFA: Well, Calamos has long been known for a particular expertise in managing convertible securities. How do the benefits and risks associated with convertibles fit with our current market environment?

BB: As you know, we’ve been investing in convertibles since the founding led by John Calamos in 1977, so that’s really part of our DNA.

Convertibles are really looked at as a risk-managed way to invest in the equity markets, because in essence a convertible is a bond with a call option. So, the benefit of a convertible is you’re still getting income from the bond portion, but the call option portion, if you will, allows you to participate in the equity markets.

The thinking is, you’re able to get the upside of the equity market, but with a less amount of risk, i.e., standard deviation. And if you look at the performance of convertibles versus equities over time, they’ve actually done very, very well, again with a somewhat lower amount of risk. When you come into periods of market volatility that we’ve had, but you’re still in an environment where income is important, I think convertibles lend themselves to not only out-and-out investment, but certainly to use in a closed-end fund vehicle.

CEFA: Bob, closed-end funds have the ability to utilize leverage, but with the Fed raising interest rates, this may be seen as a potential negative. How does Calamos utilize and manage leverage for your closed-end funds? Do you see this providing a benefit to investors?

BB: The thing about leverage is this: As long as your cost of borrowing is less than what your reinvestment rate is, leverage is accreted. So it’s not necessarily about what the leverage rate is, it’s what you are reinvesting in and how that’s working out for you. So, true, the people that borrow at a floating rate, LIBOR-based, have seen, I would say, a modest increase of their cost of leverage. We’re still fairly bullish on many of the markets out there. Over history, the leverage has been accretive to our shareholders, as we’ve been able to improve the returns, because of earning that spread between what we borrow at and what we reinvest at.

Another thing I think that is worth noting is that about two years ago, we actually went out and fixed a portion of our leverage, about 25% of our leverage, with a preferred security. And we did that for periods of, going out in five-, seven-, and 10-year increments. So, we locked in rates which were sub-4%, which I think gives us a bit of comfort. I think it gives our investors a bit of comfort, [knowing] that that leverage will not change, those rates will not change, if the floating rate continues to increase.

I think we’ve got ourselves hedged nicely. And, at the time, if we had replaced that facility, our clients [would have had] to pay a lot more than when we did this about two years ago.

CEFA: Well, we had a volatile fourth quarter in markets, and closed-end funds generally saw widening discounts as we reached the end of 2018. Does a period like that present opportunities for closed-end fund investors? Have these discounts recovered, or do you still see them as wider than recent averages?

BB: Well, they sure did sell off. I’ll tell you, in my experience, that was probably the most volatile quarter in the closed-end fund space that I’ve ever seen in my career.

Basically, what you had was a confluence of a couple events. First of all, in volatile times, investors tend to source closed-end funds for cash. I think you had quite a bit of profit-taking because the funds during the first three quarters had actually done very, very well. And I think you tend to get year-end selling, as many times investors and their financial advisors want to change the portfolios around and make some changes before year-end. So, I think all these things exacerbated the problem that we saw. You had discounts, you saw premiums, double-digit premiums going to double-digit discounts, in a very, very short period.

One of the metrics that we use and look at is the Z factor, which basically takes the average discount of a period—or, I should say, the discount on a date—which you subtract from the average discount of the period and divide it by the standard deviation of the period.

When these Z factors get out of whack, in other words negative, fairly negative, it offers some great opportunities to come in and buy these securities relative to how they’ve been trading throughout their existences. And you saw some very deep discounts, very steep Z factors, particularly in the convertible space. So, I think there were some real good buying opportunities there.

What’s happened, though, is I think the market’s a little bit more efficient than we sometimes give it credit for. Many of those discounts and tradeoffs that we started to see just before Christmas recovered quite nicely to the point now where, as we’re looking at two to three weeks into January, those discounts have eroded, they’ve really come back to trading close to par.

In fact, all of our closed-end funds right now are below a 4% discount, which I think is effectively at par. I think what’s happened is the market saw the opportunity, they realized that these can offer great performance and had offered great performance, and perhaps some of this sell-off at year-end, which we’re seeing right now in the general equity markets, may have been a little bit overblown.

I guess the message to the listeners out there is, all things being equal, if these funds have performed well, if you like the manager, and you don’t think necessarily we are going into a terribly bad economic scenario, i.e., the 2000 financial crisis, this market can really give you some great opportunities. But you’ve got to act fast.

CEFA: And how do you see an advisor or investor best positioning closed-end funds within a diversified portfolio?

BB: Well, we say right off the bat that when you invest in a closed-end fund, it should be consistent with what your asset allocation strategy is for your client. We look at them as ways to enhance whatever asset class you want to invest in. And there’s a number of closed-end funds that invest in multiple asset classes. So, there’s plenty of that out there.

What are you getting with a closed-end fund? Well, obviously, these are managed. Many of them are for income. You’re getting a nice income stream. And you’re getting liquidity. So, what I would do, is think in terms of offering it as a portion of an asset allocation strategy, whatever that may be, to supplement other investments, whether they’re mutual funds, whether they be buying actual individual stocks, or ETFs, or whatever.

I think what you want to look at when you buy a closed-end fund is analogous to buying any type of a mutual fund or even an equity. You look at the manager, you look at their longevity, you certainly look at their performance.

One thing that’s important is you look to see whether their product support—whether it be wholesalers, whether it be somebody that manages a closed-end fund business, such as myself—that you can actually pick up the phone and call and ask questions about what’s going on in that fund. I think you want to make sure that the fund on a regular basis is earning its distribution, meaning that after the distribution, the NAV is at least flush. And again, I think you need product support. There are many firms out there that do it. Many of those are members of CEFA, because they believe in the industry, they believe in the business, and most importantly, they want to help their clients and the brokers that support them, better appreciate the business.

So, I’d say one parting point to any advisors listening, that you can certainly get a leg up on the competition, and I think you can certainly help your clients, with respect to managing their portfolios, their assets, if you have an understanding of the closed-end fund market. Because it is small relative to other areas, but I think there’s a lot to be offered here, and I think you can certainly benefit your clients by bringing expertise in this particular space.

CEFA: Bob, thank you so much for being with us today and sharing your insights.

BB: My pleasure. Have a wonderful New Year.

CEFA You, too. And thank you for tuning into another CEFA podcast. For more educational content, please visit our website at

Advisors, for more information, contact your Calamos Investment Consultant at 888-571-2567 or


Audio recorded 01/17/19.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. The opinions and views of third parties do not represent the opinions or views of Calamos Investments LLC. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. 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. © 2019 Calamos Investments LLC. All Rights Reserved. Calamos® and Calamos Investments® are registered trademarks of Calamos Investments LLC. 801457 0219


Closed-end funds trade on exchanges at prices that may be more or less than their NAVs. There is no guarantee that an investor can sell shares at a price greater than or equal to the purchase price, or that a CEF's discount will narrow or be eliminated. CEFs often use leverage, which increases a fund's risk or volatility. The actual amount of distributions may vary with fund performance and market conditions. Past performance is no guarantee for future results.



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