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CEF Insights: Convertible Securities Outlook & Opportunities With Calamos Investments

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Convertible securities can offer equity exposure with less risk, making them a strategic part of an asset allocation. Against the backdrop of recent market volatility, what should investors know about the asset class’s outlook, opportunities and allocation within diversified portfolios?Calamos Investments executives Bob Bush and Eli Pars share views in this CEF Insights Podcast episode.

Calamos Investments is a leader in the convertible securities asset class, serving the needs of both institutional and individual investors. Refinitiv Lipper named the firm Best Overall Small Fund Family for 2022.

CEFA:

Welcome to CEF Insights, your source for closed-end fund information and education brought to you by the Closed-End Fund Association. Today, Bob Bush, Senior Vice President and Director of Closed-End Fund Products, and Eli Pars, Co-CIO, Head of Alternative Strategies and Co-head of Convertible Strategies, both with Calamos Advisors, will discuss the environment and outlook for convertible securities and Calamos’ approach to utilizing convertibles. Certainly worth mentioning, is that Calamos was just awarded the honor of being designated by Refinitiv Lipper as the Best Overall Small Fund Family for 2022. Congratulations to Bob, Eli, and their colleagues at Calamos for that achievement. Bob and Eli, we look forward to your discussion.

Bob Bush:

Well, thanks CEFA. Eli, Calamos started out in 1977 as a convertible manager, effectively a pioneer in the asset class by managing those securities for both institutional, as well as retail investors. Today, Calamos manages approximately $43 billion in assets, including approximately $15 billion in convertibles and over $10 billion in seven closed-end funds. With this long history of managing the asset class, what are the key characteristics of convertible securities, and how can this benefit investors?

Eli Pars:

Thanks, Bob. Converts are a very interesting way to get equity exposure with a little less risk. So step back and learn a little bit about what the structure is. So convertibles, first and foremost, are a bond. They’re typically issued at par with a five year term and redeemable par, but they also have embedded in them the option for you to convert into the company’s stock. And it’s your option, so it really only comes into play when the stock moves up. The combination of the two, the option and the bond, give you the ability to get equity exposure when things are going well for the company, but you become a bond holder if things are less well and protected the downside with that bond component. The end result you get when you actually manage these in a portfolio, you get equity like returns over a full market cycle with less volatility.

Bob Bush:

Thanks, Eli. And how diverse is the universe of issuers in the convertible space with regards to industry sector and also geography?

Eli Pars:

Yeah. So while convertibles tend to work best for growthier companies, we see all kinds of companies in the convert market. You see a lot of growth in tech and in healthcare and consumer companies come to the convert space, but you also see some bigger cap companies. It’s a pretty good mix. And geographically, while it’s somewhat dominated by the US, with the US being about 60% of the market, there’s a big convertible market in Europe. There’s a big convertible market in Asia. There’s a meaningful convertible market in Japan. So there’s a lot of different ways to look at the global convertible market.

Bob Bush:

And Eli, obviously you know this, we’ve seen exceptionally robust issuance over the past two years with over $300 billion of new deals coming out in 2020 and 2021. And I would imagine as we get into a rising interest rate environment, it may become even more compelling for some issuers to access the convertible market. Are the expectations for this trend that will continue in 2022, and what opportunities does this dynamic present to investors of convertibles?

Eli Pars:

Yeah, we’ve had nice growth in the issuance in the convertible market over the last couple years, and expectations are up for a good year this year as well. Obviously, we’ve had a little volatility in the first quarter with everything going on around the world and really volatile times. Convertibles, like other asset classes, don’t see a lot of new issuance, but we think there’s a fair amount of pent up demand on both the issuer side and the investor side that should create a healthy market going forward for the rest of the year. And the issuance really kind of is helpful multiple ways in converts. It expands the opportunity set, it brings new companies to the market that didn’t have exposure to in the convert market in the past, and it allows you to rebalance your portfolio.

Convertibles are great securities that give you good upside participation and good downside protection when they’re around par. But if they work out and the stock’s up 50 or 100%, then they can look a lot like equity. At that point, we want to rotate out of the more equity sensitive convert into something closer to par with better convexity, and the new issue market makes it easy for us to do that kind of rebalancing.

Bob Bush:

Now, obviously Eli, we’ve had a recent sell off in financial markets, certainly equities and convertibles as well, but I would imagine you’re finding some attractive valuations in convertibles in this market. And where are you seeing some of the best opportunities right now?

Eli Pars:

Yeah, you definitely had a correction, which has created some opportunity in the market. We’re probably seeing the most opportunities in the US, but also quite a bit in Asia with the pullback that we’ve seen, particularly in the Chinese markets. Europe is a little trickier right now with the war still raging in Ukraine, but we have some attractive, selective exposure we like in that region as well.

Bob Bush:

As we know, interest rates continue to be low, but the Fed has begun shifting to certainly a less accommodative stance. Inflation has become a concern. We’ve got geopolitical issues out there, and that’s created uncertainty. How does all of this position converts in the current market? And what is your thinking for the outlook for the rest of 2022?

Eli Pars:

We think this creates an interesting time to allocate to the convert market. We think converts make sense because they are a way to get equity exposure with lower volatility, that they make sense as a strategic part of an asset allocation. But right now, with the pullback we’ve seen, the volatility in the market, it’s an interesting tactical time to add to a convert allocation. It’s tough to buy equities when you’ve had this kind of volatility, and converts are a way to get some equity exposure or additional equity exposure in your portfolio and sleep at night.

Bob Bush:

So we manage three convertible closed-end funds currently. How do you see an allocation to convertibles best positioned in an investor’s diversified portfolio? And for an investor that’s more income oriented that may want to own them in a leveraged closed-end fund construct, how does that optimize the convertible holdings, in that convertible, in that closed-end fund construct using leverage, of course?

Eli Pars:

Yeah, we think it’s an interesting time to allocate to converts. In a levered vehicle like closed-end fund, the convert’s ability to manage volatility kind of protects you a little bit and takes a little of the edge off the leverage. And the leverage in the portfolio, while it’s pretty modest, 20, 30% leverage, it does allow you to get a little bit of extra return in the portfolio and produce some income that’s attractive to certain investors in the market.

Bob Bush:

That’s great. Very helpful, Eli. And obviously we’ve managed convertible closed-end funds for almost 20 years now, so it’s certainly something we were conversant in. Eli, thanks for taking the time to share your thoughts with us today. Greatly appreciate it.

Eli Pars:

Happy to be here, Bob.

CEFA:

And we want to thank you for tuning into another CEF Insights podcast.