Markets & Finance

Don't Be "Too Greedy in an Up Market"


No investment is potentially out of bounds for co-managers John Calamos and nephew Nick Calamos of Calamos Growth & Income/A (CVTRX). The team roams the capital markets for equities and bonds, both convertible and nonconvertible, that offer capital appreciation and income.

The managers will frequently shift among the various offerings in a single company's capital structure. The fund's diverse approach extends to its equity holdings, considering both growth and value picks. Starbucks (SBUX) recently joined the fund's lineup.

The portfolio is positioned for a stock recovery, with an equity weighting of about 40%, a 50% stake in convertible bonds and convertible preferreds, and a 10% position in nonconvertible bonds. The credit quality of the portfolio's bond portion is a more aggressive BB.

Still, Calamos Growth & Income, formerly known as Calamos Convertible Growth & Income, is less volatile than the broader market, reflecting its fixed-income component. The fund's three-year

standard deviation trails the S&P 500's, 9.89% vs. 16.84%.

The fund's fine long-term performance record has earned the co-managers and their team a 2004 S&P/BusinessWeek Excellence in Fund Management Award for the second year in a row. Over a 10-year period through last month, the portfolio has risen 15.8%, on average, compared with 11.3% for the S&P 500-stock index.

Recently, the Calamos fund has faced some setbacks. For the one-year period through May, it rose 13.4%, while the S&P 500 was up 18.3%. Nick Calamos says a few tech positions have hurt returns, as has a stake in Calpine (CPN). Bill Gerdes of S&P's Fund Advisor spoke recently with Nick Calamos about his strategy. Edited excerpts from their conversation follow:

Q: What's your basic investment philosophy?

A: We look throughout the capital markets for good capital appreciation and some income flow, and feel that we benefit by considering a company's overall capital structure. We try to dampen risk and generate good returns. We don't have to blow the lights out. We look for gains in good times and bad.

Q: What is the fund's current asset allocation?

A: About 50% is in convertible bonds and convertible preferreds, 40% is in equities, and 10% is in nonconvertible bonds. Our asset allocation is pretty fluid, although we don't make abrupt changes. We're always questioning our positions, and we'll adjust things on the margins.

Our 40% equity position is pretty bullish for us. On the convertible portion, we're more aggressive on credit quality, with an average credit quality of approximately BB. The average current yield for our bond holdings is about 3%, and the preferred holdings are yielding about 4.5% to 5%. The fund's average

duration is 3.37.

Q: What's the fund's turnover?

A: Our turnover is about 40% to 50%. We rebalance a lot to gain the most attractive risk/reward. We may continue to invest in the same company, but shift to different offerings in their capital structure.

Q: How do you decide among a company's different investment options?

A: We look at a company's present cash flow, project the company's potential growth, and come up with a value for the overall business.

With AES (AES), for instance, we sold its corporate bonds and went into its equities. We probably owned Home Depot (HD) from 1986 through 1998 in different types of securities. We owned International Game Technology (IGT) for four or five years in convertible securities and equities.

Q: Why would you continue to invest in a company by shifting within its capital structure?

A: Typically, they have a solid market share and strong management. We believe their balance sheets are strong enough to survive a nasty downturn.

Q: Do you consider any

top-down investing features to determine the fund's asset allocation and/or individual holdings?

A: We consider the marketplace and look at many different models. About two years ago, we felt the outlook for capital spending was attractive, so we loaded up on stocks likely to gain from higher capital spending.

Q: What's your current view of the economy?

A: The economy and the consumer are in very good shape. The ugly monster issues are Social Security and Medicare, but no statesmen have come forward to risk their careers to handle them.

Q: What's your strategy for investing in equities?

A: We're eclectic on the equity side of the fund. For growth stocks, we look for sustainable growth, such as with International Game Technology and Harley-Davidson (HDI). On the value side, we own Cendant (CD). Recently, we purchased a position in Starbucks (SBUX).

For our equity holdings, we look for companies that are growing, meaning that they generate high returns on capital. We also look for stocks trading at a discount to their intrinsic value.

Q: Why have the fund's long-term returns been strong?

A: I think it's a matter of staying focused and not getting too greedy in an up market.

Q: Why have the fund's recent returns been less competitive?

A: We've been hurt by a couple of technology positions. We also got into some utilities that have been volatile, like Calpine (CPN). We're in different parts of its capital structure, but it will be a rough ride.


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