Value Added
A Less Bumpy Ride With Convertibles
By Steven Goldberg, Contributing Columnist, Kiplinger.com
September 10, 2002
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Calamos, 61, is lead manager of Calamos Convertible Growth & Income A (CVTRX), the top-performing convertible fund over the past three, five and ten years. Over the past 12 months (as of the end of August), it has fallen just 3.7% -- versus a tumble of 18% for Standard & Poor’s 500-stock index.
Convertibles are securities that pay interest, like bonds, but that can be converted into stock at a preset price. If the price of the underlying stock rises, so does the price of the convertible.
The fund has been a model of consistency, delivering returns in the top half of its peer group in each of the past eight years. Over the past ten years the fund has beaten the S&P 500 by an annualized 4.7 percentage points.
What’s more, the fund has beaten the CS First Boston Convertible Bond index by more than an annualized five percentage points.
The beauty of convertibles
Convertibles generally produce about 75% of the return of stocks, but with about 25% less risk. “We want the upside of the stock market and the downside of the bond market,” says Calamos.
Calamos started the business in 1970. Son John Jr. and nephew Nick Calamos work with him. Together they manage about $12 billion.
Calamos believes the economy is recovering. But he sees the stock market remaining in a trading range for some time while it “waits for earnings to catch up.”
Small-company and mid-size stocks should do best in this environment, he says, along with high-yield corporate, or “junk,” bonds. Indeed, Calamos just opened Calamos Convertible Income and Opportunities (XCHIX), which will invest in both junk bonds and convertibles. The new fund gives the managers unusual latitude to invest up to 100% of assets in junk or convertibles, as they see fit.
What he’s buying now
Picking good convertibles is much like picking good stocks. It requires the same rigorous research, and much of convertibles’ prices depend upon their stocks.
Calamos also buys some stocks in his Growth & Income fund.
Among his favorites is H&R Block (HRB), the tax preparation company. “Their business continues to be very good,” he says. Their expansion into financial planning “could leverage the business.”
He also likes Raytheon (RTN), the defense and aerospace firm that seems to keep shooting itself in the foot. “They have had fits and starts, but they’re well-positioned and cheap,” says Calamos. He sees defense as a good long-term theme.
AutoZone (AZO), which sells auto parts, is another favorite. Calamos says it’s a play on continuing strong consumer spending.
Finally, Calamos likes International Game Technology (IGT), which makes slot machines and other sophisticated gambling devices. He says it will benefit from the expanding gambling industry.
A cheaper fund
The only negatives about Calamos Convertible Growth and Income are that the fund carries a 4.75% front-end sales charge and annual expenses are 1.4%.
If you’re looking for a good no-load convertible fund, Fidelity Convertible Securities (FCVSX) is probably your best bet. It trails closely behind Calamos’s fund and has an annual expense ratio of 0.77%. The manager is new, but he’s backed by Fidelity’s strong research department.