Online Extra: A Triple Play At Calamos
Nick Calamos, chief investment officer of Calamos Asset Management, hasn't met a part of the capital structure he doesn't like. Calamos, the nephew of the firm's founder, John Calamos Sr., will invest in any piece of a company -- the convertible debt, high-yield bond, or just plain old equity -- if he sees an opportunity. In fact, in some instances buys all three types of securities from a single company.
Indeed Calamos Asset Management has proven adept at investing across the capital structure. All six Calamos funds with a five-year record rank in the top quartile of their category over the past five years. The $14.3 billion Calamos Growth Fund (CVGRX ) is the third-best-performing mutual fund of the past decade. Calamos recently spoke with BusinessWeek Chicago Correspondent Adrienne Carter about the firm's investment philosophy and its recent moves. Edited excerpts of their conversation follow:
Q: What type of companies do you look for? A:
Q: What type of companies do you look for?
A:As a growth manager, we want companies with a competitive advantage that are rapidly growing their business value. We're looking for an accelerating return on capital, but also margin, revenue, or earnings expansion relative to their peer group. Often the stocks can look expensive, but we target an expected annualized return of 20%.
Q: Do you expect the same sort of returns from the holdings in your other offerings? A:
Q: Do you expect the same sort of returns from the holdings in your other offerings?
A:In our more balanced products, we may look at companies whose businesses may not be growing as rapidly but are trading at a big discount to what we consider their intrinsic value. We target 15% annualized returns for our convertibles products and 12% to 15% in our high-yield products. But they have more downside protection.
Q: Is there an advantage to managing debt, convertibles, and equities, as opposed to investing in just one part of the capital structure? A:
Q: Is there an advantage to managing debt, convertibles, and equities, as opposed to investing in just one part of the capital structure?
A:A lot of equity investors are primarily focused on the income statement and earnings. Likewise, a lot of debt managers are afraid of growth -- they just want to be paid back.
There's an advantage to viewing the whole capital structure of the company -- the bonds, the equity, and the convertibles -- because an event that occurs may not just be a security event. If the equities look attractive, there's the potential that the bonds or convertibles also look attractive.
Q: So is there a lot of overlap of companies between the portfolios? A:
Q: So is there a lot of overlap of companies between the portfolios?
A:There's about a 20% overlap of names between Calamos Growth and Calamos High Yield (CHYDX ). They tend to be aggressive growth companies. There's around a 10% to 20% overlap between Growth & Income (CVTRX ) and High Yield. And about 30% between Calamos Convertible (CCVIX ) and Calamos High Yield.
Q: Do you have an example? A:
Q: Do you have an example?
A:In February of last year we bought Bausch & Lomb (BOL ). The stock was trading at $56. But then we also bought their traditional bonds at the same time, paying about 89 cents on the dollar. The company was earning a single-digit return on capital. But we felt they had the opportunity to turn things around. They typically earn 12% to 13% return on capital. We bought the health-care products company for our high-yield and growth portfolios.
Q: Did it work out? A:
Q: Did it work out?
A:The company paid down $195 million in debt, and they've driven return on capital into the teens. As that has happened, the bonds have gone from 89 cents on the dollar to $1.11. The stock has moved from $56 to around $75. We still own both the stocks and bonds.
Q: Where are you finding opportunities now? A:
Q: Where are you finding opportunities now?
A:We're definitely moving into a market environment that favors higher-quality, steady-growth companies like Coca-Cola (KO ). We're looking at two things: the stability of the cash flow and the quality of the balance sheet. We recently bought the advertising company Omnicom Group (OMC ) and the health-care services company HCA (HCA ).
Q: You closed Calamos Convertible because of the lack of opportunities in that segment of the market. How does that area look today? A:
Q: You closed Calamos Convertible because of the lack of opportunities in that segment of the market. How does that area look today?
A:The environment has changed dramatically from a valuation perspective. A couple of years ago, the volatility levels in the market were near all-time highs and interest rates were near historical lows, so the typical convertible wasn't attractively valued. The risk/reward profile didn't make any sense to us. But now volatility is near historic lows, and interest rates, while still low, are not as low. Convertibles are attractive on a risk-reward basis.
Q: Have you seen the issuance of new convertibles pick up? A:
Q: Have you seen the issuance of new convertibles pick up?
A:Issuance is still anemic. And the hedge funds are still in the space, so they're gobbling up a lot of the new convertibles.