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  • Calamos Investments on Portfolio Management in the Private Wealth Management Industry


    John Calamos of Calamos Investments, an investment firm at the marcus evans Elite Summit 2011, on portfolio management in the private wealth management industry.

    Interview with: John Calamos, Chief Executive Officer & Co-Chief Investment Officer, Calamos Investments


    “We believe clients are best served viewing portfolios in a global context, by favouring growth among the liquid and stable firms, and through a process of careful security selection," says John Calamos, Chief Executive Officer & Co-Chief Investment Officer, Calamos Investments. Asset allocation should also reflect significant longer term trends, including the rise of emerging economies.

    From an investment firm at the marcus evans Elite Summit 2011, in Montreux, Switzerland, 21 - 23 November, Calamos shares his insights into portfolio management and asset allocation in the private wealth management space.

    What information do private wealth managers need for portfolio management?

    John Calamos: It is especially important to design an investor’s asset allocation for long term results at the core level. Tactical over- and under-weighting can allow an investor to take advantage of shorter term trends. For example, would you consider an emerging markets allocation to be tactical or core? Our view is that exposure to emerging markets can be core if the risk is managed, but also a tactical or more aggressive strategy, as the flow of funds increases volatility in this opportunistic asset class.

    Asset allocation should reflect significant longer term trends. A manager’s view of inflation will have a considerable impact on the overall allocation to bonds versus equities, as well.

    An illustration of the importance of allocation is the year 1982, one of the worst years for GDP growth and unemployment. The Dow Jones had not been above 1,000 since 1970. When it cracked 1,000 in August of 1982, we entered one of the best bull markets in history, but there were so many people sitting on the sidelines, saying, “When that market corrects back down, I’m going to get back in.” It never let them back in. To take the utmost advantage of an upturn in the markets, investors need to have an allocation to equities before the upturn begins.

    What do managers overlook when making investment decisions?

    John Calamos: The most important thing for managers to understand is that active management works. New studies indicate that it is essential, along with the proper asset allocation reflecting the investor’s risk tolerance. Because of the current emphasis on passive strategies, some wealth managers may overlook the value of experience when reviewing investment management firms. We believe that the avoidance of major investment mistakes, while not missing opportunities, requires blending many inputs, primarily the perspective that comes from long term experience.  

    As the economy rebounds, investors are trying to immunise portfolios against future crises and market fluctuations. How can they achieve this to some degree?

    John Calamos: The “insurance” to immunise a portfolio against tail risk can, at times, be very expensive. Typically, when this insurance is the most inexpensive there seems little need for it, therefore, tail risk hedging needs to be accomplished very tactically.

    Another way to reduce the total portfolio risk is by incorporating asset classes that are uncorrelated. Unfortunately, many of those asset classes, like commodities, have become correlated to the equity market and often no longer provide a cushion for the total portfolio. We have found that low-volatility equity strategies, including the use of convertible securities, can dampen some of the volatility.

    There is a natural tension between the desire for safety and the pursuit of investment returns. It is a challenge to be fully prepared for both a 2008-reprisal and an economic expansion at the same time. Unfortunately, acting to mitigate every downturn can be costly in the form of lost opportunity and/or in the form of hedging costs. In practice, this means investors are better off, in our view, seeking an appropriate middle ground of reasonable risk/return that is managed by an experienced team.

    We find that middle ground by looking at global opportunities for businesses with strong balance sheets that can finance growth without needing access to capital markets, and we then select the appropriate securities within their capital structure. If economic weakness becomes pronounced, we feel the stronger companies with diversified client bases should hold their value better. If overall growth continues, these firms should benefit from the natural expansion in their opportunity set.

    We also try to make sure we are comfortable with the underlying fundamentals of the investments we manage. We have not and will not let short-term events scare us out of good positions. One mistake investors are making is waiting on the sidelines until market conditions improve to increase their allocation to equities. The problem with that thinking is that if the volatility on the upside is anything like the volatility on the downside, investors are not going to have a chance to get back in.

    What asset allocation strategies could you recommend to private wealth managers?

    John Calamos: For the longer-term, we feel the risk is inflation, therefore, we are underweight on traditional fixed income and overweight equities. We favour enhanced fixed income such as high quality, high yield bonds, and a risk-managed emerging market strategy as a core holding. We believe equity valuations favour growth equities over value and that the valuations for growth equities at this stage in the market cycle are very compelling.

    Asset allocation is an ongoing, iterative process that leans heavily on judgment and understanding about how the global economy is evolving. At the moment, we tend to favour global growth equities as an attractive general category. Our view on fixed income is that cash and US Treasuries are less attractive, given the very low yields, and the fact that agencies and mortgages are subject to too much duration with too little standstill return.

    We would agree that the bull market in bonds is over. However, with so much volatility in stocks it is very important to consider the client’s risk tolerance when constructing and adjusting the asset allocation. So within the traditional bond market we are keeping our duration very, very low. Bonds are more of a safe-haven play, especially in this volatile market. One exception is high-yield bonds, which we think are looking attractive again as spreads have widened.

    What is unique about your investment philosophy?

    John Calamos: We utilise a very different approach to an investor’s core holding. Typically, the balance of bonds/equities in a portfolio would be adjusted to the risk level of a specific client. Our history, however, has been to utilise low-volatility equity strategies which include convertible securities, and which we feel offer similar downside protection to a bond/equity mix but with better upside potential.

    Additionally, we try to have a risk-managed approach to all asset classes we utilise. Over the years we feel this has added considerable value for our clients.

    We believe we are unique in our approach to evaluating global businesses first. That research, combined with our understanding of markets allows us to construct portfolios with attractive risk/return characteristics so clients can gain the exposure to attractive investments that are suitable for them, while managing downside risk.

    What are your thoughts and predictions for the future?

    John Calamos: Headlines we read are often sensational and exaggerated descriptions of why the economic glass is half-empty. Unpleasant memories of 2008 remain in the forefront of investors’ minds. There are also political challenges ahead in terms of how we will rationalise current and future budgets. What is important for investors to keep in mind is that the government has never been the genesis of wealth or prosperity. The glass remains half-full as long as individuals have a profit motive and there is a reasonably business-friendly environment in which to compete. Though our challenges are significant, we are making progress in working through them and economic activity continues to grow, albeit more slowly than we would like. In our view, investors will be done a disservice by holding an overly defensive portfolio at this time. We believe clients are best served viewing portfolios in a global context, by favouring growth among the liquid and stable firms, and through a process of careful security selection as opposed to passive ownership of either equities or bonds.

    As investors, we can all get focused on the short term, but we know that having a long term view is very, very important. We believe one significant longer term theme is the growth of middle class consumption globally. I believe that will be the engine of growth for many companies. Investors need to remember that middle class consumption is really where global companies are going to get their revenues. The middle class is made of people who are going to buy the washers, dryers, new cars and TVs. It is a very strong global theme. It is not bad news for the US that its middle class consumption is being reduced in proportion to the rest of the world. The growth of the middle class over the next few decades is going to be concentrated in the Far East, including, we hope, in the Middle East. We hope what comes out of all the turmoil in the Middle East is a thriving middle class.

    We are always worried about what we cannot control. We do not have control over exogenous events, like another earthquake in Japan, nor do we have control over what the political scene is going to look like around the world.

    We are free market advocates. We think upward mobility and growing the middle class works. The US has exported that idea to countries all over the world. What worries me is that now, there are those who do not think those principles are of value anymore. That, to me, is very worrisome. It is a whole change of culture and mentality. What makes a country grow is really the private sector of the market, not the public sector. When we have politicians making promises they cannot keep, that worries us because that is a whole change in culture. We have been through these tough economic periods before, and we have come out of each one very, very strong. I am confident that we will do that again.

    Sarin Kouyoumdjian-Gurunlian
    Press Manager
    marcus evans, Summits Division
    Tel: + 357 22 849 313

    About the Elite Summit 2011

    This unique forum will take place at the Fairmont Le Montreux Palace, Montreux, Switzerland, 21 - 23 November 2011. Offering much more than any conference, seminar or trade show, this exclusive meeting will bring together esteemed thought leaders in institutional investing and market leading solution providers for a highly focused and interactive networking event. The Summit addresses the ongoing evolution of private wealth management trends and provides attendees with fresh perspectives on both asset allocation and family governance strategies for a profitable investment portfolio of both financial and human assets despite market uncertainty.

    For more information please send an email to info@marcusevanscy.com or visit the event website at www.elitesummit.com 

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    About Calamos Investments

    Calamos Investments is a globally diversified investment firm offering equity, fixed-income, convertible and alternative investment strategies, among others. The firm serves institutions and individuals around the world via separately managed accounts and a family of open-end and closed-end funds, providing a risk-managed approach to capital appreciation and income-producing strategies.

    For more information visit www.calamos.com

    About marcus evans Summits

    marcus evans Summits are high level business forums for the world’s leading decision-makers to meet, learn and discuss strategies and solutions. Held at exclusive locations around the world, these events provide attendees with a unique opportunity to individually tailor their schedules of keynote presentations, think tanks, seminars and one-to-one business meetings. For more information, please visit www.marcusevans.com

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