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Excellence in Fund Management: Nick Calamos of Calamos Growth & Income Fund

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Quick Take: No investment is potentially out of bounds for co-managers John Calamos Sr. and nephew Nick Calamos of Calamos Growth & Income/A (CVTRX). The team roams the capital markets for equities and bonds, both convertible and non-convertible, 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, both growth and value. Starbucks Corp. (SBUX) recently joined the fund’s line-up.

The portfolio is positioned for a bullish recovery, with an equity weighting of about 40%, a 50% stake in convertible bonds and convertible preferreds, and a 10% position in non-convertible bonds. The credit quality of the bond portion of the portfolio 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% versus 16.84%.

The fine long-term performance record has resulted in a 2004 Standard & Poor’s/Business Week Excellence in Fund Management Award for the second year in a row. Over a ten-year period through last month, the portfolio has risen 15.8%, on average, compared with 11.3% for the S&P 500.

Recently, the Calamos fund has faced some setbacks. For the one-year period through May, the fund rose 13.4%, while the S&P 500 was up 18.3%. Nick says a few tech positions have hurt returns, as has a stake in Calpine Corp. (CPN). Fund Advisor spoke to him about the portfolio and hisoutlook going forward.

The Full Interview:

S&P: What is your basic investment philosophy?

CALAMOS: 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.

S&P: What is the fund’s current asset allocation?

CALAMOS: About 50% is in convertible bonds and convertible preferreds, 40% is in equities, and 10% is in non-convertible bonds. Our asset allocation is pretty fluid, although we don’t make abrupt changes. We are 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.

S&P: What is the fund’s turnover?

CALAMOS: 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.

S&P: How do you decide among a company’s different investment options?

CALAMOS: 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 Corp. (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.

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

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

S&P: Do you consider any top-down features to determine the fund’s asset allocation and/or individual holdings?

CALAMOS: 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.

S&P: What’s your current view of the economy?

CALAMOS: 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.

S&P: What’s your strategy for investing in equities?

CALAMOS: 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 Corp. (CD). Recently, we purchased a position in Starbucks Corp. (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.

S&P: Why have the fund’s long-term returns been strong?

CALAMOS: I think it’s a matter of staying focused and not getting too greedy in an upmarket.

S&P: Why have been the fund’s recent returns been less competitive?

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

Contact Robert F. Keane with questions or comments at:

[email protected].

Contact Robert F. Keane with questions or comments at:

[email protected].