10 Questions With Calamos Growth Fund Manager John Calamos

You may not have heard of John Calamos, but you should check out what he has to say.

The founder of the Naperville, Ill., fund shop that bears his name has quietly built an enviable track record running the (CVGRX)Calamos Growth fund since its start in 1990. The mid-cap growth fund beat the S&P 500 and more than 95% of its peers over the last one-, three-, five- and 10-year periods, according to Morningstar. Calamos has even managed to survive this year, by halving his tech weighting, en route to a 25.2% gain that tops almost all his competitors. What does he like, what doesn't he like, and what's he going to do next year? Read on.

Manager: John Calamos

Fund: (CVGRX)Calamos Growth

Managed Since: Sept. 4, 1990* (inception)

Assets: $126 million

YTD Return/ Rank in Category 29.1%/ 3 out of 557

3-Year Return/Rank in Category 40.2%/ 4 out of 402

Load/Expenses: 4.75%/2% (Class A shares)

Top Holdings: SEI Investments(SEIC) Laboratory Corp. of America(LH) Anadarko Petroleum(APC)

*Co-managed with John Calamos Jr. since 1994.

1. Let's start with where we are today with the market. The Nasdaq is down about 50% from its March 10 peak. What do you think is driving this and where do you see us going from here into next year?

Calamos: We've been going through a bit of reality on the valuations of the tech area. You know, we've been talking about that literally for years, about the priced for perfection, the high valuations. Finally, that reality seems to be setting in here.

And it seems like, yes, technology has become a larger part of the total market. I think it's some 30%-plus in the S&P 500 even. It's now also looking like the rest of the market. In other words, the market is a big cyclical.

It can't all be secular growth.

Calamos: Right, it can't all be secular growth. On the other side of that coin, I'm not throwing away my cell phone. There is a tremendous opportunity in the marketplace here. I think we've gone from looking through rose-colored glasses -- which means that whatever company they seem to be focused on is going to take over the world -- to a much more opportunistic, back to cash flow analysis. Great story, great this, great that -- except can they actually create some cash flow out of it? And I think it still leaves us in a very opportunistic investment climate.

One of the things that I like about the current environment -- not that we like to see corrections like this -- but we are in a market environment where many stocks, like the technology area, were grossly overvalued. Then other stocks were very, very cheap. So from an investor's point of view, you get a lot to pick from.

2. Let's look at tech first. A lot of that stuff is still pretty expensive on a valuation basis; what do you see in terms of the values in the tech sector today?

Calamos: I think you're right. Even though the correction looks horrible, it still leaves us with many companies that are expensive.

What we have been focusing on in the fund are companies that still have good earnings growth. We've taken our hits on some issues, but we've been focusing more in the mid-cap area. We're out of a lot of large-cap areas.

We also like companies where technology is being used in the company. We consider something like DST Systems(DST) a technology play because of the way they're using technology in an old-line business.

As part of Stilwell Financial(SV)?

Calamos: Right. We're still in some of the more traditional names you hear -- Juniper Networks (JNPR). We think that company's very viable and it's gotten hit like everything else.

But, overall, we have cut down our technology quite a bit.

That's something I wanted to ask you about. Back about the end of the first quarter, it looked like the tech weighting in the fund was at about 60%. Where would you say it's at today and when did that shift take place?

Calamos: It is below 30% now. We have halved it and it's no longer the biggest sector that we have in the fund.

What is the top sector now?

Calamos: Consumer growth staples.

So you really moved into some more defensive areas.

Calamos: Back then, the consumer growth staples was 8% or 9%. We did make a gradual shift over time; it wasn't overnight. We've increased the consumer growth staples and we've increased financials a bit in here as well.

3. In those two areas, what are your favorite two or three stocks? And what's sparking your interest?

Calamos: In the financial area, we're looking at Ace Ltd.(ACL) It's a pretty broad offshore insurance company that has been able to transition its business very nicely. And it's more of a global play. Alliance Capital(AC) -- again, another large money management, financial service firm.

In the consumer-growth staple area, we like some of the drug companies -- smaller ones. In industrial services, we like Learning Tree (LTRE), Robert Half (RHI). In fact, I noticed today Robert Half was just put into the S&P 500.

4. Do you recall a time in your career where you've seen this kind of selling and this kind of negativity -- this kind of a correction? Also, what do you think about the "R" word -- recession? Are we or are we not heading for a soft landing?

Calamos: I've seen some commentaries saying the correction here in technology is similar to '73-'74. Well, I remember those markets, it's when I first started in the business.

And '73-'74 was a little bit different in the sense that the whole market was going down. In past cycles, in the '70s, in the '80s, it seemed like the whole market was either going down or going up. In this market, obviously, the capital markets are much larger now, we've securitized so many different industries and sectors, which was not the case back then. So because of very large capital markets, it's much more important to think about industries and sectors than it is about the whole market. Quite frankly, I think a lot of the averages become a bit meaningless in here. You know, the S&P 500 should be called the S&P 5.

The S&P 500 was created in the '20s, because the Dow Jones was too narrow, now the S&P 500 is too narrow -- but that's part of what's happening. And I think that's constructive.

My sense is that we're not going to have a recession and that we'll probably end up with a soft landing. The catalyst for the market churning might be an interest-rate drop here. Obviously, the short end of the curve where the Fed really can move rates is way too high.

Do you think that's the catalyst, more than the election?

Calamos: Well, I think the election, quite frankly, does have a psychological effect and has been very poor on the market. I think it has to play very negatively on the market, because what financial people look for is some stability. A financial market likes to have the federal government, for the most part, to be a nonentity.

The nice thing that has happened over the last five, six, seven, eight years is that the Fed has done such a good job of taking that out of the equation for the most part. And all of a sudden now we have this uncertainty where some Florida judge gets to pick the president; it's not a good thing when you think about stores of wealth around the world. The store of wealth is the dollar, the yen, the euro and gold. ... The yen has not done well; it remains to be seen whether the euro becomes a store of wealth. So all of a sudden now, there are cracks in our armor. And I don't think that plays well for the global market or the financial markets here. I think that's really the outgrowth of this uncertainty with this fiasco that's going on down in Florida.

5. Let's talk about some bellwethers. I know earlier in the year you folks owned Qualcomm (QCOM), which last year returned 2,619%. But what's your take on the stock today?

Calamos: One of the disciplines that we use in the growth fund is that we try not to fall in love with a company. We tend to let our models and the numbers make the decisions for us.

As a firm, Calamos Asset Management from the end of 1999 through the early part of 2000 had a very significant position in Qualcomm, not only in the growth fund, but also in the convertibles. And we did very, very well.

Part of the discipline of the growth fund is when this stock is fully priced for future growth -- it doesn't mean that the growth will not be there, it just means that, gee whiz, everybody seems to know about it -- that, to us, to keep a disciplined approach signals a sell. And we were very excited about the CMDA technology that Qualcomm had. We got in early, which was fortunate. I think this thing with China is very positive for the company, but we're not in it right now.

We ended up selling it earlier this year, which proved to be fortunate for us. Of course, that's part of the discipline of the growth fund here: We have probably over a 200% turnover rate.

It's a very highly diversified portfolio. We have probably 60-some positions in the portfolio right now and we're looking always to stay in companies that are growing very fast and the stock has not yet reflected the growth. We're going to keep fully invested, even though we're like everyone else -- a bit uncertain about the markets in here. But we try to keep it fully invested and get the portfolio in line with what we see going over the next three, four, five months.

6. There's been a lot of talk this year about old tech vs. new tech -- old tech being tech shops that rely more heavily on maturing PC sales for their growth, vs. new tech being networkers and others more closely tied to the build-out in the Internet for their growth.

I noticed earlier this year, growth managers were getting out of Microsoft (MSFT), but value managers were buying it. And how is this going to shake out during the current instability, we've seen bleeding on both sides. Where do you come down on the old tech-new tech divide, and what do you see going forward?

Calamos: In the growth fund, we're not a value buyer in that sense. We're looking for some catalyst to have happened before we would be in there buying a value play that all of a sudden turns into a growth play. And for us, that would be anticipated higher earnings, relative strength, those types of factors.

Overall, though, as you know, we manage about $6 billion, so this $125 million in our growth fund is a smaller piece of our assets under management. From a macro point of view, we think that there are some very interesting value plays. We don't anticipate it in the growth fund. In the growth fund, we tend to keep that portfolio very nimble. In some of our other funds, the strategy is different than that of the growth fund, where we would participate in, say, a Lucent (LU) down here or Motorola (MOT). Some of these stocks have gotten pretty cheap.

7. When you look at the networking folks, those were the can't-miss kids and all of a sudden they missed ... What's your take on what we're seeing now? What do you like in that group?

Calamos: Well, I'll tell you, our models in the growth fund say it's too soon.

Our cash flow-to-total-capital models say they're almost fairly priced, but not quite. We looked at those same models a year ago. It was just like, gee, what's wrong with this model? When you have low bands and high bands -- why are they trading way above their high band? It's like something's wrong with the model and now they're all coming in. And they're still not cheap.

That's what we're looking for, because some of these companies have been taken down with everything. And that's what makes this market very interesting -- the sense that some let the plug out of the bathtub and everything is going down. Some go down the drain and others seek some sort of level that makes sense. We don't think everything's going down the drain here.

I think there is a sense of reality that has set in here and I think more traditional valuations or traditional ways to value these companies will probably be the outgrowth of this correction here. Which is different than any other correction. And I think there's some fear out there. Every correction we've had, you buy in the correction and you have the snapback, right?

Right.

Calamos: They forget that. When I got into the business in 1970, we had a correction, like 1973-'74. The market didn't go above 1000 until 1982. Twelve years when the Japanese corrected in 1988 by 50%, it's still down 50% from that high-water mark.

For investors, especially those who just got into the market in the past five years or so, is a shift in psychology going forward necessary? Things may recover, but we may not see Nasdaq 5000 for five or 10 years and maybe we don't deserve to.

Calamos: Well, I think that's true. I think that we could have a sideways market for many, many quarters in here. More churning in the market -- in the sense of different industries and different companies having to prove themselves. Not only for the Nasdaq, but for the S&P 500.

8. A lot of fund managers have been letting their cash positions mount up as the market has made its way south the past few months. What do you think it's going to take for their psychology to change? Is it having the interest-rate picture brighten a bit?

Calamos: We don't allocate to cash. Because we have found it to be a very dangerous, it's sort of like short-term stock picking. Allocating the cash in this kind of market environment can be very dangerous, because we're still constructively long-term bullish on the market.

The problem is, over the short term anything can happen and if you allocate to cash, if the Fed were to say, gee, we'll lower short-term rates 25 basis points, you don't have time to get in. You're always in after the fact, you really get whipsawed. And individual investors get whipsawed this way.

It's that old University of Michigan study that if you were out of the market during the great bull market from '82 up through '87, if I remember that study right, if you were out of the market I think it was 10 or 15 of the up days out of 2,000 days or something, your returns went down to almost money market rates. And I've seen that in my experience over the years, so basically you need to take a little bit of a longer-term view and not try and second-guess the very week-to-week, month-to-month -- very, very dangerous.

Look what happened last year. Y2K, everybody sat on the sidelines, waiting for Y2K to be over with, right? And we had a tremendous fourth-quarter rally. So all that money was sitting on the sidelines, waiting for us to make sure that everything didn't go to hell in a handbasket. And the market seemed to know better than the cash sitting on the sidelines that Y2K would be a nonevent.

This is a big mistake for individual investors: second-guessing it, going to cash, instead of looking longer term, they tend to have a very short-term focus. Many investors that I see, they think through an investment policy, an investment program, they think through it long term. And so they begin correctly. And then what happens is they let some short-term event whipsaw them out of their long-term program.

And the expectation might be right now that 20%, 25% average returns, I ought to be able to get that. That may not be the case.

9. If you had to pick three stocks today to buy and hold for five years, which would you pick and why?

Calamos: See, that's the other thing I don't believe, which is different than the past markets. I don't think the buy-and-hold strategy really works well. I don't know if it ever worked well, to be honest with you.

I think a lot of the financial press gets enamored with this. So just tell me what company over the next five years will participate in this? Is it Qualcomm? Is it Lucent? Is it Motorola? Is it IBM (IBM)? Is it whatever? Tell me what technology will be out there five years from now.

That's so hard to do. We're in a tremendous transitional phase in our economy -- in fact, the world economy, due to technology and the Information Age and all that's going on and for me to say today that these three companies are the ones that will last out is ludicrous. It could be some guy in the garage or some lab that is creating the technology that will negate the whole business plan.

So I think the portfolios have to be very nimble in this transitional type of the economy that we're in. I don't think we can just say whatever happens, Qualcomm's going to have the answer or Microsoft or Sun Micro or some of the really good companies today. I think buying one company -- and I saw that happen when I first started investing in the '60s and '70s -- just buy IBM and they'll come through. And if you look through that whole thing, IBM became a value stock, then it became a growth stock, then it became a value stock. I saw it go from $130 down to $40, $50.

So, to me, it's much more important for investors to be tuned into what's going on. Hopefully, they buy a good fund that is heavy in those attributes, because we're not in the kind of economy where they can just buy and hold.

10. What's the most recent stock you added to the fund and what's the most recent stock you added to your personal portfolio?

Calamos: I do no individual investing for the most part, so I'm a heavy investor in our own funds.

Regarding the fund, we just entered a group of stocks, let me see if I can pick it out here. One of the most recent holdings was Professional Detailing (PDII). We started adding that just last month.

Professional Detailing is providing services to the pharmaceutical industry. They help them design and implement sales programs and how to market the drugs and things like that. That's one we added just at the beginning of November.

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