In sports and the markets, sometimes statistics tell the story more thoroughly than pages of waxing rhapsodic on stellar performance. For instance: Number 1. Number 1. Number 1.
The preceding numbers are the three-, five- and 10-year percentage ranking of the
Calamos Growth fund as compared to its mid-cap growth peers. While that might be enough to send some
readers speed-dialing their brokers to move some money, you'll want to read the rest of our interview with John P. Calamos, co-manager of the fund since its September 1990 inception.
Calamos, the founder of the enormously successful Calamos Asset Management fund family, is well-known for writing the book on investing in convertible bonds, literally -- his
Convertible Securities is the seminal work on the subject. His firm's convertible-bond fund offerings such as
Calamos Convertible have racked up stellar numbers over the short and long haul.
In this week's 10 Questions, Calamos -- who co-manages many offerings with sons Nick and John Jr. -- goes beyond the numbers, pulling back the hood on his Calamos Growth fund to discuss what he likes and dislikes about this market. The fund skipper discusses the strategy behind his success, why this feels like the 1970s, where tech is heading and, of course, what he's buying and selling. While we focused extensively on the Calamos Growth fund, Calamos also touches on why he still loves converts -- and high-yield offerings -- in this market.
Read on. We're guessing you still might want to call your broker when you're done.
Click on Company Name to Jump to Calamos's Comments on a Stock
1. How has your investment strategy enabled Calamos Growth to outpace the competition so consistently the past 10 years, in good times and bad?
Our investment strategy is both quantitative and qualitative. We do a lot of quantitative modeling from the total universe of stocks. We're downloading data every day, looking at different trends using various models. Once that's done, we backfill that with qualitative data and balance-sheet items.
In the quantitative area, we look for ideas -- companies with the best sales growth, the best earnings trends or the most expanding margins. Those are our first scans, which we use to rank those companies. Then, on the qualitative side, we back that up by looking at cash flow to total capital, returns on capital, comparing those numbers to the industry. Essentially, we try to reconfirm what our quantitative models are telling us.
Using the combination of the two has really been the key. Often a lot of our qualitative findings contrast with what we see on the quantitative side. This sets up a sell discipline for us. The reason for our performance is not so much what we're buying as what we're selling -- and when we sell.
This sell discipline results in a fairly high turnover rate in the fund. But we think a higher turnover is necessary, given this climate.
Our sell discipline, for example, allowed us to get out of technology -- which we started selling in 1999 all the way through 2000. This helped us to post positive returns in both 1999 and 2000
the fund returned 77.7% in 1999 and 26.6% in 2000. We had a fairly heavy weighting in tech, and our cash flow to total capital analysis showed the growth trends for these tech stocks were unsustainable.
The qualitative work showed that these stocks were so overpriced -- two, three times -- that we wondered what the hell was wrong with our models! (Laughs.) Usually it makes sense, and it didn't make sense at all. Typically, when we don't understand something very well, we sell.
Have you sold off any positions recently?
We have sold off
( CD), sold off some
. We were heavy in the restaurant area -- we sold off
It's a pretty fluid portfolio, though. We may come back into them at some point.
2. Your turnover rate back in 2000 was about 200%; currently, it stands at about 91%. Any reason for the less-frequent activity? Are there more stocks to hold on to at this point?
A lot of that is market-related. We don't have specific target turnover rates. We do have some core holdings that we tend to hold for a long term, but it's more a component of the market action over the past year compared with the market back then.
Having said that, in this down phase of the market, there are probably fewer ranking changes among our investments.
Even with the fund's high turnover, we've been very tax-efficient.
Fund: Calamos Growth, Co-Managed since Sept. 1990 inception.
Assets: $1.91 billion
Expense Ratio: 1.5%
One-Year Performance: Down 6.05%, Top 10% of Mid-Cap Category
Three-Year Average Annual Performance: 12.15%, Top 1%
Five-Year Average Annual Performance:16.88%, Top 1%
Top Three Holdings: Apollo Group, International Game Technology and Weight Watchers.
Source: Morningstar, Calamos
3. Earlier this month, you said you see many encouraging signs in the economy. Where do you see the economy and this market heading?
GDP came out at 3%
Thursday morning -- not bad -- but you'd never know that looking at third-quarter market performance, the worst stock market in years. It does seem to us that the underlying economic situation is improving. Quite frankly, the market price action looks very much like what I experienced in the 1970s, a horrible market environment, just unrelenting on the downside at time.
The difference is that in the 1970s, economically, we were a mess. We lost control of our money -- inflation doubled and doubled again -- the bond market went into a nose dive, the Watergate scandal, we went off the gold standard. Economically, we're in much better shape today.
Our view is that this correction, economically, is a cyclical one, not a secular correction. What we see on the price action is a correction on the valuation aberration of 1998 and 1999. In fact, even with the market correction we've had, valuations on large-caps are still pretty stretched.
Many of the mid-cap stocks are pretty compelling, especially compared to the large-cap stocks. We think large-cap stocks will go sideways at best, ending up in a trading range. The more compelling valuations will be in the mid-cap sphere.
We're more in the 1970s environment, where equities can go sideways. We can go to the top of a trading range and have a terrific rally. But this is not a breakout to us, at least to me, of August 1982 proportion -- where it starts to go and keep going. That said, even in that 1970s period -- when the market seemed stuck -- there were terrific gains to be had along the way.
This is going to be a bottom-up, stock-pickers', sector-rotation market. It's not a market where you buy 20 large-caps and walk away, saying everything will be fine and dandy three, four years down the road. There's a lot of volatility here. Our view is, the flip side of volatility is opportunitiy -- we need to be opportunistic.
Also, we're more worried about the bond market than the equity market. If we're right that the economy's improving, we may get one more downtick on short-term rates, but the yield curve is going to flatten. The opportunity in bonds is in the low investment-grade areas. We've been finding plenty of good opportunities on the convertible side
for the Calamos Convertible fund.
4. Your fund family has been a leader in asset growth during 2001 and 2002. Are you concerned at all about taking in too much money? Do you plan to close funds?
I think the big asset growth is because we started from such a low base! We've been around since our first convertible fund launched in 1985; our first equity fund launched in 1990. People have started to notice that we've had pretty good performance. We have been getting good flows in our funds, and we watch that carefully.
We closed our
Market Neutralfund; we think there are limited opportunities in that strategy. There are no plans to close our other funds.
We have a couple seed funds. As I said, we are excited about what we see in the high-yield sector. We have the lowest interest rates in 50 years. Below-investment-grade paper has been traded at the widest debt spreads since 1990. High yields and busted converts have done very well.
Yes, there are risks for below-investment-grade bonds -- a double-dip recession, for instance. But the default rate has been going down, which is consistent with an improving economy. Of the nine months of data this year, seven or eight months have seen improving default rates.
We think the firm has a lot of room for growth -- places where investor money can get put to work.
5. Speaking of places to put your money to work, you're relatively heavy in retail-oriented and health care stocks right now, and fairly light in technology. Do you think tech stocks remain overvalued?
It depends. Tech stocks have all come to be seen as value stocks, and there probably are some values.
Our technology holdings are software-oriented companies --
is big in there. These are good opportunities. The rest -- the
( LU) and
( NT) -- we buy those in our
corporate bond funds, because their papers are better opportunities than their stocks. We think we participate in these fallen angels in a better way -- the high-yield convertible side -- but we don't own them in the equity portfolio.
The overcapacity in the telecom area is very worrisome to us. We're even worried about the paper we own! (Laughs.) You've got all these stocks trading at $2-$3. But we're keeping to our discipline -- looking at best companies with best relative growth.
For telecom and technology stocks to do well, capex spending has to increase here, and we don't see it happening real soon. Equipment is being sold at 20-30 cents on the dollar. We've been choosy in this area, looking at software companies or companies using technology well.
6. You mentioned eBay, a top-10 holding in your fund. Another top-10 holding is Amazon.com(AMZN) - Get Report. These two Net stocks have been great performers this year. Do you think they still have more upside?
I think eBay has done a great job. They seem to be a survivor. They're getting better and better press.
We look at Amazon as the
of the Internet. We were a bit more excited about Amazon when they finally said they want to make money -- which is a good thing for a company! When they announced, "Gee we'd like to make money instead of just market share," we thought that was a good move. We actually even owned their converts. We paid 40 cents on the dollar on those.
Both those companies are survivors. They do a good job getting most of the consumer dollars on the Net. We continue to be excited about them; we see a lot more upside for these two.
We like Tenet and UnitedHealth. The whole thing plays into the consumer themes we like. Also, health care is a longer-term theme that provides some good opportunities.
The problem is, every time there's a bill in Congress, it kills the industry. It's a very politically sensitive industry. But we do look at companies that provide services in an efficient fashion. Whenever we're in there, we're nervous because it's such a political football.
This interview was conducted before the
news of a fraud probe into two doctors at a Tenet medical center hammered its stock. Calamos couldn't be reached for further comment on the matter.
is one that we've kind of rode up and down, and looks like it's coming back a bit here. It really was going counter to the market for quite a few months, but it seems to come back, and we continue to hold it in the fund.
7. Apollo Group (APOL) is your largest holding. What do you like about the company?
Apollo Group contains several themes that we like -- the educational theme, the effective use of technology to improve their business. They do the college of financial planners, things like that. They're using the Web quite effectively.
This has been one of our core holdings.
The stock has had a big run-up in recent years, do you think it's getting frothy? The whole sector's had a nice run.
We think Apollo will be able to maintain their growth. We also own
-- that's a theme that we like.
But let me stress, this is a very active portfolio. If any of these stocks we're talking about get overpriced, we don't have any problem pulling the trigger and buying them back later.
8. What's your most recent addition to the portfolio and what do you like about it?
One I can talk about that plays into several themes we like right now is
-- it's the No. 3 holding in the fund. It's been a recent purchase -- I think we started buying last August -- and we continue to add to it.
It's had good earnings growth, and we expect to see continuing improvement. As long as they don't disappoint us there, we'll keep with them.
is a stock we've owned for a while. It's a good example of a mid-cap company that has a terrific franchise. It's growing well. It's a retail-oriented stock, which plays to several themes: low inflation, low interest-rate environment, the consumer is still spending money. The company is also trying to expand into the financial-advice area -- we think that will be a good move for them.
9. How does a fund that has fairly rapid turnover gauge a company's management? Does it matter much to you?
That's an excellent question. We have a widely diversified portfolio. We don't visit every company and have an in-depth conversation with the management. We do call them now and then if we're confused about something; we go to conferences where management presents; occasionally management comes out to us. It's a very difficult area to assess.
What we try to do when talking to management is determine what's the critical element that is going to make their business plan work or fail: What's the hinge assumption that everything works off of? That's what we're trying to do in talking to management. But we really let the numbers drive our investment decisions.
10. Given the volatility in this market, are there any stocks that you feel comfortable with letting it ride?
No. I think the big disconnect with a lot of investors is this: Great companies are not always great investments. We're letting valuation drive our fund. I can be excited about management and performance; they can be a great company. But great companies can be overvalued.
Quite frankly, I don't think the buy-and-hold strategy works. Maybe it works for Warren Buffett. But he buys the whole damn company! Investors have to buy pieces. That's a little different. We're hoping we're buying some great growth companies, and once that growth is recognized in the market, we're looking elsewhere.
When you're in the mid-cap growth arena, there are thousands of companies. And this is the sweet spot of the U.S. economy. This is where jobs get created. This is where ideas are coming from. This is the most vibrant part of the marketplace.
In this arena, it's incredibly competitive. You have to keep the portfolio very fresh. The idea that I know which one of these 80 companies I own will become the next Wal-Mart or Home Depot is not realistic.
I can't tell you the one or two mid-cap stocks to own. But I can tell you which 80 stocks to own.
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