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Elite fund bets big on an economic rebound
Calamos Growth Fund is splurging on cyclical stocks, the ones that do best when the economy is robust. The fund's strong track record means it -- and its strategy -- are well worth watching.
By Timothy Middleton
The American economy will be stronger a year from now. What are you doing to prepare your portfolio for that new reality?
Nick Calamos is selling defensive stocks and aggressively buying cyclical issues, including such downtrodden names as Cisco Systems (CSCO, news, msgs) and Qualcomm (QCOM, news, msgs).
Much of the (capital) spending that hasnt gone on for the last three years has to occur for us to remain competitive, he argues. The opportunity for corporations to boost productivity is highly perishable.
Forward thinking has characterized Calamos Growth Fund (CVGRX) since it was launched nearly 13 years ago. Morningstar rates it the top performing diversified domestic equity mutual fund for the 10 years ended April 30.
They do a great job in a variety of markets, which is testament to the acuity of their (quantitative) model and the rigor of their research, says Josie Raney, a Morningstar fund analyst. They rate all stocks by credit quality and are very focused on balance-sheet risk, and that has kept them out of a lot of trouble their competitors have had.
A family affair
Indeed, the extended Calamos family -- which includes Nicks uncle John and his cousin John Jr.; all three co-manage the fund -- is best known for credit analysis. Calamos Convertible Fund (CCVIX) invests strictly in corporate debt that can be exchanged for equity. Convertibles force you to become an equity analyst, Nick Calamos explains.
The only serious objection anyone could raise to the fund is that it doesnt observe style purity. Morningstar puts it into the mid-capitalization growth box on its tic-tac-toe style grid, but the fund is really all-cap. Consultants, therefore, eschew it because it can change its stripes. Indeed, Morningstars own 401(k) plan doesnt include this fund, but that is its loss.
This is an all-weather portfolio that beat the market in 1999 by 15 percentage points, when growth was soaring, and in 2002 by nearly 18 points, when growth was in the gutter.
At the heart of the Calamos approach to investing is computer models designed to identify what Nick calls the best growth companies in America. They're sorted in terms of accelerating revenues, operating margins, earnings and return on capital.
Depending on the industry, a stock can meet any or all of those criteria. Then its put under the microscope for fundamental analysis. We try to understand how sustainable growth is and whats driving the story, Calamos says. This analysis includes poring over companies' balance sheets. Calamos wants companies with strong finances, ready access to capital markets and the best managements in their industries.
After this bottom-up research, Calamos applies a top-down overlay. Were looking out three to five years, and even longer at times, trying to understand what drives consumer spending and business spending, the manager says.
The broad view
The themes driving this overlay currently are these:- Productivity: The only way America continues to remain competitive is to derive higher and higher productivity in manufacturing and in the service sector, Calamos says.
- War on terror: This is a long-term theme thats going to have an impact on aerospace and defense, making them less cyclical and enabling them to earn a higher return on capital.
- Baby boomers: They have tremendous discretionary spending ability, so were always focused on, for example, specialty retail like Harley-Davidson (HDI, news, msgs) and Whole Foods Market (WFMI, news, msgs).
- Health care: Thats always out there, and at times you have the opportunity to load up at good prices.
- Education: If you havent learned something new in the last two years, youre not going to last long in your job.
These themes are reflected in the funds top holdings.
| Calamos top holdings | | Stock | Sector | | Amazon.com (AMZN, news, msgs) | Retail | | Cisco Systems (CSCO, news, msgs) | Networking | | eBay (EBAY, news, msgs) | Retail | | Apollo Group (APOL, news, msgs) | Education | | Harley-Davidson (HDI, news, msgs) | Recreational vehicles |
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Source: Calamos Fund
Cisco is a relatively recent addition to the portfolio, and to make way, any number of defensive issues were sold. The Calamos approach leads to a highly diversified portfolio of more than 100 names, with only the best ideas -- the top 10 holdings -- constituting major plays. Those top names currently account for 24% of the funds assets.
Among the stocks sold: UnitedHealth Group (UNH, news, msgs), whose shares are trading near their 52-week high. We were loaded up on less cyclical names, and were now reversing that, Calamos says.
Taking the long view isn't unique in money management; Pimco earlier this month held its annual Secular Forum that looks out five years. It has often been unusually successful; just as Calamos is at the head of its class, so is Pimco.
Today's forecast
Calamoss success, moreover, gives credibility to its current forecast, and its one that would thrill any equity investor.
The weakness in the economy has been a cyclical correction, and the economy is reemerging, Calamos says. Corporations are finding it much easier to borrow than it was just a few months ago. We have a pro-growth package coming from Washington, productivity is high, inflation and interest rates are low and corporate governance issues are behind us. The economy is going to start hitting a growth phase.
That would be good news for all equity investors and, since this fund typically beats its rivals, particularly good news for Calamos Growth. Although it has delivered average gains of 16.7% since inception, it shed 8.4% of its value in each of the three years ended April 30.
But I, for one, wish I had managed to hold my personal losses to that level during the bear market. Taking a long-term view, funds that lose the least help their owners do the best.
What they're buying
Back to school: Apollo Group (APOL, news, msgs) runs the country's largest private university, the University of Phoenix (which is where the company is headquartered). Net income has surged 25% in each of the last five years.
A stranglehold: Qualcomms CDMA wireless technology basically has a stranglehold on the entire marketplace, Calamos says. The company's return on capital averages in the mid 20s, compared with an average in its industry of less than 11%.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Cisco and Qualcomm. In addition, he's writing a book for John Wiley & Sons about Pimcos chief investment officer, Bill Gross.
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