June 27, 2016 - 2:43pm EST by
2016 2017
Price: 7.00 EPS 0 0
Shares Out. (in M): 21 P/E 0 0
Market Cap (in $M): 135 P/FCF 0 0
Net Debt (in $M): 46 EBIT 0 0
TEV (in $M): -7 TEV/EBIT 0 0

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Calamos is trading around $7 right now and pays a dividend of $0.60/year, for a roughly 8.6% dividend yield.  Calamos is a publicly traded asset manager and consequently, the stock price tends to follow the AUM balance, which responds to performance of the underlying products because flows follow returns. What is interesting about Calamos is one can buy the stock, short their equity holdings, and be left with exposure to their fixed income fund management business, collecting a ~8% yield, and have their exposure to the equity side of their business hedged (and the equity side of the business is mostly composed of 1-2 star rated funds anyway, so ratings can't deteriorate much more).  Background follows...



Calamos has a substantial asset management business running equity oriented funds.   The performance of these equity funds determines a large amount of the movement in their AUM balance, not only because of the returns, but because of the flows that occur in response to returns. Investors tend to try and time moves in the equity market more than they do in the fixed income market, which is more commonly treated as a simple allocation.  This makes AUM balances for equity oriented asset managers more volatile. Consequently, publicly traded asset managers with substantial exposure to credit funds (ARES and OAK for example), tend to trade at lower dividend yields, currently 4-5%.  In Calamos, one can access exposure to the fixed income fund management business and collect a ~8% dividend yield vs. a yield of roughly half that for comps.  To do so requires aggregating the holdings of the Calamos equity funds and shorting the list of securities in weights corresponding to Calamos’ exposure levels. The cost to do this is less than 1% (I was quoted a net borrow of 60bps).  



Consensus expectations have the dividend covered for this year and on recent calls management has reiterated a commitment to making the payment.  Insiders own a substantial amount of stock and are likely incentivized to keep paying the dividend as it’s a form of comp for them.  If their equity funds begin to produce good returns, the short position will likely lose more than the advance in the stock (in the near-term) because AUM growth will respond on a lag to product performance, meaning the stock won’t react as quickly as the positions they own in their funds. But, the potential benefit is multiple expansion (that would make up for this potential performance lag) if their product performance does indeed improve. So following a quarter or two quarter lag, one should be rewarded.


Additional appeal is that most of their equity funds are rated 1-2 stars by Morningstar, so for many of their funds, the only potential path for the rating is flat to up. It’s also notable that 22% of their AUM is in two funds, the Calamos Growth and Income fund (11% of AUM, 13% of revenue), which is a two star fund, and the Calamos Growth Fund (11% of AUM and 17% of revenue), which is a one star fund.  If returns continue to be weak, the short position on their holdings will protect the investor from additional contractions in AUM, but if returns rebound, AUM growth and corresponding multiple expansion should provide upside.  Meanwhile, investors collect a healthy yield for exposure to the fixed income asset management side of their business which is relatively stable.



The path of AUM growth is also favorable. Weak performance over the past few years led to net outflows that pressured AUM but recently the outflows have stabilized. It seems with so many of their funds ranked as two star funds, those who rely on fund ratings to help guide their allocations have already exited. In fact, since January, total AUM is actually up slightly from a value of $20.6B to a value of $20.9B (as of April when the most recent data is available). 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- improvement in morningstar ratings for equity products or one of their two largest  equity oriented funds

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