Investment chief sees global opportunities

Investment chief sees global opportunities

Q. Could you give us your thoughts today about the economy?
A. Well, we relate everything in the economic world back to the financial markets. So that’s what we’re trying to figure out. We think economics, obviously, impact the financial market. So you know, our sense is, if we’re in a recession or not a recession, that seems still to be the question. As far as the financial markets are concerned, they’ve already reacted like we were in a recession.

Our sense is that the recession would not be as deep as even the financial markets are indicating. Therefore, we think this is a good opportunity, actually.

So we’re still bouncing around a lot. There’s still a lot of volatility. We don’t expect volatility to decrease in here. But you know, we don’t think investors should panic out of the markets here, as we’re seeing some do. And these are the type of markets that you really need to lean more on the underlying valuations of your portfolio and what you own, rather than getting kind of a panic out because of high short-term volatility. So we’re looking out six months, twelve months, and so we’re pretty constructive as to the look out that far.

Will we have a recession? Yes, maybe. But I think we have to realize that the market is much broader than people realize. You know, one sector, housing, automotives, and maybe financials in here, they are definitely in a recession and maybe worse. But there are a lot of parts of the economy that remain strong. And so, there’s the old stock market adage, it’s not a stock market, it’s a market of stocks.

So feel comfortable with what you own, and you know, we feel comfortable in how we’re positioned in here, and we seem to be getting rewarded, at least in the past few weeks. And then, we think, you know, that’s really the way to manage portfolios is really over the long term, not try to short term create this market.

Q. Where one industry is really in trouble, for instance, we’ve seen everything going up as the price of oil rises, is there a ripple effect?
A. There really is. I think what it does is the oil really ends up acting in the economy like taxes. It’s an increase in taxes for especially, you know, the lower economic tier or our society, and that hurts. And it’s just like they got a tax increase. Now we have less money to spend. So that’s obviously one of the negatives of what’s going on here. The consumer in that economic tier will have less disposable income; it will impact those types of stores that they usually buy from.

It seems if you’re looking for a company to invest in, you avoid those types of companies. The higher-end consumers are still spending in here. Our unemployment rate is nowhere near recession levels. It’s still very good. So you know, you kind of avoid the housing market. You avoid those areas.

Q. What are some good areas in which to invest?
A. Among those are positive in here are information technology, where you know we continue to be in a very competitive world. And technology is a means by which companies become more and more competitive and try to keep their margins. So we think that area continues to be very good. The valuations are fair to undervalued in here.

We look at companies that if we do have a prolonged kind of slow period here we’re looking at companies that have more of their revenues overseas than here. Globalization is still up and alive and well. So you know, if you look at our portfolios you’ll see companies that have really a substantial amount of their income coming from a global environment.

Q. You have spoken already of globalization and we hear of the “BRIC” countries—Brazil, Russia, India and China—as those to keep an eye on in the global economy. Are they and others among those you always look at?
A. We have global equity portfolios. We have global opportunities, which is a variety of, you know, convertible bonds and equity strategies on a global basis. The highest risk area of the global markets is emerging markets. And those can become very, very volatile. We typically limit our exposure there.

You know, we’re not in Russia. You know, they don’t have the rule of law yet. We’re not actually even in China, because China is all about creating more and more jobs, not about making money. So we’re in companies that benefit from China and doing things like that. Most of our areas are more conservative, even if we’re global. So we limit that exposure to the emerging market.

Now, having said that, we’re pretty excited about the emerging markets long-term here. Globalization is upon us. It’s not going away. It’s a tremendous force in the world. It’s a very positive, positive force. Globalization has the benefit or the byproduct of keeping governments more honest. If we make a policy mistake, the global economy is going to hit us right across the head. We’ll lose business.

If we raise taxes, we’ll lose business. Some of the countries you’re talking about, you see within the Balkans in Europe and everything else, they have a zero tax rate. Why? They need investors. Germany lowered their taxes, and now they’re expanding finally. The Netherlands, a very socialistic state, is lowering their taxes. So it really, you know, what they’re trying to do, and they’ll say, gee, how do we compete in a global economy? And we need to compete with the United States. And so they’re lowering their tax rates.

What we hope doesn’t happen here is in order to solve our issues here that we think raising taxes is the solution, and of course the unintended consequence of that is slow growth. So for investors it’s good news in the sense that it’s so much easier now to invest in different parts of the world.

Q. Is that ease of investment a good thing?
A. We think that’s positive. I guess what I was leading to is that we’re coming out with a new fund this summer which we call New World Fund, which will be focused on those areas. Not the “BRIC” (countries) but emerging markets. We think it is a new world. This is not a short-term fad. This is a new world. It’s really exciting. It’s pretty volatile, pretty risky. We want to make sure that people understand that type of volatility.

Q. So you’re taking kind of a calculated risk?
A. Yeah, yeah. But overall, you hope for higher returns. And you know, there is the key relationship of higher returns, higher risk. You can see those markets, and they’re up 60, 70, 80 percent, and they’re down, in a few days, 50-60 percent. So it’s pretty volatile.

Q. Now you don’t just go jump off the building after one bad day.
A. No, no. You want to limit your exposure to those areas and do the right kind of asset allocation. So you can get some of the benefits.

Q. You mentioned the word risk, not so much financial risk but your own risk as a manager. The number we’ve seen is about 50,000 people have been laid off in the financial services industry. And you mentioned that. It’s obviously a sector that’s under stress.
A. The financial services industry, due to all of the sub-prime problems and the securitization of all that——we were fortunate enough in our portfolios to stay away from housing and no sub prime——but the industry as a whole had the macro effect hit us. And so we’ve been on a growth track for a number of years.

Q. So what exactly happened with Calamos?
A. Trying to anticipate that if we’re going to be in a flatter period of growth, let’s make sure our expense side of the house really matches that. So we had a layoff of, I think it must have been like 5 percent. So it was 20-some people out of 400 and some. And we had such a ramp-up in the last few years that we didn’t want to, not knowing how long this would have to work itself out as a public company. And we have public shareholders out there.

We wanted to make sure that we matched the expenses to where we’re at. We—both myself and Nick—cut our salaries 80 percent or more. So we took the hits along with everybody else in here. And it’s not like we’re losing money or in trouble. We have good margins. It’s really, how do we really match that going forward? And, hopefully, as we work out of this period, we’ll get back to a normal rate of growth.

Q. Tell us a little bit about your thoughts about basic risk-taking in business, not necessarily the financial markets, but you and starting this business and what you had to put into it.
A. Well, the business is now in its 31st year. Every year has been a challenge, quite frankly. The one thing, as I go back over 30-some years is that I tell people around here running a business like this is like riding a bike uphill. You can’t just stop growing. As soon as you stop pedaling, you’re going the other way pretty quick.

It’s been very challenging, but, obviously, it has been rewarding. But the basic premise of the business from 30 years ago remains today. If you do a good job for the clients, and you serve them well, and you meet their objectives, a byproduct of doing that well is your own success. And that has not changed from, you know, day one.

You know, we work very hard to do a good job for all our clients, and we have institutional clients. We have mutual fund clients. We serve the financial advisor community. We have a lot of different clients today, and we work very hard to serve them all. And you know, we’ve had terrific performance on our strategies, our investment strategies that have grown over the years. And so we think we’ve done a good job over the years of serving those clients.

Q. Looking back those 30 long years, what’s the most difficult challenge you’ve had in managing this business and growing the business?
A. Well, I think from a businessman’s point of view, as you grow the business, it becomes more difficult to manage as you delegate away. Delegate away responsibilities; delegate away from yourself. And you hope they have the same passion. You hope they have the same view of servicing clients that you have. I used to say to people around here, too, that at one point I knew every client. Well, now we have millions of shareholders. It’s hard to know every client.

Q. So while managing the business can be difficult, what are some of the positives?
A. I think one of the rewarding things about what we do here is knowing the client and feeling like we’ve served them well. We have a lot of clients, I have, I still have some of my clients I’ve had since 1977. A lot of them are retired now, and they rely on us to provide their retirement check for them and manage the assets. And so there is a lot of gratification of doing a good job for them over the years, and we want to continue to be able to do that.

Q. Have any of your risks that you’ve taken as a business person not worked out? And would you mind telling us about one or two, just to show that you’re like the rest of us?
A. There were some strategies that at the time we felt would be good, but proved not to be what we feel beneficial. And we usually put our own money in it, too, so it’s not using other people’s money. So it’s always disappointing when you have to close one of those down. And it’s usually typically not losing money, but not keeping up with what are the objectives of what we’re doing.

And just trying to make sure that you have a team around you that is focused and dedicated, and keeping that is always, always a challenge, always a challenge in this business. Sometimes that has not worked, so we’ve had to make changes and reorganize.

I used to belong to a monthly CEO group called Tech, where you meet other CEOs and companies every month. And every time I’d come back to the office, the whole office was in fear, because I would reorganize the whole company. But I think you do need to be thinking about change all the time, you know. We’re in a very dynamic industry and a lot of change is going on all the time. We need to kind of stay in front of that.

Q. In speeches and other remarks, you’ve said that you always had a strong work ethic, growing up above the family grocery store and working in it. Have you always had an empathy for the little guy who starts from scratch?
A. I think so. I think we still service what a lot of people would consider smaller clients. I think they deserve our attention, just like clients of higher net worth. We’ve tried to honor that over the years. Strong work ethic is important. It was ingrained in myself and my family as a kid. Maybe I need to slow down a little bit, but it’s the same thing about customer service. We lived above the grocery store, and every Sunday night when somebody needed a quart of milk, they’d ring the doorbell, and you had to go down and give them a quart of milk.

Q. Have you allowed your children to do any stupid idea they want?
A. Oh, yeah. I have no control over them. We value education very highly. My daughter’s a professor at UNC, and my son’s one of our portfolio managers here.

Q. You touched on a moment ago about bringing along other managers, and it appears that Nick is the heir apparent. Is that true?
A. Nick (his nephew) has been in the business since 1983, so this is his 25th year in the business. So a lot of times when people say, well, I have my nephew, they think, oh, you know, just out of school. He’s been here 25 years. So Nick and John, my son—he has been here since 1987—have helped build the business over the years. They’re owners in the business. Having family in the business, having people that you can trust has been very helpful. A lot of our staff have been here a long time, and they have become, you know, we have, we told them all, if you think like owners and act like owners, you’ll be rewarded like owners. So now we have maybe 60 people with restricted stock and options.

Q. There is that whole thing about “SOBs,” Sons Of Bosses. And it’s a whole study that business professionals do. Has have you handled that whole transition and bringing them on board?
A. Having family in businesses and through my TEC group too, I’ve seen it not work a lot. And it probably has not worked more often than worked, from my Tech group experience. So, I think over the years I’ve tried hard to make it work. There are a couple of things, I think, looking back on it now, is when they came in the business, is not treating them like children in the family any longer. Giving them responsibility, letting them live up to that responsibility, and having a lot of mutual respect for what they know. And where I’ve seen it not work is, you know, “Go sit in a corner. You’ve been bad.” Or something like that, where they are still a child. But treating them like adults, supporting why they were here. They’ve both got their master’s degrees.

Q. It’s been said that operating a public company is like managing on the head of a pin. What has it been now, four years that you’ve been public?
A. Since ‘04, about four years.

Q. Can you give us a thought or two about how that’s changed your business philosophy? Has it been good for Calamos?
A. Overall it’s been good. You know, it’s better when the stock price is going up than when the stock price is going down. But we think of the business as a long-term business with a lot of long-term benefits. The market often values it on a very short-term basis, so that’s a little discouraging. What we try and do is not change our focus. Let’s own/manage the business for each quarter. Let’s keep our long-term focus, and that’s what we’re trying to do.

The market right now is saying in a sense to me that we no longer think you can grow. We’re pretty substantial from, I remember (when) we were pushing a billion dollars, and I thought, gee, that’s a lot of money, and now we’re over 40 billion, and we’ve been in the mid-40s for awhile in here.

And we have a good day in the market, you know, where it’s up 2 or 3 percent, and it’s a billion dollars just that one day. And so it’s a lot more substantial, but we think we have continued to add new strategies and diversify the business. So we think, we feel, still feel we have a lot of growth.

Q. Where do you see that growth?
A. We’ve just registered four of our funds in Europe. So we have a plan for a more global type, and part of that strategy is with globalization, as I said earlier. It’s not only to be able to invest globally, but to have global clients. And we have institutional clients. Actually, we have clients all over the world. You know, not on black right now, but we want to build off that, and we think there’s a lot of opportunity for growth there.

Q. So you’re still pleased that you went public?
A. We’re still pleased. One of the reasons to go public, of course, was to be able to diversify our ownership. The second was to resolve some estate planning issues. Remember, our estate taxes are not very favorable. And what we feared was if something were to happen to me, the company would have to be sold just to pay taxes.

And so, how do we get ahead of that? We set up an independent advisory board. And we say, okay, your job is to help us talk about succession, ongoing, because we’re all family, so it’s a little bit harder to talk about.

They’re now, for the most part, our corporate board. So part of that discussion that we had over those years was, should we sell a piece of the company? What should we do? And we said the best opportunity for us is to go public, capitalize that, take some of that capital, put it on a balance sheet, which we have, and invest alongside our funds.

So right now we have an $800 million portfolio. We borrowed some money, and it’s all invested in all our own funds. So we eat our own cooking. And we, you know, we’re not only growing the business, but we have a balance sheet that we hope to grow as well. And so going public is about diversifying the shareholder base, succession planning, and I had another thought there. But you know, then access to capital.

The reason you’re a public company (is so) you can access capital in the market. Having said all that, we still own 80 percent of the company. So it’s not like we don’t care.

Q. Certainly your experiences as you go back to the grocery store have formed a lot of who you are. You’ve indicated, too, that your time in the military was really important to you, not only for the camaraderie but also with the teamwork aspect. And you said that has been an important part here, particularly that you work as a team on a lot of things, which is unusual for this industry.
A. Yes, it is. The way our company evolved, and the most important part of what we do here is performance, investment performance. And the way we manage money and produce investment performance is a bit different than typical firms in the sense that we manage money as a team. We don’t have one guy in the corner doing this strategy, somebody else doing something else and something else. Everybody works as a team. It wasn’t such a brilliant idea 20 years ago (that) we should do that. It sort of evolved over time. And it has really helped us quite a bit.

I think it does come from maybe the military experience, where you know, people have been in the military, and they value the camaraderie. You’re doing dangerous things. You want people checking your back. You want people that you respect, and they’re doing important work. That the team aspect, you know, if the team wins, everybody wins. It’s not all about them.

Looking back that has surely been an important component of why we’ve done that. So today we’re managing over 40 billion in global equity, international equity, convertible strategies, high yield, all the same team, which is very different.

Q. Do you have any team mentors in business or business heroes?
A. I always read a lot. I used to read Peter Drucker a lot over the years. I read the Harvard Business Review all the time. And looking for guidance in a way. Obviously, those are some of the more important aspects of things.

Q. Tell us about real estate for awhile. You’ve got quite a development over here.
A. A little development. The Hotel Arista is going to be open this fall. As you can see, it’s kind of a mixed use. We’ve got the office building there and then some retail. So the idea there is to sort of bring the city out here. And that’s why it’s called City Gate. It’s to kind of create an environment where if you want to have a business lunch, you don’t have to drive 45 minutes and waste two hours.

But the City Gate will be the only five-star hotel in the western suburbs. It’s a green development. We’re excited. Smith Barney and Citibank are coming into the building on the first floor. Then Leaders Bank right here. This is our foray into the real estate business.

Q. We know that you personally and maybe the company as well have been very generous in your philanthropy. Can you talk a little bit about that and your philosophies?
A. We manage money for foundations, and so on a corporate side we have a philanthropy program, or we donate money to different causes. On a personal side, I set up a foundation a few years ago with the objective of supporting things that I think are very important to me. One was education. So I’m a trustee of Benedictine University. I’m a trustee of IIT, where I went to school.

Q. How does the foundation support education?
A. So we try and support those educationally and set up a scholarship program to really promote education. I think it’s really important. The other part of the foundation supports, it’s really looking back at my family and the immigrant experience, which was, I think, really important to this country. If we don’t honor it in this generation, it’s going to be forgotten. And so too the immigrant experience for Greek immigrants, obviously, in particular, and so I’m a big supporter of the Hellenic Cultural Museum that’s being built in the old Greek Town. It’s where my mother grew up, actually.

Just to make sure that somehow, that that experience is not forgotten. And especially with the children and grandchildren now, that they remember that, you know, there’s a saying, you don’t know where you’re going unless you know where you’re from. In my view, you know, growing up in the Greek family with that ethics, as I went through life, it gave me a lot of strength. I knew who I was. Nobody could persuade me to do something other than what I felt who I was.

Today, with all of the problems we have with drugs and all those things, I think it’s pretty important stuff. So there’s a number of organizations that have similar goals that I try to support.

Q. You said once, according to Plato, who said to lead a good life you’re first a student, then a soldier, then a businessman, then a statesman.
A. I have a lot of my clients come up and say, well, hey, my son wants to be a portfolio manager. What finance courses should he take? I say, have him read Plato and Aristotle, philosophy. Have him learn how to think critically. That’s what philosophy teaches. Not only Greek philosophy, all philosophy. So with my foundation I’m going to do more to support the classics in school.

Q. John McCain’s running for president at age 71. You’re in approximately the same age group. How much longer for John Calamos?
A. Oh, I don’t know. I enjoy the business. Sometimes it’s like work. I think we’re all looking for the right kind of balance between being active. I can’t imagine sitting around all day. A lot of my friends are from my days as an Air Force pilot. So they were all airline pilots, so they retired, you know.

But then on the other hand, I’m going to China. We’re doing these things. That’s not too bad. I’m still very active in the business. I intend to be active in the business as long as I can keep healthy, which I work at. So it will be awhile.

Q. As the head of a major company here in this area, in the Chicago area, does it concern you at all, or does it matter to you that the Chicago area is losing so many companies that used to be headquartered here?
A. I think tax policy has something to do with it, how we treat companies here. Companies that have made major investment here are often not treated very well. That is of concern. I think you have to have a government that understands that jobs come from companies. Jobs do not come from governments. And you want a tax policy, and you want a government that supports capital investments, because capital investment creates jobs.

And you want the right kind of jobs. I mean, one of the issues in the election is, we’re exporting all these jobs to China, and we have to keep out the immigrants, and we have to keep them out, they’re taking our jobs. What I tell those people, oh, yes. You’re right. What I want my grandson to do is grow up picking bricks. Or I want him to work in a foundry. I worked for Motorola in Augustus. I want him to work for Motorola sticking tubes in a TV set.

Is that what you want? Is that the job you want to save? Or do you want to save the intellectual capital, like Bill Gates says? How come we have the best universities in the world, and we don’t let these people stay? How come we’re training the world in our universities, and then exporting them out.

Posted on Monday, June 09, 2008 (Archive on Monday, June 16, 2008)
Posted by jstoltz Contributed by jstoltz

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