Calamos Convertible Opportunities and Income Fund (CHI) N-CSRSCertified semi-annual shareholder report (management investment company)

CONVERTIBLE OPPORTUNITIES AND
INCOME FUND (CHI)

INVESTMENT TEAM DISCUSSION

Please discuss the Fund’s strategy and role within an asset allocation.

Calamos Convertible Opportunities and Income Fund (CHI) is an enhanced fixed-income offering that seeks total return through a combination of capital appreciation and current income. It provides an alternative to funds investing exclusively in investment grade fixed-income instruments and seeks to be less sensitive to interest rates. Like all Calamos closed-end funds, the Fund invests in multiple asset classes and seeks to provide a steady stream of distributions paid out monthly.

The Fund invests in a diversified portfolio of convertible securities and high yield bonds. The allocation to each asset class is dynamic and reflects our view of the economic landscape as well as the potential of individual securities. By utilizing these asset classes in combination, we believe that the Fund is well positioned to generate capital gains and income. The broader range of security types also provides increased opportunities to manage the risk/reward characteristics of the portfolio over full market cycles.

We seek companies with respectable balance sheets, reliable debt servicing and good prospects for sustainable growth. We are also investing in cyclical companies that are poised to perform well in a post-pandemic environment with earnings expansion potential due to pent up consumer demand. While we invest largely in securities of US issuers, we favor companies that are actively participating in markets with geographically diversified revenue streams and global-scale business strategies.

How did the Fund perform over the semiannual period?

The Fund returned -18.95% on a net asset value (NAV) basis and -17.23% on a market price basis for the six months ended April 30, 2022 (“semiannual period”) versus -11.26% for the Comparator Index comprised of 50% ICE BofA All US Convertibles Index and 50% Bloomberg US Corporate High Yield 2% Issuer Capped Index for the same period. At the end of the semiannual period, the Fund’s shares traded at a 4.23% premium to net asset value.

What factors influenced performance over the semiannual period?

Declines in the convertible bond and high yield markets detracted from the Fund’s returns over the period. The convertible and equity markets were challenged during the reporting period by Covid-19 variants, supply chain disruptions, the war in Ukraine, surging inflation, elevated oil prices and rising interest rates. Against this volatile backdrop, the US Convertible market represented by the ICE BofA All US Convertible Index declined -15.19% and lagged behind the S&P 500 Index (-9.65%). Convertible bond issuance also significantly declined during the period as market volatility dampened capital markets activity.

The convertible market is well represented by small and mid-sized growth issuers, and the semiannual period was especially challenging for these companies as evidenced by the -25.96% decline of the Russell 2500 Growth Index. Given that the underlying stocks of the convertible market declined -28.18%, convertibles provided downside mitigation by participating in only 54% of this drawdown. The equity market decline also meant that convertibles moved closer to their bond floor. With more than half of the convertible market priced below par at the end of April, convertibles held up much better during the month of April; the ICE BofA All US Convertible Index declined -7.10%, while the S&P 500 Index declined -8.72%.

With the heightened market volatility, our preference has been convertibles with the balanced risk/reward attributes, while maintaining an underweight to the most equity-sensitive convertibles, which generally lack favorable downside resistance.

After pivoting to a hawkish tone late last year, each FOMC meeting and speaking opportunity seemed to serve as an occasion to reinforce the market’s expectations for tightening monetary policy. With 75 basis points of tightening already baked into the federal funds rate, the market was pricing in an additional eight Fed hikes during calendar 2022. Balance sheet reduction will commence on June 1 with a short acceleration period followed by a $95 billion monthly run-off cap going forward.

Performance by rating category within the high yield market was mixed, with the move to higher underlying Treasury yields driving negative returns across the credit spectrum. BB-rated bonds returned -8.6%, whereas B-rated issuers delivered a loss of -5.8%, and CCC-rated paper returned -6.7%. At the beginning of the period, the trailing 12-month default rate was at an all-time low of 0.3%, as record increases in revenue and EBITDA improved the credit health of the broad market. By the end of the reporting period, default rates had increased to 0.5%, still well below the long-term average of 3.6%. After closing the previous reporting period with option-adjusted spreads on high yield bonds at 271 basis points, the market sold off this past quarter, closing at 379 basis points.

Other factors that contributed and detracted from Fund performance included the following:

•In spite of our relatively low financing costs over the period, our use of leverage was not helpful as our reinvestment rate was less than our associated costs due to overall convertible market declines. While leverage can enhance returns during favorable markets, the opposite may occur during unfavorable conditions.

•On an unleveraged basis, the portfolio slightly underperformed that of the Comparator Index. Our relative overweight in convertibles and underweight in bonds relative to the index were detrimental to performance.

credit process tends to guide us away from the most speculative corporate securities while still providing regular income. That said, we do selectively invest in lower-credit securities when we believe the risk/reward dynamics are favorable for our investors.

Our portfolio is positioned with the risk of rising interest rates in mind, as we maintain a relatively low average duration level pertaining to our investments in bonds. As of April 30, 2022, the average duration of these securities was 2.7 years.

Moreover, where the risk/reward is compelling, we are investing in global businesses with the ability to seek the best opportunities around the world and diversify their revenue streams. Overall, we believe our portfolio companies are performing very well fundamentally, earning attractive cash flow margins and improving their credit profiles, while utilizing reasonable debt levels to fund their operations.

What are your closing thoughts for Fund shareholders?

The equity and credit markets have been knocked about by the turbulence of rising inflation and interest rates as well as intense geopolitical risks. Convertibles have not been immune to this increase in volatility, which also subdued the pace of new convertible issuance. While we have anticipated a deceleration in the annual volume of new convertibles after back-to-back years of near record amounts, issuance thus far in 2022 has slowed to a crawl because of the heightened global uncertainty. However, we continue to expect that an eventual calming in the overall markets should return volumes back to a more traditional seasonal pace for the balance of the year. Despite the recent issuance slowdown, the strong issuance from 2020 and 2021 expanded the market and pushed back the maturity wall in the existing convertible market, which provides attractive opportunities in our view.

Our base case anticipates a more volatile spread environment with moderately higher interest rates over the balance of 2022. Rapid changes in communication from the Fed have led to market rates already pricing in an aggressive path of tightening. In our view, the Treasury curve flattening we have seen up to this point simply reflect that aggressiveness. While we continue to doubt that the above-trend inflation environment will lead to drastically higher interest rates in long-dated maturities, we are maintaining cautious duration implementation across our fixed income strategy.

Given our outlook for a continued volatility, we are favoring quality growth companies as well as certain cyclical companies that can continue to improve their positioning in a post-pandemic, rising interest rate environment. Favorable factors within the U.S. include improving employment, high levels of liquidity, a return to normalization both from a social and economic perspective, still relatively low interest rates, continued consumer demand, improving employment rates and solid corporate earnings.

Accordingly, we see opportunities in the consumer discretionary sector as consumer optimism continues to improve. We believe that the eventual easing of supply chain issues will allow pent-up demand to be satisfied for goods and especially services. We believe that the information technology sector will continue to flourish as virtual experiences have become an important aspect of daily life even as the impact of Covid on restricting physical activities abates. In addition, we believe that health care companies will continue to offer opportunities as preventative care post-Covid 19 will be an emphasis. In addition, demographics continue to offer support for investing in the health care sector.