Calamos Long/Short Equity & Dynamic Income Term Trust (CPZ) N-CSRSCertified semi-annual shareholder report (management investment company)

Long/Short Equity & Dynamic
Income Trust (CPZ)

INVESTMENT TEAM DISCUSSION

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

Calamos Long/Short Equity & Dynamic Income Trust (CPZ) is a closed-end fund that seeks to provide current income and risk-managed capital appreciation. The Fund provides hedged market exposure through Calamos’ time-tested global long/short equity strategy. In addition to offering an attractive monthly distribution, the Fund is supported by a multi-asset income strategy structured to be potentially less vulnerable to volatile financial markets by actively managing risk with dynamic asset allocation.

The Fund normally will invest at least 80% of its managed assets in a globally diversified portfolio of equity securities including common stocks, preferred stocks, convertible securities and exchange-traded ETFs. At least 50% of the managed assets of the portfolio will be invested in the long/short equity strategy. The Fund may invest up to 20% of its managed assets in global income producing securities, including high yield and investment grade corporate debt.

How did the Fund perform over the semiannual period?

For the six months ended April 30, 2022 (“semiannual period”), the Fund returned -6.59% on market price and -2.39% on a net asset value (NAV) basis versus -9.17% for the Comparator Index comprised of 50% Bloomberg US Corporate High Yield 2% Issuer Capped Index, 30% MSCI ACWI Index and 20% ICE BofA US All Capital Securities Index.

The Fund’s shares traded at a -7.99% discount to NAV on April 30, 2022, compared to a discount of -3.86% six months earlier on October 31, 2021. Portfolio returns coupled with a belief that the Fund was well-positioned to generate income and deliver capital appreciation going forward served as an impetus to increase the Fund’s distribution rate three times for a total of $0.0300 per share since inception. The Fund’s monthly distribution stands at $0.1400 per share as of April 30, 2022, which equates to an annualized distribution rate of 9.07%. We believe that distribution increases are a way to enable shareholders to benefit more directly from the returns of the portfolio.

How do NAV and market price return differ?

Closed-end funds trade on exchanges, where factors other than the value of underlying securities may drive the price of shares. The price of a share in the market is called market value. Factors unrelated to the performance of the Fund’s holdings, such as general market sentiment or future expectations, may influence market price. A fund’s NAV return measures the actual return of the individual securities in the portfolio, less fund expenses; it also measures how a manager was able to capitalize on market opportunities. Because we believe closed-end funds are best used long term within asset allocations, we think that NAV return is the better measure of a fund’s performance. However, when managing the Fund, we strongly consider actions and policies that have the potential to optimize overall price performance and returns based on market value.

Rising equity volatility in 2022 cannot be traced to the underlying fundamentals of economic growth or corporate profits. Instead, it relates to the growing role of inflation in activity, the heightened uncertainty that inflation poses for capital allocation, and the inevitability that financial assets must be priced differently.

What helped and hurt Fund performance over the period?

Long/Short Equity Strategy

As the Delta variant peaked in late 2021 and was replaced by the Omicron variant, our focus on value names with more cyclical and value attributes paid off. Our avoidance of many technology companies was beneficial as they experienced a broad derating. We are selectively focused on companies that benefit from higher long and short rates; companies with sufficient pricing power to pass along higher inputs costs to customers; companies with reasonably valued and sustainable growth; and companies set to benefit from the reopening trade.

Accordingly, the Fund’s Long/Short Equity sleeve offered positive returns for the period, garnering contributions from several sectors, chiefly energy, materials and real estate. In addition, our short position hedges on the S&P 500 Index offered positive returns in the wake of equity market declines for the period. Conversely, our long positions in the financials, industrials and information technology sectors detracted from results for the period.

As of April 30, 2022, the long/short portion of the portfolio had a delta-adjusted net long position of approximately 46%, which represents a reduction from the previous period.

One key conviction has been our cautious view on duration and its equity derivatives. This translates into a bias toward shorter-duration, more-profitable businesses versus those with less support from earnings, cash flow and tangible assets or book value. We have been wary of stocks where the bulk of their value depends on assumptions about growth in the far future. This sheltered the Fund from some of the most egregious stock disappointments of the past quarter and year.

Equally important has been our preference for services over goods as the world emerges from the pandemic. This implies a robust recovery in travel and entertainment along with a return to the office. Both producers and retailers of goods will struggle in real terms (volume rather than price) well into 2023. We think the pandemic pulled forward years of demand across industries and this will take time to digest.

During the semiannual period, we modestly increased our international exposure by adding high-quality cyclical equities in Europe and select financial equities in Latin America. We have continued to avoid exposure to Chinese equities despite declining valuations as we still do not believe investors are appropriately rewarded for the heightened political and cyclical risks

Dynamic Income Strategy

Preferred Securities. The Fund’s preferred securities modestly outperformed the ICE United States All Capital Securities Index during the period. Security selection among both banks and REITs contributed positively to returns, while security selection among insurance companies weighed on performance. In part, the flattening yield curve raises concerns that net interest income for banks will be under pressure in coming quarters, though we have not seen this pressure emerge to date.

Dynamic Income Strategy

In preferreds, our highest allocation was in the financials sector, specifically banks. In high yield, industrial securities represented our largest allocation, with consumer non-cyclical positions representing the largest component.

Our dynamic income investment philosophy focuses on being well compensated for the risks taken. Credit spreads have widened significantly with the reset in risk asset valuations. That said, fundamentals are quite strong, with leverage measures returning to pre-COVID levels and interest coverage at all-time highs.

From a credit-quality perspective, the Fund is positioned with a relative underweight in the BB and CCC categories, with a corresponding overweight in B-rated and out-of-benchmark BBB-rated issuers. We continue to find value in out-of-benchmark positions in both leveraged loans and investment-grade credit.

From a sector perspective, the portfolio holds overweight positions in insurance and consumer non-cyclicals. Underweights include energy and consumer cyclicals. Over the course of recent months, notable sector changes to the portfolio included:

Capital Goods. The allocation to the capital goods sector was increased, notably in the building materials industry.

Consumer Non-Cyclical. The allocation to the consumer non-cyclical sector was reduced, primarily by reducing our position in the consumer products industry.

Please discuss the Fund’s distributions during the annual period.

Within this Fund, we employ a managed distribution policy with the goal of providing shareholders a consistent distribution stream.

The monthly per share distribution rate at the end of the period was $0.1400, up from $0.1100 at inception in November 2019 and representing a 27% increase. As of April 30, 2022, the annualized distribution rate was 9.07% on market price. We believe that the Fund’s distribution rate and level both remain attractive. While interest rates rose sharply during the six-month period with the yield on the 10-year Treasury rising from 1.55% to 2.89%, rates remain modest in absolute terms historically, and negative in real terms (below the rate of inflation). As of April 30, 2022, the dividend yield on the S&P 500 Index stood at 1.56%. The Fund’s 9.07% yield compares favorably to both fixed income and equity alternatives.

The Fund had no return of capital associated with distributions in 2021, nor are there any estimated return of capital components in distributions paid in fiscal year 2022 through April 30, 2022.

Please discuss how the Fund uses Leverage.

As the financial markets continue to recover, we believe the environment is conducive to the prudent use of leverage as a means of enhancing total return and supporting the Fund’s distribution rate. With low current borrowing costs, our use of leverage may offer a favorable reinvestment dynamic as markets recover. As of April 30, 2022, the amount of leverage employed was approximately 23.3% of Fund assets.