Experience and Foresight

 

About Calamos Investments
For more than 30 years, we have helped investors like you manage and build wealth to meet their long-term individual objectives by working to capitalize on the opportunities of the evolving global marketplace. We launched our first open-end mutual fund in 1985 and our first closed-end fund in 2002. Today, we manage five closed-end funds. Three are enhanced fixed-income offerings, which pursue high current income from income and capital gains. Two are total-return oriented offerings, which seek current income, with increased emphasis on capital gains potential. Calamos Strategic Total Return Fund (CSQ), falls into this category. Please see page 5 for a more detailed overview of our closed-end offerings.

 

We are dedicated to helping our clients build and protect wealth. We understand when you entrust us with your assets, you also entrust us with your achievements, goals and aspirations. We believe we best honor this trust by making investment decisions guided by integrity, by discipline, and by our conscientious research.

 

We believe that an active, risk-conscious approach is essential for wealth creation. In the 1970s, we pioneered low-volatility equity strategies, which seek to participate in equity market upside and mitigate some of the potential risks of equity market volatility. Our investment process seeks to manage risk at multiple levels and draws upon our experience investing through multiple market cycles.

 

We have a global perspective. We believe that globalization offers tremendous opportunities for countries and companies all over the world. In our view, this creates significant opportunities for investors. In our U.S., global and international portfolios, we are seeking to capitalize on the potential growth of the global economy.

 

We believe there are opportunities in all markets. Our history traces back to the 1970s, a period of significant volatility and economic concerns. We have invested through multiple market cycles, each with its own challenges. Out of this experience comes our belief that the flipside of volatility is opportunity.

Letter to Shareholders

 

Dear Fellow Shareholder:

 

Welcome to your semiannual report for the six-month period ended April 30, 2011. I encourage you to review this report carefully. It includes commentary and insights from the investment team, as well as a listing of portfolio holdings, financial data and highlights, and detailed information about the performance and allocation of your fund.

 

Calamos Strategic Total Return Fund (CSQ) is an income-oriented total return fund. This means we are focused not only on delivering a competitive stream of distributions, but also on total return.

 

CSQ utilizes an innovative approach designed to provide competitive distributions as a component of total return.

 

We are pleased to report that CSQ provided a steady stream of monthly distributions, while also participating in the rise of the U.S. equity market. We believe that these results—as well as the fund’s longer-term record—illustrate the benefits of a dynamic asset allocation and an income-oriented total return approach. In the Q&A beginning on page 6, we discuss the fund’s strategy and performance over the reporting period at greater length.

 

Steady and Competitive Distributions

CSQ’s distribution policy reflects our long-term perspective, focus on consistency, and risk-aware approach. We recognize that many of our investors prefer consistent monthly distributions, instead of unpredictable ones. This fund has a level rate distribution policy, which means we seek to keep distributions the same from month to month. We and the fund’s Board of Directors are committed to providing distributions that we believe can be sustained over the long-term. In setting the fund’s distribution level, we consider the market and economic environment, prevailing interest rates and the opportunities we see in individual securities and asset classes. We discuss the level distribution policy at greater length on pages 5 and 32.

 

Prudent Use of Leverage

In this fund, we have the flexibility to employ leverage to enhance total return and to support the fund’s distribution rate. Leverage involves borrowing money and reinvesting the proceeds. During the reporting period, we believed the economic environment was favorable for the prudent use of leverage. Our use of leverage contributed favorably to overall performance, as

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Letter to Shareholders

we were able to achieve a higher return than our borrowing costs. We intend to continue to utilize leverage judiciously, as long as we believe it will serve the fund’s shareholders well.

 

As part of our emphasis on risk management, we employed interest rate swaps as a hedge against a potential rise in interest rates. We use these swaps to manage the borrowing costs associated with our leverage activities. Through these swaps, we essentially lock down an interest rate that we believe to be attractive. Currently, interest rates are at historically low levels throughout much of the fixed income market. However, given the current economic landscape, we believe that it is possible that rates could surge very quickly, even over a period of weeks, as was the case in the 1970s and 1980s. We believe the fund’s interest rate swaps could be a valuable tool to help protect the fund from increasing borrowing costs, should rates rise.

 

Markets Demonstrate Resilience

During the reporting period, unexpected events unsettled the U.S. markets. These included the earthquake and tsunami in Japan, as well as political turmoil and violence in the Middle East and North Africa. Other longer-running concerns persisted, such as the debt burdens of developed nations, commodity prices, inflationary pressures, and evolving geopolitical relationships between established and rising powers.

 

Yet on the whole, U.S. markets demonstrated considerable resilience, as market participants seemed to give increased attention to more positive influences. There were continued signs of improving economic conditions, such as many instances of improving corporate profits and balance sheets, as well as gains in private sector job growth. The credit markets remained open and strong, providing good access to capital for large cap and mid cap companies, in particular.

 

The S&P 500 Index, a measure of U.S. equity market performance, soared 16.36%. Equity-sensitive securities also participated in this advance, with the BofA Merrill Lynch U.S. All Convertible Ex-Mandatory Index returning 11.69%. The Credit Suisse High Yield Index rose 6.01%. However, as investors became increasingly attentive to the potential long-term implications of government debt and dollar devaluation, the broad bond market lagged, with the Barclays Capital U.S. Government/Credit Index returning -0.61%.

 

Positioned for Global Growth

We believe there are a number of long-term global trends that can drive growth opportunities for U.S. companies. As we have discussed previously, one of the most important of these trends is the growing prosperity of emerging economies. We believe that progress in emerging markets has exciting ramifications for countries and companies all over the world, including U.S. companies. These growth opportunities extend not only to companies that may benefit from infrastructure build-out, in sectors such as energy, materials and industrials, but also to businesses that provide goods and services that help individuals achieve an improved quality of life. We expect rising prosperity in

2		CALAMOS STRATEGIC TOTAL RETURN FUND SEMIANNUAL REPORT

 

In Closing

We believe that innovation thrives in all market environments. Our investment team continues to find many businesses that are guided by a spirit of creativity and entrepreneurship—companies that we have seen adapt and change as the global economy evolves.

 

While I believe that globalization presents a very exciting backdrop for investors, the prospects vary considerably—from company to company and from industry to industry. Because of this, an active approach to portfolio management is particularly important. We believe our decades of experience, our selective, risk-aware approach and our unwavering commitment to our shareholders will continue to differentiate CSQ as we pursue high income as a component of total return.

 

If you would like additional information about this fund or our other closed-end offerings, please contact your financial advisor or our client services team at 800.582.6959 (Monday through Friday from 8:00 a.m. to 6:00 p.m., Central Time). We also invite you to visit us at www.calamos.com.

 

We thank you for your continued trust. It is an honor to partner with you to help you achieve your financial goals.

 

Sincerely,

 

 

John P. Calamos, Sr.
CEO and Co-CIO
Calamos Advisors LLC

 

 

 

This report is for informational purposes only and should not be considered investment advice.

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The Calamos Closed-End Funds: An Overview

 

In our closed-end funds, we draw upon decades of investment experience, including a long history of opportunistically blending asset classes in an attempt to capture upside potential while managing downside risk. We launched our first closed-end fund in 2002.

 

Closed-end funds are long-term investments. Most focus on providing monthly distributions, but there are important differences among individual closed-end funds. Calamos closed-end funds can be grouped into two broad categories: (1) enhanced fixed income and (2) total return. Funds in both groups provide a stream of income paid out on a monthly basis and invest in a combination of asset classes.

 

OBJECTIVE: ENHANCED FIXED INCOME		OBJECTIVE: TOTAL RETURN
Portfolios Positioned to Pursue High Current Income from Income and Capital Gains		Portfolios Positioned to Seek Current Income, with Increased Emphasis on Capital Gains Potential
Calamos Convertible Opportunities and Income Fund (Ticker: CHI)		Calamos Global Total Return Fund (Ticker: CGO)
Invests in high-yield and convertible securities, primarily in U.S. markets		Invests in equities and higher-yielding convertible securities and corporate bonds, in both U.S. and non-U.S. markets
Calamos Convertible and High Income Fund (Ticker: CHY)		Calamos Strategic Total Return Fund (Ticker: CSQ)
Invests in high-yield and convertible securities, primarily in U.S. markets		Invests in equities and higher-yielding convertible securities and corporate bonds, primarily in U.S. markets
Calamos Global Dynamic Income Fund (Ticker: CHW)
Invests in global fixed-income securities, alternative investments and equities

 

 

Our Level Rate Distribution Policy

 

Investors often choose a closed-end fund because they seek a steady stream of income. In recognition of this, all five Calamos closed-end funds have adopted a level distribution policy. Our policy is to pay a distribution reflective of the funds’ past results and projected earnings potential through income as well as capital gains. Our team is focused on delivering an attractive monthly distribution, while maintaining a long-term focus on risk management. The level of the funds’ distributions can be greatly influenced by market conditions, including the interest rate environment. The funds’ distributions will depend on the individual performance of positions the funds hold, our view of the benefits of retaining leverage, fund tax considerations, and maintaining regulatory requirements.

 

For more information about any of these funds, we encourage you to contact your financial advisor or Calamos Investments at 800.582.6959 (Monday through Friday from 8:00 a.m. to 6:00 p.m., Central Time). You can also visit us at www.calamos.com.

 

For more information on our level rate distribution policy, please see page 32.

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Investment Team Discussion

 

STRATEGIC TOTAL RETURN FUND

INVESTMENT TEAM DISCUSSION

 

The Calamos Investment Management Team, led by Co-Chief Investment Officers John P. Calamos, Sr. and Nick P. Calamos, CFA, discusses the fund’s strategy, performance and positioning for the six-month period ended April 30, 2011.

 

Q. To provide a context for its performance, please discuss the fund’s strategy and role within an asset allocation.

A. Calamos Strategic Total Return Fund (CSQ) is a total return oriented offering that seeks to provide a steady stream of income paid out on a monthly basis. We invest in a diversified portfolio of equities, convertible securities and high yield securities. 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 combining these asset classes, we believe that we are well positioned over the long-term to generate capital gains as well as income. This broader range of security types also provides us with increased opportunities to manage the risk and reward characteristics of the portfolio over full market cycles. Through this approach, we seek to offer investors an attractive monthly distribution, as well as equity participation.

 

While we invest primarily in securities of U.S. issuers, we favor those companies that are actively participating in globalization with geographically diversified revenue streams and global business strategies. We emphasize companies that we believe offer reliable debt servicing, respectable balance sheets and good prospects for sustainable growth.

 

Q. How did the fund perform over the reporting period?

A. CSQ gained 15.79% on a net asset value (NAV) basis for the six-month period ending April 30, 2011, performing broadly in line with the broad equity market, as measured by the S&P 500 Index, up 16.36%. On a market price basis, the fund returned 13.68% for the same period.

 

Q. How do NAV and market price return differ?

A. Closed-end funds trade on exchanges, where the price of shares may be driven by factors other than the value of the underlying securities. The price of a share in the market is called market value. Market price may be influenced by factors unrelated to the performance of the fund’s holdings.

 

A fund’s NAV return measures the return of the individual securities of 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 utilized as a long-term holding within asset allocations, we believe that NAV return is the better measure of a fund’s performance.

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Investment Team Discussion

 

SINCE INCEPTION MARKET PRICE AND NAV HISTORY THROUGH 4/30/11

 

 

Q. Please discuss the fund’s distributions during the annual period.

A. As we discussed in the opening letter, we employ a level rate distribution policy within this fund, with the goal of providing shareholders with a consistent distribution stream. The fund provided a steady distribution stream over the period. Monthly distributions were $0.0525 per share, and the fund’s annual distribution rate was 6.33% of market price as of April 30, 2011.

 

We believe that the fund’s distribution rate and level remained attractive and competitive, as low interest rates limited yield opportunities in much of the marketplace. For example, as of April 30, 2011, the dividend yield of S&P 500 Index stocks averaged 1.8%. Yields also remained low within the U.S. government bond market, with 10-Year Treasurys and 30-Year Treasurys yielding 3.5% and 4.5%, respectively. Moreover, we believe the fund’s distribution rate is particularly compelling in that the fund also captured much of the equity market’s return, demonstrating the potential merits of a total return approach.

 

Q. The fund is currently trading at a discount to its NAV. Please discuss this discount.

A. At of the close of the reporting period, the fund was trading at a discount of 13.39%. This means that its market share price is 13.39% less than its NAV price. As we have noted in the past, we believe that this may be favorable for long-term investors seeking to purchase shares because investors can buy shares of the portfolio at a price that is lower than the fair value of the portfolio, as measured by its NAV.

 

Q. What factors influenced performance over the reporting period?

A. As equity markets advanced and investors demonstrated a continued interest in income, the fund’s principal areas of focus—common stocks, convertible securities and high yield corporate bonds—all contributed favorably to performance. Broadly speaking, in the convertible securities and high yield corporate bond markets, many of the most speculative grade issues were favored by investors seeking yield. Because we take a total return approach that focuses on avoiding downside risk—and not solely the pursuit of income—we took a very select approach to these credits. This served to limit some upside performance over the semiannual period, but as risk-aware, total return investors, we believe our positioning is appropriate for the long-term.

 

From a sector perspective, an underweight position to the financial sector relative to the S&P 500 Index proved advantageous, as did our security selection decisions. The fund’s underweight reflects our long-standing concerns about the potential risks within much of the sector. For example, we believe unfolding regulation and deleveraging may hinder

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Investment Team Discussion

revenue and profit growth in many banks. We have found opportunities within the financials industry however, in companies involved in activities such as investment banking and brokerage. The fund also benefited from its underweight position within the utilities sector. As investors were more optimistic about equities on the whole, this defensive sector trailed other areas of the S&P 500 Index. Generally, we have not found an abundance of attractive total return opportunities within this more highly regulated segment of the economy.

 

In contrast, although our security selection within the energy sector contributed favorably to performance in absolute terms, it slowed the pace of performance relative to the S&P 500 Index. In our positioning decisions, we sought to balance return considerations with a thorough assessment of potential risks, such as increased regulatory risks and commodity price volatility. In some cases, we chose to participate in the energy sector by investing in convertible issues. We did this as a way to potentially mitigate downside risk. Convertible securities blend equity and fixed income characteristics. Equity characteristics provide the opportunity for upside participation, while fixed income characteristics, such as coupon income, may provide a degree of downside resilience. The fund’s convertible issues in the sector captured much of the upside performance but lagged behind the equities in the sector. Security selection decisions within the health care sector also detracted from overall performance, particularly names within the pharmaceuticals industry. Within the health care sector, we have found a number of securities at what we believe are attractive valuations. We are favoring areas such as pharmaceuticals, based on our view of their growth prospects, while remaining cautious in regard to areas that may be particularly adversely affected by health care regulation.

 

Our use of leverage was also beneficial to the fund’s performance. We were able to borrow at low rates and then invest the proceeds in securities that generated higher returns. As we discussed in the opening letter, we utilized interest rate swaps to lock in an interest rate we believe to be attractive and to provide a hedge against a potential rise in interest rates.

 

Q. How is the fund positioned?

A. We have found securities across asset classes that we believe support our focus on income-oriented total return. In the current environment, we have emphasized common stocks, which make up more than half of the portfolio as of April 30, 2011. Broadly speaking, we have favored larger U.S.-based global businesses, with diversified revenues and strong brands. We believe that these companies may be particularly well positioned to capitalize on the growth trends we see around the world, including those related to emerging markets. Convertible securities represent slightly more than one-fifth of the portfolio, while corporate bonds represent slightly less than one-fifth of the portfolio. In regard to the fund’s convertible securities and corporate bonds, we seek out companies that we believe offer reliable debt servicing and the potential for credit upgrades. Where possible, we also favor those with global business strategies. In keeping with our risk-conscious approach to income, we favored a mix of investment grade credits and credits from the higher tiers of the high-yield universe (generally recognized as credits with ratings less than BBB). From a sector perspective, we have found the most compelling opportunities within the information technology, energy and health care sectors.

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Investment Team Discussion

 

Q. What is your outlook for Calamos Strategic Total Return Fund?

A. We believe that the fund’s dynamic multi-asset class approach will continue to provide us with enhanced opportunities to achieve income-oriented total return, both in the current low rate environment as well as in an environment where rates could rise, perhaps quite suddenly. Because this fund can invest in convertible securities, common stocks and corporate bonds, we believe it may be less susceptible to U.S. interest rate changes that could result from dollar devaluation and government debt, versus funds that rely primarily on U.S. Treasury bonds or municipal securities for yield.

 

In our view, active, multi-faceted risk management will remain very important. Recovery is underway in the U.S., but we do not believe that the current environment is one in which “a rising tide will lift all boats.” We do expect continued spikes in volatility, and in this environment, we believe that our ability to utilize a broad range of securities will remain an important differentiator of our income-oriented approach to total return.

 

We are optimistic about the prospects of many U.S. companies with global strategies and global reach, given our views on global economic growth and the long-term secular trends in many parts of the world. We believe that the markets provide ample opportunities for this fund’s income-oriented approach to total return, and we maintain high conviction in its strategy.

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