Nick Calamos is no stranger to talk about the family business. "When I was growing up, my aunts, uncles and grandparents always talked about the grocery stores and restaurants they owned," he recalls.

At least one relative, however, was serving up something different. In 1977, when Nick was still in high school, his uncle John left his job as a stockbroker to start one of the first investment-management firms specializing in convertible bonds. "When I started as a broker in the '70s, almost no one had heard of convertible bonds," says John P. Calamos, now 60. "But those were volatile times in both the stock and bond markets, and I knew there was a good deal of value in the risk-control characteristics of convertibles."

His nephew Nick, now 39, apparently agreed when he joined the firm in the research department in 1983 as a computer programmer, a background that he says still helps him develop pricing models and do quantitative research. By the time Nick came on board, John had added some institutional names to the small businesses and individuals who formed the core of his clientele. When son John Calamos Jr., now 37, joined the firm in 1987, Calamos Asset Management was on its way to becoming a boutique specialist in a highly defined niche.

Today, Calamos Asset Management has $6.1 billion under management. Despite its size, the firm remains at its core a family business with a defined power structure, both stated and understood. Nick Calamos is managing director and senior portfolio manager; John Calamos, president and chief investment officer; and John Calamos Jr., vice president, portfolio manager and research analyst.

Except for the $150 million in the Calamos Growth Fund, all of its money under management is invested in convertible bonds. The growth fund, managed by John Calamos and his son, attracted a good deal of attention in 1999 and 2000, when it clocked in total returns of 77.68% and 27%, respectively.

But the essence of the Calamos clan's business remains convertible bonds, an area that even investment professionals often don't understand or ignore. "It's possible to go through many business schools and never have a class on convertible bonds," says Nick.

Many financial advisors have trouble getting a handle on them as well, in part because they don't fit neatly into a particular category of security. Only about one-tenth of the money under management in the firm's seven mutual funds comes from individuals or their advisors.

"Convertibles don't fit neatly into asset-allocation models," says John. "But they do fit."

John Calamos has spoken to some financial advisors who use them as part of their fixed-income allocation for clients who want more upside oomph than traditional bonds offer. Others shuttle them to the equity side for conservative investors who want some downside protection against stock market volatility.

The fact is it's hard to say just where these chameleons of the investment world fit in. Sometimes they act like stocks, at other times, they act like more like bonds. Sometimes investors get the best of both worlds; sometimes they can get the worst.

Nothing reflects that dichotomy better than the investment strategies employed over the last two years by Nick and John Calamos, who co-manage the Calamos Convertible Fund, the firm's first offering and flagship fund product. In 1999, even as rising interest rates decimated other areas of the bond market, convertibles had a banner year. With a rising stock market, these securities took on the growth characteristics of equities, shrugging off the bond side of their personalities. By the end of the year, the fund's net asset value had risen more than 35%, largely because of its heavy allocation toward technology-company issuers whose stocks took off.

But by the beginning of last year, the Calamoses began taking a more cautious stance. Many of the underlying stocks of their portfolio holdings had risen substantially, which meant that their convertibles traded like stocks and had little downside protection.

So they began moving into more defensive sectors, such as utilities and financials. They also lightened up on many convertibles selling at a premium to their conversion value and bought those trading under par, which behave more like bonds. "In 2000, we took profits on many of our technology holdings, reduced our equity sensitivity and looked for strong balance sheets," says Nick. "The portfolio took on more defensive, bond-like characteristics."

On the downside, the fund was underweight in the surging energy sector for most of the year. Returns were also pulled down by several "busted convertibles"-bonds that plummeted in value because of the dismal performance of their underlying tech stocks. Calamos Convertible Fund ended the year with a sedate total return of 7%.

No fund in the family felt the impact of the tech wreck more directly than the fledgling Calamos Convertible Technology Fund. Launched in August 2000, it plunged nearly 19% in the fourth quarter, compared with a modest loss of 2.5% in the more diversified convertible offering.

Yet Calamos maintains that convertible bonds are an excellent way to take some of the sting out of the sector's volatility. After all, he points out, a 19% loss is better than the Nasdaq decline of nearly 33% during the same period. And as of late January, with the resurgence of some battered technology stocks, the fund had bounced back with a year-to-date return of 13.5%.

Last year's fourth quarter underscores the point that despite their defensive characteristics, convertible bonds are often issued by less-than-stellar credits. That has been particularly true in recent years, when many untested, unrated technology issuers came to market. "There is no question that a lot of convertible-bond issuers are growth companies, and growth companies don't tend to have investment-grade ratings," says Nick Calamos.

Yet it is in some of those companies that he sees the best opportunities for equity-like returns this year. Take Internet advertising agency DoubleClick, for example. Last year, investors abandoned the stock in droves, bringing devastation to its convertibles as well. Calamos picked up the bond at a price of 59 in late December, and it rose to 79 by late January, after an uptick in the stock price. "The bond still has a conversion premium of 75%, so it's nowhere nearly to being in the money," he says, referring to the point at which it makes financial sense to convert. "The stock's at $18 a share now, but it would need to reach $40 before the bond is in the money. Of course, in the world of the Internet, that could be next week."

With the Calamos Convertible Fund, they stabilize the more aggressive side of the portfolio with investment-grade issuers. About 55% of the fund is in investment-grade bonds now, with the rest in issuers rated below BBB or unrated. The Calamos Convertible Technology Fund and the Calamos Convertible Growth and Income Fund, more aggressive offerings, have a larger portion of their holdings in below-investment-grade issuers.

Nick Calamos thinks that convertible funds will once again see equity-like returns this year, as some of last year's beaten-down bonds stage a recovery. And John Calamos likes this year's outlook from a big-picture standpoint as well. "Convertible bonds tend to do better relative to other asset classes when markets are volatile or moving sideways," he says. "And convertible bonds have a strong correlation to the mid-cap growth universe, where we see a lot of value right now."