Eaton Vance Enhanced Equity Income Fund: Poor Performance, High Discount

Dec.27.12 | About: Eaton Vance (EOI)

Eaton Vance Enhanced Equity Income Fund trades on the New York Stock Exchange under the symbol EOI. It is one of a series of closed end funds launched by Eaton Vance. EOI was intended as a buy / write fund, selling calls against an equity portfolio to produce additional yield. Although Eaton Vance is a large, well recognized investment manager, EOI has been a continual disappointment on multiple levels. At present, it is selling at a very high discount from net asset value and this makes it somewhat attractive. In addition, its basic underlying portfolio seems to contain a diversified portfolio of quality large capitalized moderate growth stocks.

EOI, as of September 30, 2012, had a portfolio of 75 different company shares of which 98.9% were domestic and 1.1% were foreign. It pays a monthly dividend.

The problem is that it does not write as many options against its positions as it should. It only has calls written on 58 of the company shares in its portfolio and the average call only has 37 days to expiration. Covered calls written are only 1.6% of its entire portfolio.

EOI was launched on October 29, 2004 and its performance has been as follows:

1 year 5 year since inception
at Net Asset Value 25.24% 0.69% 4.68%
at Market Price 25.06 (0.39) 2.94
S & P 500 Index 30.20 1.05 5.27
CBOE S & P 500 buy/write Index 25.31 2.12 4.38
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On September 30, 2012, the discount from net asset value was 12.41% and has since widened to in excess of 15%. It is worth considering with this kind of discount.

It is well diversified, with sector allocation being as follows:

Information Technology 22.3%
Financials 13.3
Energy 11.5
Health Care 11.4
Consumer Staples 10.6
Consumer Discretionary 10.3
Industrials 8.1
Telecommunication 3.6
Utilities 3.4
Materials 3.2
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Its ten largest holdings constitute only 28.6% of assets and are as follows:

Apple (NASDAQ:AAPL) 4.7%
Exxon Mobile (NYSE:XOM) 3.2
QUALCOMM(NASDAQ:QCOM) 3.0
Coca Cola (NYSE:KO) 2.9
IBM (NYSE:IBM) 2.7
Google (NASDAQ:GOOG) 2.6
Philip Morris (NYSE:PM) 2.5
Wells Fargo (NYSE:WFC) 2.5
Accenture (NYSE:ACN) 2.3
Pfizer (NYSE:PFE) 2.2
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As of September 30, 2012, the fund had net assets of $503,828,134 of which 2.3% was in short term near cash investments. Its only liability is the $8,223,185 from the covered call options. EOI had a loss carryforwards of $144,559,745 and unrealized appreciation of $111,624,575.

For a buy/write fund seeking additional yield, net investment income has been poor. The five year ratios have been uninspiring and are as follows:

2012 2011 2010 2009 2008
Return on Net Asset Value 25.24% (4.63%) 6.87% (6.20%) (13.54%)
Return on Market Price 25.06 (17.12) 6.02 18.23 (24.23)
Expense Ratio 1.15 1.15 1.12 1.17 1.10
Investment Income 0.80 0.52 0.69 1.17 0.79
Portfolio Turnover 35 78 27 65 117
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CONCLUSION

I really do not know why they have done so badly. They do have a nice portfolio. They should not call themselves a buy/write fund but rather a large capitalization growth fund. At these high discount levels, the fund is worth a nibble.

Disclosure: I am long EOI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.