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Many investors in retirement are looking for a decent income stream with lower than normal volatility and interest rate sensitivity. They fear that interest rates may soon start to move dramatically higher. Because of the Federal Reserve’s quantitative easing policy, nearly all traditional low risk, low volatility investments like T-Bills, CD’s and money market accounts currently have extremely low yields near zero.
If you are willing to take on a little credit risk, the Eaton Vance Limited Duration Income Fund (NYSEMKT:EVV) is a good way to earn a higher return from a portfolio with an average investment grade rating.
EVV is the fourth largest closed-end fund in the U.S. with 2.9 billion in total assets including leverage. The primary objective of EVV is to seek a high level of current income. Capital growth is a secondary objective.
The fund currently invests at least 50% of its total assets in two sectors:
  1. Mortgage-backed securities: both government guaranteed and privately issued. The EVV board recently expanded this category by allowing other investment grade bonds rated BBB- or higher.
  2. Investments rated below investment grade including senior loans and high yield bonds.
The fund may also invest in other securities including commercial mortgage-backed securities, unsecured loans, investment-grade corporate bonds and money market instruments.
EVV has generated attractive income payouts over the last few years by blending together three asset classes- Senior Loans, Government Agency MBS and non-investment grade bonds in combination with low cost leverage. The fund has higher current income with less sensitivity to interest rates than other longer duration portfolios, and less credit risk than other higgh yield portfolios with lower average quality bonds.
EVV has a good long term performance record. Since inception, it has only had one losing year in 2008 when the net asset value dropped by 28%. Most of this drop occurred during the Lehman bankruptcy period in September/October 2008. But EVV recovered nicely with a 60% gain in 2009 followed by a 14.6% gain in 2010.
EVV is currently selling at a discount to NAV of -6.34% compared to the 6 month average discount of -4.16%. The 1-Year Z-Statistic is -1.46. This means the current discount to net asset value about 1.5 standard deviations below the mean.
EVV is run by a team of seven portfolio managers that specialize in different areas of fixed income. All seven asset managers have earned the CFA designation.
Asset Class Breakdown (as of 10/31/2010)
Investment-Grade Corporate Bonds
3.6%
High Yield Bonds and Notes
31.9%
Mortgage Backed
27.1%
Commercial Mortgage Backed
6.8%
Senior Floating Rate Interests
27.7%
Short-term Debt
2.9%
NAV Performance (as of March 18, 2011)
YTD
+2.93%
One Year
+12.92%
Three Years (annualized)
+12.93%
Five Years (annualized)
+8.47%
Here are some other stats on EVV:
Ticker: EVV Eaton Vance Limited Duration Income Fund, pays monthly
  • Total Assets= 2917MM Total Common assets: 1981MM
  • Annual Distribution (Market) Rate= 8.78%
  • Income Only Yield= 7.90% (based on last annual report)
  • Last Monthly Distribution= $0.1158 (Annual= $1.3896)
  • Fund Expense ratio= 1.02% Discount to NAV= -6.34%
  • Portfolio Turnover rate= 46%
  • Weighted Average Credit Rating= BBB
  • Weighted Average Duration= 3.11 years
  • Effective Leverage: 32.1%
  • Average Daily Trading Volume= 340,000 shares
  • Average Daily Dollar Volume= $4.95 milliion
Overall, I think EVV is a worthwhile purchase at current levels, especially in a tax deferred retirement account. It would be an outstanding buy at a discount level of 10% or higher. EVV is quite liquid and normally trades about 300,000 shares a day.

Disclosure: I am long EVV.
Source: EVV: Good High Income, Closed-End Fund With Low Duration