The Eaton Vance Tax-Managed Global Diversified Equity Income Fund For Tax Friendly Monthly Income Review

| About: Eaton Vance (EXG)

Summary

The Eaton Vance Tax-Managed Global Diversified Equity Income Fund is a closed end fund and has a steady monthly income of $0.0813/month or 11.7%/year.

Total return is 6.78% less than the DOW average total return, over the last 39 month test period.

The Fund is 21.71.% in financial companies equal to the distribution of the MSCI World Index (part of the funds model).

Moderate downside protection and income from covered call writing.

This article is about the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE:EXG) for steady monthly income and a secondary goal of capital appreciation. The fund try's to model partially on the MSCI World Index. EXG invests in large Cap and Mid Cap companies from around the world. Topics to be looked at are Yearly Income Percentage, Total Return And Discount, Geographic Distribution, Company Allocation, Covered Calls, Distributions, and Takeaways.

Yearly Income percentage, Total Return And Discount

Being in retirement, my goal is to have a steady monthly income, without the swings of dividends that are paid on a quarterly or yearly basis. EXG distribution of 11.7%/year ($0.0813/Month) return in today's low interest rate environment is fantastic and gives income investors a solid footing but does not keep even with the market.

I calculated the total return of EXG over a 39 month period starting with January 1, 2013 till the end of march 2016, 39 months in total. I chose this time frame since it included the great year of 2013, the moderate year of 2014, the losing year of 2015 and the volatile year of 2016 YTD. EXG underperformed the DOW average by 6.78%. For the 39 month period, the DOW total return was 33.46% and EXG missed that at 26.89%, but did make money. The economy seems to be moving forward slowly which is good for EXG with its covered call approach to dampen the swings of the market and its high percentage of financial companies.

EXG sells at a 8.2% discount to the NAV price. There are investors that like to play the discounts of CEF funds against each other, this is beyond my knowledge.

Company

Total Return for 39.0 Months

Difference from Dow Baseline

Yearly Distribution

EXG

26.89%

-6.78%

11.7%

DOW Baseline

33.67%

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Geographic Distribution

The fund companies are mainly from North America and Europe but there are also companies from Asia/Pacific and the Middle East

Geographic Distribution

Percentage

North America

54.84%

Europe

35.47%

Asia/Pacific

8.17%

Middle East

1.52%

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Company Allocation

The Eaton Vance website gives a full list of the companies and percentage of each company in the fund portfolio for the latest quarter. The table below gives the top ten companies for the fund and their percentage in the fund portfolio. Using price chart data, I calculated the total return of EXG top 10 companies out of 74 that the fund owns.

Company

Percentage

 

In Portfolio

Alphabet Inc. (NASDAQ:GOOG)

4.01%

Wells Fargo & Co. (NYSE:WFC)

2.50%

General Electric (NYSE:GE)

2.46%

United Technologies Corp (NYSE:UTX)

2.33%

Royal Dutch Shell PLC (NYSE:RDS.A)

2.17%

Credit Suisse Group AG (NYSE:CS)

2.15%

Synchrony Financial (NYSE:SYF)

2.08%

JPMorgan Chase & Co. (NYSE:JPM)

2.04%

Facebook (NASDAQ:FB)

1.94%

Lowe's Co. Inc (NYSE:LOW)

1.80%

Total

23.48%

Click to enlarge

Source: Eaton Vance

Six of the ten outperformed against the DOW average in total return of 33.67% over the 39 month test period except SYF, UTX, CS and RDS.A. The total percentage for the top ten companies in the fund is shown at the bottom of the table. So overall the fund has large cap companies in its portfolio and is producing a total return below the DOW average over the 39 month test period. SYF was not in existence during the 39 months test period and total return was not calculated. UTX total return was +23.97% below the baseline but still positive. CS and RDS.A both had total return that was negative at -34.25%. and -17.37% respectively. The high percentage in banks is really hurting the fund as interest rates just seem to be going down Worldwide. This mix does not look good.

Covered Calls

EXG sells index covered calls against 46% portfolio value with an average duration of 13 days and the percent out of the money of 1.5%. Covered calls provide EXG fund portfolio some downside risk protection and extra income to smooth out the normal market gyrations. The management in using covered calls, has the time to use covered call exit methods, if the market price goes against them. For EXG selling index covered calls on the portfolio value provides a steady income that does well in total return in a strong up market and gives some downside protection in weaker markets. In this volatile market the covered calls do not give enough protection to stop the fund price from taking a hit. If you want to learn about covered calls, I recommend the books written by Alan Ellman on the subject.

Distributions

Each month, the fund issues a statement saying which part of the distributions comes from short-term capital gains, long-term capital gains, investment income and return of capital. It is best to have EXG in a taxable account to take advantage of the tax friendly nature of the fund. EXG distribution for December 2015 has the cumulative distributions for the year that was 7.4% investment income, 0.0% short-term capital gains, 0.0% long-term capital gains and 92.6% return of capital. This is typical with return of capital being a significant part of EXG's distribution. The fund does really well in a strong up market and follows the market in an average market. The fund managers advise against drawing any performance conclusions from the distribution breakdown. They do manage the fund payouts to try and keep the monthly payment constant and being tax friendly. The negative side of the return of capital is that it reduces your cost basis so that upon selling, you will have a larger long-term capital gain if held more than a year in a taxable account. For a full explanation of return of capital, please refer to the article written by Douglas Albo (CEFs and Return of Capital: Is It as Bad as It Sounds?).

Take Aways

EXG is a fair income vehicle in a taxable account. It gives a high monthly distribution which is steady but underperforms the DOW averages over the test period of 39 months. EXG is a fair complement to individual company positions. EXG follows the market in an average market and does really well in a strong up market. EXG also provides steady income, with fund price muted both on the upside and down side swings by the covered calls. If the oil price goes up and the bank interest rates start to go up EXG might be an interesting choice but right now I would avoid it.

I wrote an article on the Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV) a couple of weeks ago and ETV has much better performance than EXG. EXG has a higher income distribution than ETV but EXG does not keep you even in total return to the DOW while ETV does, ETV is also tax friendly. ETV market price is at a 4.4% premium while EXG is at a discount of 8.20%. Even if you have an IRA or tax deferred account ETVs beating the DOW can be bought in an IRA type account also for steady income.

ETV is not part of The Good Business Portfolio that I usually write about (see my article on 2015 fourth-quarter performance for the complete portfolio list), but is held in a small Taxable account I have. I am long on ETV.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long ETV, GE.

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.