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Eaton Vance Risk-managed Diversified Equity Income Fund is a closed end fund traded on the New York Stock Exchange under the symbol ETJ. It was intended to be a buy/write equity income fund but seems to have abandoned its goals. Perhaps its name should be changed. ETJ does have a nice broad portfolio of large cap stocks and does sell at a substantial discount from net asset value.

As of December 31, 2011, ETJ had net assets of $922,225,709, with 2.1% of assets in call options written and 2.6% in put options purchased. As a buy/write fund it seems to be spending more money buying options than it makes selling options. As of December 31, 2011, it was selling at a discount of 17.33% from net asset value and the discount continues in that area. It has a managed distribution program, which far exceeds its net income. For the last calendar year this distribution was the equivalent of 10.11% of net asset value and an astounding 12.23% on market value.

Performance has been very mediocre and has been as follows:

One Year

Since 7/31/2007

Net Asset value

(2.79%)

1.86%

Market Value

(12.43%)

(2.43%)

S & 500 Index

2.11%

(1.09%)

CBOE Buy/Write Index

5.72%

1.22

The difference in performance based on net asset value and market value indicates and continuing increase in the discount from net asset value. It is also obvious that they are not following their mandate as a buy/write fund.

ETJ does have a nice broad portfolio which should do them well over time. Their ten 910) largest holdings were 32.2% of net assets and are representative of the quality of their portfolio. Their top eight (8) holdings are as follows:

Exxon Mobil (NYSE:XOM)

4.7%

Apple (NASDAQ:AAPL)

4.2%

Proctor & Gamble (NYSE:PG)

3.6%

Google (NASDAQ:GOOG)

3.6%

IBM (NYSE:IBM)

3.4%

Pfizer (NYSE:PFE)

2.8%

Danaher (NYSE:DHR)

2.6%

Verizon (NYSE:VZ)

2.5%

ETJ does have tax loss carry forwards and its tax situation is as follows:

Capital Loss Carry Forward

($352,687,792)

Net Unrealized Appreciation

$136,535,421

Performance ratios over the past five (5) years show high turnover, average operating expenses and low income. ETJ is called an equity income fund but does not live up to its name. The figures are as follows:

Percent Operating Expenses

Percent of Net Investment Income

Percent Portfolio Turnover

2011

1.09

0.57

109

2010

1.07

0.76

39

2009

1.08

0.99

59

2008

1.06

0.85

100

Ending 2007

1.08

1.29

30

ETJ does have a very nice and high quality portfolio. I can also understand why they purchased puts to protect their portfolio in a volatile market. They even sold a few index calls. Unfortunately all this is at best tangentially related to their mandate which is to produce incremental income by buying dividend generating stocks and writing options against their positions. The actual net income they generate is quite similar to funds that only purchase large cap growth stocks.

It is unfortunate that truth in advertising is not enforced by closed end funds. It makes you wonder who is watching or monitoring these things. ETJ has a fine portfolio but they are simply not doing what they are supposed to do.

Source: Eaton Vance Risk Managed Diversified Equity Income Fund