Repurchasing Closed End Shares: When Do Boards Take Action?

| About: Eaton Vance (ETY)

Eaton Vance's Tax-Managed Diversified Equity Income Fund, ticker ETY, has traded at a discount to its net asset value for the majority of time since its launch, November, 2006.

By way of background, a closed end fund will frequently trade at a premium or discount to its net asset value (NAV). The dynamics of supply and demand, coupled with an interest by investors to obtain a management style which is unique are some of forces which drive shares to trade at a value other than its pure NAV.

Accounting policy and quality of dividends are additional reasons for a closed end fund to trade at a price different than its NAV. Some funds contain language in their prospectus which are designed to restore value to shareholders once a fund has deviated from its net asset value and trades at a discount.

This is the case with ETY. Since September 2010, the fund has traded at a steeper and steeper discount to its NAV. This fund carries a distribution yield over 10%, but a good portion of that return is a return of shareholders principal. While the discount can offer a new shareholder an attractive entry point right now, once enough principal has returned to shareholders then the economics break down. Thus, once these economics break down the distribution yield becomes a flawed concept.

But this begs the question; when does the fund's Board of Directors take notice and act in the interest of its shareholders?

The prospectus of Eaton Vance's Tax-Managed Diversified Equity Income Fund contains the following paragraph:


Because shares of closed-end management investment companies frequently trade at a discount to their net asset values, the Board has determined that from time to time it may be in the interest of Common Shareholders for the Fund to take corrective actions to reduce trading discounts in the Common Shares. The Board, in consultation with Eaton Vance, will review at least annually the possibility of open market repurchases and/or tender offers for the Common Shares and will consider such factors as the market price of the Common Shares, the net asset value of the Common Shares, the liquidity of the assets of the Fund, the effect on the Fund's expenses, whether such transactions would impair the Fund's status as a regulated investment company or result in a failure to comply with applicable asset coverage requirements, general economic conditions and such other events or conditions that may have a material effect on the Fund's ability to consummate such transactions. There are no assurances that the Board will, in fact, decide to undertake either of these actions or, if undertaken, that such actions will result in the Common Shares trading at a price equal to or approximating their net asset value. The Board, in consultation with Eaton Vance, may from time to time review other possible actions to reduce trading discounts in the Common Shares."

So, when do boards take action? In the case of ETY it appears that the market, and animal spirits, believe this board is asleep at the wheel.

Disclosure: I am long ETY.