EXG - Mediocre Performance, Terrible Price
Summary
- EXG is a closed-end fund sponsored by Eaton Vance, seeking current income and capital appreciation through investment in global common stocks and through utilizing an options strategy.
- The fund is trading at a discount of 1.6% to its net asset value and distributing a market distribution of 9.97% (as of March 7, 2018).
- In-depth discussion on the fund and how it differs from its ETF competition.
The covered call strategy is one of my favorite investment strategies and one which I personally use for both client and personal money.
Through a proper "covered call" strategy, investors are able to both reduce the risk of holding an investment while at the same time monetizing that risk and getting paid for it!
I wrote about covered calls and covered call closed-end fund in the article "If You Must, Please Use Protection." Subsequently, we discussed a number of closed-end funds which have been well liked such as the Nuveen S&P 500 Buy-Write Income Fund (BXMX), Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), and the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) in the articles "BXMX: All The Fun With A Lot Less Risk," "SPXX: The SPY For Income", and "QQQX: Cure For Tech Overload?"
After discussing the index-based covered call funds, we took a deep look at one of the most widely held actively managed covered call closed-end funds, the Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY) in the article "ETY: A Covered Call CEF Cornerstone" (the Income Idea Version can be found here).
What we found was a widely popular fund which unfortunately did not seem to deliver on its premise, especially against the Nuveen index based cover call funds.
ETY has another popular sibling fund, a global equity income version of itself, the Eaton Vance Tax-Managed Global Fund (NYSE:EXG).
Does EXG deliver any alpha? Or does it suffer the same fate? Or are there better alternatives?
Let's find out!
Fund Basics - Essential Info
- Sponsor: Eaton Vance
- Managers: Michael A. Allison, Christopher Dyer
- AUM: $2.795 Billion
- Historical Style: Global Large Cap
- Investment Objectives: The fund seeks current income and capital appreciation through investment in global common stocks and through utilizing an options strategy.
- Number of Holdings: 97
- Current Yield: 9.97% based on market price, monthly distributions
- Inception Date: 2/23/2007
- Leverage: None
- Fees: 1.07% as of 10/31/2017
- Discount to NAV: 1.61%
Sources: CEF Connect, Eaton Vance, and YCharts.
The Sales Pitch
We have previously discussed the benefits of equity options and the covered call/buy-write strategies. The strategy provides income and in turn risk management through a lower cost basis.
The fund's selling points as presented by Eaton Vance are as expected, the income from writing the index options, a tax-managed strategy, a managed monthly distribution, and the liquidity of being listed on the NYSE.
Source: EV
The benefit of Eaton Vance, of course, is its expertise and focus on "tax-managed" investing.
The Alpha/Fund Strategy
EXG is very much like (ETY) which we previously discussed in detail. The major difference is that while ETY focuses on domestic equities, EXG is a global portfolio.
Against the portfolio, the fund writes index call options on a portion of the stock portfolio in order to generate current cash flow.
The fund also has a tax management component as part of the overall fund strategy.
Source: EV Brochure
As we have seen in the past, we will have to take a look with whether a fund's focus be it on a particular strategy or a set of principles has a negative impact on overall performance.
The Portfolio
The fund based on its investment mandate has a focus on dividend-paying stocks. The top names in the portfolio are names you would commonly find in many large-cap portfolios.
The top holdings include names such as Google (GOOG), Amazon (AMZN), Royal Dutch Shell (RDS.A), Unilever (UL), and Johnson & Johnson (JNJ). Overall, the top 10 names make up a bit over 21% of the fund indicating a fairly well-balanced portfolio.
Source: Eaton Vance
Overall, the portfolio is fully invested with more than 99% of the assets invested.
Source: YCharts
On that, portfolio management writes slightly out of the money index options (.4%) on about 48% of the fund.
Geographically, the fund is a true global fund with about 50% invested in U.S. domiciled companies.
Source: YCharts
One place where there could be more effort made is in Asia, which I feel is grossly underrepresented with only 13%.
Looking at the sector breakdown, we see a very well diversified fund with Financials, Healthcare, Industrials, and Technology making up the top sectors and all almost equally represented.
Source: YCharts
Finally, we can take a look at some portfolio stats to see what we can expect in the performance numbers.
Source: YCharts
As we can see, in the data, the fund has a five-year beta of 1.092, this means the fund has been more volatile than simply buying the S&P 500 outright. Over the years, the fund had a maximum drawdown of 58.19%.
Over the last 10 years, the fund achieved a Sharpe Ratio of just .404. This implies that it only earned .404% in excess of the risk-free rate, which isn't impressive.
The Numbers
ETY currently yields 9.97% and is trading at a discount of 1.61% to its net asset value.
Source: CEF Connect
Like many CEFs, EXG saw its discount to NAV shrink over 2017. While they did open up for many fixed-income funds over the past few months, they have not for EXG.
Source: CEF Connect
CEFs are generally not a "rational" market and often go through periods of trading at significant discounts or premiums. Today, EXG trades at an exceptionally small discount and even traded at a small premium over the last year. Overall, however, the fund has traded at substantial discounts of 10% or more. Anyone seriously considering investing in the fund today needs to examine and ask themselves, "Why?"
Source: CEF Connect
Is the performance stellar enough to want to pay full NAV or a premium for the fund?
Year to date, the fund has achieved a total loss of just under .5%. The price per share has declined 2.03% while the NAV declined 2%.
Over the last year, the fund has done significantly better with a 17.59% total return. The price per share increased 6.48% while the NAV increased a mere 1.75%. This tells us that a good chunk of the total gains came from the closing of the discount to NAV, and not underlying performance.
Over the last 3 years, we see a "normal" for the fund where it achieved a 29.39% total returns driven by the distribution. The price per share, however, declined 5.93% and the underlying NAV is down 10.7%. This once again shows the meaningful impact the closing of the discount to NAV had on overall performance.
It is an almost identical picture over the previous 5 years, where the fund achieved a 63.64% total return against a 2.34% drop in the price per share and an 11.6% drop in the net asset value.
We can further extrapolate this trend and see it play out over the previous 10 years.
A solid 86.97% total return but a very severe 43.3% drop in the price per share and a 46.1% drop in the net asset value of those shares.
"Since inception" has not been the exception with the fund achieving a 69.15% total return driven by the distributions, while the underlying price per share declined 54% and the NAV fell 51.3%.
This is where we get the max draw-down of nearly 60% from the fund's inception through the bottom during the Great Financial Crisis.
In order to compare the fund's performance in perspective, we take a look at EXG against funds with a similar strategy in the Nuveen S&P 500 Dynamic Overwrite Fund, a competing global covered call CEF, the Voya Global Advantage and Premium Opportunities fund (IGA), the PowerShares S&P 500 BuyWrite ETF (PBP), and the uncovered iShares MSCI World ETF (URTH) which is the benchmark for the underlying securities.
Year to date, the standout is the Nuveen covered call fund (SPXX) with a 3.35% total return. EXG trails behind both the simple MSCI World ETF (URTH) and the broad PowerShares Buy Write ETF.
Over the previous year, the trend continues with SPXX being the clear winner. IGA and EXG do well enough but still lag the plain vanilla ETF.
Looking back over 3 years, the trend continues. SPXX - i.e., "buy an index fund and write options on it" - comes out ahead. Both the Voya and the Eaton Vance funds lag the passive MSCI World ETF while the PowerShares ETF lags behind.
5 years?
Hmm...
To get a 10-year number, we have to replace the iShares ETF with the pure index.
Even on a 10-year basis, the Eaton Vance fund fails to outperform the index. IGA, however, just beats it by 2%.
Only when we look back through to since inception numbers do we see EXG beat the MSCI World index. Even still, the more traditional covered call (SPXX) handily outperforms.
Bottom Line
EXG has always been a popular fund, and I believe it is for two reasons. The first is that it is a "Tax-Managed" fund and trust attracts certain investors who would put focus on that rather than underlying performance.
The second reason is that it is "Eaton Vance" and the company is exceptionally popular with the investment advisor community and is generally known in the closed-end fund space.
This is a good reason why both EXG and ETY are the two largest covered call closed-end funds at $2.755 billion and $1.768 billion each!
SPXX, for instance, is a mere 10% of EXG's size or about $289 million in market capitalization and IGA is even smaller at $205 million!
The one group of investors who would and should consider this fund are the investors who are looking for tax-advantaged income from their non-qualified or taxable accounts.
For ETY, I wrote:
The fund is certainly interesting and I can see why there are so many investors in it.
Because it is a tax managed fund I will break this up in to two discussions, one for the tax conscious investors with taxable accounts and high incomes and investors who are predominately investing IRA money or do not need to take taxes into consideration.
On the surface while the fund has performed well enough and provided a good distribution, for a number of reasons I would still consider the two Nuveen funds before the EV Tax-Managed Dividend Equity Income Fund.
Therefore, for tax deferred accounts there may be other choices.
Where this fund may be good is for investors who need equity income in taxable accounts where taxes are an issue. The fund's focus on tax-management gives it an advantage and I suspect on an after-tax basis, the performance would leap above the competition.
Having said that, I see less reason for investing in EXG than ETY as quite frankly the performance has been bad. Even applying the fund's strategy on a total return basis, the fund fails to outperform the benchmark.
There is even less reason, in my opinion, to consider EXG today as it trades at a mere 1.61% discount to NAV while numerous similar funds trade at much steeper discounts. Today, there are 18 other funds which are classified as "covered call" closed-end funds which are trading at a larger discount to NAV than EXG. There are only 8 funds on the other hand, which trade at a smaller discount or a premium including 3 other Eaton Vance closed-end funds.
Yes, you will say: "But, Maks, the other funds are all distributing far less than the near 10% EXG is." To that, I respond: "The fund is obviously not earning 10% and the difference between what it earns and what it pays is simply returning your money."
We go into detail on this topic in the article "CEF School: Distributions 101 - Distributions Are Not Dividends."
For more information about the fund, please take a look at the fund's website here.
If you have not done so already, please take a look at my previous covered call fund articles, including:
Note: Primary ticker articles (articles predominately around a specific investment) are now locked after 10 days for readers without a new Pro subscription. Income Idea subscribers, however, have full access to all of my articles and receive a more detailed analysis including my take including risk factors, pros and cons, and implementation ideas.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (43)
When you reach RMD time and withdraw from the IRA, you will pay your regular (max at the time) tax rate. So, it can hurt more then.
But- I do the same since I'm not too worried & nearly all of my portfolio is IRA & ROTH- but trying to build the taxable with my RMD stocks that I move in-kind each year.
G
Even ETY's is .536- so not so great either. Options can throw a wrench into Sharpe results too- so not sure it means all that much.
G
Maks I would venture to say most folks buying HY double digit yielding CEF's are buying for Income flow to either be spent or reinvest at least a portion vs a going in TR goal.
How can you state an "in-depth discussion" without at least looking at "income" generated with and without dividends reinvested... everyone of your charts focuses on TR or price chg % etc
>>Folks do yourself a favor and know your going in goal for HY CEF's, Income flow or TR.If one chooses Income, then take a look at how EXG has done over time with div reinvested and the resulting share count today X current monthly or annual dividend and see how the income has grown....pls notice no where did I state that price chg is a factor in calculating growing income flow.
In addition, look at how well EXG has performed despite a dividend cut (or as I call a course correction; yet still yielding @ 10%) @ Feb 2017 which the author did not even mention in his "in-depth discussion".
"The fund is obviously not earning 10% and the difference between what it earns and what it pays is simply returning your money."
Huh- as opposed to the others? Which of those mentioned are truly 'earning' their distribution? Not any per cefdata.com
Not to defend EXG- they are earning only 11.45%, but the others max out around 23%- the rest of their earnings are ROC and short/long term cap gains.
Also- going back 5-10 years on charts of the majority of CEFs is going to look pretty sick- 2008 messed them-up. I like to look at recent 1-3 yrs- is NAV & price sloping upward? If so, I can give them a break. EXG opened in Feb '07- not a great year to start.
thanks for the review-
G
Please "follow" me here on Seeking Alpha by clicking the orange "Follow" button if you have not done so already. Not only will you stay up to date with my work, but it also helps me as an author under the new system where new follows are taken into account by Seeking Alpha.
Thanks!
-MaksAlso, if you would like to preview the Distribution Quality section I do for Income Idea subscribers, you can download it here... http://bit.ly/2oWQQaK
I would be very interested in knowing what you meant about the 10% distributions not being earnings or dividends, but rather return of capital. If they are partially return of capital that portion wouldn't be taxable, I presume.
