ETO - LGI Vs. ETO: Which Fund Is Superior?

2023-08-06 23:11:03 ET

Summary

• Lazard Global Total Return and Income Fund is a solid global equities CEF with a 7.4% forward distribution yield.
• LGI fund has historically earned 7.8% total returns over 5 years, enough to fund its 7.4% distribution yield.
• However, compared to the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund, the ETO fund has lower fees, higher returns, and a comparable distribution yield.
• I prefer the ETO fund over the LGI.

Recently, I wrote a bullish article on the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund ( ETO ), noting that the ETO fund is a solid choice for income-oriented investors looking for global equities exposure while enjoying an attractive distribution yield.

This article examines a peer to the ETO fund, the Lazard Global Total Return and Income Fund ( LGI ), to see how the two funds compare and determine which may be more attractive.

Fund Overview

The Lazard Global Total Return and Income Fund is a closed-end fund ("CEF") that seeks to deliver current income and capital appreciation from a portfolio of global equities plus short-duration emerging market forward currency contracts and other emerging market debt instruments.

The LGI fund was formed from the merger of the Lazard World Dividend & Income Fund, Inc ("LOR") and the Lazard Global Total Return & Income Fund in December 2019 with the LGI ticker retained for the resulting fund.

The LGI fund is managed by Lazard Asset Management, the asset management division of the investment bank Lazard Ltd ( LAZ ).

The LGI fund employs leverage to enhance returns and as of June 2023, the fund had $229 million in net assets and $317 million in managed assets for 28% effective leverage. The LGI fund charged a 1.9% net expense ratio in fiscal 2022.

Portfolio Holdings

As of June 30, 2023, the LGI fund's asset allocation is shown in Figure 1. The LGI fund has 70% of its portfolio invested in global equities and 24% invested in emerging market currencies and debt. Of the allocation to emerging market currencies and debt, currency forward contracts account for 80% and bonds account for 20%.

Figure 2 shows the LGI fund's regional and sector allocations. The fund has 59% allocated to North American equities, 25% to European equities, and 7% to the U.K.

The largest sector weights are Information Technology (19.1%), industrials (18.7%), Financials (17.2%), Consumer Discretionary (13.8%), and Consumer Staples (12.3%).

Figure 3 shows the sector allocation of the iShares MSCI World ETF ( URTH ) for comparison. Relative to URTH, the LGI fund is underweight Information Technology (19.1% vs. 21.9%), Energy (0.0% vs. 4.7%), Materials (0.8% vs. 4.1%) and Health Care (12.0% vs. 14.9%). It is overweight Industrials (18.7% vs. 11.0%), Financials (17.2% vs. 14.9%), Consumer Discretionary (13.8% vs. 11.0%) and Consumer Staples (12.3% vs. 7.3%).

Returns

Figure 4 shows the historical returns of the LGI fund. The LGI fund has delivered modest long-term returns with 3/5/10/15Yr average annual returns of 10.0%/7.8%/7.6%/6.6% respectively to July 31, 2023.

On an annual basis, LGI's returns can be quite volatile, ranging from -18.2% in 2022 to 33.3% in 2017.

Figure 5 shows the historical returns for the URTH ETF for comparison. The URTH ETF has delivered 3/5/10Yr average annual returns of 11.8%/9.3%/9.5% respectively.

Investors should note that LGI's returns are not directly comparable to the URTH ETF, as the LGI fund is only ~70% invested in global equities.

Distribution & Yield

The LGI fund pays an attractive monthly distribution, with monthly distribution currently set at $0.09339 / share or a forward yield of 7.4% on market price or 6.4% on NAV. The LGI fund follows a managed distribution policy that aims to pay a monthly distribution equal to 7.0% of the fund's net asset value as of the close of the previous calendar year.

As the fund's NAV declined in 2022, the monthly distribution was reset lower to $0.09339 / share versus $0.12473 / share in 2022.

LGI Trading At Steep Discount

The LGI fund is currently trading at a steep 12.7% discount to its NAV (Figure 6). This is a historically wide discount for the LGI fund, with the fund's discount to NAV ranging from -15% during the COVID pandemic to a small 2% premium in 2022.

LGI vs. ETO

Having analyzed the LGI fund as a standalone entity, let us now compare and contrast the LGI fund to the ETO fund.

First, comparing the fund structures, the LGI fund has $229 million in net assets and charged a 1.9% net expense ratio in 2022. In contrast, the ETO fund has $410 million in net assets and charged a 1.59% net expense ratio. A larger fund should translate into better liquidity for investors and tighter bid/ask spreads, however, the difference between LGI and ETO's AUM is not large. In terms of fund structure, the ETO fund is slightly more attractive due to its lower fees.

Figure 7 shows the historical returns of the ETO fund. The ETO fund has delivered 3/5/10/15Yr average annual returns of 12.1%/9.6%/9.8%/7.5% respectively to July 31, 2023 compared to 10.0%/7.8%/7.6%/6.6% for the LGI fund.

Across all time frames, the ETO fund has delivered superior returns compared to the LGI fund.

Finally, comparing the distribution yields of the two funds, the LGI fund is currently paying a forward yield of 7.4% while the ETO fund is paying a forward yield of 7.2%. On NAV, the two funds are paying 6.4% and 6.6% respectively.

Overall, I believe the ETO is the superior global equities fund for investors, as it is cheaper, has delivered superior historical total returns, and has a comparable distribution yield.

Conclusion

On a standalone basis, the Lazard Global Total Return & Income Fund is a solid global equities CEF that pays a generous 7.4% forward distribution yield. The LGI fund has historically earned 7.8% total returns over 5 years, enough to fund its distribution.

However, when comparing the LGI fund directly with the Eaton Vance Tax-Advantaged Dividend Opportunities Fund, I find the ETO fund has delivered superior returns while being lower-cost. The two funds pay similar distribution yields.

Overall, I rate the LGI fund a hold , as the ETO fund appears clearly superior within the global equities category.

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