2024-01-14 06:07:12 ET
Summary
- Eaton Vance Tax-Advantaged Global Dividend Income Fund has finished 2023 with a solid performance.
- The solid performance actually moved the fund to a sizeable discount, which is perfect for investors looking to acquire or grow their position.
- The fund's distribution rate is barely over 6%, and that should bode well for a potential increase in the future.
Written by Nick Ackerman, co-produced by Stanford Chemist.
Eaton Vance Tax-Advantaged Global Dividend Income Fund ( ETG ) is finishing up 2023 fairly solidly. The fund's net asset value - that is, the fund's underlying portfolio - finished up higher than its actual share price. In the closed-end fund space, that's exactly what we want to see when we are looking to buy a fund. That's because we know that it means the fund has moved to a discount. Although discouraging as it can be when you are already long a fund, as I am with ETG, it's part of investing in CEFs. Discounts are something to exploit and are one of the main advantages that are fairly unique to CEFs.
Our last update was in mid-October when the market was at its lowest for the year and entering near correction territory, which it touched briefly. With that being said, as we would expect, this mostly equity-focused fund that employs leverage has blasted higher in this period. Enough so to outpace the S&P 500 during this short period and buck against the discount actually widening out slightly during this period, too.
ETG Performance Since Prior Update (Seeking Alpha)
The fund posted its latest annual report for fiscal 2023 as its year-end is at the end of October. While the fund has surged in a brief period of time, I think the outlook remains positive for this fund, and the current valuation makes sense.
ETG Basics
- 1-Year Z-score: -1.46
- Discount: -12.51%
- Distribution Yield: 6.98%
- Expense Ratio: 1.18%
- Leverage: 19.75%
- Managed Assets: $1.873 billion
- Structure: Perpetual
ETG invests "primarily in global dividend-paying common and preferred stocks and seeks to distribute a high level of dividend income that qualifies for favorable federal income tax treatment." This means they are looking for companies whose dividends are considered to be qualified dividend income. Of course, that is good for investors who might hold this in a taxable account. It would reduce the tax obligation for an investor, which is where the "tax-advantaged" portion of its name comes from.
The fund utilizes leverage, and those costs surged in a higher-rate environment. The fund pays borrowings at OBFR plus 0.62%. For fiscal 2023, that translated into an average annual interest rate of 5.53%. That was up substantially from the average costs of 1.72% for the prior year.
In this case, ETG is leveraged relatively mildly. Though, that does still push up the fund's total expense ratio to 2.70% for fiscal 2023 from the 1.58% it was at the end of fiscal 2022.
It also means that, in general, it is a riskier fund as leverage can both contribute positively or more negatively to the total end results of a fund. They had not hedged going into a higher rate environment either, so they felt the full brunt of the higher interest rate costs.
Performance - Discounts Keeps This Fund Interesting
The fund is technically a hybrid fund because it also carries a sleeve of preferred and other income securities. Historically, the fund has been pretty much dominated by its equity sleeve, which accounts for 76.76% of the fund's assets as of its last fact sheet . They then listed another 20.53% as fixed income, with the remainder being in cash.
Additionally, as one could also probably gather from the name of the fund, there is also a global tilt here. With all that being said, that does mean they use a blended index to benchmark against. Against that blended benchmark, the fund's results have exceeded or been quite competitive in the standard periods.
ETG Annualized Performance Vs. Benchmark (Eaton Vance)
More specifically, on the share price and net asset value change on a YTD basis, we can see that the fund continued to perform well after the October 31, 2023 performance period listed above. YTD, at this point, is basically 2023.
YCharts
What we can also take note of is that the fund's share price was hanging in there with its NAV through most of the year. It was during the latter part of the year's market swoon that they started to diverge materially. This is often the case with CEFs; it is often those times of greater volatility that can really shake up these funds to discounts. However, CEFs have seen historically wide discounts through most of the last two years overall.
Discounts can always go wider; there is really nothing here stopping that from happening. ETG doesn't have any term feature or tender offer coming up that would be a specific catalyst to spark a reduction in the discount. That said, historically speaking, this level of discounts is near the widest discounts we've seen for this fund in the last year. That generally bodes well and becomes somewhat of a soft floor, meaning that even further discount widening from here wouldn't be the likely scenario.
YCharts
International investments overall remain relatively cheaper than their U.S. counterparts. In fact, international investments are relative to their own historical valuations, and the U.S. is overvalued historically. Although, with only a select few holdings, primarily the Mag 7 names are driving most of the valuation here.
That could be a potential catalyst for seeing international investments outperform and a key focus on why adding global diversification to one's portfolio can make sense.
International Valuations (JPMorgan)
ETG combines both international and U.S. exposure, which also includes a few of the Magnificent 7 names within its top holdings. So, it isn't necessarily going to be the most beneficial if those investments outside the U.S. really take off; however, the fund level discount and having at least some sleeve outside of the U.S. still makes it appealing, in my opinion.
Distribution - Solid Distribution
The fund has had two cuts in its history, one during the Global Financial Crisis and the second more recently in 2022. The cut in 2022 was unfortunate, given that it was after a relatively shortly-lived bump in the distribution that occurred in 2021. Eaton Vance isn't afraid to adjust their distributions when they need to, though, and that can help preserve NAV over the longer term.
ETG Distribution History (CEFConnect)
At this time, the fund's distribution rate on a NAV basis is barely over 6%, and that bodes well for a potential increase in the future - and perhaps the near future. If equities don't fall off a cliff in 2024 and can continue to put up some decent results, we could easily see a bump in 2024 in the payout.
Most equity funds will require significant capital gains to fund their distributions to investors. ETG is no different, and with higher borrowing costs, that would have been a headwind throughout 2023. Despite this, the fund has seemingly shifted itself to an even further dividend focus as its net investment income rose dramatically year-over-year.
ETG Annual Report (Eaton Vance)
The fund saw interest on leverage climb from around $6.4 million to $20.471 million. However, it was thanks to the total investment income surging to $100.129 million that the fund received for fiscal 2023 compared to $61.82 million in the year-ago period.
On a per-share basis, it went from $0.507 for fiscal 2022 to $0.835 this year. That translates into NII coverage of around 70%. That's actually quite high NII coverage for an equity fund. The fund's capital gains realized this year were able to easily top off the payout for investors - though that was still working against the massive unrealized depreciation saw in 2022.
In our previous update, we looked at their semi-annual report, and we saw it was on trend to increase its NII. However, the size of the increase was much more substantial than the annualized figure would have suggested. It would have been around $40.7 million NII, and the fund had NII coverage of around 44%. Thus, the back half of the year certainly did a lot of lifting for the fund in terms of generating TII and, therefore, NII.
For tax purposes, the fund's distribution for 2023 has been mostly ordinary income. This was the reverse last year, but fortunately for investors that may hold this in a taxable account, historically speaking, 100% of these ordinary dividends have been considered qualified. Given the fund emphasizes a "tax-advantaged" approach to targeting "favorable federal income tax treatment," this does make sense. It's what makes this fund completely fine for holding in a taxable account.
ETG Distribution Tax Classification (Eaton Vance)
ETG's Portfolio
The fund emphasizes a weighting toward equity securities, but that is split between U.S. and global sleeves. Within the fund's fixed-income sleeve, the majority is allocated to the investment grade category. Since our last update, the asset mix has stayed fairly static. However, a fairly marginal increase in the U.S. equity allocation could be noted as it increased from the 42.54% it had been previously.
ETG Asset Allocation (Eaton Vance)
According to CEFConnect, the fund has 180 holdings, but Eaton Vance puts the number of equity positions at 102. As is usually the case, this number fluctuates, but for ETG, it can fluctuate a bit more than usual. This fund is often fairly aggressive in terms of its portfolio turnover. For fiscal 2023, the turnover rate came to 101%. Last year, they were the least active in the preceding 5 years, with a turnover rate of 59%. However, in 2020, the portfolio turnover rate came in at a whopping 224%.
Even with that said, one area the fund has continued to emphasize is the financial sector in terms of sector breakdown. That has been one of the recurring themes of this fund and was the case in our prior update as well. That being said, tech has seen its weighting increase to the point where it is nearly on par with the financial allocation. In our prior update, tech was at 17.68%, which did still put it as the second largest weighting for the fund.
ETG Sector Allocation (Eaton Vance)
The fund might have an emphasis on dividend-paying securities, but that doesn't mean everything the fund owns pays a dividend. Even with seeing NII increase quite materially this year, the fund still holds some large weightings in Alphabet ( GOOG ) and Amazon ( AMZN ). These are two Mag 7 names that pay no dividends at all. The other names that ETG is carrying are Microsoft ( MSFT ), which remained its largest position, and Apple ( AAPL ). These are dividend payers, but they have a much greater focus on dividend growth rather than upfront yields today.
ETG Top Ten Holdings (Eaton Vance)
Overall, the top ten also commands a fairly outsized allocation of the fund's total managed assets. It is nearly a quarter of the fund's assets despite pushing close to 200 positions in the fund. In particular, the top name MSFT commands quite a relatively large allocation.
Of course, it is these Mag 7 names that have actually helped the fund perform so well this year relative to its more value-oriented holdings that comprise its top ten. That could be names such as Nestle ( OTCPK:NSRGY ), ConocoPhillips ( COP ) or EOG Resources ( EOG ).
YCharts
Though speaking of EOG, this was a newer name to the top ten list as it hadn't appeared in our prior update. That said, turn back a year ago, and it was listed in their 2022 annual report . Not only that, but it was a top-ten holding at that time, too. In that report, ETG held 223,185 shares, and as of their latest report, they now hold 211,971 shares.
Conclusion
ETG has put up a solid performance, helped by a significant weighting in the Mag 7 names. However, the fund still places a heavier emphasis on the financial sector overall instead of tech - even if just barely, as of their latest report. The fund experienced significantly higher interest rate costs for their borrowings. Still, with what appears to tilt the portfolio more toward income players, it was able to offset those costs and much more. This was reflected in the fund's net investment income rising materially. The strong performance of the fund since they cut their distribution ironically puts them in a situation where there is room to increase the payout once again potentially.
For further details see:
ETG: Discount Keeps This Fund Appealing