2023-10-16 16:46:31 ET
Summary
- Closed-end funds are often more sensitive to market movements, through being leveraged but also their discount/premium mechanics.
- Eaton Vance Tax-Advantaged Global Dividend Income Fund has seen a drop due to September's weakness and also a widening discount, creating a potential opportunity for investors.
- ETG focuses on global dividend-paying stocks and offers tax advantages, but its leverage and expense ratio has increased due to those borrowing costs rising.
Written by Nick Ackerman, co-produced by Stanford Chemist.
Closed-end funds are often more sensitive to movements in the market not only due to employing leverage but also due to their discount/premium mechanic. This is often one way to exploit opportunities in this investment structure.
One fund that has seen a drop due to the weak September market moves was Eaton Vance Tax-Advantaged Global Dividend Income Fund ( ETG ). This is a fund that is focused primarily on equities but is also a hybrid fund as it carries some fixed-income exposure, too. The fund has a global tilt, which makes it even more flexible. The drop in the last month for this fund was exacerbated by the fund's discount widening, creating a potential opportunity for investors that can handle more volatility.
The Basics
- 1-Year Z-score: -1.47
- Discount: -11.76%
- Distribution Yield: 7.81%
- Expense Ratio: 1.18%
- Leverage: 22.71%
- Managed Assets: $1.704.2 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 is fairly modestly leveraged, but any leverage is going to increase volatility as it increases both the upside potential and the downside moves as well. Additionally, with increasing interest rates from the Fed, they've seen their borrowings skyrocket. When accounting for the leverage costs, the fund's total expense ratio came to 2.64% at the end of its last semi-annual report . That's a substantial increase in the fund's expense ratio relative to its fiscal 2022 end, when it came in at 1.58%.
The fund has implemented some derivative strategies, such as short and long futures contracts on various global equity indexes. However, the fund hadn't set up any hedges against rising interest rate costs, such as shorting Treasury futures or interest rate swaps.
Discount And Market Falter Setting Up Opportunity
ETG's discount has been expanding even further since our last update , and primarily in the last month. September once again proved to be the worst time for stocks, with September being the worst month for 2023 so far. That discount widening has meant the drop in the fund's performance on a share price basis has been even more pronounced. The S&P 500 Index isn't really an appropriate benchmark, but it can give us some color of what has been happening with the general U.S. equity space.
ETG Performance Since Previous Update (Seeking Alpha)
For investors who may have entered a position in 2022, this widening discount from when it was trading at a premium makes the fall particularly painful.
Ycharts
Overall, ETG has been having a fairly decent 2023. They've enjoyed quite the rebound, as last October was when the broader market had made its lows. However, for an investor who might have bought last October, the performance through today has been much more muted when comparing its total share price return to its total NAV performance. This is why buying funds at a decent discount relative to their historical trading level is often a smart decision.
This was the performance comparison between October 1, 2022, through the end of September.
Ycharts
Last October to today's results were still fairly strong just because of how strong the rebound was. However, the main point I'm trying to highlight today is that equities are down sharply through a tough September; in addition, the fund's discount is now trading at a very tempting level relative to its historical discount. That can set the fund up for much better performance going forward when buying with both of these conditions.
Distribution Relies On Capital Gains
As is the case with most equity funds, the distribution will need to be covered through capital gains. As mentioned, this year, the fund was performing incredibly well - and to be honest, it still is despite the latest drop.
We touched on it in our previous updates, but the fund had raised its distribution only to see it quickly cut back down last year. That's partially what I believe was responsible for seeing the fund's discount widen so materially besides the overall market volatility.
That said, at an NAV distribution rate of 6.88% currently, it would seem there is no need to cut the distribution again for the foreseeable future - barring a black swan market collapsing type of event. Eaton Vance is often the fund to first start cutting their distributions, but they are more like a canary in the coal mine. If they start cutting, expect more funds to follow down the road.
The fund has seen its net investment income rise if the trajectory holds in the first half of the year relative to the entirety of fiscal 2022. NII coverage came in at around 44%. That can help keep coverage stable, but as we can see, the fund will still require material capital gains to have the distribution covered.
In each of the previous years, ordinary income and long-term capital gains were classified for the tax classifications of the payout.
However, the good news is that despite classifying the distribution with some fairly meaningful ordinary income classifications - those that get taxed at the highest rate - 100% of last year's ordinary income was qualified dividend income. This can be seen in the fund's year-end tax character breakdown , where they characterize the distributions more thoroughly.
ETG's Portfolio
This fund often comes with some fairly high portfolio turnover. The last six-month report put the turnover rate at 49%. That puts it on pace to be almost double last year's 59%. However, last year was a bit of an anomaly as 2021, 2020, and 2019 portfolio turnover rates came in at 111%, 224% and 175%, respectively.
They list 126 equity position holdings at the end of June 30, 2023. Although this portfolio isn't comprised of equity alone. Equity positions, primarily in the U.S., followed by foreign equity, are the largest weightings of the fund, but when tallying up the entirety of fixed-income allocation, it does carry a fairly meaningful amount as well. This is what makes it more of a hybrid fund, and having greater flexibility from the management isn't necessarily a bad thing. It leaves them more open to invest where and in what they believe can potentially provide the most attractive returns going forward.
ETG Asset Allocation (Eaton Vance)
Besides the global positioning of this fund that sets it apart from comparing directly to the S&P 500 Index, its actual underlying sector exposure is vastly different as well. The fund takes a benchmark of the MSCI World Index, and even against that, the portfolio is positioned quite differently. Instead of favoring tech as those two indexes do, the fund has favored investing in financials. This is then followed by a weighting to the tech sector.
With the higher turnover of this fund, the weighting can change somewhat regularly. However, at the same time, the fund had also listed financials as the largest weighting at 23.09% in our prior update. So, during this period, the fund hasn't shifted too materially in terms of its overall top sector weightings.
With that being the case, it probably comes with little surprise that the top holdings of the fund haven't shifted too dramatically either.
ETG Top Ten Holdings (Eaton Vance)
Microsoft ( MSFT ), Alphabet ( GOOGL ), Amazon ( AMZN ) and Apple ( AAPL ) are all top holdings - being part of the Magnificent Seven, and we can start to see just why ETG has been performing so well this year. All four of these positions have seen their weighting grow since our prior update as well.
The only new name to the top ten list includes GXO Logistics ( GXO ), which saw Sanofi ( SNY ) fall off. With that being said, as of the last N-PORT for the reporting date of July 31, 2023, SNY was still listed as a position.
Conclusion
Equities took a tumble in September, as historically this has been the case, with September being the worst month for stocks. However, the worst month for stocks can create long-term opportunities for investors. Not only did we see equities perform poorly, but closed-end fund discounts widened out on some quality names such as ETG.
For further details see:
ETG: Equities Fall And Discount Expands For This Solid Fund