2023-04-11 04:08:21 ET
Summary
- The EXG fund provides exposure to a global portfolio of leading companies.
- The fund pays an 8.6% distribution yield which appears in line with the fund's long-term historical returns.
- I am warming up to international investments as the conditions are ripening for international markets to outperform the U.S.
The Eaton Vance Tax-Managed Global Diversified Equity Income Fund ( EXG ) provides exposure to a diversified portfolio of leading global companies. The fund pays an attractive distribution yield of 8.6%.
Unlike many other high yielding CEFs that I have reviewed recently, I believe EXG's current distribution yield is sustainable, as it is in line with the fund's long-term historical returns.
I believe conditions are setting up for international equities to outperform domestic equities, similar to the period in the early 2000s.
First, the U.S. dollar may have peaked, which favours international investments. The bursting of the 'ARKK bubble' in unprofitable growth stocks could also shift investor sentiment towards value/real economy companies which tend to have larger weights in international markets and indices. Financially, the twin narratives of supply-chain diversification and green revolution could spur investments in international markets in the coming years.
I believe the EXG fund may be suitable for investors who want to benefit from a shift towards global investing while collecting a handsome distribution.
Fund Overview
The Eaton Vance Tax-Managed Global Diversified Equity Income Fund is a closed-end fund ("CEF") that provides exposure to a diversified portfolio of domestic and international large-cap dividend paying stocks. The EXG fund may sell covered-calls on one or more U.S. and foreign indices on a portfolio of the portfolio to generate additional income.
The EXG fund has $2.5 billion in net assets and charges a 1.07% net expense ratio.
Portfolio Holdings
Figure 1 shows the EXG fund's sector allocation relative to the MSCI World Index as of December 31, 2022. For the most part, the EXG fund's sector allocation is roughly in line with the MSCI World Index. The notable differences are a slight overweight in Information Technology, Health Care, and Industrials, and slight underweights in Communication Services, Materials, and Real Estate.
Figure 1 - EXG sector allocation (EXG factsheet)
As per the fund's mandate, the EXG fund is diversified geographically, with 56.5% of its portfolio invested in North American equities, 34.5% invested in Europe, and 7.4% invested in Asia/Pacific (Figure 2).
Figure 2 - EXG geographical allocation (EXG factsheet)
Returns
Figure 3 shows the EXG fund's historical returns. The EXG has delivered solid long-term returns, with 3/5/10/15Yr average annual returns of 16.5%/7.5%/7.4%/5.7% respectively to March 31, 2023.
Figure 3 - EXG historical returns (morningstar.com)
Investors should note that the 3Yr average return figure is flattered by the starting period of March 31, 2020, which coincides with the market lows near the beginning of the COVID-pandemic. I believe the longer-term 5 and 10Yr average annual return figures of 7.5% and 7.4% is more representative of what the EXG fund can deliver to investors.
Figure 4 shows the historical returns of the iShares MSCI World ETF ( URTH ) for comparison. In general, EXG's performance tracks the URTH, although it has underperformed URTH by ~100-150 bps p.a. on a 5 and 10Yr time frame.
Figure 4 - URTH historical returns (morningstar.com)
Distribution & Yield
In exchange for lower total returns, investors in EXG are paid a handsome distribution yield. The EXG fund has a managed distribution policy currently set at $0.0553 per month or 8.6% forward yield. On NAV, the yield is currently 7.8%. This compares favourably to URTH's 1.6% trailing distribution yield.
EXG's monthly distribution was cut from $0.0689 in November 2022. Although painful for unitholders, I believe this was a prudent move by the manager, as the fund had clearly performed poorly in 2022 and continuing to pay the prior distribution rate would have taxed the fund's resources.
Instead, the distribution cut reduced EXG's distribution rate to 7.8% of NAV, which is in line with the fund's 5 and 10Yr average annual return of 7.5% and 7.4%, respectively.
Historically, EXG's distribution has been funded from a combination of net investment income ("NII"), capital gains, and return of capital ("ROC") (Figure 5).
Figure 5 - EXG financial summary (EXG 2022 annual report)
In fiscal 2022, 20% of EXG's distribution was funded from NII, 79% was from capital gains, and 1% was from ROC.
Although ROC usage has been high for the EXG fund in prior years, I am not particularly concerned, as long as the fund is able to earn total returns in line with its distribution rate. In fact, high ROC usage could be for tax management purposes, as ROC distributions reduce the cost-basis of the investment and defers taxes due. (Note, investors should consult a tax professional regarding their individual tax circumstances.)
EXG Trades At a Significant Discount
Due to the EXG fund's poor performance in 2022 and the aforementioned distribution cut, investors seem to have lost confidence in the fund, allowing it to trade at a steep 9% discount to NAV (Figure 6).
Figure 6 - EXG trades at a 9% discount to NAV (cefconnect.com)
Compared to recent history, EXG's current 9% discount screens fairly attractive.
However, investors should note that during periods when international investments were deeply out of favour (for example, 2011 during the European debt crisis), the EXG fund's discount to NAV could widen to as much as 15%.
Warming Up To Global Stocks...
The ratio between the S&P 500 Index and the MSCI World Index recently broke down after outperforming for more than a decade. Could this herald a new era of international investing, a la the early 2000s (Figure 7)?
Figure 7 - S&P 500 / MSCI World Ratio broke down (Author created with price chart from stockcharts.com)
For long-time market participants, there are certainly parallels between the early 2000s and the current markets. First, the early 2000s experienced a peak in the U.S. dollar, as measured by the DXY Index.
Figure 8 - DXY Index peaked in early 2000s (stockcharts.com)
Today, we are bombarded with news articles of China and Russia usurping the U.S.'s role in international trade by convincing trading partners like Saudi Arabia and France to conduct bilateral trade in Yuan instead of U.S. dollars.
Furthermore, the early 2000s saw the Dot-Com crash, which turned investors away from U.S. equity investments for nearly a decade. Today, we are coming off the bursting of the 'ARKK bubble', where unprofitable concept stocks were bid up to unsustainable levels by growth-focused investors (Figure 9).
Figure 9 - Bursting of 'ARKK bubble' rhymes with Dot-com bubble (Author created with price chart from stockcharts.com)
The bursting of this U.S.-led 'ARKK bubble' could deter investors from U.S. equity markets in the coming years, as international indices and markets tend to have more 'real economy' stocks such as energy companies, banks, and industrial conglomerates.
Finally, the major market narrative in the early 2000s was the 'rise of China' as China's inclusion in the WTO opened up its huge population to international markets as both a source of labour and a demand for commodities.
In the coming years, India and other emerging markets could supplant China as the world's factory as global companies diversify their supply chains, and the 'green revolution' could displace China as the major demand driver for raw commodities. Both of these mega-themes, supply-chain diversification and green revolution could drive international investments for years to come.
In short, the conditions and circumstances are starting to align for a period of outperformance by international markets relative to the U.S.
...But Don't Get Carried Away
However, before investors rush out and sell their domestic equities, they should keep a few things in mind. First, although news articles of the U.S. losing its reserve status are alarming, investors need to remember that the U.S. dollar remains dominant in global foreign exchange reserves, accounting for 58% of all reserves (although the figure has fallen by approximately 12% over the past 2 decades) (Figure 10).
Figure 10 - U.S. dollar remains dominant in global reserves (IMF)
So even if there is a trend towards de-dollarization, the U.S. dollar is not going to be replaced overnight.
Furthermore, although the 'ARKK bubble' has crashed and burned, many U.S. companies remain dominant in their respective markets, unlike the Dot-com bust which saw large market weight companies like Cisco and Microsoft suffer 80-90% drawdowns. Today, leading domestic companies like Apple, Microsoft, NVDIA, and Alphabet continue to attract investor support as they are actually safe havens during stormy markets.
Conclusion
The Eaton Vance Tax-Managed Global Diversified Equity Income Fund provides exposure to a diversified portfolio of leading global companies. The fund pays an attractive distribution yield of 8.6%. Unlike many other high yielding CEFs that I have reviewed recently, I believe EXG's current distribution yield is sustainable, as it is in line with the fund's 5 and 10Yr average annual returns.
I believe conditions are setting up for international equities to outperform domestic equites, similar to the period in the early 2000s. First, the U.S. dollar appear to have peaked, which favours international investments. The bursting of the 'ARKK bubble' in unprofitable growth stocks could also shift investors towards value/real economy companies which have larger weights in international markets and indices. Financially, the twin narratives of supply-chain diversification and green revolution could spur investments in international markets in the coming years.
The EXG fund may be suitable for investors who want to collect high distribution yields while benefiting from a shift towards global investing.
For further details see:
EXG: High Yielding Global Equity Fund