2023-04-12 03:55:58 ET
Summary
- EXG provides a good way to add international exposure to your portfolio and earn an attractive yield.
- It is currently trading at an above average discount to net asset value.
- The fund sells calls on liquid index options to generate additional income.
- EXG is one of the largest closed-end funds and is highly liquid.
Eaton Vance Tax-Managed Global Diversified Income Fund ( EXG ) is a covered call global equity closed-end fund, created in Feb. 2007, with about $2.6 Billion in assets under management. The primary objective of the fund is to provide current income, with a secondary objective of capital appreciation.
(Data below is sourced from the Eaton Vance website unless otherwise stated.)
The fund is currently selling at an 8.62% discount to NAV which is at the higher end of its normal trading range. Here is a five-year history of the premium/discount from CEFConnect:
The Fund invests in global equities with an emphasis on dividend paying stocks. They also write call options on one or more US and foreign indices to generate additional cash flow from the option premiums received.
Within the equity covered call CEF sector, I generally prefer funds that use index options over those that write call options against individual stocks. Aside from the tax advantage, the options on stock indexes generally trade with a lower bid-asked spreads and are much more liquid. This means reduced “slippage” costs resulting in less drag on performance.
A big plus of EXG is that they only use index options for hedging purposes. The following index options were being used to hedge in the last annual report- Dow Jones Euro STOXX 50 Index, FTSE 100 Index, Nikkei 225 Index and the S&P 500 Index. All of these have highly liquid option contracts available.
As with many Eaton Vance covered call funds, EXG uses a managed distribution plan where they currently are paying out $0.0553 monthly. In November, 2022, the monthly dividend payout was reduced from $0.0689, largely because of the weak stock markets last year. EXG usually "earns its distribution" because of its covered call writing, but occasionally uses return of capital if there is a shortfall.
This article from Eaton Vance does a good job in explaining how "return of capital" distributions can be advantageous. Compared to ordinary dividends, they offer the potential advantages of reducing (to long-term capital gains rates) and deferring (until year of sale) shareholder taxes.
Here is the geographic mix of investments as of Dec. 31, 2022:
EXG Geographic Mix (Eaton Vance web site)
The top equity sector allocations as of Feb. 28, 2023 are listed below. There are above average allocations to Financial Services, Industrials, Consumer Defensive and Healthcare compared to its category.
EXG Sector Breakdown (Morningstar)
EXG Performance Record
Here is the total return NAV performance record of EXG since 2013 compared to funds in Morningstar's Derivative Income category.
EXG NAV Performance | Derivative Income NAV | |
2013 | +18.03% | +15.35% |
2014 | + 1.54% | + 2.99% |
2015 | + 3.54% | - 1.69% |
2016 | + 1.54% | + 8.05% |
2017 | +18.16% | +16.85% |
2018 | - 9.18% | - 8.54% |
2019 | +27.46% | +19.79% |
2020 | +12.25% | + 6.29% |
2021 | +20.82% | +17.62% |
2022 | -15.71% | -12.06% |
YTD | + 7.73% | + 6.24% |
EXG has produced good long-term total returns as of April 10, 2023:
EXG NAV Return | EXG Market Return | |
1 Year | - 3.31% | -10.13% |
3 Year | +14.67% | +13.86% |
5 Year | + 7.43% | + 6.14% |
10 Year | + 7.33% | + 8.11% |
15 Year | + 5.61% | + 6.49% |
Source: Morningstar
Here are the top ten portfolio holdings for EXG as of Dec. 31, 2022. The top holdings are solid mega-cap companies.
EXG Top 10 Holdings (Eaton Vance web site)
Fund Management
- Christopher M. Dyer, CFA: Managing Director of Morgan Stanley. Head of the Eaton Vance Global Equity team. Joined Eaton Vance in 2015. Morgan Stanley acquired Eaton Vance in March 2021.
- B.S. Georgetown University
- MBA The Wharton School, Univ. of Pennsylvania
- Managed EXG since 2015.
Alpha is Generated by High Discount + High Distributions
The high distribution rate of 8.57% along with the 8.62% discount allows investors to capture alpha by recovering a portion of the discount whenever a distribution is paid out.
Whenever you recover NAV from a fund selling at an 8.62% discount, the percentage return is 1.00/ 0.9138 or about 9.43%. So the alpha generated by the 8.57% distribution is computed as:
(0.0857)*(0.0943)=0.0081 or about 81 basis points a year in discount capture alpha.
This goes a long way toward covering the fund's expense ratio of 1.07%.
Ticker: EXG - Eaton Vance Tax Managed Global Diversified Equity Income Fund
- Total Assets= $2.594 Billion
- Annual Distribution (Market) Rate= 8.57%
- Fund Expense ratio= 1.07%
- Discount to NAV= -8.62%
- Monthly Distribution= 0.0553
- Annual Distribution= 0.6636
- Portfolio Turnover rate= 27%
- Average Daily Volume= 488,233
- Average Dollar Volume= $3.8 million
- % of Stock Portfolio Call Options Written = 48%
- Average Days to Expiration of Options= 17 Days
- No leverage used
- NAV Ticker: XEXGX
US stocks have delivered strong performance over the last decade. But international stocks outperformed the US markets in 2022 and looking at past history suggests that international stocks may continue to outperform going forward.
Here is an interesting chart from the Hartford Funds that shows long term US versus International performance. Since 1975, the outperformance cycle for US versus international stocks has lasted about eight years on average. We are currently 11.8 years into the current cycle of US outperformance based on 5-year monthly rolling returns.
Summary
This looks like a good time to buy some EXG. It is highly liquid and easy to purchase. For those in a high tax bracket, it may be best to purchase EXG in a tax deferred IRA account, although it can also be a decent holding for a taxable account, since most of the distributions have been long term capital gains or qualified dividend income.
For further details see:
EXG: This High Yielding Global Equity Fund May Be Ready To Outperform