EXG: The Distribution Is Your Return
Eaton Vance Tax-Managed Global Diversified Equity Income Fund is a mouth full of a name. It isn’t a bad fund, but your return is largely coming from distributions. That may not be a problem for you, but it is something you’ll want to keep in mind. A reader recently mentioned the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE: EXG ), a fund I haven’t written much about yet. Since I have examined some of this fund’s brethren at Eaton Vance, I figured it was time for a deep dive on EXG, too. At the end of the day, it’s a mixed bag. What’s it do? EXG is a globally diversified option income fund. However, global primarily means developed markets. So the United States and Europe make up roughly 90% of the fund. And the fund’s Asian exposure is primarily in Japan. This is probably the best course of action for a fund that intends to sell options on its holdings with the goal of producing enough current income to support a managed distribution policy. You just need to keep in mind that emerging markets don’t play much of a role here. In addition to investing globally and writing options, the fund also strives to reduce taxes by using such techniques as tax loss harvesting and extending holding periods to at least a year. On one level it’s nice to know that these are a key focus for the fund, on another it seems like such strategies should be the norm for every fund, closed-end or open-end. But I don’t consider this a deal breaker or maker for EXG, it’s just another fact to know. What your return looks like Looking at total return, EXG isn’t a bad fund at all. The fund’s annualized return was 10% over the trailing three- and five-year periods through June. That trails the S&P 500 index and the Vanguard Global Equity Fund Investor Shares (MUTF: VHGEX ) over those spans. However, investing in the S&P or VHGEX would have left investors with yields in the low single digits. EXG’s distribution yield is in the high single digits. So there’s a trade off. And that’s an important thing with EXG. The distribution, especially over the last few years, has been the main source of your return. For example, the fund’s net asset value was $12.30 at the start of the company’s 2010 fiscal year (years end in October). It fell to $10.22 by the end of fiscal 2011 before rebounding to $10.82 at the start of fiscal 2014. It has since been in a downtrend again, recently hitting $10.50 or so. The recent NAV compared to $12.30 isn’t a flattering comparison. However, since 2011, the NAV has been fairly consistent. That, not surprisingly, coincides with a trimming of EXG’s distribution. Effectively the distribution was eating away at NAV, basically destructive return of capital, and Eaton Vance took steps to change that dynamic. For the fund that was a good decision and has clearly been an important part of stabilizing the fund’s NAV. But the second take away here is that the distribution has basically provided nearly all of the return the fund has offered in recent years. If you are looking for income that may not be a bad thing. However, EXG’s 9%+ distribution yield pretty much means you shouldn’t expect much capital appreciation from this fund. And if you are looking for a mix of income and capital appreciation you’re probably best looking elsewhere. Some more things to consider EXG’s expense ratio is roughly 1.07%. While that’s expensive compared to Vanguard’s products (VHGEX, for example, has an expense ratio of around 0.6%) and exchange traded funds, it’s not outlandish for an actively managed fund that invests globally. So it isn’t cheap to own, but nor is it expensive. Interestingly, EXG’s standard deviation is below that of VHGEX by nearly 10% over the trailing five-year period. However, that makes sense based on the fund’s use of option. Essentially, they will help protect a fund from losses because option premiums will offset stock declines. To whit, EXG was down roughly 27% in 2008. VHGEX declined nearly 47%. But options will also hamper returns on the upside, too, since positions with options written on them can be called away. Which is why in 2009 EXG advanced 23% and VHGEX was up a more impressive 33%. EXG’s trend of smaller losses and smaller gains is the norm between this pair. That said, if you are worried about the level of the world’s stock markets, EXG is a way to stay in the game while at least potentially protecting yourself from a severe downdraft. Good for some, not for others At the end of the day, I think EXG is an OK fund. I’m not so excited about it that I think everyone should own it, but for the right investor it could make a lot of sense. The big thing to remember, however, is that the yield is your return. That could turn into an issue if there’s another big market decline. With the NAV stuck in neutral for several years, a market-driven decline in NAV would make it harder to sustain the current payout. So, if you do step aboard here for global exposure, make sure to watch the NAV closely. Eaton Vance has proven willing in the past to trim distributions to protect NAV and I would expect them to do so again. As for premiums and discounts, EXG’s recent discount is narrower than its three- and five-year averages. Thus it isn’t a good candidate for investors looking to play closed-end fund premiums and discounts. So, for income investors looking for global exposure, EXG is worth a look. That’s especially true if you are concerned about the potential for a global market sell off. But EXG probably shouldn’t be the only fund you consider. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.