Summary 15% Discount to NAV is near 5 Year Highs. High 11% Distribution Rate Combined with Discount Produces Alpha. The fund uses dividend capture and an options overlay to increase distributable income. The Wells Fargo Advantage Global Dividend Opportunity Fund (NYSE: EOD ) is a covered call global equity closed-end fund, created in March 2007, with about $365 Million in assets under management. The primary objective of the fund is to provide a high level of current income, with a secondary objective of long term capital growth. (Data below is sourced from the Wells Fargo Advantage website unless otherwise stated.) The fund is currently selling at a 15% discount to NAV which is near its five year high. Here is a five year history of the premium/discount from cefconnect: (click to enlarge) The Fund invests in global equities with an emphasis on companies with attractive dividend policies and/or those with the potential to grow their dividends over time. The Fund focuses on companies in the utilities, telecom and energy sectors. They also employ dividend capture and an options overlay to increase distributable income. Within the equity covered call CEF sector, I generally prefer funds that use index options over those that use options on individual stocks. Aside from the tax advantage, the options on stock indexes generally trade with a lower bid-asked spread and are more liquid. This means reduced “slippage” costs resulting in less drag on performance. EOD uses both kinds of options. But the options holdings are modest (around 7%) of equity value, so the slippage factor is not a big deal here. As with many covered call funds, the fund uses a high managed distribution plan where they currently are paying out $0.18 per quarter. Five years ago the fund was paying out $0.28 per quarter, but the NAV has fallen because the total return has not kept up with the large distributions. EOD usually “earns its distribution” because of the options overlay and dividend capture strategies, but occasionally will use return of capital if there is a small shortfall. The quarterly distribution was reduced to $0.21 in November, 2012 and was lowered again to $0.18 in November, 2013. The distribution cuts have been successful in preventing major drops in NAV the last three years. This was the top eight country allocation as of July 31, 2015: U.S. 51.3% U.K. 11.4% Italy 8.2% Bermuda 7.4% France 6.8% Canada 5.4% Spain 5.2% Germany 4.2% The top equity sector allocations as of Sep. 30, 2015 are listed below. Note that there was zero exposure to the Basic Materials, Technology, Consumer Defensive or Healthcare sectors. Equity Sector Allocation Utilities 31.8% Real Estate 20.3% Communications 16.1% Financials 11.3% Consumer Cyclical 9.4% Industrials 5.6% Energy 5.5% Source: Morningstar Here is the total return NAV performance record since 2008 along with its percentile rank compared to Morningstar’s World Allocation category. EOD NAV Performance World Allocation NAV Percentile Rank in Category 2008 -33.55% -39.30% 31% 2009 +13.33% +46.71% 100% 2010 + 3.13% +23.98% 100% 2011 – 4.44% – 3.21% 65% 2012 +9.23% +19.81% 85% 2013 +12.65% +11.07% 85% 2014 + 8.29% + 6.14% 30% YTD – 4.42% + 0.06% 91% Source: Morningstar Here are the top ten holdings for EOD as of Sep. 30, 2015: (click to enlarge) Fund Management Timothy P. O’Brien, CFA: Managing partner at Crow Point Partners LLC. Previously worked with the Value Equity team of Evergreen Investments. Has been in the investment management industry since 1983. Kandarp Acharya, CFA, FRM: Senior portfolio manager at WellsCap. Has a background in quantitative research, development of capital markets expectations, multi-asset class market risk modeling, risk management and hedging and optimization strategies. Christian L. Chan, CFA: Senior portfolio manager at WellsCap. Prior positions include roles as head of investments on several asset allocation funds at Wells Fargo, and quantitative research manager at an institutional investment consultancy. The discount to NAV as of November 6 is -14.83%. The one year discount Z-score is -1.24 and the one year average discount is -10.69%, which means that the current discount to NAV is more than one standard deviation below the average discount over the last year. Source: cefanalyzer Alpha is Generated by High Discount + High Distributions The high distribution rate of 11.46% along with the 15% 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 a 15% discount, the percentage return is 1.00/ 0.85 or about 17.6%. So the alpha generated by the 11.46% distribution is computed as: (0.1146)*(0.176)=0.0201 or about 2% a year in discount capture alpha. Note that this is way more than the 1.07% baseline expense ratio, so you are effectively getting the fund management for free with a negative effective expense ratio of -0.93%! Ticker: EOD Wells Fargo Advantage Global Dividend Opportunity Fund pays quarterly Total Assets= $361 Million Annual Distribution (Market) Rate= 11.46% Fund Expense ratio= 1.07% Discount to NAV= -14.83% Portfolio Turnover rate= 76% Average Daily Volume= 192,000 Average Dollar Volume= $1.2 million Call Options as a % of total assets= 6.62% No leverage used This looks like a good time to start buying EOD. It is liquid and easy to purchase. Tax loss selling may still be depressing the price, so there may be more purchase opportunities as we approach year end. For those in a high tax bracket, it is probably best to purchase EOD in a tax deferred IRA account since most of the distributions are taxable income. Full Disclosure: Long EOD.
