Written by Nick Ackerman, co-produced by Stanford Chemist.
The final time we up to date protection on Eaton Vance Enhanced Fairness Earnings Fund (NYSE:EOI), we famous that it was considered one of solely a few fairness EV funds that had not lower their distribution. The one different fund to keep away from a lower was Eaton Vance Tax-Managed Purchase-Write Technique Fund, which was in the end merged into Eaton Vance Tax-Managed Purchase-Write Alternatives Fund (ETV). The straightforward purpose for EOI to keep away from a distribution lower was that its distribution fee hadn’t develop into as elevated.
Since then, EOI has been in a position to maintain up higher by way of its low cost/premium degree. Its sister funds have principally all been seeing their reductions widen materially. Nonetheless, we’ve got seen some low cost tightening from simply how deep the reductions have been.
General, this makes EOI maybe a much less engaging alternative at this time on a relative foundation. Its premium has nonetheless come down from the place it was, at the same time as that they had left its distribution intact. Nonetheless, being a reasonably distinctive fund – as all of the EV funds have a little bit of a unique strategy regardless of the same names – it may nonetheless present an attention-grabbing alternative for some buyers.
Over the long term, the fund has offered a stable monitor file, and with the general market performing properly in 2023, this yr has additionally proven stable outcomes for EOI. Extra just lately, participation has began to choose up extra broadly available in the market, which is one other optimistic. Inflation is cooling with the most recent report, and the Fed is anticipated to be close to peak charges. This will all bode properly for efficiency going ahead to proceed performing properly.
- 1-Yr Z-score: -0.65.
- Low cost: -0.89%.
- Distribution Yield: 7.94%.
- Expense Ratio: 1.11%.
- Leverage: N/A.
- Managed Property: $667.9 million.
- Construction: Perpetual.
EOI’s funding goal is to “present present revenue, with a secondary goal of capital appreciation.” They try to realize this by “a portfolio of primarily large- and midcap securities that the funding adviser believes have above-average development and monetary energy and writes name choices on particular person securities to generate present earnings from the choice premium.”
EOI focuses on the S&P 500 and writes single stock-covered calls towards its portfolio. Writing towards particular person positions within the fund units it aside from a lot of the different EV funds that write towards indexes. The one different EV fund that writes towards particular person positions is Eaton Vance Enhanced Fairness Earnings Fund II (EOS). We have in contrast each of those funds beforehand. As a fast reminder, the principle distinction is that EOI targets the S&P 500, and EOS targets the Russell 1000 Development.
Efficiency – Strong Observe Document
Traditionally the fund has offered some stable outcomes to buyers through the years. As a consequence of its choices technique, the lined name technique can usually lag straight fairness funds, such because the S&P 500 Index benchmark. Nonetheless, it could actually additionally restrict a few of the draw back strikes in occasions of struggling or sideways markets.
We’ll contact on the efficiency extra beneath when discussing the portfolio, however it is a distinctive case the place EOI outperformed its straight benchmark over the long run.
EOI runs with 69 whole holdings as of their final report; in addition they goal round 50% overwrite for his or her choices. The final stats offered confirmed they have been 46% overwritten at 23 days out, on common, 2.6% out of the cash. So whereas 50% of their portfolio in a bull market can run unfettered, 50% could be considerably capped. That is the first wrongdoer for lined name fund underperformance over longer intervals of time.
As an actively managed fund, they will shut or roll positions to regulate the place and probably enable for additional upside. That stated, this may additionally create losses. This may be why we have seen within the newest semi-annual report that their written choices have truly misplaced cash for the fund.
Their final fiscal yr annual report confirmed some optimistic written choices contributions to the fund’s outcomes. It was a reasonably negligible quantity, however it displays that it’s not a protracted development of manufacturing losses from their choices technique.
In relation to the fund’s valuation, it could seem that the fund over the past decade had traded at a reduction more often than not. This has resulted within the longer-term common for the fund being at a reduction. Within the final couple of years, it has been a newer transfer the place the fund has flipped to start out buying and selling at a premium fairly often.
That is what primarily makes EOI a bit much less interesting relative to a few of its sister EV funds which can be already buying and selling at their longer-term averages and even deeper.
Distribution – Regular
Exterior of the fund’s cuts across the World Monetary Disaster, the fund has paid a reasonably common distribution. They’ve even raised a few occasions since these collection of cuts.
Because the distribution fee on the NAV stays at round 7.97%, it is at a degree that could possibly be thought-about fairly affordable. Because of the fund buying and selling round parity with its NAV, the distribution fee for buyers is a really related 7.94%. That is one other draw back of a fund buying and selling at parity or a premium to NAV; you do not get any ‘enhanced’ distribution.
Whereas the fund has a lined name technique that may probably contribute to capital good points, it can nonetheless require sturdy fairness outcomes. So the outcomes we’re seeing this yr are important to the long-term sustainability of the distribution. The web funding revenue generated within the underlying portfolio is inadequate for protection, and for this fund is especially low. Nonetheless, this isn’t uncommon for fairness CEFs; that is normal distribution working process. That is precisely why we noticed so many EV funds slash their payouts final yr when equities struggled.
One other distinction you may discover with EOI is with regards to tax time. Whereas many EV option-based funds have a tax-advantaged focus, EOI does not have that particular focus. Subsequently, they don’t seem to be seeking to generate important quantities of return of capital to defer tax obligations. On this case, most distributions have been categorised as long-term capital good points, with 2022 reflecting this.
A part of the tax technique of the opposite funds shouldn’t be realizing good points from their underlying portfolio. This will naturally result in a reasonably restricted quantity of turnover on a few of the EV funds, usually. Nonetheless, EOI with no tax-managed technique permits them extra flexibility to portfolio turnover. The final six-month report confirmed a turnover of 27%, with the final 5 years displaying a mean turnover of round 45%.
For some context, ETV’s common turnover within the final 5 years was 10.4%. That features the 19% turnover reported in 2022, which was greater than double any of the opposite prior years.
Regardless of solely 69 holdings for EOI, they do an amazing job of reflecting almost similar weightings to the S&P 500 itself. They merely accomplish that with a sampling strategy.
Totally different positioning may also lead to completely different outcomes between it and the S&P 500. These variations could be above and past what the lined name methods trigger. That is additionally together with EOI’s expense ratio.
Nonetheless, sampling may also result in outperformance in the event that they efficiently pick the choose few outperformers. Traditionally talking, EOI has been in a position to ship this. That is why it is a pretty distinctive lined name fund that has outperformed its straight vanilla benchmark. EOI has offered superior outcomes over the SPDR S&P 500 ETF (SPY).
Doing a lot of the heavy lifting for these outcomes is the mega-cap development names known as the magnificent 7 lately. It is not a high holding, however NVIDIA (NVDA) additionally makes its method into their portfolio at a 1.89% weighting, placing it within the eleventh place, simply off the highest ten.
Over the long term, EOI has outperformed the S&P 500 benchmark, a reasonably uncommon feat given the lined name technique throughout a protracted bull market. They’ve achieved this by portfolio positioning being extra selective relative to the broader index.
Nonetheless, this requires administration to proceed to be right going ahead. You too can discover intervals the place EOI would underperform relying on the timeframe. Working example, on a YTD foundation thus far, EOI is barely lagging behind the S&P 500.
We cannot ever know precisely how administration will carry out going ahead, however one factor we are able to management is once we enter a fund. When a fund trades at a deeper relative low cost, we are able to usually enhance our odds of performing properly. Because of the lack of low cost right here, I can solely see EOI as a “Maintain” at this degree, regardless of its stable monitor file and engaging distribution fee.