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Equity CEFs: Funds To Buy, Funds To Sell From The Major Fund Sponsors

Summary The end of the year will often window dress strong performing funds while others drift lower due to tax-loss selling or simple neglect. Though 2016 may bring more of the same with the strongest stocks and funds continuing their advance, there will still be opportunities to buy and sell from all CEF sponsors. Such is the nature of CEFs to go in and out of favor based on sector exposure but also on nothing more than popularity or seasonality. Instead of my usual table of the best and worst performing equity CEFs for 2015, I’m going to list equity CEFs by the major fund sponsors to make it easier to see and go over. So let’s start with my favorite fund sponsor, Eaton Vance . Eaton Vance has been, by far, the most successful equity CEF sponsor over the last few years though the valuations of their funds have recently gone off in wildly different directions. Here are all of Eaton Vance’s equity CEFs sorted by their total return NAV performances for 2015 through December 30th. Funds in light blue use an option-income strategy and funds in orange use a leveraged strategy. (click to enlarge) Note: Funds highlighted in green have outperformed the S&P 500, up 2.2% including dividends, whereas funds highlighted in red have not Easily the most overpriced fund here is the Eaton Vance Tax-Managed Buy/Write Income fund (NYSE: ETB ) , $16.83 market price, $15.61 NAV, 7.8% premium, 7.8% current market yield . At a whopping 7.8% market price premium despite having one of the worst NAV performances of the group and one of the lowest yields, ETB is at the extreme end of its valuation range. Sure, ETB has historically been a great fund, something that I have pointed out numerous times since 2011 when it traded at a sharp discount. But it’s not going to have near the NAV upside as some of the other Eaton Vance equity CEFs due primarily to its high option coverage. That high option coverage has certainly helped ETB during difficult market periods, especially during 2008. But if you think the broader markets are going to have a more difficult time in 2016, then you really should be owning the Eaton Vance Risk Managed Diversified Equity Income fund (NYSE: ETJ ) , $10.01 market price, $11.23 NAV, -10.9% discount, 11.1% current market yield . ETJ has its faults and it’s typically been my least favorite of the Eaton Vance option funds, but there’s no question that ETJ will provide investors with more downside protection if the markets turn defensive. So why is a premium market price such a bad thing? Well, it’s not if its deserved (which very few funds are). But realize that not only are you paying more than what the portfolio is worth but more importantly you are not getting the yield the fund is actually paying. ETB has to cover its NAV yield of 8.3% to grow its NAV, but a buyer at market price would only get 7.7%. Maybe not a big deal to a small investor but to an institutional investor who may own hundreds of thousands of shares, that’s a big difference. So here in lies the problem. You cannot expect a more sophisticated investor to accept a yield less than what the fund is paying so you should not expect sophisticated investors to establish positions at a premium valuation. So then you are left with investors who buy entirely due to window dressing their existing positions here at year-end or from unsophisticated investors who establish new positions because the fund is in an uptrend or has been highlighted, like ETB was in Barron’s on November 28th. ETB at a $16.90 market price and a $15.65 NAV is wildly overpriced when you could buy other Eaton Vance equity CEFs that have had better NAV total return performances this year and have much higher yields. The Eaton Vance Tax-Managed Global Diversified Equity Income fund (NYSE: EXG ) , $8.81 market price, $9.77 NAV, -9.8% discount, 11.1% current market yield, has been beating ETB at the NAV level all year but for some reason here at year end the market prices have diverged dramatically, perhaps due to window dressing or perhaps due to concerns about the global outlook in 2016. Now has ETB’s NAV crushed EXG’s NAV since their inceptions? Yes, it’s not even close, but that’s all in the past and there are reasons why. First and foremost, EXG is a global option income CEF with a low 47% option coverage whereas ETB is purely US-based stocks with a high 93% option coverage. So when you go through difficult market periods, especially in 2008, ETB’s NAV will hold up far better. Combine that with EXG having the unfortunate timing of going public in 2007 vs. ETB in 2005 as well as EXG having the highest overseas stock exposure of any of the Eaton Vance option funds and that helps explain why ETB’s NAV has held up so much better than EXG’s over the years. Today however, the two funds’ top 10 positions are really not that much different despite EXG’s global footprint. So why would you pay a premium and receive a discounted yield when you could buy a fund at a steep discount and receive a much higher windfall yield? Certainly, EXG has more risk/reward with its low option coverage and a relatively high NAV yield that is more difficult to cover, but I believe that is largely offset by the huge valuation discrepancy between the funds. EXG also is one of the largest CEFs out there at almost $3 billion in assets whereas ETB is one of Eaton Vance’s smallest at only $400 million in assets. The other Eaton Vance option-income CEFs I would be buying are the Enhanced Equity Income II fund (NYSE: EOS ) , $13.70 market price, $14.54 NAV, -5.9% discount, 7.7% current market yield, and the Tax-Managed Dividend Equity Income fund (NYSE: ETY ) , $11.23 market price, $11.95 NAV, -6.0% discount, 9.0% current market yield. I’m neutral on ETV and ETW due to valuations though I recently bought ETW again on weakness between $10.90 to $11.15. I am also now neutral on EOI after the strong move it has made recently and in fact I have sold most of my position (EOI was actually my second largest position though I did not write about it much). In essence, I have swapped EOI and ETB for ETW and EXG and continued to add to positions in EOS and ETY. Of the Eaton Vance leveraged CEFs, my favorite currently is the Tax Advantaged Global Dividend Income fund (NYSE: ETG ) , $15.59 market price, $17.18 NAV, -9.3% discount, 7.9% current market yield , though these funds can go in and out of favor on short notice as well. Leveraged CEFs are generally more volatile than option-income CEFs though I don’t think you can get much better than the Eaton Vance leveraged funds even if the Eaton Vance option-income get all of the attention. The Nuveen Equity CEFs The second most successful equity CEF family over the last few years have been from Nuveen though this is a decidedly mixed bag. Nuveen also has a broad lineup of option-income CEFs and leveraged CEFs even though Nuveen is much more known for its wide selection of fixed-income and muni bond CEFs. Here are Nuveen’s equity based CEFs once again sorted by total return NAV performance for 2015 through December 30th. (click to enlarge) Of this group, the sweet spot is really in the middle. (NASDAQ: QQQX ) and especially (NYSE: BXMX ) have become a bit pricey after the strong moves they have made. QQQX used to be my largest position though I sold most of the position in the fall to add to BXMX when it was down. Now I have sold most of my BXMX after its recent strong move as well. Certainly, both funds have been great this year and I would buy them back on lower valuations. But I think the opportunity in the Nuveen equity CEFs going into 2016 is really in the two index funds, the S&P 500 Dynamic Overwrite fund (NYSE: SPXX ) , $13.41 market price, $14.82 NAV, -9.5% discount, 7.8% current market yield, and the Dow 30 Dynamic Overwrite fund (NYSE: DIAX ) , $14.45 market price, $15.90 NAV, -9.1% discount, 7.4% current market yield . Both SPXX and DIAX represent more value related stock portfolios compared to QQQX and BXMX, which are more growth oriented. Though BXMX is very defensive with its option strategy and is suppose to be more S&P 500 index related like SPXX, in reality the fund is more growth oriented. BXMX also is the only Nuveen option fund managed separately from Nuveen, managed by Gateway Advisors , who have obviously done a great job. Though certainly more risky, the Nuveen equity CEF I actually like the best for 2016 is the Tax-Advantaged Total Return fund (NYSE: JTA ) , $11.70 market price, $13.22 NAV, -11.5% discount, 9.3% current market yield. JTA is a relatively small fund that can make big moves due to its 30% leverage in global dividend stocks and senior loan securities. JTA is not for the faint of heart. But with a 9.3% current market yield (8.2% NAV yield) and a -11.5% discount, I believe JTA offers excellent risk/reward in a rising interest rate environment and a contrarian global equity rebound in 2016. I also like JCE and JTD as part of the sweet spot middle group of the Nuveen funds but I would forget about JGV which has been a disaster for longer than I can remember. I gave JGV a chance with this article in May of this year, Now Is The Time For The Nuveen Global Equity Income Fund , but it has done nothing but disappoint. Conclusion Due to the length of this article, I will be back with my next round of equity CEFs to buy/sell form fund sponsors, including BlackRock and Voya .

Fidelity Equity Dividend Income: I’d Rather Own A CEF

FEQTX changed managers in 2011 looking to spruce up performance. Although there has been improvement, the results have been middling. If you are looking for income, you might be better off with a CEF. Mutual funds are generally the top-of-mind way for investors to quickly gain access to professional management. However, the Fidelity Equity Dividend Income (MUTF: FEQTX ) shows why you need to be cautious when you go down this route. In the end, if you are looking for dividend income, there are better options out there. Turning to a new leader FEQTX changed managers in late 2011 with the goal of shaking things up at a fund that had been lagging and, generally, not living up to its name. That means that 2011 and part of 2012 were really a transition period as new manager Scott Offen put his mark on the fund. So he’s got about three years of performance under his belt with a portfolio he created. The fund’s objective is reasonable income and capital appreciation. Reasonable income is defined as a yield above that of the S&P 500 Index. FEQTX’s trailing yield is roughly 2%. For comparison, the SPDR S&P 500 ETF Trust’s (NYSEARCA: SPY ) yield is about 1.9%. So I guess it lives up to its definition of reasonable yield, but that may not be your definition. Searching for stocks, Offen looks for , “…companies that deliver attractive, above-market dividend income and provide exposure to conservative earnings-growth potential with relatively low volatility.” He likes companies with, “…high or improving returns on capital and companies with strong balance sheets, including cash on hand…” As a shareholder, these are the types of things you’d like a manager to look for. The fund tilts toward value stocks, which isn’t surprising since Offen’s last gig was at a value fund. The interesting thing here is that the manager cautions that focusing too much on yield is dangerous. He highlights the banking sector during the 2007 to 2009 recession as a cautionary tale. And while that’s a worthy warning, 2% isn’t a material yield and it certainly isn’t much more than an index is offering, so income investors looking at, or in, this fund have a right to wonder if they are getting their money’s worth. Performance is so-so The problem is that performance relative to the S&P isn’t all that great. Over the trailing three years through July, FEQTX’s annualized return, which includes reinvested distributions, is around 14.7%. The SPY’s annualized return over that span is nearly 17.6%. Both have roughly similar standard deviations and FEQTX’s Beta is nearly 0.95, meaning it moves roughly in line with the S&P. (SPY, as you might expect, moves in lock step with the S&P.) So there’s little yield advantage, no performance advantage, and the same amount of risk. Although the expense ratio of around 0.60% is low for a mutual fund, the extra expense isn’t worth it when you could by SPY, get better performance and a similar yield, and pay just 10 basis points or so in expenses. A better alternative? This is why you shouldn’t get sucked in by a fund name. I’m not suggesting that FEQTX is a bad fund, per se, just that it isn’t compelling enough compared to other options. That said, I don’t believe it lives up to the words “dividend income,” which are found in its name. If you own the fund or are looking at it, you’ll basically be getting something on an index clone at greater cost. Why not shift gears and look at a completely different space? For example, you might consider the Nuveen S&P 500 Buy-Write Income Fund (NYSE: BXMX ). This fund was created through the merger of two older Nuveen closed-end funds late last year and now has the goal of tracking the S&P while writing index options to generate current income. It doesn’t have a long track record, to be sure, but it has put up decent results so far. First off, the distribution is around 7.6%, well above that offered by the index and FEQTX. And year to date through July, BXMX’s return is nearly 6.2% while SPY is about 3.4% and FEQTX is just 1.3%. A big difference, however, is in the expense ratio, which is just under 1%. But based on performance so far under the new investment strategy, you are being rewarded for that. The biggest risk, of course, is that the new strategy is untested. Which is a legitimate concern. That said, writing options should mute downside risk since in a falling market option income will offset capital losses. At least that’s the theory, anyway. Time will be the true test of this, meaning that you’ll need a little faith if you choose to own BXMX. But with a discount of nearly 7%, you are getting a little protection built in by buying below the actual value of the portfolio. Looking at that a little closer at recent performance, since the last few months have been pretty rough, BXMX’s trailing daily return over the last three months through August 26th was a loss of almost 4.2%. The S&P over that same span fell just under 7.3%. Over the trailing month through August 26th, BXMX was down about 5.1% and the index was down nearly 6.5%. So, through the current turmoil anyway, BXMX seems to be holding its own. Note, too, that upside performance should be muted in a roaring bull market because of the use of options. This year’s sideways market is really a good space for option writing. So the strong out of the gate performance really shouldn’t be taken as an indication of future performance. But income should always be notable. Not the only option That said, BXMX is just one option. It seems like a compelling one compared to FEQTX, but there are other closed-end funds with compelling yields and performance histories. That said, the real point here is to make sure you understand what you own. That’s particularly true of mutual funds where a fund may not be living up to its name. If you find you are an income-oriented investor stuck in such a fund, consider shifting to closed-end funds. You might find you are willing to pay a little more for a higher level of income-that’s especially true when the fund you own is simply tracking a broader index. 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.