FMD Capital Management

Tapping New Equity CEF Opportunties

Written by Michael Fabian, February 26th, 2016

Late last year we took strategic steps to raise cash for our Dynamic CEF Income portfolio in light of the decline in high yield bonds.  In hindsight, having a 20% money market position going into the January-February 2016 correction was certainly a relief.  Nevertheless, it has always been our plan to deploy that capital at more advantageous prices or in funds exhibiting a stronger relative value story. 

Until just recently, many of the funds on our watch list presented more risk than reward.   We have been diligently evaluating new opportunities from a premium/discount perspective in addition to complementing our existing portfolio exposure.  In our opinion, adding exposure back to more high yield bond CEFs simply wasn’t needed to round out our portfolio’s asset allocation.  A more desirable asset class are equity CEFs, which have been the area we have had our eye on to capitalize on depressed prices.

This week, we added the Eaton Vance Tax Advantaged Global Dividend Income Fund (ETG) to our client’s portfolios.  We chose this particular stock-oriented CEF for a few specific fundamental and technical reasons.

The larger than normal discount that has materialized as a result of the persistent selling in risk assets is a primary opportunity.  In fact, ETG now trades at a 12% discount, when its 52-week average is 7.72%.  This leaves ample room for the fund to narrow its discount without meaningful underlying portfolio appreciation concerns.  In addition, at the current market price, ETG yields 9.12% and utilizes only 24% leverage.


Another intriguing element of this fund is that the monthly dividend has been very stable throughout its history and it carries a relatively low expense ratio in comparison to other buy-write or dividend equity CEFs.

The addition of ETG will tilt our portfolio towards more stock exposure rather than fixed-income at a time when equities are still significantly off their highs.  It also carries a mix of both U.S. and international holdings, which will further enhance the diversification of our current CEF mix.

The tax-advantaged strategy referenced in the fund name is as a result of low annual turnover of the underlying holdings.  Funds that take too aggressive of an active mandate can often distribute large year-end capital gains, which is detrimental to taxable accounts.  Fortunately, this fund eschews that philosophy in order to maximize its net tax impact to shareholders.

From a strategy perspective, our new position in ETG will be considered a core holding, and fill a key role of adding risk exposure back to our mix.  We feel comfortable adding to ETG at this juncture in light of the series of higher lows following the brief move to new lows in early February.

Furthermore, given oil’s recent stabilization, we have a higher level of confidence that the equity market won’t endure another wave of persistent selling which could ultimately lead us to new lows. If we do see a change in the fundamental backdrop, we still have an ample slice of cash to draw from for new or unforeseen opportunities.

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