Alpha Strategy Global Gains
10/18/2013 9:00 am EST
I just bought shares of a fund aimed at generating income and lowering volatility, by owning securities with wide valuations and above-average dividend; it can be considered a stock hedge fund for the retail investor, suggests Vivian Lewis, editor of Global Investing.
Eaton Vance Tax-Managed Global Equity Income Fund (EXG) favors active management in a declining market based on CIO Michael Wilson's strategy for closed end funds.
Morgan Stanley recently rated overweight, based on the fund's actively-managed strategy. EXG uses covered calls to boost income and lower portfolio volatility.
Writing calls is a good strategy for boosting income, but you have to focus on it. The fund, run by the same two managers since its founding in 2007, is focused.
EXG is largely invested in non-US shares (mostly continental and about 10% UK) and writes calls on broad foreign equity index options (usually slightly out of the money).
The calls are offset by its portfolio of high-yielding foreign blue chip individual company stock. The current top positions in the fund include Royal Dutch, Nestle, Roche, Vodafone, HSBC, Sanofi, Novo Nordisk, BP, Unilever, Bayer, Astra Zeneca, Diageo, and ABB.
This is what analysts call an alpha hedging strategy, selling the overall market and buying individual selected potential out-performers, but with a closed-end fund that is accessible to retail investors.
The index options meanwhile, are the beta of the portfolio to boost yield. This currently is 9.3% of net asset value, something of a record for closed-end funds doing covered call trading, probably because of the foreign component.
The fund also operates to cut tax liabilities. EXG executes timely trades to capture additional qualified dividend income (QIF) subject to capital gains taxes which are usually lower than income taxes.
The other major component of the payout is return of capital (ROC), which is not taxed but added to your basis for US taxes. EXG's 2012 distributions comprised 15% QIF and 85% ROC. It distributes monthly. Of course the makeup may change this year.
EXG may repurchase up to 10% of its shares out when they trade at a discount and last did this in March. It trades at a 10% discount from NAV, par for the course for CEFs. I suggest paying around $10.50 per share.
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