Two Enticing Funds Go on Sale

02/15/2011 11:58 am EST


Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

A blue-chip fund that recently cut its dividend and one focused on ailing Ireland are selling at big discounts to the value of their holdings, writes Richard Lehmann of the Forbes /ISA Closed End Fund & ETF Report.

We noticed that many of the Eaton Vance funds have increased their discounts to net asset value in the last few months. The management company cut the dividend payouts on most of its funds, no doubt accounting for the growing discounts.

Fund discounts are often a function of fund payout, fund size, and asset-class popularity. The Eaton Vance funds tend to be large, and their declining prices have boosted current yields close to where they were before the decline. We like the prospects for a return to average discounts for these funds.

The Eaton Vance Enhanced Equity Income II (NYSE: EOS) closed-end fund has one the largest divergences from its 52-week average discount. The average was a premium of 2.12%; it now trades at a discount of 5.26%.

This fund has the distinction of paying a monthly dividend, which is popular with investors and should help it recover from its current discount. It currently trades at $12.61 and pays out .092 per month, giving it a yield of 8.8%.

The fund invests in large and mid-cap stocks and writes options on about 70% of its portfolio with duration of 44 days. It invests in the following sectors: information technology at 33.21%; consumer discretionary, 16.14%; and industrials, 13.33%. It is not leveraged and has an expense ratio of 1.14%.

Profit from the Irish Mess

The news on Ireland is of a broken economy. Once it was the darling of investors as its low corporate tax rates brought in new investment and industry. Its educated and English-speaking work force has made it an attractive place for companies to locate.

However, since the banking crisis enveloped the country, the government made rash promises to back up not only bank depositors but also bank bondholders. This huge government liability has scared off investors, or so one would think.

Actually stock prices have continued to gently climb in recent months. The New Ireland Fund (NYSE: IRL) trades at $7.24 versus its net asset value of $8.56. The current discount is 15.4% versus its 52-week average discount of 14.7%.

All the bad press has served to depress the market value of this closed-end fund. We think it’s a buy at current prices. Payouts are made annually and depend on capital gains rather than interest income, so are hard to predict.

Almost all of its assets are invested in Irish equity. The average price/earnings ratio has climbed from a low 7.62 to its current 17.56, in keeping with the fund’s desire to invest in more growth than value. The fund does not use leverage.

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