EXG Is Failing To Generate The Income It Seeks

Eaton Vance Tax-Managed Global Diversified Equity Income Fund is traded on the New York Stock Exchange under the symbol EXG. I have written on its sister fund, ETY, which is part of a similar group of extremely large buy/write equity funds sponsored by Eaton Vance. EXG is more global than ETY, but they work on the same principle -- generating excess income on equity portfolios by selling options against the portfolio. Unfortunately, this has not worked well for them.

EXG has a managed distribution program which pays out annual returns far in excess of actual net income. Obviously this has fooled few investors, as it sells at a very substantial discount from net assets, which is usually in excess of 15%. Performance has been poor, and I am not sure why. I suspect they were off in their timing and did not sell enough options when they should have. I suspect they believed the market was cheap and did not wish to give away future appreciation for current income.

This is an extremely large fund, which as of October 31, 2011, had net assets of $3,122,464,341. The call writing program was only $52,670,437, representing 1.7% of assets. The only options EXG was writing were:

• Dow Jones Euro Stoxx 50 Index Calls
• FTSE 100 Index Calls
• S & P 500 Index Calls
• SMI Index Calls

Performance was poor in its last fiscal year, as follows:

Fund at Net Asset Value	(0.80%)
Fund at Market Value	(11.63%)
S & P 500 Index	8.09%
CBOE S & P 500 Buy/Write Index	4.57%
FTSE Eurotop 100 Index	(4.81%)

It should be noted that the decline in share price of EXG far exceeded its actual performance, which was almost flat.

Sector allocation was as follows:

Financials	15.3%
Health Care	14.9%
Consumer Staples	13.2%
Energy	12.7%
International technology	9.2%
Consumer Discretionary	8.5%
Industrials	7.5%
Telecom Services	7.0%
Materials	6.6%
Utilities	3.2%

This is a very broad and very bland sector distribution, and truly constitutes a balanced equity portfolio.

The funds six largest country allocations were as follows:

United States	39.5%
United Kingdom	19.2%
Germany	9.6%
France	7.9%
Switzerland	6.3%
Netherlands	3.7%

The fund's ten largest individual holdings only constitute 21.5% of assets, and were as follows:

Royal Dutch Shell (RDS)	3.5%
Vodafone (VOD)	2.6%
Nestle (NSRGY.PK)	2.5%
GlaxoSmithKline (GSK)	2.2%
Apple (AAPL)	2.0%
Novartis (NVS)	2.0%
Siemens (SI)	1.9%
Unilever (UL)	1.8%
Total (TOT)	1.5%
Goldcorp (GG)	1.5%

EXG has not done well, and it has the following tax position:

Accumulated Net realized Loss	($1,143,664,784)
Undistributed Net Income	$114,907
Net Unrealized Appreciation	$140,750,318

Yes, that net realized Loss is over a billion dollars.

Per share figures for the fiscal year ending October 31, 2011, are as follows:

Expense Ratio	1.05%
Net Investment Income	1.72%
Portfolio Turnover	53%

A buy/write program is designed to generate income, and this is not happening here. Either EXG has deviated from its mandate, or it is attempting to focus, unsuccessfully, on capital appreciation. As I said of ETY, Eaton Vance is a fine investment management company that should be doing a better job, or at least an average job. If performance improves, then the existing discount makes EXG a bargain.

Disclosure: I am long EXG, ETY.