|Shares Out. (in M):||10||P/E||0||0|
|Market Cap (in $M):||91||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Eaton Vance Tax-Managed Buy-Write Strategy Fund (EXD) is a closed end fund selling at an 8% discount to Net Asset Value (NAV) with a good chance of erasing the discount (and possibly selling at a premium) in a relatively short period of time.
At its inception in 2010, EXD (then known as the Eaton Vance Tax-Advantaged Bond and Option Strategies Fund) was designed to provide tax-advantaged income by combining a portfolio of municipal securities with a program of writing options against the S&P 500 index. The gains from writing out of the money put and call spreads would presumably enhance the returns from a staid portfolio of AAA and AA rated municipal bonds.
Closed End Funds are sold and not bought. After coming public in 2010, the fund promptly sank to a discount to NAV and stayed there ever since. (The 8% load taken off the top by the underwriters didn’t help, nor did annual performance of around 2.2% at NAV and 1.2% at market value.)
Eaton Vance decided to reposition the fund and in February announced the following changes:
1) The investment strategy changed to a equity buy/write strategy whereby the fund will invest at least 80% of its assets in a diversified portfolio of common stocks and sell index call options against the portfolio.
2) The fund adopted a managed distribution policy with monthly dividends of $.0708. This is a 32.8% increase compared to the previous $.16 quarterly dividend and translates into a current yield of approximately 9%.
3) Eaton Vance cut its management fee from 1.25% to 1.00%.
4) The name was changed to the Eaton Vance Tax-Managed Buy-Write Strategy Fund.
A closed end fund selling at a discount would not be unusual. There are plenty of closed end funds out there many trading at larger discounts than EXD. In this case, the 8% discount largely balances out the 1% management fee. Without a catalyst, closed end funds can languish at a discount for decades. The one thing closed end fund investors are willing to pay a premium for is steady high income (even if the income represents a return of their own capital).
Eaton Vance operates two other closed end funds which are very similar to ETD – the Eaton Vance Tax-Managed Buy-Write Income Fund (ETB) and the Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV). ETB and ETV both trade at a premium to NAV, and both are managed by the same portfolio managers at Eaton Vance.
The table below compares the three funds:
Assets (Discount)/ NAV
(millions) Premium Yield Return
ETV 1,000 5.4% 8.8% 8.3%
ETB 387 3.8% 8.4% 11.0%
EXD 103 (8.0)% 9.0% 1.7%(since inception)
There is a significant overlap between ETV and ETB’s top 10 holdings. (Microsoft and Apple are #1 and #2 for both funds.) ETV has a higher weighting toward tech. EXD is running a more concentrated strategy with 13% of assets invested in MSFT, and 12% each in APPL and AMZN. Over time, I expect EXD to trade closer to par (if not at a premium).
The change to a managed distribution strategy began in March. Many pricing services have not adjusted to reflect the new policy. This should start to screen better for income oriented retail investors in the next few months.
Eaton Vance seems to be using EXD to run a more concentrated version of its buy-write strategy. At $100 million in assets, it could easily be rolled into one of the other two funds that Eaton Vance operates in this strategy.