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Tapping a New Equity CEF Opportunity (ETG)

Here are the elements that make ETG a sound investment choice

By Michael Fabian, FMD Capital Management

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Late last year we took drastic steps to raise cash for our Dynamic CEF Income portfolio in light of the decline in high yield bonds.  Although in hindsight having a 20% cash exposure going into the January-February 2016 correction was certainly a relief. 

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, instead equity CEFs have been the area we have had our eye on to capitalize on depressed prices.

Last 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 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 portfolios.  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 conviction that the equity market won’t endure another wave of persistent selling which could ultimately lead us to new lows. However, 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.

The post Tapping New Equity CEF Opportunties appeared first on FMD Capital Management.

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