The Eaton Vance Enhanced Equity Income Fund (NYSE:EOI) is a closed-end fund, or CEF, that income-focused investors can purchase as a method of achieving a high level of income from the assets that they already possess. The fund does fairly well at this, too, as its 8.23% current yield is fairly attractive when compared to the company’s peers. We can see this here:
Fund Name |
Morningstar Classification |
Current Yield |
Eaton Vance Enhanced Equity Income Fund |
Equity-Covered-Call Funds |
8.23% |
BlackRock Enhanced Capital and Income Fund (CII) |
Equity-Covered-Call Funds |
6.11% |
Columbia Seligman Premium Technology Growth Fund (STK) |
Equity-Covered-Call Funds |
5.61% |
First Trust Enhanced Equity Income Fund (FFA) |
Equity-Covered-Call Funds |
6.95% |
Madison Covered Call & Equity Strategy Fund (MCN) |
Equity-Covered-Call Funds |
9.93% |
Voya Global Advantage and Premium Opportunity Fund (IGA) |
Equity-Covered-Call Funds |
10.83% |
We can see that the Eaton Vance Enhanced Equity Income Fund does not have the highest yield available in the fund category. However, its current yield does still compare quite well to that of many members in the peer group. This is a good sign, as an outsized yield could be a sign that the market doubts the fund’s ability to sustain its distribution. That does not appear to be a problem here, as the fund’s distribution yield is not ridiculously high relative to the others, but it is still high enough to satisfy most investors who are seeking an attractive level of income.
There might be some readers who point out that the fund’s yield is nowhere near as high as some of the fixed-income funds that we have discussed in this column. That is certainly true, but the fact that this fund invests exclusively in equities (which have a lower yield than most fixed-income securities) gives it a very real advantage going forward. This is because equities offer much better protection against inflation than fixed-income securities. As I explained in a previous article:
One of the nice things about this fund is that it invests in equity securities, so it provides a certain amount of protection against inflation, which may be a bigger problem going forward than it has been in the past. After all, the projections for large fiscal deficits going forward are well-known, and it is difficult to see any way for these deficits to be funded by any method apart from the creation of new currency. Historically, equities, real estate, and gold have been the best ways to preserve the purchasing power of your money against inflation.
The Eaton Vance Enhanced Equity Income Fund therefore offers investors a slightly lower yield than would be available from a fixed-income fund, in exchange for better maintaining the purchasing power of their wealth over time. Honestly, that is a very attractive proposition if the fund is to be held for more than a few years. The fiscal problems will not be going away soon, and the market appears to suspect that inflation will reignite as soon as the Federal Reserve starts cutting interest rates. After all, gold prices have been on the upswing over the past few days and gold is historically the go-to asset when investors are worried about inflation. As such, it may be worth moving money out of fixed-income assets and into equity funds like this one to protect yourself.
As regular readers might remember, we previously discussed the Eaton Vance Enhanced Equity Income Fund in mid-November of 2023. The equity markets have been strong all around the world since that time. Numerous market participants have been excited about the possibilities that come from generative artificial intelligence, as well as the implementation of a new monetary easing cycle all over the world. As such, we might expect that the Eaton Vance Enhanced Equity Income Fund has also delivered a fairly strong performance since our last discussion.
This is indeed the case, as shares of the Eaton Vance Enhanced Equity Income Fund have appreciated by 23.34% since the previous article was published. This is very close to the 23.72% gain that the S&P 500 Index (SP500) delivered over the same period:
While this is a good performance that will almost certainly appeal to most investors, especially those who want to earn a high level of income, I will admit that I have some concerns. As we will see in this article, the Eaton Vance Enhanced Equity Income Fund writes covered calls against some equity securities in its portfolio. A fund using such a strategy should not have been able to deliver the same performance as a diversified portfolio of large-cap stocks that does not employ such a strategy. Therefore, it is worth taking a closer look at this fund’s portfolio composition and performance to determine whether this price appreciation really is justified. After all, despite the drag from the covered call strategy, it might be possible to deliver a return on par with the large-cap index if the fund is heavily weighted towards only a few high-performing stocks. Much has been written about how the majority of the index’s returns over the past year or two have been due to a half-dozen or so stocks, after all.
Perhaps most interestingly, investors in this fund actually did far better than investors in the S&P 500 Index over the period in question. As I explained in a recent article,
A simple look at the closed-end fund’s share price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets.
When we include the distributions that were paid out by the Eaton Vance Enhanced Equity Income Fund since mid-November of last year (the time of our previous discussion on this fund), we get this alternative performance chart:
As expected, investors in this fund significantly outperformed the S&P 500 Index over the period in question. This is mostly because the fund’s share price nearly matched the performance of the index, and the fund has a substantially larger yield than the index, so it received a boost from that. Overall, most income-focused investors (or any investors, really) are quite likely to find this performance very attractive.
Despite the fund’s strong recent performance, we should take a closer look at its portfolio positioning and financial condition before making an investment in it. After all, past performance is no guarantee of future results. As roughly ten months have passed since our previous discussion, it is logical to assume that quite a few things have changed that we should discuss today. The remainder of this article will focus specifically on this task.
About The Fund
According to the fund’s website, the Eaton Vance Enhanced Equity Income Fund has the primary objective of providing its investors with a very high level of current income. This is a surprising objective for an equity closed-end fund, due simply to the fact that equities are not generally considered to be income vehicles. We can see this very simply by looking at the yields of the major U.S. stock market indices:
Stock Index |
TTM Dividend Yield |
Dow Jones Industrial Average (DJI) |
2.04% |
Dow Jones Transportation Average (DJT:IND) |
1.97% |
Dow Jones Utility Average Index |
3.18% |
S&P 500 Index |
1.31% |
Russell 2000 Index (RTY) |
1.46% |
NASDAQ 100 Index (QQQ) |
0.79% |
(All figures from the Wall Street Journal.)
As of the time of writing, a money market fund yields between 5% and 5.50%. Thus, all the major domestic common stock indices have yields that are substantially below that of cash equivalents. In addition, all of these common stock indices have yields that are well below the 3.831% current yield of ten-year U.S. Treasury notes. This includes traditionally high-yielding sectors such as utilities. Thus, it does not make much sense for any equity-focused closed-end fund to be focused on a current income objective because these are not income securities. Rather, common stocks deliver the bulk of their total returns through capital appreciation.
As is frequently the case with Eaton Vance funds, the website does not offer any information about how the fund will seek to achieve its objective. The fact sheet does provide a bit of information, though. This document states:
The Fund invests in a portfolio of primarily large- and midcap securities that the investment adviser believes have above-average growth and financial strength and writes call options on individual securities to generate current earnings from the option premium.
This does not tell us too much about the fund’s strategy, although it does verify that the fund will be using a covered call strategy. As I pointed out in various previous articles, this is a strategy that can be used to boost the effective yield earned by a common equity portfolio. The option premium can be a fairly high percentage of the stock’s price. For example, in this article, I showed how a covered call-writing strategy could essentially turn Microsoft (MSFT) into a 12.46%-yielding stock. When we consider this, the fund’s income objective does make more sense. However, the fact sheet’s strategy description is not as detailed as we might like. After all, it does not tell us whether the fund is writing at-the-money or out-of-the-money calls, nor does it tell us how much of the fund’s portfolio will be used as backing for covered calls. This is important because it is possible for a fund to sacrifice all the potential capital gains using a covered call-writing strategy. That would basically remove all the inflation protection that we want from a fund like this.
Fortunately, the fund’s most recent annual report offers a much better description of the fund’s strategy. Here is what this document states:
The Fund pursues its investment objectives by investing primarily in a portfolio of mid- and large-capitalization common stocks. Under normal market conditions, the Fund seeks to generate current earnings from option premiums by selling covered call options on a substantial portion of its portfolio securities.
Under normal market conditions, the Fund invests at least 80% of its total assets in common stocks. The Fund generally invests in common stocks on which exchange traded call options are currently available. The Fund invests primarily in common stocks of U.S. issuers, although the Fund may invest up to 10% of its total assets in securities of foreign issuers, including American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts.
Under normal market conditions, the Fund pursues its primary investment objective principally by employing an options strategy of writing (selling) covered call options on a substantial portion of its portfolio securities, although on up to 5% of the Fund’s net assets, the Fund may sell the stock underlying a call option prior to purchasing back the call option. Such sales shall occur no more than three days before the option buy back. The extent of option writing activity will depend upon market conditions and the Adviser’s ongoing assessment of the attractiveness of writing call options on the Fund’s stock holdings. Writing call options involves a tradeoff between the option premiums received and reduced participation in potential future stock price appreciation. Depending on the Adviser’s evaluation, the Fund may write call options on varying percentages of the Fund’s common stock holdings. The Fund seeks to generate current earnings from option writing premiums and, to a lesser extent, from dividends on stocks held. The Fund may, in certain circumstances, purchase put options on the S&P 500 and other broad-based security indices deemed suitable for this purpose, and/or on individual stocks held in its portfolio or use other derivative instruments to help protect against a decline in the value of its portfolio securities.
This explains a lot, including verifying that the covered call strategy is the reason the fund has a current income objective. Perhaps the most critical thing here, though, is that the percentage of the fund’s securities that might be called away by the counterparty to its call options trades varies from time to time. This is an entirely unique animal from something like the Global X S&P 500 Covered Call ETF (XYLD) that always maintains a 100% overwrite position. Generally speaking, we want a fund to not be writing options against its entire portfolio because we want to be able to benefit from the capital appreciation as an inflation hedge.
The fact sheet states that 48% of the fund’s portfolio had options positions written against it as of June 30, 2024. This is actually a fairly low percentage when compared to some of the fund’s peers:
Fund Name |
% of Portfolio Overwritten |
Eaton Vance Enhanced Equity Income Fund |
48.00% |
BlackRock Enhanced Capital and Income Fund |
52.56% |
Columbia Seligman Premium Technology Growth Fund |
24.70% |
First Trust Enhanced Equity Income Fund |
63.92% |
Madison Covered Call & Equity Strategy Fund |
83.50% |
Voya Global Advantage and Premium Opportunity Fund |
49.42% |
(All figures are per the most recent fact sheet, website date, or holdings report available as of August 28, 2024.)
As we can see, most of the peer funds have a higher overwrite percentage than the Eaton Vance Enhanced Equity Income Fund as of today. This basically means that the fund is less reliant on the options premiums than on capital appreciation to generate a return. This is ideal for an inflation hedge, although it might result in this fund having slightly lower income than its peers.
In my last article on this fund, I showed that the Eaton Vance Enhanced Equity Income Fund has a substantial percentage of its assets invested in a handful of mega-cap U.S. technology companies. This remains the case today, as can be clearly seen by looking at the largest positions in the fund:
We see outsized positions to Microsoft, Nvidia (NVDA), Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG) (GOOGL), Meta Platforms (META), and Broadcom (AVGO) here. These seven companies account for fully 40.69% of the fund’s net assets. This is terrible for diversification, especially since most of these companies are also held among the largest positions in many other funds. As such, those investors who have significant holdings of other domestic common stocks may want to think long and hard about adding this fund to their portfolios. It does not appear that it will do much to help achieve diversification. In fact, as we can see here, this fund’s weightings to these companies are actually higher than that of the S&P 500 Index:
Company Name |
Fund Weighting |
S&P 500 Weighting |
Microsoft |
9.18% |
6.51% |
NVIDIA |
7.80% |
6.68% |
Apple |
7.25% |
6.96% |
Amazon.com |
4.89% |
3.36% |
Alphabet Inc. |
4.85% |
3.77% |
Meta Platforms |
4.03% |
2.41% |
Broadcom |
2.69% |
1.49% |
(Alphabet’s S&P 500 Index weighting is the total of both the Class A and Class C shares.)
Thus, the conclusion is that the Eaton Vance Enhanced Equity Income Fund is even more dependent on the performance of a small handful of companies than the S&P 500 Index right now. Thus, adding this fund to a portfolio that already includes an S&P 500 index fund (or indeed most other domestic equity funds) will actually increase the impact that the performance of these technology stocks will have on the portfolio as a whole. This is not really the best situation for risk-averse investors, especially if generative artificial intelligence proves unable to live up to the current hype and is merely a bubble. There might be some reasons to believe that this is the case, as the current hopes that it will replace hundreds of millions of jobs will result in an economic catastrophe if that many people really do lose their incomes.
The fact sheet confirms that the fund is overweight to the technology sector compared to the S&P 500 Index:
As we can see here, the fact sheet claims that the fund’s allocation to the information technology sector is 33.60% of its assets, compared to 32.45% in the S&P 500 Index. That is a substantial increase over the 27.84% weighting that the fund had to this sector the last time that we discussed it. This is even worse from a diversification perspective, as it clearly shows that the fund’s portfolio performance (as well as that of the index) is becoming even more dependent on just a handful of companies.
It is worth noting though that this begs some questions. The most notable of these is that the fact sheet’s weighting seems questionable. In order for this fund to have 33.90% of its assets in the technology sector, then at least one of Microsoft, Nvidia, Apple, Amazon, Alphabet, or Meta Platforms cannot be considered a technology company. After all, we already saw that the website’s own weightings for these companies total 38.00%. The fund’s semi-annual report states that Amazon is a retailer and not a technology company. That could account for the discrepancy here, but I have never heard anyone legitimately claim that Amazon is not an information technology company.
There has only been one company removed and replaced from the fund’s largest holdings list since the last time that we discussed it. This is that Mastercard (MA) was removed and replaced with Broadcom. The remaining nine companies that are currently on the list were on it the last time that we discussed the fund, although some weightings have changed. That might simply be the result of one company outperforming another in the market, and need not be due to the fund actually buying and selling stocks to change its weightings. This could lead one to believe that this fund has a fairly low annual turnover.
The semi-annual report states that the fund had a 25% turnover in the first half of the current fiscal year. That annualizes to 50%, which would be relatively in line with what the fund had in past fiscal years:
FY 2023 |
FY 2022 |
FY 2021 |
FY 2020 |
FY 2019 |
|
Portfolio Turnover |
63% |
50% |
35% |
41% |
55% |
That is not especially high for an equity closed-end fund, but I will admit that I expected to see it lower given the lack of significant changes to the fund’s largest positions list over the past ten months. It is possible that most of the changes are taking place among the fund’s smaller positions, however.
Distribution Analysis
The primary objective of the Eaton Vance Enhanced Equity Income Fund is to provide its investors with a very high level of current income. To this end, the fund pays a monthly distribution of $0.1338 per share ($1.6056 per share annually). This gives the fund an 8.23% yield at the current price, which as we have already seen is reasonably attractive relative to its peers.
Unfortunately, the Eaton Vance Enhanced Equity Income Fund has not been especially reliable with its distribution over the years. This is shown here:
The fund’s lack of reliability mostly comes from a series of distribution cuts that followed the financial crisis and the Great Recession. However, from the previous article:
As we can see, the fund has generally increased its distribution over the past decade. This is much nicer than Eaton Vance’s other option-income funds, some of which have had to cut their distributions in response to losses that they took in the reversal of the long-standing loose monetary policy in 2022. We certainly want to have a close look at the finances of this fund though, since it seems a bit unlikely that it would be able to avoid losses from 2022’s bear market. This is especially true since a covered call strategy only provides partial protection against a market decline (the premiums offset some of the share price declines).
The Eaton Vance Enhanced Equity Income Fund continued its recent trend of distribution hikes earlier this year, as the fund raised its distribution by 22.19% in April. That is another thing that is very nice to see for an inflation hedge, at least assuming that the fund can sustain the new higher distribution.
As of the time of writing, the fund’s most recent financial report is the semi-annual report corresponding to the six-month period that ended on March 31, 2024. A link to this report was provided earlier in this article. This is obviously a much newer report than the one that was available to us the last time that we discussed this fund, which is quite nice to see, as it should give us a much better idea of how well this fund is covering its payouts.
For the six-month period that ended on March 31, 2024, the Eaton Vance Enhanced Equity Income Fund received $3,932,996 in dividends net of foreign tax withholding. The fund had no investment income from any other source, so its total investment income also was $3,932,996. The fund paid its expenses out of that amount, which left it with $72,611 available for shareholders. That was not sufficient to cover the $26,521,103 that the fund paid out in distributions during the period.
Fortunately, the fund was able to make up the difference through capital gains. For the six-month period that ended on March 31, 2024, the Eaton Vance Enhanced Equity Income Fund reported net realized gains of $34,976,246 along with $115,304,573 in net unrealized gains. Overall, the fund’s net assets increased by $123,832,327 after accounting for all inflows and outflows during the period.
The fund managed to cover its distributions fully with net realized gains alone. It was even able to do that and have some additional realized gains left over for later distribution. When combined with the net unrealized gains, we can clearly see that this fund should be in good shape to cover its distributions unless a severe market crash occurs. As such a crash seems unlikely, we can conclude that investors in this fund should not need to worry about its ability to keep paying the distribution. It should be able to sustain the current payout for a while.
Valuation
Shares of the Eaton Vance Enhanced Equity Income Fund are currently trading at a 3.65% discount to net asset value. This is a much more attractive price than the 1.69% discount that the fund’s shares have had on average over the past month.
It is worth noting that the fund had a 4.58% discount the last time that we discussed the fund. Thus, as I suspected in the introduction, the fund’s shares have been performing better than the portfolio itself. If this continues, it might push the fund to a premium, and that is generally too expensive to be worth considering.
For now, though, it is still possible to get shares of this fund for less than the assets underlying them are actually worth.
Conclusion
In conclusion, the Eaton Vance Enhanced Equity Income Fund is a very good-performing covered call fund that offers a higher level of income than could be obtained via a straight equity portfolio. However, it appears that one of the ways that this fund has achieved such performance is by investing heavily in the handful of technology stocks that have been driving much of the market’s performance year-to-date. As such, the fund is not nearly as diversified as most risk-averse investors would prefer. However, it could be a good addition to an income portfolio today, as long as the securities that comprise the rest of the portfolio are structured in a way that results in reasonable diversification.
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