It has been a turbulent 2018 for the stock market, with huge declines followed by dramatic rebounds.
While fund managers are scrambling to adjust, the executives in charge of one of the largest closed-end funds, the $2.5 billion Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) , say they are well-prepared to ride out the stormy market.
The fifth largest fund, according to Lipper Research, EXG makes extensive use of options to smooth out returns, catering to investors seeking a steady stream of income.
"Really, what we are trying to do is provide investors with a predictable income stream in a tax efficient manner while at the same time giving them exposure to the equity market," says Christopher Dyer, a vice president of Eaton Vance Advisers International Ltd. who oversees EXG and many other funds as director of global equity.
Still, like their open-end mutual fund cousins, closed-end funds have taken beating over the last few months amid all the market gyrations, and EXG has been no exception.
EXG's net asset value fell 6.2% in the third quarter and is down 3%, year to date, according to Lipper Research.
That said, over the past calendar year, the EXG's performance looks a bit better, down just 0.6% in the 12 months ending on Oct. 31, Lipper reports.
That puts the big closed-end fund in the middle of the pack, at number 303 in terms of performance out of the 623 closed-end funds tracked by Lipper.
But EXG has bet heavily on hedging strategies in order to protect what some consider its key draw, an annual distribution rate of over 10% that is paid out to investors monthly.
For this, the EXG writes covered call options against the stocks in its portfolio, agreeing to sell various holdings when they hit a certain price. The strategy both limits the potential damage from a down market while also netting the EXG premiums paid by the buyers of the options.
While the option strategy tends to temper returns in a bull market, it also helps put a break on losses in a bear market.
Options can also be used to offset gains and harvest losses to minimize the amount that investors in the fund owe in federal taxes.
"The options strategy dampens that volatility," Dyer says. "Investors can feel a little more comfortable that they are not getting whipsawed around to that extent."
In maneuvering through a choppy market, EXG can also draw upon the skill of a transatlantic crew of veteran stock pickers, with two based in Boston and six in London.
Michael Allison, a vice president of Eaton Vance Management and a director of equity strategy implementation, has helped manage the fund since its 2007 launch. A CFA, Allison got his start in investment management in 1988, and was an equity analyst before joining Eaton in 2000.
Dyer got his start in financial services in 1995 and was managing director and head of equity for Goldman Sachs Asset Management before signing on with Eaton Vance in 2015.
EXG's team has "very much a bottom-up stock picking approach," says Dyer, noting his team has an average of 17 to 18 years investment experience. The fund takes a long-term view when it comes to stock picking, focusing on solid companies with the ability to generate returns for investors over a number of years.
Still, while the fund is focused on generating income for investors, EXG isn't exactly buying up dividend rich utility stocks either, Dyer notes, adding the fund also looks at long-term value and total return.
EXG's top four holdings are all tech companies, Google parent company Alphabet (GOOGL) , Amazon.com (AMZN) , Microsoft (MSFT) and Apple (AAPL) , all in that order. Exxon Mobil (XOM) , Johnson & Johnson (JNJ) and Walt Disney Co. (DIS) , round out the top 8.
"The stocks we are investing in, we are really focused on generating total return," Dyer says.
Looking ahead to 2019, Dyer offers a glass half full forecast, at least for the overall economy.
Dyer sees mutual interest driving the U.S. and China to work out a trade deal, arguing that prospect has yet to be priced into the market. And the decline in oil prices "should provide a little more of a tailwind in 2019," he adds.
"I am fairly optimistic," the EXG manager says.
Alphabet, Amazon.com, Microsoft, Johnson & Johnson, Walt Disney and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells GOOGL, AMZN MSFT, JNJ, DIS or AAPL? Learn more now.