Eaton Vance Enhanced Equity Income Fund II Delivers Despite Promises

The Eaton Vance Enhanced Equity Income Fund II (EOS) aims to generate active income and capital growth through a diversified portfolio of stocks. While it promises more than it delivers, EOS still manages to deliver sufficient returns for investors. With a focus on income generation and capital preservation, EOS is a suitable option for those seeking a stable and relatively low-risk investment.

The Eaton Vance Enhanced Equity Income Fund II (EOS) is an actively managed fund that aims to generate active income and capital growth through a diversified portfolio of stocks. The fund is almost a sequel to the Fund I (EOI), with a primary objective of generating active income and a secondary goal of capital appreciation. This fund is particularly attractive to investors seeking a stable and relatively low-risk investment.

EOS employs an option writing strategy as its primary income generation tool, with a 1-3 month expiration window and strikes at or above the current market prices of the stock. This strategy allows for better upside capture and dynamic adaptation to underlying holdings' price movements. Additionally, the fund uses other derivative exposure beyond call writing to hedge the portfolio or gain speculative returns, with a cap of 10% on speculative or income generating derivatives (excluding hedges).

The fund's sectoral allocation is more growth-oriented compared to EOI, with significant technology exposure and underweight positions in healthcare and financials. This makes EOS a more volatile but potentially higher-returning income offering. The top 10 holdings in EOS include active bets on Intuit and TJX, showing the fund's active management approach. The fund's concentration on the top 10 holdings is high, allowing for potential alpha generation compared to market cap-weighted approaches.

EOS' dividend payouts are stable and predictable, with yields fluctuating between 6.5% and 9%. The current yield of ~7.5% is lucrative, especially when considering the NAV growth. The fund's conservative payouts ensure no structural NAV erosion over time, while capital growth can lead to higher absolute payouts. The fund's performance analysis shows that while the option layer may not generate significant alpha, the active stock selection and strategic option play can capture upside rallies effectively. However, EOS' drawdown management is not as robust as some other option write strategies, indicating that its methodology may not provide the same level of downside protection.

Overall, EOS is a balanced approach to income generation and capital growth, suitable for investors seeking a stable and relatively low-risk investment. Its focus on active income generation and capital preservation makes it an attractive option for those looking to diversify their income portfolio.

References:
[1] https://seekingalpha.com/article/4803219-eos-promises-more-than-it-delivers-but-still-delivers-enough
[2] https://www.pimco.com/us/en/resources/video-library/media/unlock-diversified-income-potential-with-securitized-assets