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New N-2 Filing – 2 Year Eaton Vance Closed-End Fund Trust

December 9, 2011

We have included our commentary on the filing as well as an overview of the Investment Program and the Prospect Summary covering the Trust. A link to the full N-2 filing is at the end of this post.

What is a “N-2 Filing”:

A filing with the Securities and Exchange Commission (SEC) that must be submitted by closed-end management investment companies, with the exception of small business investment companies licensed by the Small Business Administration, to register under the Investment Company Act of 1940, and to offer their shares under the Securities Act of 1933. SEC Form N-2 is meant to provide investors with information about closed-end management companies to determine whether they should invest in them. A N-2 filing does not guarantee the fund or trust will actually have an IPO event. We expect this fund would IPO in early to mid 2012.

What is an “eUnit”?

An eUnit is a trademark filed by Eaton Vance Management in July of 2009.

It is defined as, “Fund investment services featuring securities offered as structured notes in the form of closed-end funds; Management of portfolios comprising securities; Closed-end fund investment; Financial services, namely, administration of transactions by closed-end funds involving securities, stocks, funds, equities, bonds, notes, cash, or other types of financial investments.”

CEFA’s Commentary:

In our opinion, the main reason Eaton Vance has offered the two year life for the trust would be to use the liquidation at NAV as a discount control measure.
Though completely different asset classes, it reminds us of the BlackRock Municipal 2018 17 Year Term Trusts (BPK). This fund currently trades at a 5.22% premium to NAV (as of 12/8/11). In recent markets BPK has only traded at a discount to NAV in the fall of 2008 (very briefly – only 5 days, two of which were discount of less than 1%) . The fund did trade at a discount from 2002-2005 when muni bond funds were out-of-favor and the fund was earlier in its life as t the termination date was 7-9 years into the future.  Investors can  remember the fall of 2008 was a rough market and very few closed-end funds in any asset class held on to premiums on a day-to-day basis during the crisis.
The fund has annualized a +6.76% on Market Price and +6.83% on NAV for shareholders since its inception in October 2001.  Of course, past performance cannot predict future results or be guaranteed.  We have included the fund’s performance chart below and also included the peer-group’s comparable market price and NAV results.
                            BPK NAV & Market Price Chart (Inception)
View Price History
  Chart Source: CEF Connect
                                                                                                                                                        Chart Source: CEF Connect
Our firm and many investors expect equities to outperform bonds in the next 2-3 years as interest rates will eventually have to rise, pushing bond prices lower.  With the shorter 2 year life for the anticipated fund, we wouldn’t expect as much of a discount to form in its early life like BPK experienced. Ultimately, the biggest risk in the fund lies with the investment adviser being able to give NAV performance: Can they grow the assets net of fees relative to the US markets? 
While it is nice to get out of a closed-end fund at NAV vs. a discount – if you bought the fund for $15 on the IPO, you would expect to receive more than $15 after two years regardless of the NAV and discount/premium relationship. A downside to the structure or format would be that it is unlikely the fund would ever trade at much of a premium as investors know they will get NAV in 24 months or less (for secondary market buyers).
As usual, our firm prefers to analyze a fund’s trading patterns and relative discount vs. peer-funds in the secondary market after the green shoe or secondary market support has dried up and true market forces are in play so we have never been involved in a CEF’s IPO.

eUnits™ 2 Year U.S. Market Participation Trust: Upside to Cap / Buffered Downside

Investment Program.  

The Trust’s investment program will consist primarily of: (1) investing substantially all of the initial net assets of the Trust to purchase U.S. Treasury obligations (“Treasuries”) that will mature on or shortly before the Termination Date and (2) entering into private contracts (the “Contracts”) that provide for the Trust to pay or receive cash at Contract settlement (sometimes referred to as “single-pay contracts”) based on the price performance of the Index over the life of the Contracts, which are scheduled to conclude on the Termination Date.  Through payoff profiles embedded therein, the Contracts seek to provide exposure to the price performance of the Index corresponding to that which the Trust seeks to provide Unit holders in accordance with its investment objective.  The Trust will enter into its initial investments, including the Contracts, shortly following the conclusion of its initial public offering and expects to maintain a substantially fixed investment program through the life of the Trust.  Amounts available to distribute to Unit holders upon termination of the Trust will depend primarily on the performance of the Trust’s investments in Treasuries and the Contracts, and are not guaranteed by any party.  The Trust will enter into Contracts that provide specified returns based upon the price performance of the Index, with a notional value approximately equal to the Trust’s initial net assets.  For these purposes “notional value” is the designated reference amount of Index exposure reflected in the Contracts.

 Although the Trust’s investment program is not expected to change materially over the investment life of the Trust, the net asset value of Units will vary over time due to the performance of the Index, changes in interest rates and other factors.  The Trust is not intended to be a complete investment program and investing therein may not be appropriate for all investors.

 Units of the Trust are intended to be held until the Termination Date, and not as short-term trading vehicles.  Holders that sell their Units prior to the Termination Date will forgo the opportunity to realize the Trust’s investment objective and, like other Unit holders, may lose money.  See “Risk Considerations—Liquidity risk of Units” and “Secondary Trading.”

Prospectus Summary

The Trust:

The Trust seeks to provide investors purchasing units of beneficial interest (“Units”) in the initial public offering the opportunity to earn returns over the investment life of the Trust based on the price performance of the S&P 500 Composite Stock Price Index® (the “Index”) as described herein.  The Trust anticipates concluding its investment activities on or about January 24, 2014 (the “Termination Date”) and making a liquidating cash distribution to Unit holders of the Trust’s net assets within 7 business days thereafter. If the Index appreciates over the investment life of the Trust, the Trust seeks to provide a return on the initial net asset value of the Units equal to the percentage change in the price of the Index, up to a maximum return of 15 to 20 percent.  If the Index depreciates over the investment life of the Trust by 15 percent or less, the Trust seeks to return the initial net asset value of the Units.  If the Index depreciates by more than 15 percent over the investment life of the Trust, the Trust seeks to outperform the Index price change by 15 percent of initial Index value.  The Trust will enter into Contracts (as defined below) that provide specified returns based upon the price performance of the Index with a notional value approximately equal to the Trust’s initial net assets.  For these purposes “notional value” is the designated reference amount of Index exposure reflected in the Contracts.

The Trust’s investment objective is a fundamental policy and cannot be changed without the approval of the holders of a majority of the Trust’s outstanding voting securities.

Although the Trust will seek to provide returns based on the price performance of the Index as described above, the Trust is not a so-called “index fund.”  There can be no assurance that the Trust will achieve its investment objective.  The Trust’s returns will depend primarily on the performance of its investment program as described herein, and are not guaranteed by any party.  If, for example, the Index appreciates over the term of the Trust by up to the 15-20 percent maximum return, it is possible that the Trust may underperform the Index and may lose money.  Similarly, if the Index declines over the term of the Trust, the Trust may not avoid exposure to the first 15 percent of the Index price decline and may lose money.

Units of the Trust are intended to be held until the Termination Date and not as short-term trading vehicles.  Holders that sell their Units prior to the Termination Date will forgo the opportunity to realize the Trust’s investment objective and, like other Unit holders, may lose money.  See “Risk Considerations—Liquidity risk of Units” and “Secondary Trading.”

The Trust’s investment adviser and administrator is Eaton Vance Management (“Eaton Vance” or the “Adviser”).  Eaton Vance has engaged its affiliate Parametric Risk Advisors LLC (“Parametric” or the “Sub-Adviser”) to serve as sub-adviser to the Trust responsible for advice on and execution of the Trust’s Contracts as described below.

Full  N-2 Filing (132 Pages)http://www.sec.gov/Archives/edgar/data/1476721/000089843211001275/n-2a.htm

Disclaimer: The views and opinions herein are as of the date of publication and are subject to change at any time based upon market or other conditions. None of the information contained herein should be constructed as an offer to buy or sell securities or as recommendations. Performance results shown should, under no circumstances, be construed as
an indication of future performance. Data, while obtained from sources we believe to be reliable, cannot be guaranteed.

From → N-2 Filings

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