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Friday, August 20, 2004

Eaton Vance Wants Options

Reported by Theresa Sim

Eaton Vance is readying a new fund based on an old concept. The Boston manager filed to launch a new options income fund on August 12.

The most notable feature of the Enhanced Equity Income Fund is that Eaton Vance will sell covered call options on the stocks in the fund's portfolio, a concept that fund companies started utilizing in the 1970s.

Managers will invest in at least 75 large and mid-capitalization, primarily domestic, stocks.

"[Eaton Vance]...believes that a strategy of owning common stocks in conjunction with writing covered call options on a substantial portion of the stocks held should generally provide returns that are superior to simply owning the same stocks under three different stock market scenarios: 1) Down-trending equity markets; 2) flat market markets; and 3) moderately rising equity markets," stated officials in the filing.

"Only in strongly rising equity markets would the stock-plus-covered calls strategy generally be expected to underperform the stocks held," officials stated.

Eaton Vance hired Ronald Egalka and David Fraley of Rampart Investment Management to subadvise the option-related portion of the fund.

At Eaton Vance, Duncan Richardson, senior vice president and chief equity investment officer, and Walter Row, vice president and director of equity research, will handle the day-to-day management of the fund.

"Even though closed end fund demand has declined from the pace of the past two years, we hope to be able to offer closed end fund products that utilize Eaton Vance's unique investment management strength," said Jim Hawkes, chief executive officer of Eaton Vance, in an earnings call on Wednesday.

Hawkes added he believed competitors do not offer as much product breadth as Eaton Vance.

But the new Eaton Vance fund faces competition from other similar products. Palo Alto, California-based Kelmoore Investment Company offers three funds that write options on securities in portfolio holdings.

Kelmoore's $242 million Strategy Fund also primarily invests in large-cap stocks. Tamara Beth Heiman, director of marketing for Kelmoore, welcomes the competition. New funds increase investor awareness of options strategies and also provide comparables.

Other managers with funds utilizing options include ICON Advisers and Gateway Investment Advisers.

PFPC will be the transfer agent for the new Eaton Vance fund and Investors Bank & Trust will custody the fund. A shareholder servicing agent was not included in the filing. 

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