Yesterday afternoon I was pleasantly surprised to see that our tax return had been deposited into my checking account. This puts us in the pleasant position of deciding what do with the money. After some thought, I’ve decided to take a position in the Evergreen Utilities and High Income Fund (ERH).
ERH is an exchange traded fund that invests primarily in the common stock and securities of utility companies, high yielding bonds, as well as number of more exotic strategies such as corporate loans and options. The fund additionally makes liberal use of leverage and foreign currency transactions. The objective of ERH is to provide high current income and moderate capital appreciation.
ERH’s redeeming factor is that they’re delivering shareholder value. Over the past couple of years, the share price has increased from 20 to 29 dollars. Not only that, the ERH pays modest monthly dividends and over the past two years has given out substantial annual dividend payments. Given that both myself and my wife are in graduate school, we need current income, so ERH would meet our needs in that regard.
However, in the interest of full disclosure, ERH has some serious drawbacks. First, the fund’s parent company, Evergreen Investments has been accused by the NASD of engaging in improper payments to generate referral business from brokers. What happened was Evergreen put together a posh resort weekend and invited a number of brokers to solicit their referral business. NASD alleged that Evergreen had allocated 27 million for kickbacks to those aforementioned brokers.
Also, ERH has a fair amount of portfolio churning. In 2004, 2005 and 2006 the fund’s turnover exceeded 100%. Also, the fund is relatively new and has a low float. This suggests that management is unproven and if there is a problem it might be hard to sell quickly to get out.
On the whole, I’ve decided to a limited position in ERH. There are some significant downsides, but the funds cumulative return over the past year has been over 40%, so it’s hard to argue with results. We’ll keep you posted on how the fund works out.
Best,
James
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