The Eaton Vance Tax-Managed Diversified Equity Income Fund (NYSE:ETY) is a closed-end fund that income-focused investors can purchase as a way of achieving their goals of earning a high level of current income from the assets in their portfolios. As the name of the fund suggests, the Eaton Vance Tax-Managed Diversified Equity Income Fund invests primarily in common stocks and other equity securities as opposed to the fixed-income securities that comprise the portfolios of most income-focused closed-end funds. There are a number of advantages to this, especially when it comes to protecting the purchasing power of your wealth against inflation. As I explained in a recent article, there are some reasons to believe that the true rate of inflation is far higher than what the consumer price index indicates. If we accept that this is the case, then fixed-income securities today might not have sufficient after-tax yields to offset the erosion of purchasing power that is caused by inflation. Equities, however, should be better at this task due to the fact that inflation should cause revenue and net income growth for the company that issued the equity securities. As such, a fund like the Eaton Vance Tax-Managed Diversified Equity Income Fund could be a better long-term holding than any fixed-income fund if one of your goals is to maintain the purchasing power of your wealth.

The fund does not disappoint when it comes to income. As of the time of writing, the Eaton Vance Tax-Managed Diversified Equity Income Fund boasts an 8.43% yield. This is obviously far above the current yield offered by the S&P 500 Index or any other major domestic stock indices:

Here is how the Eaton Vance Tax-Managed Diversified Equity Income Fund compares with its peers in this respect:

Fund Name	Morningstar Classification	Current Yield
Eaton Vance Tax-Managed Diversified Equity Income Fund	Equity-Covered-Call Funds	8.43%
BlackRock Enhanced Capital and Income Fund (CII)	Equity-Covered-Call Funds	5.96%
Columbia Seligman Premium Technology Growth Fund (STK)	Equity-Covered-Call Funds	5.51%
First Trust Enhanced Equity Income Fund (FFA)	Equity-Covered-Call Funds	7.09%
Madison Covered Call & Equity Strategy Fund (MCN)	Equity-Covered-Call Funds	9.76%
Voya Global Advantage and Premium Opportunity Fund	Equity-Covered-Call Funds	11.50%

As we can see, the fund's yield is just above the median for this group of funds. This is something that we should appreciate because it means that the fund is probably not over-distributing, and the market is not too worried about a cut. It also should be high enough to appeal to most income-seeking investors.

As regular readers might remember, we previously discussed the Eaton Vance Tax-Managed Diversified Equity Income Fund in early March of this year. The global equity market since that time has been remarkably strong, and the S&P 500 Index has set several record highs since that time. As such, we can probably expect that the Eaton Vance Tax-Managed Diversified Equity Income Fund has done fairly well since our previous discussion. This is indeed the case, as shares of the fund are up 6.81% since that time:

This is certainly an interesting chart, as we can see that the fund has trailed the S&P 500 Index (SP500) by only a single basis point since the previous publication date. This is highly unusual for an option-income fund such as the Eaton Vance Tax-Managed Diversified Equity Income Fund. After all, the fund's strategy basically requires it to sacrifice some of the upside potential inherent in a common equity investment in favor of income. We actually do see that this is the case when we look at the fund's net asset value, which tells us how its portfolio actually performed over the period:

As we can see, the fund's net asset value is only up by 5.23% since the date that the previous article was published. This is not as good as the share price performance over the same period, which strongly suggests that the fund is now more expensive than it was at the time of our previous discussion. This has serious implications for the fund's valuation, which we will discuss later in this article.

It is important to note that investors in this fund actually did better than the S&P 500 Index since early March. As I stated in the previous article on this fund:

We can see that the fund's performance compared to the index is even more impressive when we consider the impact that the fund's distributions have had on its returns. After all, the direct payments that the fund provides to its investors represent real profits to the investors that increase their wealth regardless of the fund's share price movements. This will always result in the investors receiving a better return than the share price movement alone will indicate.

When we include the distributions that the fund paid out since early March in the chart above, we get this alternative chart that shows how investors in this fund really did over the period:

As we can immediately see, investors in the Eaton Vance Tax-Managed Diversified Equity Income Fund received a 9.86% total return since the last time that we discussed this fund. That is substantially better than the 6.82% total return that the S&P 500 Index delivered over the period, which will certainly prove attractive to pretty much any investor.

As almost four months have passed since the last time that we discussed this fund, it is a fair assumption that a great many things have changed. This article will focus specifically on those changes and attempt to determine if our thesis for this fund remains intact. The fund released an updated financial report a few days ago, so that will certainly help us with this task.

About The Fund

According to the fund's website, the Eaton Vance Tax-Managed Diversified Equity Income Fund has the primary objective of providing its investors with a high level of current income and current gains. This makes a certain amount of sense for an equity fund, as one of the primary reasons why people invest in stocks is to have the price go up. The fund naturally has this same goal. Current income, however, is difficult to achieve with equities due to the relatively low yields of most equity securities. For example, let us take a look at the current yields of the largest positions in the fund's portfolio. Here are the positions:

Here are the current dividend yields of each of these stocks:

Company Name	Current Dividend Yield
Microsoft Corp. (MSFT)	0.65%
NVIDIA Corp. (NVDA)	0.03%
Apple Inc. (AAPL)	0.45%
Alphabet Inc. (GOOG)	0.11%
Amazon.com Inc. (AMZN)	N/A
Meta Platforms Inc. (META)	0.20%
Eli Lilly & Co (LLY)	0.57%
AbbVie (ABBV)	3.74%
Walmart Inc. (WMT)	1.22%
Broadcom Inc. (AVGO)	1.27%

If it is hard to earn a high level of current income with an ordinary portfolio of common stocks, it is especially difficult to do so with this particular portfolio. As we can see here, AbbVie is the only one of these companies that has a yield that is higher than the index's already low 1.33%. AbbVie is only 2.45% of the portfolio, but all of the stocks shown here together account for fully 46.28% of the fund's portfolio. As such, AbbVie's reasonably attractive yield is nowhere near high enough to offset the very low yields of the rest of the stocks here. We therefore cannot expect the fund to be doing a good job of providing its investors with a high level of current income if all it has is the dividend income from the stocks in this portfolio.

However, this fund does not aim to earn a high level of income off of dividends paid by the common stocks in its portfolio. The annual report explains its strategy thusly:

Under normal market conditions, the Fund's investment program consists of owning a diversified portfolio of common stocks. The Fund seeks to earn high levels of tax-advantaged income and gains by (1) investing in stocks that pay dividends that qualify for favorable federal income tax treatment and/or (2) writing (selling) stock index call options with respect to a portion of its common stock portfolio value.

Under normal market conditions, the Fund invests at least 80% of its total assets in a combination of (1) dividend-paying common stocks and (2) common stocks the value of which is subject to covered written index call options.

Typically, the Fund invests in common stocks of United States issuers. The Fund may invest up to 40% of its total assets in securities of foreign issuers, including securities evidenced by American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts. The Fund may invest up to 5% of its total assets in securities of emerging market issuers. The Fund expects that its assets will normally be invested across a broad range of industries and market sectors. The Fund may not invest more than 25% or more of its total assets in the securities of issuers in any single industry. The Fund may invest a portion of its assets in stocks of mid-capitalization companies.

The final paragraph in this description is curious. The fund's annual report explicitly states that the Eaton Vance Tax-Managed Diversified Equity Income Fund may not invest more than 25% of its total assets into any individual market sector. However, the fund's fact sheet states that 29.25% of its assets were invested in the technology sector as of March 31, 2024:

The fund's largest positions chart as shown on the website shows that the six largest positions in the fund's portfolio are all technology companies. The total weighting of these six companies was 36.64% on May 31, 2024. If we consider Broadcom to be a technology company, that takes its weighting to the information technology sector up to 38.94% just from eight stocks. The fund is therefore violating its own mandate requiring that it not invest more than 25% of its assets in any single market sector. It is also, on a different note, hard to see how any fund can have 36% or more of its assets invested in a single sector and still call itself "diversified."

With that said, the S&P 500 Index itself has become increasingly less diversified in recent times. Last May, Morgan Stanley pointed this out:

First, investors in the S&P 500 Index may think they are getting exposure to a diversified basket of 500 companies. But today, the top 10 mega-cap companies in the index account for almost 35% of its entire market capitalization compared to 25% during the 1999-2000 tech bubble and an average of 20% over the past 35 years. This means that money deployed into the market-cap weighted S&P 500 is increasingly a wager on the health of just a few companies - with the fundamentals of the other 490 carrying less weight.

That warning by Morgan Stanley was made in May 2023, and the problem has gotten worse since then. As of right now, Microsoft, Apple, NVIDIA, Amazon.com, Meta Platforms, and Alphabet account for 31.46% of the S&P 500 Index. That is certainly a lot, but it is far less than the weighting that the Eaton Vance Tax-Managed Diversified Equity Income Fund has assigned to these stocks. Thus, the conclusion here appears to be that this fund is less diversified than the index as a whole.

Unfortunately, the fund appears to be less diversified today than it was the last time that we discussed it. The fund's weighting to the six giant technology companies was 34.10% at the time of our previous discussion:

Company Name	Previous Weighting (%)	Current Weighting (%)	Change
Microsoft	9.66%	8.87%	-0.79%
Apple	6.78%	7.01%	+0.23%
Amazon.com	4.86%	4.61%	-0.25%
NVIDIA	4.71%	7.37%	+2.66%
Meta Platforms	4.36%	3.89%	-0.47%
Alphabet	3.73%	4.89%	+1.16%

We can see that most of the changes that we see to the fund's "Magnificent 7" weighting comes from very large increases to NVIDIA and Alphabet that outstripped the declining weight to everything else. NVIDIA has been one of the best-performing stocks year-to-date, so this is perhaps not very surprising, especially if the fund's managers did not bother to take some gains and sell into the market rally. The Eaton Vance Tax-Managed Diversified Equity Income Fund does have a 63% annual turnover though, so it is certainly engaging in a certain amount of trading activity. If the fund's goal really is to maintain a diversified portfolio, it is rather surprising that it would not take some money off of the table.

As we saw in the previous article on this fund, the Eaton Vance Tax-Managed Diversified Equity Income Fund generally writes short-term call options against the S&P 500 Index. Its semi-annual report shows the same thing, as the fund was short the following options on April 30, 2024:

As we can see, all of the options that it held on that date expired at some point during the month of May. This is useful from a risk management perspective as it is unlikely that the S&P 500 Index will move so rapidly within a month that the fund ends up taking large losses if these options end up getting exercised against it. It also explains the concentrated portfolio, as the fund cannot hold a stock portfolio that underperforms the S&P 500 Index to any significant degree as then these naked option positions could prove destructive to the fund's net asset value if they are executed.

The takeaway here is that this fund is not nearly as diversified as it claims to be. In fact, it is violating its own mandate with respect to individual sector exposure. While this is, at least in part, a problem with the S&P 500 Index right now, investors still need to keep it in mind. Any investor in this fund should make sure that the remainder of their own portfolio has proper diversification across sectors or any problems in the technology sector (such as generative artificial intelligence not earning explosive profits) could prove to be devastating.

Distribution Analysis

The primary objective of the Eaton Vance Tax-Managed Diversified Equity Income Fund is to provide its investors with a high level of current income and current gains. As is usually the case with closed-end funds, it aims to deliver these two objectives via direct payments to its shareholders. To this end, the fund pays a monthly distribution of $0.0992 per share ($1.1904 per share annually). This gives the fund an 8.43% yield at the current share price.

The Eaton Vance Tax-Managed Diversified Equity Income Fund has generally been pretty consistent with respect to its distribution over the years, but it has not been perfect:

While we do see a distribution cut in late 2022, we also see that the fund increased its distribution in April 2024:

The fund's current distribution is quite a bit higher than it was the last time that we discussed the fund. In fact, the current distribution is the highest level that the fund has had since 2010. There might be some dispute over this as the distribution chart appears to show a much higher distribution prior to 2013, but this is due to the timing of the distribution. At the start of 2013, this fund converted from a quarterly distribution to a monthly distribution. Prior to the conversion, the fund paid $0.2530 per share, which is lower than the $0.2930 per share quarterly that the fund is currently paying. The last time that the fund made a quarterly distribution larger than $0.2930 per share was in November 2010.

The fact that the fund's distribution is now at the highest level that it has had in fourteen years is quite nice for anyone who is suffering from the ravages of inflation. However, we want to make sure that the fund can actually afford the higher distribution that it is now paying out. This is where the semi-annual report comes in, as this recently released document corresponds to the six-month period that ended on April 30, 2024. This is obviously a much newer report than the one that we had available the last time that we discussed this fund, and it is current enough that it should be able to provide a great deal of insight into the fund's ability to sustain its current distribution.

For the six-month period that ended on April 30, 2024, the Eaton Vance Tax-Managed Diversified Equity Income Fund received $10,481,999 in dividends from the assets in its portfolio. The fund had no income from any other source, so this figure represents its total investment income for the period. This was not enough to cover the fund's expenses for the period, and the fund ended up reporting a net investment loss of $438,647 for the period. Obviously, this was not enough to cover the $78,961,573 that the fund paid out to its shareholders during the period.

This fund was able to more than make up the difference through capital gains. For the six-month period, it reported net realized gains totaling $145,093,617, and it had another $207,504,716 in net unrealized gains. Overall, the fund's net assets increased by $273,198,113 after accounting for all inflows and outflows during the period. Thus, this fund easily covered all of its distributions during the period and had a substantial amount of money left over.

The fund's distribution looks to be in pretty good shape. This fund easily covered all of its distributions solely out of net realized gains, let alone the net unrealized gains and all of the excess realized gains that it did not pay out. Investors in this fund should not need to worry about the fund's ability to maintain its distribution, as all the excess gains that it earned during the six-month reporting period should be able to sustain it for quite a while.

Valuation

Shares of the Eaton Vance Tax-Managed Diversified Equity Income Fund are currently trading at a 3.68% discount on net asset value. This is a more attractive price than the 2.92% discount that the shares have had on average over the past month. Thus, the current price looks reasonable.

Conclusion

In conclusion, the Eaton Vance Tax-Managed Diversified Equity Income Fund certainly enjoyed a very strong first half of its 2024 fiscal year. The fund's portfolio produced substantially more investment profits than it needed to pay its distributions, and it was able to raise its distribution to the highest level that it has had in over a decade. This is something that any income investor would certainly appreciate. However, the fund does not appear to be meeting its own diversity standards, as it is very highly concentrated in just a few names. Indeed, if generative artificial intelligence proves to be a bubble, then this fund's portfolio could take a real beating. For now, though, the fund looks good as long as you construct the rest of your portfolio appropriately to achieve proper diversification on your own.