Notes to Financial Statements
1 Significant Accounting Policies
Eaton Vance Tax-Managed Diversified Equity Income Fund (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Funds primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.
The following is a summary of significant accounting policies of the Fund. The policies are in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP). The Fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946.
A Investment Valuation The following methodologies
are used to determine the market value or fair value of investments.
Equity Securities. Equity securities listed on a U.S. securities exchange
generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and ask prices on the exchange where such securities are principally traded. Equity
securities listed on the NASDAQ Global or Global Select Market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or closing quotations are not available are valued at the mean
between the latest available bid and ask prices.
Derivatives. U.S. exchange-traded options are valued at the mean between the bid and ask prices at valuation
time as reported by the Options Price Reporting Authority. Non U.S. exchange-traded options and over-the-counter options are valued by a third party pricing service
using techniques that consider factors including the value of the underlying instrument, the volatility of the underlying instrument and the period of time until option expiration.
Foreign Securities and Currencies. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rate quotations supplied by a
third party pricing service. The pricing service uses a proprietary model to determine the exchange rate. Inputs to the model include reported trades and implied bid/ask spreads. The daily valuation of exchange-traded foreign securities generally is
determined as of the close of trading on the principal exchange on which such securities trade. Events occurring after the close of trading on foreign exchanges may result in adjustments to the valuation of foreign securities to more accurately
reflect their fair value as of the close of regular trading on the New York Stock Exchange. When valuing foreign equity securities that meet certain criteria, the Funds Trustees have approved the use of a fair value service that values such
securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued securities.
Affiliated Fund. The Fund may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an affiliated investment company managed by Eaton Vance
Management (EVM). While Cash Reserves Fund is not a registered money market mutual fund, it conducts all of its investment activities in accordance with the requirements of Rule 2a-7 under the 1940 Act.
Investments in Cash Reserves Fund are valued at the closing net asset value per unit on the valuation day. Cash Reserves Fund generally values its investment securities based on available market quotations provided by a third party pricing service.
Fair Valuation. Investments for which valuations or market quotations are not readily available or are deemed unreliable are valued at fair value using
methods determined in good faith by or at the direction of the Trustees of the Fund in a manner that most fairly reflects the securitys fair value, which is the amount that the Fund might reasonably expect to receive for the
security upon its current sale in the ordinary course. Each such determination is based on a consideration of relevant factors, which are likely to vary from one pricing context to another. These factors may include, but are not limited to, the type
of security, the existence of any contractual restrictions on the securitys disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations or relevant information
obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the companys or entitys financial
statements, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.
B Investment Transactions Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized
gains and losses on investments sold are determined on the basis of identified cost.
C Income Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. However, if the ex-dividend date has passed, certain dividends from foreign securities are recorded as the
Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the Funds understanding of the applicable countries tax
rules and rates. In consideration of recent decisions rendered by European courts, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various
administrative and judicial proceedings within these countries. Due to the uncertainty as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment, no amounts are reflected in
the financial statements for such outstanding reclaims.
D Federal Taxes The Funds policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its net investment
income, and all or substantially all of its net realized capital gains. Accordingly, no provision for federal income or excise tax is necessary.
As of
October 31, 2019, the Fund had no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. The Fund files a U.S. federal income tax return annually after
its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three years from the date of filing.
Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2019
Notes to Financial Statements continued
E Foreign Currency Translation Investment
valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange rates. Purchases and sales of foreign investment securities and income and expenses
denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions. Recognized gains or losses on investment transactions attributable to changes in foreign
currency exchange rates are recorded for financial statement purposes as net realized gains and losses on investments. That portion of unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is
not separately disclosed.
F Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of income and expense during the reporting period. Actual results could differ from those estimates.
G Indemnifications Under the Funds organizational documents, its officers and Trustees may be indemnified against certain
liabilities and expenses arising out of the performance of their duties to the Fund. Under Massachusetts law, if certain conditions prevail, shareholders of a Massachusetts business trust (such as the Fund) could be deemed to have personal liability
for the obligations of the Fund. However, the Funds Declaration of Trust contains an express disclaimer of liability on the part of Fund shareholders and the By-laws provide that the Fund shall assume,
upon request by the shareholder, the defense on behalf of any Fund shareholders. Moreover, the By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by
reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The
Funds maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
H Written Options Upon the writing of a call or a
put option, the premium received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written, in accordance with the Funds policies on investment valuations discussed above.
Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine
the realized gain or loss. When an index option is exercised, the Fund is required to deliver an amount of cash determined by the excess of the exercise price of the option over the value of the index (in the case of a put) or the excess of the
value of the index over the exercise price of the option (in the case of a call) at contract termination. If a put option on a security is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer
of an option, may have no control over whether the underlying securities or other assets may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities or other assets underlying
the written option. The Fund may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
2 Distributions to Shareholders and Income Tax Information
Subject to its Managed Distribution Plan, the Fund makes monthly
distributions from its cash available for distribution, which consists of the Funds dividends and interest income after payment of Fund expenses, net option premiums and net realized and unrealized gains on stock investments. The Fund intends
to distribute all or substantially all of its net realized capital gains. Distributions are recorded on the ex-dividend date. Distributions to shareholders are determined in accordance with income tax
regulations, which may differ from U.S. GAAP. As required by U.S. GAAP, only distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary income. Distributions in any year may
include a substantial return of capital component.
The tax character of distributions declared for the years ended October 31, 2019 and October 31, 2018
was as follows:
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Year Ended October 31,
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2019
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2018
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Ordinary income
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$
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14,918,353
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$
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12,167,878
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Long-term capital gains
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$
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82,143,641
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$
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72,611,208
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Tax return of capital
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$
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54,494,528
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$
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66,490,334
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During the year ended October 31, 2019, distributable earnings was increased by $2,609 and
paid-in capital was decreased by $2,609 due to differences between book and tax accounting. These reclassifications had no effect on the net assets or net asset value per share of the Fund.
As of October 31, 2019, the components of distributable earnings (accumulated loss) on a tax basis were as follows:
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Net unrealized appreciation
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$
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442,609,544
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Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2019
Notes to Financial Statements continued
The cost and unrealized appreciation (depreciation) of investments, including open derivative contracts, of the Fund at October 31, 2019, as determined on a federal
income tax basis, were as follows:
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Aggregate cost
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$
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1,349,879,726
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Gross unrealized appreciation
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$
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464,076,038
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Gross unrealized depreciation
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(21,467,145
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)
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Net unrealized appreciation
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$
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442,608,893
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3 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for management and investment advisory services rendered to the Fund. Pursuant to the investment advisory
agreement and subsequent fee reduction agreement, the fee is computed at an annual rate of 1.00% of the Funds average daily gross assets up to and including $1.5 billion, 0.98% over $1.5 billion up to and including $3 billion
and at reduced rates on daily gross assets over $3 billion, and is payable monthly. Gross assets as referred to herein represent net assets plus obligations attributable to investment leverage, if any. The fee reduction cannot be terminated
without the consent of a majority of Trustees and a majority of shareholders. For the year ended October 31, 2019, the Funds investment adviser fee amounted to $17,473,232 or 1.00% of the Funds average daily gross assets. The Fund
invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. EVM also serves as administrator of the Fund, but receives no compensation.
Trustees and officers of the Fund who are members of EVMs organization receive remuneration for their services to the Fund out of the investment adviser fee.
Trustees of the Fund who are not affiliated with EVM may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the year ended October 31, 2019, no
significant amounts have been deferred. Certain officers and Trustees of the Fund are officers of EVM.
4 Purchases and Sales of
Investments
Purchases and sales of investments, other than short-term obligations, aggregated $994,015,367 and $1,170,928,893, respectively, for the year
ended October 31, 2019.
5 Common Shares of Beneficial Interest and Shelf Offering
Common shares issued by the Fund pursuant to its dividend reinvestment plan for the years ended October 31, 2019 and October 31, 2018 were 262,676 and 303,904,
respectively.
In August 2012, the Board of Trustees initially approved a share repurchase program for the Fund. Pursuant to the reauthorization of the share
repurchase program by the Board of Trustees in March 2019, the Fund is authorized to repurchase up to 10% of its common shares outstanding as of the last day of the prior calendar year at market prices when shares are trading at a discount to net
asset value. The share repurchase program does not obligate the Fund to purchase a specific amount of shares. There were no repurchases of common shares by the Fund for the years ended October 31, 2019 and October 31, 2018.
Pursuant to a registration statement filed with and declared effective on May 9, 2019 by the SEC, the Fund is authorized to issue up to an additional 22,462,218
common shares through an equity shelf offering program (the shelf offering). Under the shelf offering, the Fund, subject to market conditions, may raise additional capital from time to time and in varying amounts and offering methods at
a net price at or above the Funds net asset value per common share.
During the year ended October 31, 2019, the Fund sold 158,062 common shares and
received proceeds (net of offering costs) of $1,882,126 through its shelf offering. The net proceeds in excess of the net asset value of the shares sold were $15,939. Offering costs (other than the applicable sales commissions) incurred in
connection with the shelf offering were borne directly by EVM. Eaton Vance Distributors, Inc. (EVD), an affiliate of EVM, is the distributor of the Funds shares and is entitled to receive a sales commission from the Fund of 1.00% of the gross
sales price per share, a portion of which is re-allowed to sales agents. The Fund was informed that the sales commissions retained by EVD during the year ended October 31, 2019 were $3,802.
6 Financial Instruments
The Fund may trade in
financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include written options and may involve, to a varying degree, elements of
risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and do not
Eaton Vance
Tax-Managed Diversified Equity Income Fund
October 31, 2019
Notes to Financial Statements continued
necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and
offsetting transactions are considered. A summary of obligations under these financial instruments at October 31, 2019 is included in the Portfolio of Investments. At October 31, 2019, the Fund had sufficient cash and/or securities to
cover commitments under these contracts.
The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund writes index
call options above the current value of the index to generate premium income. In writing index call options, the Fund in effect, sells potential appreciation in the value of the applicable index above the exercise price in exchange for the option
premium received. The Fund retains the risk of loss, minus the premium received, should the value of the underlying index decline.
The fair value of open derivative
instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is equity price risk at October 31, 2019 was as follows:
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Fair Value
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Derivative
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Asset Derivative
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Liability Derivative(1)
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Written options
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$
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$
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(12,767,375
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)
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(1)
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Statement of Assets and Liabilities location: Written options outstanding, at value.
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The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary
underlying risk exposure is equity price risk for the year ended October 31, 2019 was as follows:
The average number of written options contracts outstanding during the year ended October 31, 2019, which is indicative of the volume of this
derivative type, was 2,945 contracts.
Under generally
accepted accounting principles for fair value measurements, a three-tier hierarchy to prioritize the assumptions, referred to as inputs, is used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in the
three broad levels listed below.
In cases where the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level disclosed is
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities.
At October 31, 2019, the hierarchy of inputs used in valuing the Funds investments and open derivative instruments, which are carried at
value, were as follows: