Diversified Currency Income Fund (A) Share
Class

A

• A
• C
• I

A Word On The Markets  as of Mar 31, 2013

The first quarter was characterized by optimism about the U.S. economy, discouraging news coming out of Europe and dynamic developments in Japan. In the U.S., investors shrugged off the government spending cuts that went into effect March 1 and instead appeared to focus on improvement in the housing and job markets. Economic data across Europe remained weak, Cyprus required emergency funds to shore up its banks and inconclusive elections in Italy dashed hopes for near-term economic reforms. The Bank of Japan doubled its inflation target to 2% and pledged to ease monetary policy more aggressively. The yen weakened substantially versus the U.S. dollar during the quarter.

The minutes from the Federal Reserve’s (the Fed) January meeting showed that some Fed officials thought the central bank might need to alter the stated course of its bond-buying programs to preempt inflation. Subsequent remarks from Fed Chairman Bernanke alleviated concerns that quantitative easing might end sooner than expected. The U.S. yield curve¹² steepened during the quarter; maturities of two years and longer rose, with the largest increase in yields coming in the 10- through 30-year space. Rates for maturities two years and under were largely unchanged.

The performance of emerging market Asian currencies versus the U.S. dollar was mixed. The largest gainers were the Thai baht and Indian rupee, while weaker currencies included the Taiwanese dollar and South Korean won. Credit spreads were generally unchanged, with the exception of Indonesia where spreads widened modestly.

Broadly speaking, Latin American currencies appreciated versus the U.S. dollar, with particular strength in the Mexican peso. Credit spreads across Latin America were mostly unchanged, although spreads widened in Brazil. Central and Eastern European currencies generally depreciated versus the euro, led by weakness in the Hungarian forint. Credit spreads within the region widened, most notably in Hungary. Currencies in Africa and the Middle East were mixed versus the U.S. dollar, while credit spreads widened, especially in Egypt.

Performance Summary 

Eaton Vance Diversified Currency Income Fund (the Fund) outperformed its benchmark, the Barclays Capital Global Ex-USD Benchmark Currency (Trade-Weighted) Index (the Index),³ at net asset value during the quarter.

• Correlations among currencies declined, and dispersion among the returns of individual currencies widened. This increased the opportunity for management to add value though currency selection. Management’s selection decisions benefited the Fund, as it owned a number of currencies that performed well.
• Many regions made positive contributions to return. Strength in Asia was driven by the Thai baht, while the Ghanaian cedi and Israeli shekel led the gains in Africa and the Middle East. Holdings in Central and Eastern Europe, as well as Latin America, also favorably impacted results, boosted by the Georgian lari and Mexican peso.
• Gold exposure detracted from Fund performance, as did positions in the Dollar Bloc where the Canadian dollar was particularly weak.

Contributors 

Factors contributing to the Fund’s relative performance compared to the Index during the quarter:

• An investment in the Thai baht appreciated amid strong economic data, the abatement of political risk and the country’s continued attractiveness to foreign direct investors who are moving manufacturing plants from China to Thailand.
• Mexico’s new government asserted its political independence, and the recently elected president proposed a number of economic reforms. These developments benefited a position in the peso.
• Exposure to the Nigerian naira was advantageous given continued strong economic growth led by the oil sector.

Detractors 

Factors detracting from the Fund’s relative performance compared to the Index during the quarter:

• An investment in the South Korean won was unfavorable due to rising tensions with North Korea and equity flows out of South Korea and into Japan.
• A position in gold negatively impacted Fund performance, as investors began to anticipate less accommodative policies from the Federal Reserve.
• Diminished expectations that the Bank of Canada would tighten monetary policy, along with softening economic data, decreased the value of the Fund’s investment in the Canadian dollar.

Investment Outlook And Fund Positioning 

Management believes that the economic recovery in the U.S. is following a pattern typical of emergence from a financial recession. While growth has improved and unemployment has retreated, the country’s fiscal balance sheet continues to deteriorate and fiscal uncertainty remains.

The issues in the eurozone have not been resolved. Unemployment is at a record high, industrial production is declining and the region’s economy is on track to post its sixth straight quarterly contraction. Cyprus was the fifth nation to receive aid from the eurozone’s rescue funds, and it is likely that other countries will also need help. Further, European financial company balance sheets are suffering, as they remain the largest funding source for some of the weaker countries within the region.

Management continues to seek opportunities to invest in Asia, Latin America, and Central and Eastern Europe, as well as Africa and the Middle East. Many countries in these regions are benefiting from strong economic and political fundamentals that may help them weather the continued market turmoil originating in the developed world.

The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as "forward looking statements". The Fund's actual future results may differ significantly from those stated in any forward-looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund's filings with the Securities and Exchange Commission.

Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding. Fund primarily invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund and may also invest directly. References to investments are to the aggregate holdings of the Fund and the Portfolio.

About Risk 

The value of foreign currencies as measured in U.S. dollars will fluctuate and may be unpredictably affected by changes in foreign currency rates and exchange control regulations, application of foreign tax laws, governmental administration of economic or monetary policies, intervention by U.S. or foreign governments or central banks, and relations between nations. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. In emerging or frontier countries, these risks may be more significant. An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non–payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Derivatives instruments can be used to take both long and short positions, be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk. If a counterparty is unable to honor its commitments, the value of Fund shares may decline and/or the Fund could experience delays in the return of collateral or other assets held by the counterparty. The value of commodities investments will generally be affected by overall market movements and factors specific to a particular industry or commodity, including weather, embargoes, tariffs, or health, political, international and regulatory developments. As interest rates rise, the value of certain income investments is likely to decline. Because the Fund may invest significantly in a particular geographic region or country, value of Fund shares may fluctuate more than a fund with less exposure to such areas. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.

No attribution information is available.

Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding. Fund primarily invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund and may also invest directly. References to investments are to the aggregate holdings of the Fund and the Portfolio.

About Risk 

The value of foreign currencies as measured in U.S. dollars will fluctuate and may be unpredictably affected by changes in foreign currency rates and exchange control regulations, application of foreign tax laws, governmental administration of economic or monetary policies, intervention by U.S. or foreign governments or central banks, and relations between nations. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. In emerging or frontier countries, these risks may be more significant. An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non–payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Derivatives instruments can be used to take both long and short positions, be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk. If a counterparty is unable to honor its commitments, the value of Fund shares may decline and/or the Fund could experience delays in the return of collateral or other assets held by the counterparty. The value of commodities investments will generally be affected by overall market movements and factors specific to a particular industry or commodity, including weather, embargoes, tariffs, or health, political, international and regulatory developments. As interest rates rise, the value of certain income investments is likely to decline. Because the Fund may invest significantly in a particular geographic region or country, value of Fund shares may fluctuate more than a fund with less exposure to such areas. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.