Emerging Markets Local 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 curve¹³ 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 Emerging Markets Local Income Fund (the Fund) outperformed its benchmark, the J.P. Morgan GBI-EM Global Diversified Index (the Index)² at net asset value during the quarter.

• In Asia, local sovereign yield curves fell in Indonesia and the Philippines but remained essentially unchanged in Malaysia and Thailand. The Fund’s benchmark country overweight in the Philippine peso contributed positively to performance. An off-benchmark currency position in the South Korean won detracted, as did an overweight benchmark position in the Malaysian ringgit.
• In Latin America, local sovereign yield curves were lower in Mexico, Brazil and Columbia. The Fund’s overweight benchmark position in the Mexican peso contributed positively to performance. An underweight position in the Brazilian real and an overweight benchmark position in the Peruvian new sol detracted.
• In Central and Eastern Europe, yield curves fell in Poland and Russia, the yield curve in Hungary steepened and the yield curve in Turkey flattened. The Fund’s benchmark country overweight in the Turkish new lira benefited performance, as did an underweight position in the Hungarian forint.
• In Africa, the Fund’s benchmark country overweight in the Nigerian naira helped performance. An underweight in South Africa was a relative contributor, as the currency depreciated.

Contributors 

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

• In Nigeria, strong economic growth led by the oil sector attracted foreign investors to the country’s locally denominated bonds. This drove interest rates lower and the naira higher, benefiting the Fund’s local credit investments.
• An overweight position in the Mexican peso was helpful. The currency appreciated versus the dollar as Mexico’s new government asserted its political independence, and the recently elected president proposed several economic reforms.
• An underweight in the South African rand had a positive impact amid weak economic data and continued wildcat strikes.
• An underweight in the Hungarian forint was favorable. The currency depreciated on worries that, under new leadership, the central bank might lose its independence and become a political arm of the government.

Detractors 

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

• An overweight position in the Malaysian ringgit dragged on returns. Uncertainty about the country’s upcoming national election fueled concerns that the ruling coalition might lose power, ending more than 50 years of uninterrupted leadership.
• An overweight in the Peruvian new sol hurt results. The central bank intervened to weaken the currency, and threats from mining companies to leave Peru exacerbated the decline.
• An off-benchmark position in Argentina detracted early in the quarter (the remaining position was exited during February). Ongoing legal proceedings surrounding U.S. dollar-denominated bonds caused prices to decline and spreads to widen.

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 

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. A non-diversified fund may be subject to greater risk by investing in a smaller number of investments than a diversified fund. 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 

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. A non-diversified fund may be subject to greater risk by investing in a smaller number of investments than a diversified fund. 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.