Floating-Rate Advantage Fund (A) Share
Class

A

• A
• Advisers
• B
• C
• I

A Word On The Markets  as of Mar 31, 2013

The U.S. floating-rate loan market performed solidly during the first quarter, reflecting positive investor sentiment across the capital markets. Following a strong performance in 2012—during which loans earned a 9.66% return—momentum continued in the asset class, with the S&P/LSTA Leveraged Loan Index (the Index)³—a broad barometer for the loan market—advancing 2.11% for the three-month period ended March 31, 2013. Returns were comprised of nearly equal parts price appreciation and investment income, with loan values firming on healthy fundamental and technical conditions in the market. Loans finished the quarter on strong footing, with the Index returning 0.82% in March.

With fundamentals broadly in check and the default rate low, returns during the quarter were primarily driven by technical conditions, which remained favorable. Inflows into the asset class remained robust, with collateralized loan obligation (CLO) issuance and retail fund subscriptions outstripping the net supply of new loans issued, which expanded during the quarter though more modestly. With investors’ search for yield and growing appetite for risk, loans remained in focus due to their near-par valuations, zero-like duration and floating income stream. Still, with loans priced near par, strong demand continued to drive spread compression in the market throughout the quarter, lowering coupon income in a way not dissimilar to the reduced yields found in many other income market segments.

Performance Summary 

Eaton Vance Floating-Rate Advantage Fund (the Fund) outperformed the Index at net asset value during the first quarter.

• The predominant factors driving relative performance during the quarter were quality positioning, beneficial credit selection, non-U.S. loan exposure and investment leverage.
• Against a backdrop that continued to favor lower-quality loans, the Fund outperformed the Index despite its up-in-quality biased portfolio. For the quarter, BB-rated loans in the Index returned 1.39%, B-rated loans in the Index returned 2.42% and CCC-rated loans in the Index returned 5.21%. Across these ratings tiers, the Fund had overweight exposure to BB-rated loans and underweight exposure to B-rated and CCC-rated loans.¹⁴
• While the Fund’s quality positioning generally served as a headwind, off-benchmark exposure to non-U.S. loans—which outperformed the domestic market—employment of investment leverage and beneficial credit selection across the board provided enough contribution to relative results to drive positive relative results overall for the quarter.

Contributors 

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

• Exposure to non-U.S. loans—which outperformed the domestic loan market—contributed to relative returns. Non-U.S. loans are not included in the Index.
• Employment of investment leverage was a contributor to relative results, as leverage enhanced the performance of the Fund's loan portfolio. The Index is unlevered.
• Credit selection was broadly beneficial across the Fund's many sectors.
• Underweight exposure to utilities and drugs—which underperformed the broad market—contributed to performance relative to the Index.

Detractors 

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

• The Fund's overweight exposure to BB-rated loans and underweight exposure to B-rated and CCC-rated loans served as a headwind during the quarter, as lower-quality loans outperformed.
• Underweight exposure to radio & television (which outperformed the broad market) and overweight exposure to food products (which underperformed the broad market) detracted from performance relative to the Index.

Investment Outlook And Fund Positioning 

Looking ahead, performance should be characterized predominantly by the income component of returns. The vast majority of the loan market traded at, and even above, par values as the second quarter began to unfold. The average price for the overall market ended March at $98.17, although this metric is driven below par predominantly by CCC-rated loans, which had an average price of $83.5 at the end of March and comprise approximately 10% of the market. By comparison, BB-rated loans and B-rated loans ended the quarter at average prices of $100.8 and $100.2, respectively. As a result of these levels, “clip-the-coupon”-type total return expectations seem appropriate as a baseline.

We believe the environment for loans should remain benign in the near term, thanks to low credit risk and a positive technical bias. The default rate in the market ended March at 2.21% by principal amount. Looking at technicals, demand continues from all quarters, including funds, CLOs and institutional accounts. Should the positive technical condition in the market persist, lower coupon income for the loan investor may be in the offing. Still, given the low-yield environment, heightened bond risk and the dearth of fairly valued, low duration income alternatives, we believe loans should retain their relative attractiveness ahead.

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 invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings.

About Risk 

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. There can be no assurance that the liquidation of collateral securing an investment will satisfy the issuer's obligation in the event of nonpayment or that collateral can be readily liquidated. The ability to realize the benefits of any collateral may be delayed or limited. 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. Borrowing to increase investments (leverage) will exaggerate the effect of any increase or decrease in the value of Fund investments. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline. Bank loans are subject to prepayment 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. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged. 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 invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings.

About Risk 

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. There can be no assurance that the liquidation of collateral securing an investment will satisfy the issuer's obligation in the event of nonpayment or that collateral can be readily liquidated. The ability to realize the benefits of any collateral may be delayed or limited. 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. Borrowing to increase investments (leverage) will exaggerate the effect of any increase or decrease in the value of Fund investments. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline. Bank loans are subject to prepayment 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. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged. 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.