Global Macro Absolute Return Fund (A)

A Word On The Markets  as of Mar 31, 2012

Stronger-than-forecasted economic figures in the United States drove a rally in U.S. equity and high-yield debt markets. GDP growth that exceeded expectations coupled with improving employment statistics pushed yields higher on longer-dated U.S. Treasury bonds. Further pushing longer-dated yields higher was an indication from the Federal Reserve that additional quantitative easing (QE) may not be needed to stimulate the U.S. economy.

Unprecedented long-term refinancing operation measures used by the European Central Bank (ECB) to inject liquidity into the European banking systems helped bring a semblance of calm to the eurozone sovereign debt crisis. With over a trillion euros injected into the market, the euro depreciated against most Central and Eastern European countries. Greece was able to engineer the largest sovereign debt swap ever by enforcing retroactively inserted collective action clauses into its Greek law bonds. Yields on long-term Spanish debt rose as the recently elected administration announced that the country would sharply miss its budget deficit target.

The Bank of Japan continued its asset buying program and announced an explicit consumer price inflation target of one percent. The yen depreciated versus the U.S. dollar in response. Most Latin American and Asian currencies appreciated versus the dollar during the period, as the liquidity measures from developed world central banks helped assuage fears of another sharp decline in global economic growth.

The Middle East and North Africa continued to be a source of event risk, as sanctions were levied against Iran, Syria headed toward outright civil war and the Mali government was overthrown via coup.

Performance Summary 

For the quarter ended March 31, 2012, Global Macro Absolute Return Fund outperformed its benchmark, the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index².

• Most of the Fund's long positions in emerging-market short-duration local sovereign bills or currency forwards appreciated versus the dollar. Fueled by expectations of improving global growth from the liquidity injected by the ECB, Asian and Latin American currencies gained, as the markets favored long risk positions. The gains from these positions were offset by losses on short external credit positions in the regions.
• The Fund's long external credit positions in Latin America and Central and Eastern Europe appreciated during the quarter. Markets favored external credit issued by sovereigns with strong fundamentals and favorable political developments. The gains on these positions were dampened by losses on the Fund's short eurozone sovereign credit investments.
• The Fund's investments in smaller, more idiosyncratic or specific, countries fared well. Long currency positions via sovereign local bills in Nigeria and the Republic of Georgia contributed positively to performance.

Contributors 

Contributors to performance during the first quarter:

• The Indian rupee and Malaysian ringgit appreciated versus both the dollar and the euro during the period, which benefited the Fund's long positions.
• The Fund's long investment in Hungarian external debt posted gains during the period.
• Poland's zloty appreciated versus the euro during the period and contributed to Fund performance.
• The Fund's long Venezuelan external debt investment gained during the quarter, as the political opposition coalesced behind a strong candidate to challenge President Chavez in the upcoming election.
• The Fund's relative value position short gold and long platinum appreciated during the quarter.

Detractors 

Detractors to performance during the first quarter:

• The Fund's short Taiwan dollar position declined during the period, as most Asian currencies appreciated against the dollar.
• The Fund's position short French credit versus long German credit detracted from performance as the spread between the bonds narrowed.
• External credit spreads in Brazil narrowed during the period, which led to losses on the Fund's short external credit position.

Investment Outlook And Fund Positioning 

Management believes that the economic recovery in the United States is following a pattern historically reflective of emergence from a financial recession. While growth has improved and unemployment has retreated, the country's fiscal balance sheet continues to deteriorate.

We believe that markets will continue to focus on developments in Europe, especially as it relates to Spain's ability to fight economic contraction, budget deterioration and sovereign debt cost escalation. Political risks remain high in the eurozone during the coming quarters as countries hold elections and attempt to push through highly unpopular austerity measures. Further, while European financials have benefited from recent liquidity injections, they remain the largest funding source for some of the weaker countries within the eurozone.

We feel that there are opportunities to invest in Asia, Latin America, and Central and Eastern Europe as well as Africa and the Middle East. Many of these countries benefit 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.

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 Portfolio's holdings. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

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. As interest rates rise, the value of certain income investments is likely to decline. 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. Because the Fund investments may be concentrated in a particular geographic region or country, the Fund share value may fluctuate more than that of a less concentrated fund. 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.

Attribution available in Fund Literature tab.

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 Portfolio's holdings. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

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. As interest rates rise, the value of certain income investments is likely to decline. 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. Because the Fund investments may be concentrated in a particular geographic region or country, the Fund share value may fluctuate more than that of a less concentrated fund. 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.