High Income Opportunities Fund (A) Share
Class

A

• A
• B
• C
• I

A Word On The Markets  as of Mar 31, 2013

High-yield bonds started 2013 not just by continuing last year’s trend of strong performance, but also with an impressive display of resilience. First-quarter macroeconomic events that just a few years ago might have disrupted the markets, like the U.S. fiscal sequestration and the troubles in the eurozone over Cyprus, were largely shrugged off. High-yield bonds returned 2.89% during the quarter, the highest among fixed-income sectors, based on the BofA/Merrill Lynch High Yield Index (the Index).¹

The yield-to-worst⁸ on the Index fell in the first quarter by 37 basis points (bps) to 5.71%—another record low in yields, which have fallen steadily by 105 bps since August 2012. The Index spread over U.S. Treasurys continued to shrink, as it has since the middle of 2012, notching another 45 bps tighter to 486 bps. But given the extremely low yields on U.S. Treasurys, that spread is still just 72 bps below its 20-year average of 558 bps, and some distance from its record tight of 246 bps in May 2007.

These results were driven by generally favorable U.S. economic developments and the Federal Reserve’s (the Fed) continued accommodative policies. Modest improvements in indicators such as housing, consumer spending, manufacturing and labor pointed to a firming recovery, albeit one that is relatively weak by historical standards. The impact of the sequestration may emerge more fully over the coming months.

Performance Summary 

Eaton Vance High Income Opportunities Fund (the Fund) outperformed its benchmark, the BofA/Merrill Lynch U.S. High Yield Index (the Index),¹ at net asset value during the first quarter.

• As was the case last year, the generally positive macroeconomic environment led investors to embrace risk, as CCC-rated bonds within the Index comprised the best-performing credit sector with a 5.39% return. The worst -performing credit sector, BB-rated bonds, returned 1.91%.
• All 37 industries in the Index had positive returns for the quarter, led by the food & drug retail sector (+9.92%). The weakest sector, cable and satellite TV, had a total return of 1.12%

Contributors 

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

• Credit selection was again the main driver of overall returns. This was most notable in the services, gaming and telecommunication sectors.
• An underweight position in utilities helped overall relative returns, as that sector was the second worst -performing sector in the Index.
• Bonds rated CCC and below had the highest return among ratings classes for the Fund during the quarter. This was due to strong credit selection within the CCC segment of the market as well as the overall strength of CCC-rated bonds in the quarter.
• The Fund’s equity holdings were among the highest-performing positions for the quarter.

Detractors 

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

• Holdings in diversified financial services and banks & thrifts, as well as underweight positions in steel and food & drug retail, detracted from overall performance relative to the Index.
• Also detracting from performance were BB-rated holdings as well as holdings in the two- to five-year duration⁹ range.

Investment Outlook And Fund Positioning 

We anticipate that the supportive environment for high yield will continue. We believe the Fed is unlikely to change its accommodative stance as long as the economy has low growth without inflationary pressures. With record-high corporate cash levels in a strengthening economy, default levels are near record lows—that is why we see credit risk as preferable to interest-rate risk, which poses significant downside. We believe B-rated bonds offer the best value, with less interest-rate sensitivity than BB-rated issues and lower default risk than CCC-rated bonds.

We are still mindful of risks in the global economy, whether from the U.S., Europe, China or elsewhere. We believe our approach of rigorous credit research and market factor analysis is especially appropriate for today’s markets.

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. Ratings are based on Moody’s, S&P or Fitch, as applicable. Ratings, which are subject to change, apply to the creditworthiness of the issuers of the underlying securities and not to the Fund or its shares. Credit ratings measure the quality of a bond based on the issuer’s creditworthiness, with ratings ranging from AAA, being the highest, to D, being the lowest based on S&P’s measures. Ratings of BBB or higher by Standard and Poor's or Fitch (Baa or higher by Moody's) are considered to be investment grade quality. Credit ratings are based largely on the rating agency's analysis at the time of rating. The rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition and does not necessarily reflect its assessment of the volatility of a security's market value or of the liquidity of an investment in the security. If securities are rated differently by the rating agencies, the higher rating is applied. Holdings designated as “Not Rated” are not rated by the national rating agencies stated above.

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. 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. 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. 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. 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. 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. 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. 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. 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.