Large-Cap Growth Fund (A)

A Word On The Markets  as of Dec 31, 2011

Political irresolution characterized most of the developed world during the fourth quarter of 2011, creating an atmosphere of uncertainty that subjected global equity markets to dramatic volatility. In the U.S., the congressional Super Committee failed to identify $1.2 trillion in federal spending cuts in November. Then, in December, Congress waffled once more and failed to approve until the twelfth hour a two-month extension of unemployment benefits and the payroll-tax holiday. In Europe, EU officials were unable to convince the markets that they had a viable plan to stem the region's sovereign debt crisis. In spite of this, the U.S. economy displayed signs of economic growth in the fourth quarter, spurred largely by lower energy prices. Looking globally, manufacturing data showed expansion, including in China, where there have been concerns about slowing.

Despite extreme volatility during the fourth quarter, global equity markets generally posted solid positive returns. The MSCI EAFE Index¹⁰ rose 3.33%, while the broader-based MSCI All Country World Index¹¹ rose 7.18%. In the U.S., the S&P 500 Index¹² added 11.82% during the quarter to finish up 2.11% for the calendar year, while the blue chip Dow Jones Industrial Average¹³ jumped 12.78%, posting a return of 8.38% for the year. Small-cap stocks outperformed large-caps during the quarter, with the Russell 2000 Index¹⁴ gaining 15.47% compared to 11.84% for the large-cap Russell 1000 Index¹⁵. Across capitalizations, value stocks outperformed growth stocks.

Performance Summary 

In a difficult environment for fundamental managers, Eaton Vance Large Cap Growth Fund underperformed its benchmark, the Russell 1000 Growth Index², at net asset value during the fourth quarter, returning 8.56% compared to 10.61% for the benchmark.

• In a continuation of a trend that persisted throughout the year, stock selection proved challenging as volatility remained at heightened levels. Additionally, the market's preference for lower-quality and smaller-capitalization stocks resurfaced, posing a headwind to Fund's returns relative to the benchmark during the fourth quarter.
• The risk on environment that characterized the quarter generally resulted in cyclical groups outperforming defensive areas. The best sectors in the benchmark were the energy, industrials and materials sectors, while the weakest were utilities and health care.
• All 10 of the economic sectors included in the benchmark had positive returns for the quarter and, similarly, the Fund posted positive performance in each of the eight sectors in which it was invested. Both stock selection and sector allocation had a negative impact on relative returns during the quarter.

Contributors 

Stock selection in the materials and health care sectors made the most meaningful contributions to relative return comparisons during the quarter.

• Stock selection had the largest positive impact in health care, led by the Fund's investment in Intuitive Surgical, the leader in surgical robotics. Also adding value was a position in dialysis provider, Davita, and an underweight in diversified health care company, Baxter International.
• In materials, investments in agricultural biotechnology company, Monsanto and Ecolab, a leading provider of cleaning products and services, bolstered returns.
• Other meaningful contributors in the Fund included entertainment giant, Walt Disney, Internet and advertising leader, Google, and oil producer, Occidental Petroleum.

Detractors 

While the Fund generated positive returns in all sectors, relative weakness was primarily concentrated in the energy, consumer staples and industrials sectors. Stock selection in these sectors accounted for much of the shortfall relative to the benchmark.

• In energy, the Fund's exposure to natural gas and oil producer, Southwestern Energy, detracted, as did its underweight to oilfield services provider, Baker Hughes. An underweight to large benchmark constituent, Exxon Mobil, also held back returns, as the stock appreciated meaningfully in the fourth quarter.
• Lack of exposure to slower-growth tobacco giant, Phillip Morris, dampened returns in consumer staples. Positions in Dr Pepper Snapple Group and Mead Johnson Nutrition, which added value in the prior quarter, dragged on returns, as they did not appreciate at the same rate as peers in the market's rally.
• Elsewhere, Fund investments in chipmaker, Broadcom, and application software provider Oracle, disappointed, as investors reacted negatively to quarterly earnings announcements.

Investment Outlook And Fund Positioning 

The magnitude of recent market moves and its direction clearly remain closely tied to investor emotion. Wild swings persisted throughout 2011 and we believe they may continue to do so for some time. Investors will likely remain focused on the issues plaguing the eurozone, the likelihood of a soft landing in China and a slowdown in growth across many emerging markets. While we believe the capital markets remain vulnerable to potential shocks, we see no reason to materially change our outlook for the U.S. economy for 2012. We anticipate a slower-than-normal economic recovery, and though global economic and geopolitical risks remain, the U.S. appears to be on stronger footing than other developed markets. As such, we continue to emphasize U.S.-centric, large-capitalization, companies with above-average growth prospects and financial strength, which we believe present attractive valuation and growth opportunities in the uncertain global economic environment.

While we believe opportunities exist at the individual company level, all of the macro crosscurrents have led us to maintain a portfolio diversified¹⁶ between core, secular and cyclical growth opportunities. At quarter-end, relative to the benchmark, the Fund's largest overweight was in the information technology sector, while its largest underweight was in the materials sector.

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

About Risk 

Fund share values are sensitive to stock market volatility. 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. 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.

Additional Notes 

Source: Factset.

Attribution analysis shows the contribution of indicated factor exposures to a portfolio's relative total return versus a designated benchmark. Results are based on each day's ending holdings, and linked to generate attribution over longer periods. Portfolio returns do not reflect applicable expenses and trading costs, or variations in transaction prices from end of day values.

Allocation Effect 

Measures portfolio's excess return due to over or under-weighting a sector.

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

About Risk 

Fund share values are sensitive to stock market volatility. 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. 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.