Multi-Strategy Absolute Return Fund (A)

A Word On The Markets  as of Mar 31, 2012

The world's equity markets climbed sharply higher in the first quarter, lifted by unusually accommodative monetary policy and signs of improvement in the U.S. economy. The MSCI Emerging Markets Index⁸ and MSCI World Index⁹ gained 14.08% and 11.56%, respectively. Among developed markets, the S&P 500 Index¹⁰ increased 12.59% and the MSCI EAFE Index¹¹ rose 10.86%.

In the United States, initial jobless claims fell to a four-year low, manufacturing activity continued to expand and auto sales surged. The Federal Reserve pledged to keep short-term interest rates near zero through at least late 2014. The Fed also continued with Operation Twist, the stimulus program it began last October to lower borrowing costs for consumers and businesses. Overseas, the European Central Bank offered its second round of low-interest, three-year loans to the region's banks to ease funding pressures.

While equities rallied, returns in the broad fixed-income markets were flat. The Barclays Capital U.S. Aggregate Index¹² gained 0.30% and the Barclays Capital U.S. Government/Credit Index¹³ rose 0.08%. Bond yields did not rise the way they normally do when investors get more optimistic about the economy. We think this was related to the Fed buying longer-term Treasury securities as part of Operation Twist. Amid rising risk appetites and demand for yield, the BofA Merrill Lynch U.S. High Yield Index¹⁴ gained 5.15%. The euro strengthened against the U.S. dollar and Japanese yen in what was a period of relative calm in Europe's debt crisis.

Performance Summary 

During the first quarter, Eaton Vance Multi Strategy Absolute Return Fund (MSAR) outperformed its benchmark, the BofA Merrill Lynch 3 Month U.S. Treasury Bill Index², at net asset value.

• Seven of eight portfolios in which the Fund invested exhibited positive returns.
• The Fund was positioned conservatively throughout the quarter. This muted performance since riskier assets generally outperformed defensive assets.
• The managers employ an absolute return approach. As a result, the Fund's investments in perceived higher-risk assets, such as equities and floating-rate loans, were primarily hedged during the quarter. So while most of the portfolios in which the Fund invested exhibited positive returns, the hedges employed within MSAR Completion Portfolio detracted from performance.

Contributors 

Factors positively impacting Fund performance during the quarter:

• Allocations to Global Macro Portfolio and Global Macro Absolute Return Advantage Portfolio made significant contributions to return, helped by long positions in emerging-market debt and emerging-market currencies.
• The "risk-on" environment benefited the commercial mortgage-backed securities (CMBS) within MSAR Completion Portfolio, as did stabilizing commercial real estate values.
• Allocations to Short-Term U.S. Government Portfolio and Government Obligations Portfolio also had a positive effect. These portfolios are heavily weighted in residential mortgage-backed securities (MBS), which performed well on optimism that the Fed might initiate another round of MBS purchases.

Detractors 

Factors negatively impacting Fund performance during the quarter:

• The managers' decision to modestly extend the Fund's duration by employing Treasury futures within MSAR Completion Portfolio was unfavorable given rising Treasury yields.
• The option absolute return strategy employed within MSAR Completion Portfolio also detracted, as volatility steadily declined from already-reduced levels at the beginning of the quarter.

Investment Outlook And Fund Positioning 

Europe's debt crisis is pushing the region into recession. And while recent U.S. economic data look encouraging on the surface, the influence of seasonal factors and extreme policy settings makes us question its sustainability. Consequently, our global economic outlook remains quite cautious, as it has been for some time.

Although our macro views do not change frequently, valuations do. So if valuations of risky assets were to become more attractive, we might find opportunities to increase the Fund's risk profile. But, for now, we think the Fund is appropriately positioned. The managers reduced the cash position during the quarter, adding to positions in a few portfolios. This had minimal impact on the Fund's targeted volatility, which management believes to be near the low end of its 2.0% to 6.5% range.

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 one or more affiliated investment companies (Portfolios) and may also invest directly. Unless otherwise noted, references to investments are to the aggregate holdings of the Fund and the Portfolios. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

About Risk 

While the Fund has a targeted annual performance volatility range, its actual, or realized, volatility for longer or shorter periods may be materially higher or lower than the target range depending on market conditions. 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 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. 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 effectiveness of the Fund's option strategy is dependent upon a general imbalance of natural buyers over natural sellers of index options. This imbalance could decrease or be eliminated, which could have an adverse effect on the Fund. 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. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. Securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. A portfolio with negative duration generally incurs a loss when interest rates and yields fall. As interest rates rise, the value of certain income investments is likely to decline. Short sales risk includes, among other things, the potential loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract, causing a loss to the fund. 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 one or more affiliated investment companies (Portfolios) and may also invest directly. Unless otherwise noted, references to investments are to the aggregate holdings of the Fund and the Portfolios. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

About Risk 

While the Fund has a targeted annual performance volatility range, its actual, or realized, volatility for longer or shorter periods may be materially higher or lower than the target range depending on market conditions. 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 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. 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 effectiveness of the Fund's option strategy is dependent upon a general imbalance of natural buyers over natural sellers of index options. This imbalance could decrease or be eliminated, which could have an adverse effect on the Fund. 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. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. Securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. A portfolio with negative duration generally incurs a loss when interest rates and yields fall. As interest rates rise, the value of certain income investments is likely to decline. Short sales risk includes, among other things, the potential loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract, causing a loss to the fund. 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.