Multi-Strategy Absolute Return Fund (A) Share
Class

A

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• I

A Word On The Markets  as of Mar 31, 2013

Equity markets in most developed countries advanced in the first quarter, including the S&P 500 Index,¹² which rose 10.61%. However, stock markets in many emerging countries declined. We attribute much of the uneven stock market performance to differing liquidity conditions around the world. Central banks in the United States and Japan—two top-performing markets—are pumping massive amounts of liquidity into their economies. However, in China, Brazil and India—markets that fell—the risk of inflation is limiting monetary authorities’ ability to provide stimulus.

In the fixed-income markets, the Barclays Capital U.S. Aggregate Index¹³ declined 0.12% and the Barclays Capital U.S. Government/Credit Index¹⁴ fell 0.16%. The yield curve steepened modestly, as optimism about the U.S. economy highlighted the reality that, sooner or later, the Federal Reserve (the Fed) would have to start unwinding its stimulus programs. The steepening in the yield curve more than offset the positive impact of narrowing credit spreads in the investment-grade sector of the corporate bond market. The Barclays U.S. Investment Grade Corporate Index was down 0.11%, modestly outperforming the 0.19% decline in the Barclays U.S. Treasury Index. However, positive spread compression prevailed in the high-yield sector, and the BofA Merrill Lynch U.S. High Yield Index¹⁵ gained 2.89%.

The U.S. economy grew at an annual rate of approximately 1.7% as measured by GDP in the second half of 2012. More recent data paint an unclear picture of whether or not the economy strengthened in the first quarter of 2013. The economic statistics have been muddled by the residual impact of Hurricane Sandy on construction and auto sales, the evolving impact on growth of payroll and income tax increases, and impending federal budget cuts due to sequestration.

Performance Summary 

Eaton Vance Multi Strategy Absolute Return Fund (the Fund) outperformed its benchmark, the BofA Merrill Lynch 3 Month U.S. Treasury Bill Index (the Index),² at net asset value, during the quarter.

• Allocations to absolute return strategies, in general, positively impacted Fund performance, as did exposure to strongly performing credit sectors such as floating-rate loans.
• Management continued to target the Fund’s volatility to be near the low end of its 2% to 6.5% range throughout the quarter. This conservative positioning detracted from results due to the strong appreciation in riskier assets.
• While duration¹⁶ in the portfolio was low throughout the quarter, management’s decision to maintain a positive duration was a slight drag on Fund performance, as interest rates rose modestly during the period. Portfolio duration was 1.22 years on March 31.

Contributors 

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

• Allocations to Global Macro Portfolio and Global Macro Absolute Return Advantage Portfolio positively impacted results. Around the world, returns in the currency and sovereign debt markets were mixed, and management’s decisions about which sovereign assets to own and which assets to short added value.
• Long positions in floating-rate loans benefited the Fund, as investors sought income and protection against rising interest rates in the low-yield environment.
• Exposure to Parametric Market Neutral Portfolio was helpful, led by the U.S. equity and emerging-market equity market neutral¹⁷ sleeves.

Detractors 

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

• The option absolute return strategy employed within MSAR Completion Portfolio hurt Fund performance. The U.S. stock market surged and volatility declined, creating an unfavorable environment for the strategy’s short call options.
• Hedging strategies employed within MSAR Completion Portfolio muted returns, which was not unexpected in the “risk-on” environment.¹⁸ For example, long positions in Treasury futures (which are used to manage duration) weighed on results amid rising interest rates.

Investment Outlook And Fund Positioning 

The U.S. economy has yet to experience the full effects of recent tax increases and government spending cuts. European economic data continues to be very weak, and it remains to be seen whether the inflationary policies of a newly elected government in Japan will spur real growth. As developed countries struggle, policymakers in emerging markets face the challenge of rebalancing their economies away from exports and toward domestic consumption.

Our global economic outlook has been cautious for some time. But while our macro views don’t change very often, valuations frequently do. Therefore, if risky asset classes such as high-yield bonds were to become more attractively valued, we might find opportunities to increase the Fund’s risk profile despite our cautious outlook. But for now, we believe the Fund is appropriately positioned.

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 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.

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. Fund share values are sensitive to stock market volatility. 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. Investing in an exchange traded fund (ETF) exposes the Fund to all of the risks of that ETF and, in general, subjects the Fund to a pro rata portion of the Fund's fees and expenses. Investing in exchange traded notes (ETNs) exposes the Fund to the performance of the issuer. The Fund's investments may lose their entire value if the issuer fails. 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.

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

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. Fund share values are sensitive to stock market volatility. 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. Investing in an exchange traded fund (ETF) exposes the Fund to all of the risks of that ETF and, in general, subjects the Fund to a pro rata portion of the Fund's fees and expenses. Investing in exchange traded notes (ETNs) exposes the Fund to the performance of the issuer. The Fund's investments may lose their entire value if the issuer fails. 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.