Parametric Commodity Strategy Fund (Institutional)¹ Share
Class

Institutional

• Institutional
• Investor

A Word On The Markets  as of Mar 31, 2013

Commodity markets, as measured by the Dow Jones–UBS Commodity Index Total Return (the Index),),⁴ ended down -1.13% for the quarter. This decline masks a wide dispersion of sector returns, with precious metals, agriculture and industrial metals suffering steep drops, while the energy sector rallied strongly.

The energy sector’s rally was fueled by several factors. The improving health of the U.S. economy, as reflected by growing employment and higher equity markets, helped crude oil prices increase. This increase in crude oil prices was further reflected in higher gasoline prices in the first quarter. Similarly, a late onset of winter-like conditions in the Midwest and East Coast triggered a strong rally in natural gas prices.

Drops in other commodity sectors arose for a variety of reasons. Industrial metal prices dropped on worries about a slowing Chinese economy, accompanied by growing inventory levels for many metals. Grains dropped as it slowly became apparent that last year’s drought did not have as dire an impact on storage amounts as many investors had feared. Finally, the increasing expectation for U.S. interest rates to rise in the near future had a negative impact on precious metals. Typically, precious metals do better in lower interest-rate environments, as the interest foregone by holding gold or silver is minimal.

Performance Summary 

Parametric Commodity Strategy Fund (the Fund) underperformed the Index at net asset value during the quarter. The Fund primarily relies on three actions in pursuing its investment objectives: reweighting versus the Index, rebalancing and commodity curve positioning.¹⁰

• The Fund’s reweighting decision had the most impact on returns during the quarter, with the bulk of the underperformance arising from notable underweights to natural gas and WTI crude oil and overweights to lead.
• The Fund’s emphasis on rebalancing back to target weights mildly detracted from performance, due to a lack of strong reversion among the commodities in the Index. Reversion describes the situation where recent relative outperformers become relative underperformers and vice versa. Rebalancing requires one to sell a portion of the outperforming assets, and is beneficial during times of reversion.
• Curve positioning also mildly detracted from Fund performance over the quarter.

Contributors 

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

• An overweight to gasoline contributed to the Fund’s outperformance, as the increase in crude oil prices, accompanied by reduced refinery capacity, increased prices over the quarter.
• An underweight to Kansas City wheat also contributed, as prices dropped steadily over the course of the quarter. This is primarily a reflection of easing drought conditions in the U.S. Midwest, and signs of a successful wheat harvest in the Southern hemisphere.
• Finally, an underweight to gold also helped the Fund’s performance, as gold prices fell over the quarter.

Detractors 

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

• An underweight to natural gas in the Fund detracted from performance relative to the Index, as a colder-than-expected February and March increased natural gas demand for home heating purposes.
• An underweight to WTI crude oil was also a detractor, as an improving U.S. economy and a strong equity market led many investors to believe oil demand would soon pick up.
• Non-Index positions in the Fund, taken as a whole, harmed performance. This is primarily due to the large overweight to lead, which saw prices drop due to worries about China’s growth slowdown and the continuing struggles within the euro-based economies.

Investment Outlook And Fund Positioning 

Commentators continue to demonstrate a wide range of opinions on the commodity markets, with some stating commodity markets are poised for a rapid bull market, while others espouse the exact opposite. Regardless of the near-term forecast however, the secular trend of increasing demand for raw materials from the emerging economies is believed by many to a be a permanent feature in the global economy. While commodities may continue to demonstrate remarkable volatility, they may do so against a background of increasing prices.

How does one invest in this space with so much current uncertainty? We manage risk through broad diversification ,avoiding concentrations, treating this current volatility as an asset and by rebalancing—all key factors to consider when making investment decisions. Parametric’s commodity investment strategy relies on a rules-based approach, in combination with a rebalancing discipline to avoid concentration, and is aimed to seek total return.

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.

About Risk 

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. 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. Because the Fund investments may be concentrated in a particular sector, 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. 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.

About Risk 

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. 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. Because the Fund investments may be concentrated in a particular sector, 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. 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.