Parametric Currency Fund (Investor)¹ Share
Class

Investor

• Institutional
• Investor

A Word On The Markets  as of Mar 31, 2013

Currency markets, as measured by the Barclays Capital Global ex-USD Benchmark Currency (Trade-Weighted) Index (the Index),⁴ fell in the first quarter, ending down -0.94% for the quarter. The Index is inherently short the U.S. dollar, so it declines as the dollar strengthens versus other global currencies. As such, this decline in the Index reflects a broad-based strengthening of the dollar.

This strengthening was based upon a growing sense of optimism about the health of the U.S. economy, coupled with concerns about the growth prospects in the eurozone, Great Britain and several prominent emerging-market countries. In addition, the explicit policy of the Japanese government intended to weaken its currency was successful in dramatically lowering the value of the Japanese yen versus the U.S. dollar.

However, several well-known currencies appreciated versus the dollar. For example, the Mexican peso rallied due to Mexico’s proximity to an improving United States economy. This has made it one of the few emerging-market currencies to be popular with investors over the quarter. Separately, the Israeli shekel has strengthened so much on the back of a natural gas boom that the government is now poised to weaken the shekel’s value.

Performance Summary 

Parametric Currency Fund (the Fund) underperformed the Index at net asset value during the quarter. The Fund primarily relies on two actions in pursuing its investment objective: broad diversification¹¹ of currency exposures and rebalancing.

• The Fund’s diversification decision had the most impact on returns during the quarter, with large detractors including the Fund’s large underweight to the Chinese yuan. The Chinese yuan is closely tied to the value of the U.S. dollar via a range-bound exchange rate mechanism. Because of this, during times of broad dollar strengthening, the Fund’s underweight to the yuan will detract from performance.
• The Fund’s inclusion of non-Index currencies (primarily from the emerging markets) also generally detracted from performance.
• The Fund’s emphasis on rebalancing back to target weights was mildly positive to performance, due to the lack of strong reversion across most of the currencies in the Fund. Reversion describes the situation where recent relative performers become relative underperformers and vice versa. Rebalancing requires that one sell a portion of outperforming assets, and is beneficial during times of reversion.

Contributors 

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

• A large underweight to the euro was the largest contribution to relative performance, due to decreasing optimism about the eurozone’s economy, as a result of the banking crisis in Cyprus.
• An underweight to the Japanese yen also contributed to the Fund’s performance, due to the yen’s rapid depreciation following currency market interventions and asset purchase programs by the Bank of Japan.
• Finally, an underweight to the Canadian dollar also helped the Fund’s performance, as it depreciated versus the U.S. dollar over the quarter.

Detractors 

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

• The largest detractor to the Fund’s performance versus the Index was an underweight to the Mexican peso, as this currency was viewed more positively over the quarter. This was due to the continued economic strength of Mexico, and its perceived ties to the recovery in the United States.
• An overweight to the South African rand was also detrimental to the Fund’s relative performance, as the currency suffered sharp losses in the first quarter after the announcement of a wider-than-expected current account deficit.
• Non-Index positions in the Hungarian forint and Czech koruna also detracted from performance relative to the Index.

Investment Outlook And Fund Positioning 

Commentators continue to demonstrate a wide range of opinions on the long-term strength of the U.S. dollar, with some stating that it will maintain its perceived safe-haven status, while others argue that growing fiscal and monetary pressures will ultimately undercut its value. Regardless of the near-term forecast, however, we observe many investors have a concentration in U.S. dollar-denominated assets who may benefit from strategies designed to guard against possible U.S. dollar depreciation.

How does one invest in currencies, with so much volatility and pricing uncertainty? We manage risk through broad diversification, avoiding concentrations, treating this asset class’s volatility as an asset and by rebalancing—all key factors to consider when making investment decisions. Parametric’s currency investment strategy relies on a rules based approach, in combination with a rebalancing discipline to avoid concentration, and is aimed to protect against depreciation of the U.S. dollar relative to other currencies.

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.

About Risk 

The value of foreign currencies as measured in U.S. dollars will fluctuate and may be unpredictably affected by changes in foreign currency rates and exchange control regulations, application of foreign tax laws, governmental administration of economic or monetary policies, intervention by U.S. or foreign governments or central banks, and relations between nations. 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. While certain U.S. government-sponsored agencies may be chartered or sponsored by acts of Congress, their securities are neither issued nor guaranteed by the U.S. Treasury. 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.

About Risk 

The value of foreign currencies as measured in U.S. dollars will fluctuate and may be unpredictably affected by changes in foreign currency rates and exchange control regulations, application of foreign tax laws, governmental administration of economic or monetary policies, intervention by U.S. or foreign governments or central banks, and relations between nations. 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. While certain U.S. government-sponsored agencies may be chartered or sponsored by acts of Congress, their securities are neither issued nor guaranteed by the U.S. Treasury. 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.