Parametric Structured Emerging Markets Fund (A)

A Word On The Markets  as of Dec 31, 2011

Global investors learned the hard way in 2011 that the strong long-term growth story for emerging markets does not necessarily produce strong returns in the short term. For example, after seeing a noticeable rise in performance for the month of October, the emerging markets lost momentum in November and December. October's returns were sufficiently large to cover the losses in the following two months, resulting in an overall gain for the fourth quarter of 2011. All told, emerging markets were up 4.4% during the fourth quarter, as measured by the MSCI Emerging Markets Index² (the Index). Frontier markets, with their exposure to the Middle East, posted a loss of -1.9% for the quarter, as measured by the MSCI Frontier Markets Index⁸. For the calendar year, index returns for emerging and frontier markets were down -18.4% and -18.7%, respectively.

Although the emerging markets as a whole ended the period with a gain, it is apparent that global investor confidence relating to the crisis in the eurozone remains shaky at best. As far away as Japan, the Bank of Japan's key tankan survey for the quarter showed a sharper-than-expected deterioration in business sentiment of larger manufacturers due to Europe's debt woes, a stronger yen and floods in Thailand.

Meanwhile, from an investor return standpoint, it was a mixed bag among emerging markets, especially among the BRICs⁹, for the quarter, according to the MSCI Emerging Markets Index. Brazil, for example, posted an 8.80% investment gain, as it reduced policy interest rates for the third consecutive time with the hope of offsetting any contagion effects from Europe's debt crisis. In China, the effects of tighter bank lending and higher interest rates were able to counteract slowing export growth and led to a positive investment return of 8.10% for the quarter. However, India, battling inflationary problems as well as the effects of its recent exchange rate volatility, produced investment returns that weren't quite so pleasant-its quarter ended with a -14.25% loss. In the smaller emerging markets, the eastern European countries seemingly suffered directly from the eurozone crisis, while the Middle Eastern emerging markets showed the lingering effects of the "Arab Spring¹⁰" on investor returns.

Performance Summary 

The Fund returned 2.4% in the fourth quarter although it underperformed the Index's return of 4.4%. Of the countries in the strategy, Peru, Thailand and Malaysia all ended with positive double-digit country returns.

Contributors 

Contributors to the Fund's relative performance to the benchmark were the Fund's:

• Structural overweight to Thailand, which outperformed the benchmark's return for this country of 11.47%.
• Structural underweight to Taiwan, which underperformed the benchmark's return for this country of -0.38%.
• Structural underweight to India, which underperformed the benchmark's return for this country of -14.25%.

Detractors 

Detractors from the Fund's relative performance to the benchmark were the Fund's:

• Structural underweight to China, which outperformed the benchmark's return for this country of 8.10%
• Structural overweight to Turkey, which underperformed the benchmark's return for this country of -15.72%.
• Structural underweight to Brazil, which outperformed the benchmark's return for this country of 8.80%.

Investment Outlook And Fund Positioning 

In their outlooks for the year ahead, market commentators demonstrate a wide range of opinions, with some fearing a global slowdown from a recession in Europe and others, a pullback in China's growth. Still others believe the new levels of volatility seen in 2011 may, in fact, be the new norm. Many of these unknowns could come to a head in 2012, and emerging-market investors may exhibit heightened sensitivity to any news, both good and bad.

How does one invest in this space with so much current noise and uncertainty? We believe managing risk by broad diversification¹¹, avoiding concentration, treating this current volatility as an asset and rebalancing intelligently are all key aspects that help address thoughtful investment decisions. Parametric's emerging-market investment strategy relies on a rules-based approach, in combination with a rebalancing discipline, while emphasizing broad diversification in seeking its objective of long-term capital appreciation.

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. Diversification cannot assure a profit or eliminate the risk of loss.

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. In emerging countries, these risks may be more significant. 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.

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. In emerging countries, these risks may be more significant. 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.