Parametric Structured Emerging Markets Fund (I)

A Word On The Markets  as of Mar 31, 2012

As 2012 began, global investors had reasonable concerns that the frequency of significant events that occurred during much of 2011—volatile trading sessions, the impact of the eurozone crisis on neighboring nations and the "Arab Spring" revolutions, to name a few—would continue to affect global markets as a whole. While their trepidations appear to have eased slightly due to an encouraging first quarter of 2012, investors may still be wary of potential surprises, as the bruises received during 2011 are still relatively fresh.

Even as some investors remain on edge regarding global markets, there may be growing hopes that emerging markets—which helped the global economy bounce back from the 2008 financial crisis—could again be the hand that lifts investor sentiment. Suffice it to say, 2012 is off to a great start—emerging markets (as measured by the MSCI Emerging Markets Index (the Index))² advanced 14.08% during the first quarter. Frontier markets (as measured by the MSCI Frontier Markets Index) lagged their emerging-market counterparts but still had a solid quarter, posting a 5.5% gain.

A number of individual emerging market countries performed well during the first quarter. India, for example, was up 20.1% amid continued rapid growth due to strong export demand. In Brazil, a strong gain of 13.8% can be attributed to both commodity exports and increased domestic demand. Among smaller emerging markets, Eastern European countries have weathered various reform proposals in the eurozone. Turning to the Middle East, oil markets approached three-year highs during the quarter, directly benefiting Egypt and propelled its equity market to a return of over 40%.

One caveat to the encouraging news across emerging markets was the recent slowdown in China. While still gaining 9.9% for the quarter, China's market lost nearly 500 basis points in the last two weeks of March and ended up as the worst performer among the BRIC countries (Brazil, Russia, India and China). There are increasing concerns that China's economy, while still growing at a brisk pace, may cool off more quickly than hoped. Key companies in important sectors of China's economy reported disappointing earnings toward the end of the quarter, which spooked global investors.

Performance Summary 

The Fund's A shares returned 14.92% in the first quarter, thereby outperforming the Index's return of 14.08% at net asset value, during the quarter. Of the countries in the Fund, 11 countries posted positive returns of at least 20%.

Contributors 

Contributing to the Fund's performance relative to the benchmark was the Fund's:

• Underweight to China, which underperformed the benchmark's return for this country of 9.92%
• Overweight to Egypt, which outperformed the benchmark's return for this country of 41.05%
• Overweight to Turkey, which outperformed the benchmark's return for this country of 27.08%
• Overweight to Mexico, which outperformed the benchmark's return for this country of15.58%

Detractors 

Detracting from the Fund's performance relative to the benchmark was the Fund's:

• Exposure to Kuwait, which returned 1.63%
• Exposure to Qatar, which returned 3.93%
• Exposure to Morocco, which returned 4.04%

Investment Outlook And Fund Positioning 

In their outlooks for the next quarter, market commentators demonstrate a wide range of opinions, with some fearing that emerging markets may not be able to continue with the positive run seen during the first quarter. Potential complications, such as strong currencies, inflation and deficits are causes for apprehension for some observers. Still, others believe that emerging markets will weather these obstacles and continue providing a boost to the global economy.

How does one invest in this space with so much current noise and uncertainty? We believe managing risk by broad diversification⁴, 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, to reduce concentration, 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.

Selection Effect 

Measures portfolio's excess return from selecting individual stocks within each 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.