Parametric Tax-Managed Emerging Markets Fund (Institutional)¹

A Word On The Markets  as of Mar 31, 2013

After posting strong returns in 2012, the emerging markets experienced moderate declines in the first quarter of 2013, with the MSCI Emerging Markets Index (the Index)³ down -1.62%. This decline was broad-based, as the majority of countries in the Index posted negative returns.

Many factors played into the decline, including signs of slowing growth in the Chinese economy; a fall in commodity prices, impacting the stocks of commodity producers; the banking crisis in Cyprus; and a general trend toward dollar-based assets, as the U.S. stock market reflected growing optimism regarding the growth prospects of the world’s largest economy. Egypt was a notable underperformer, due to concerns about the strength of the Egyptian pound. In addition, Poland and the Czech Republic were negatively impacted by the continued economic troubles in the eurozone.

In contrast, frontier-market countries generally saw moderate gains during the first quarter. The top-performing frontier markets were Ghana, Kenya and Zimbabwe, each up more than 25% for the three-month period. This past quarter stood in sharp contrast to the performance trend in 2012, when frontier-market countries generally lagged the emerging markets.

Performance Summary 

Parametric Tax-Managed Emerging Markets Fund (the Fund) outperformed its benchmark, the MSCI Emerging Markets Index (the Index), for the quarter ended March 31, 2013, returning 0.33% for Institutional Class at net asset value versus the Index’s -1.62%.return.

• The Fund’s emphasis on diversification via a system of target country weights and systematic rebalancing back to these target weights drove most of the outperformance relative to the index. These diversification targets have the Fund underweight large countries and overweight small countries. During the quarter, many countries with larger Index representation (e.g., China and Korea) underperformed the Index, while countries with smaller Index representation outperformed.
• In addition, the continued volatility of country returns during the quarter played positively to the Fund’s rebalancing process, in that the Fund systematically bought into price weakness and sold into strength.

Contributors 

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

• The Fund’s underweight to China, which underperformed the Index, contributed to relative performance during the quarter.
• The Fund’s overweight to the United Arab Emirates, which outperformed the Index, also contributed to relative performance.
• The Fund’s overweight to Thailand, which outperformed the Index, further boosted relative performance.

Detractors 

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

• The Fund’s overweight to Poland, which underperformed the Index, detracted from relative performance during the quarter.
• The Fund’s overweight to the Czech Republic, which underperformed the Index, also detracted from relative performance.
• The Fund’s overweight to Kazakhstan, which underperformed the Index, was another drag on relative performance.

Investment Outlook And Fund Positioning 

Given the recent downturn in the equity markets of Brazil and China, many commentators believe the tide has turned, with the developed world now offering better growth prospects for equity investors. Others believe the economies of the emerging world have persistent demographic and economic advantages over the developed world, and that investors ignore these advantages at their own peril. Regardless of the near-term trend, many point to the growth of the emerging economies as a permanent feature of the global economy. While the emerging markets may continue to demonstrate remarkable volatility, they may do so against a backdrop of generally increasing economic fortunes.

How does one invest in this space with so much current noise and uncertainty? We believe managing risk by broadly diversifying, avoiding concentrations, treating recent volatility as an asset and systematic rebalancing are all key aspects that can help inform thoughtful investment decisions. Parametric’s emerging-market investment strategy relies on a rules-based approach, in combination with a rebalancing discipline, to reduce concentrations, while emphasizing broad diversification¹⁰ in seeking its objective of long-term, after-tax returns.

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 

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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation. 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.