Small-Cap Fund (A)

A Word On The Markets  as of Dec 31, 2011

Political irresolution characterized most of the developed world during the fourth quarter of 2011, creating an atmosphere of uncertainty that subjected global equity markets to dramatic volatility. In the U.S., the congressional Super Committee failed to identify $1.2 trillion in federal spending cuts in November. Then, in December, Congress waffled once more and failed to approve until the twelfth hour a two-month extension of unemployment benefits and the payroll-tax holiday. In Europe, EU officials were unable to convince the markets that they had a viable plan to stem the region?s sovereign debt crisis. In spite of this, the U.S. economy displayed signs of economic growth in the fourth quarter, spurred largely by lower energy prices. Looking globally, manufacturing data showed expansion, including in China, where there have been concerns about slowing.

Performance Summary 

Eaton Vance Small-Cap Fund (the Fund) underperformed its benchmark, the Russell 2000 Index², for the quarter ended December 31, 2011 with a return of 13.87% at NAV.

• Stock selection was the main detractor from relative performance to the index, while sector allocation also had a negative impact.

Contributors 

Stock selection in certain sectors benefited the Fund's performance relative to the benchmark.

• Selections in the health care and energy and consumer staples contributed to relative performance.
• Within the energy sector, the Fund benefited from owning an exploration and production company that was acquired during the quarter.
• The Fund's overweight position in the energy sector benefited relative performance.

Detractors 

Selections in the financials sector were among the main detractors from relative performance to the index.

• Relative performance was adversely affected by a pharmacy benefit management company that lowered guidance for 2012.
• The Fund's results were also hurt by an investment in a gaming company that is seeing product demand pushed further into the future.

Investment Outlook And Fund Positioning 

We see no reason to materially change our outlook for the U.S. economy for 2012. We anticipate a slower-than-normal economic recovery, with intermittent zero or negative growth in gross domestic product (GDP) a possibility. With consumption likely to be impeded by high unemployment, investment by a depressed housing market and government spending by austerity measures, an economic slowdown would not appear difficult to provoke.

Until the elections in November, we believe that congressional gridlock is likely, with pre-election posturing virtually guaranteeing continued volatility. We are hopeful that the 2012 elections will provide clarity and a mandate to address the obstacles to economic growth; for example, the growing regulatory burden, ballooning fiscal deficit and entitlement reform. We believe leadership on these issues would increase confidence and put economic recovery on a more sustainable path. If the crises are successfully averted, we believe fundamentals may take center stage again and that the quiet strength of U.S. equities could be rewarded. With the difficulties of the world so apparent, we believe opportunities for equity investors in 2012 could be more plentiful. We believe equity valuations on the whole appear cheap and while small-cap stocks, as a group, may not look particularly inexpensive relative to large caps, they do look attractive on an historic basis. We may very well see a rebound in mergers and acquisitions activity in the coming year.

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.

Fund invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. 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. 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.

Fund invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. 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. 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.