Small-Cap Value Fund (I)

A Word On The Markets  as of Mar 31, 2012

Investor confidence snapped back in the first quarter of 2012 as equity markets staged a powerful rally. After the extreme volatility of 2011, U.S. and global stocks began climbing in early January and continued their rapid ascent nearly uninterrupted before cooling slightly in late March. Several key market indices reached post-financial crisis highs during the quarter.

Among upbeat economic indicators, falling unemployment in the U.S. helped drive stocks higher, and even the long-depressed housing market showed signs of improvement. The Federal Reserve's renewed commitment to keeping interest rates low for the foreseeable future provided an additional tailwind. Concerns about political gridlock in Washington and the upcoming elections appeared to have little negative impact on the world markets for the time being. Encouraging steps toward resolving Europe's debt crisis boosted international markets and helped sustain U.S. stock gains. Cautionary influences on world markets included ongoing worries about China's slowing economy and elevated oil prices fueled by geopolitical tensions in the Middle East.

The breadth of the market rally across geographies and market segments was reflected in the returns delivered by the major U.S. and overseas indexes. The MSCI EAFE Index¹¹ rose 10.86% during the quarter, while the MSCI Emerging Markets Index¹² gained 14.08%. In the U.S., the S&P 500 Index¹³ surged 12.59%, while the Dow Jones Industrial Average¹⁴ advanced 8.84%. Large-cap stocks narrowly outperformed their small-cap counterparts, with the Russell 1000 Index¹⁵ jumping 12.90% versus 12.44% for the Russell 2000 Index¹⁶. Across market capitalizations, growth stocks outperformed value stocks.

Performance Summary 

Eaton Vance Small-Cap Value Fund A share trailed its benchmark in the first quarter of 2012, gaining 7.37% at net asset value versus 11.59% for the Russell 2000 Value Index³.

• Within the small-cap space, growth outperformed value as the Russell 2000 Growth Index¹⁷ rose 13.28% compared to a gain of 11.59% for the Russell 2000 Value Index³.
• The overall strength in the equity markets was evident in the breadth of small-cap performance. 8 out of 10 sectors in the Russell 2000 Value Index³ posted a double-digit gain.
• During the quarter, the small-cap market was led by lower-quality stocks with smaller market capitalizations, lower returns on equity and higher betas. This put our strategy at a disadvantage due to our emphasis on what we believe to be higher-quality names with strong fundamental prospects.

Contributors 

Contributors to performance during the first quarter:

• The Fund's underweight in the utilities sector and its overweight in materials both contributed positively to performance relative to the benchmark.
• Stock selection in the energy sector also helped lift relative performance.
• In terms of individual stocks, two notable contributors to Fund performance were Protective Life Corporation and Aeropostale.

Detractors 

Detractors to performance during the first quarter:

• While sector allocations generally had a neutral effect on the Fund, stock selection overall hurt relative performance.
• Stocks in industrials, information technology, and materials sectors detracted from performance.
• Among individual stocks, one notable performance detractor was JDA Software Group.

Investment Outlook And Fund Positioning 

The strength of the first-quarter equity market rally suggests that the worst effects of recent global financial crises may be behind us. The upswing confirms our belief that investors have finally begun to focus more on healthy economic and corporate fundamentals than on the macro risks that have dominated headlines for so long. Better employment and other data have raised hopes that U.S. economic growth may continue to accelerate, potentially giving investor sentiment an added boost. However, investors should not be surprised if equity markets turn volatile again or pull back in the months ahead, particularly following the strong run-up we have just experienced. Much will depend on the pace of the U.S. recovery, the extent of China's economic slowdown, the global impact of high energy prices, political developments, and whether further progress is made in Europe.

At quarter-end we remain fully invested and feel that our continued emphasis on quality can help manage risk, while our focus on fundamentally strong companies may offer the potential for upside gains over the long term.

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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry, including REITs. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry, including REITs. 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.