Tax-Managed Growth Fund 1.2 (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.

Despite extreme volatility during the fourth quarter, global equity markets generally posted solid positive returns. The MSCI EAFE Index¹¹ rose 3.33%, while the broader-based MSCI All Country World Index¹² rose 7.18%. In the U.S., the S&P 500 Index² added 11.82% during the quarter to finish up 2.11% for the calendar year, while the blue chip Dow Jones Industrial Average¹³ jumped 12.78%, posting a return of 8.38% for the year. Small-cap stocks outperformed large-caps during the quarter, with the Russell 2000 Index¹⁴ gaining 15.47% compared to 11.84% for the large-cap Russell 1000 Index¹⁵. Across capitalizations, value stocks outperformed growth stocks.

Performance Summary 

In a difficult environment for fundamental managers, Eaton Vance Tax-Managed Growth Fund trailed its benchmark, the S&P 500 Index, during the fourth quarter, returning 11.08% at net asset value compared to 11.82% for the benchmark.

• In a continuation of a trend that persisted throughout the year, stock selection proved challenging as volatility remained at heightened levels. Additionally, the market's preference for lower-quality and smaller-capitalization stocks resurfaced, posing a headwind to the Fund's returns relative to the benchmark.
• The risk on environment that characterized the quarter generally resulted in cyclical groups outperforming defensive areas. The best sectors in the benchmark were the energy, industrials and materials sectors while the weakest were telecommunication services and utilities.
• All 10 of the economic sectors included in the benchmark had positive returns for the quarter and, similarly, the Fund posted positive performance in each of the 10 sectors in which it was invested. Both stock selection and sector allocation had a negative impact on relative returns during the quarter.

Contributors 

Security selection in the consumer discretionary and health care sectors supported performance during the fourth quarter, while select sector underweighting decisions also added value.

• Meaningful contributors at the stock level included several investments in the consumer discretionary sector; in particular, entertainment giant, Walt Disney, online retailer, Amazon.com, major coffee retailer, Starbucks, and home improvement leader, Home Depot.
• Other positions that bolstered performance were farm equipment maker, Deere & Co., biotechnology firm, Amgen, and oil producer, Anadarko Petroleum.
• Underweights to the defensive-oriented utilities and telecommunication services sectors also lifted results, as these sectors lagged during the market's fourth quarter recovery.

Detractors 

Detracting from performance were a number of positions in the information technology (IT), energy and consumer staples sectors. Additionally, modest underweights to the energy and IT sectors held back relative returns compared to the benchmark.

• In IT, positions in application software provider, Oracle, consulting and service provider, Accenture PLC, and chipmaker, Broadcom, dragged on relative results, as these stocks underperformed benchmark holdings.
• In energy, the Fund's lack of exposure to strong-performing oil producers, Occidental Petroleum and EOG Resources, detracted as did its underweight to oilfield services provider, National Oilwell Varco. An underweight to large benchmark constituent, Exxon Mobil, also held back returns, as the stock appreciated meaningfully in the fourth quarter.
• Lack of exposure to slower-growth tobacco giant, Phillip Morris, dampened returns in consumer staples. Positions in food & beverage stocks, such as Nestle, Pepsico and Coca-Cola, also dragged on performance, as their defensive characteristics led to more-muted returns in the market's rally.

Investment Outlook And Fund Positioning 

The magnitude of recent market moves and its direction clearly remain closely tied to investor emotion. Wild swings persisted throughout 2011 and we believe they may continue to do so for some time. Investors will likely remain focused on the issues plaguing the eurozone, the likelihood of a soft landing in China and a slowdown in growth across many emerging markets. While we believe the capital markets remain vulnerable to potential shocks, we see no reason to materially change our outlook for the U.S. economy for 2012. We anticipate a slower-than-normal economic recovery, and though global economic and geopolitical risks remain, the U.S. appears to be on stronger footing than other developed markets. As such, we continue to emphasize U.S.-centric, large-capitalization, high-quality growth companies, which we believe present attractive valuation and growth opportunities in the uncertain global economic environment.

The Fund remains well balanced across core, secular and cyclical growth opportunities. At quarter-end, relative to the S&P 500 Index, the Fund was most overweight in the information technology and consumer staples sectors, and most underweight in the energy and utilities sectors.

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. 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. 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.

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. 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. 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.