Tax-Managed 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 Index¹⁰ rose 10.86% during the quarter, while the MSCI Emerging Markets Index¹¹ gained 14.08%. In the U.S., the S&P 500 Index¹² surged 12.59%, while the Dow Jones Industrial Average¹³ advanced 8.84%. Large-cap stocks narrowly outperformed their small-cap counterparts, with the Russell 1000 Index¹⁴ jumping 12.90% versus 12.44% for the Russell 2000 Index¹⁵. Across market capitalizations, growth stocks outperformed value stocks.

Performance Summary 

Eaton Vance Tax-Managed Value Fund A share underperformed its benchmark, the Russell 1000 Value Index², for the quarter ended March 31, 2012, returning 10.61% at net asset value versus the benchmark's 11.12% return.

• The environment for bottom-up stock selection generally improved, as correlations¹⁶ among stocks declined sharply from the second half of 2011. Against this backdrop, the Fund's return relative to the benchmark was affected by allocation decisions and stock selection.
• In general, value stocks underperformed their growth counterparts during the quarter. Within the value space, lower-quality and higher-beta stocks generally outperformed higher-quality lower-beta names, posing a headwind to the Fund's relative performance.
• The best-performing benchmark sectors were financials, consumer discretionary and information technology, while the weakest were utilities, telecommunication services and consumer staples. Nine of the 10 benchmark sectors delivered positive performance for the quarter and, similarly, the Fund posted positive returns in nine of those 10 sectors.

Contributors 

The Fund outperformed the benchmark in several sectors during the quarter. Stock selection in information technology was the major positive influence on relative performance compared to the benchmark, aided by an underweight to the poorly performing utilities sector.

• Stock selection was particularly strong in information technology. Tech giant Apple, an out-of-benchmark holding, was the largest individual contributor to Fund performance, while other blue-chip names—Microsoft, Oracle and International Business Machines—also contributed to relative performance.
• Stock selection was also favorable in the health care sector, including the Fund's overweight position in insurer UnitedHealth Group and its lack of exposure to pharmaceutical firm Bristol-Meyers Squibb.
• Also bolstering relative returns, the Fund did not own Procter & Gamble, a large benchmark holding that underperformed the broader consumer staples sector.

Detractors 

Of the sectors in which the Fund underperformed the benchmark, stock selection in energy and financials were notable drags on relative performance compared to the benchmark.

• Within financials, the Fund's overweight positions in stocks that underperformed the broad sector—for example, real estate investment trust Boston Properties—detracted from relative performance. In addition, lack of exposure to Bank of America, which rose sharply, hurt relative results.
• In energy, the Fund's overweight position in Exploration & Production firm Occidental Petroleum held back relative returns. In addition, the Fund did not own several strong performing benchmark holdings, including equipment maker National Oilwell Varco and refiner Marathon Petroleum.
• Stock selection in the industrials sector—for example, overweight positions in aerospace leader Boeing and rail carrier Union Pacific—also detracted from the Fund's relative results.

Investment Outlook And Fund Positioning 

Despite better U.S. economic data in recent months, the sustainability of the U.S. recovery is far from guaranteed. Overseas troubles could potentially flare up again as well. Investors should therefore not be surprised if markets slow or pull back in the coming months, particularly following the strong run-up we just experienced. Much will depend on the pace of the U.S. recovery and whether the Fed provides additional stimulus. Other lingering questions include the fate of the Bush tax cuts, the extent of China's slowdown, the global impact of high energy prices, and whether further progress is made in Europe.

As always, we remain committed to investing in companies with strong franchises and growth prospects and intend to invest in such companies at what we regard as attractive valuations. At quarter-end, the Fund's largest sector overweights were in health care and industrials, while its largest underweights were in utilities and consumer staples.

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.