Worldwide Health Sciences Fund (A)

A Word On The Markets  as of Dec 31, 2011

2011 was certainly a volatile year for investors, and the fourth quarter was no different. The last three months of the year saw the broad market rally sell off and rally again into year-end to close the gap in what was a relatively flat year for global equities. The S&P 500² was up +11.8% in the quarter, but up only +2.1% (total return) for calendar year 2011.

Health care stocks also rallied significantly in the fourth quarter, providing the vast majority of returns for the year in the last quarter of the year. The MSCI World Health Care Index³ was up +7.9% in the quarter and +9.5% for calendar year 2011.

For the broad market, the year-end market surge reflected stronger-than-expected U.S. economic data and a partial easing of concerns about the European financial crisis. Overall, cyclical sectors lagged in 2011 but led in the fourth quarter 2011.

For health care, the period saw a clear pickup in generalist investor interest in large-cap pharmaceutical stocks. Themes included the potential for share price appreciation due to strategic investments in research and development, liquid names with what appeared to be low valuations and potential for dividends. Similar investment sentiment was seen in large-cap biotechnology stocks. Health care-related news flow remained rather muted in the quarter.

Performance Summary 

In light of the move higher in health care stocks, the Fund provided a positive absolute return in the fourth quarter. However, the Fund underperformed its primary benchmark, the MSCI World Health Care Index³, which, in turn, underperformed the S&P 500² in the quarter.

• While pharma stocks moved higher as a group, the Fund's underweight positioning detracted from performance relative to the Fund's benchmark.
• Emerging biotechnology stocks, led by M&A, were a key positive contributor to the Fund's performance in the quarter and were the largest contributors to relative performance.
• The Fund's holdings also outperformed the benchmark in managed care and health care equipment, supplies and technology.
• The Fund's exposure to Japanese equities was a drag on performance this quarter, as Japanese pharmaceutical stocks were collectively down in the period.
• The life science tools/diagnostics sector did not participate in the fourth quarter rally and, in fact, sold off during the period, negatively impacting Fund performance.

Contributors 

The performance of the top contributors in the fourth quarter were driven by either fundamental factors or market sentiment.

• Pharmasset Inc. was the top contributor during the period. In November, the company was acquired in a record-breaking deal with Gilead paying $11 billion in cash to purchase Pharmasset, a developer of oral drugs to treat the hepatitis C virus (HCV).
• No specific pharma stock was a particular outlier in the quarter, save for Pfizer, which led pharma sector performance. Similarly, other large-cap pharmaceutical stocks contributed to the Fund's absolute performance.
• The Fund's holding in the dental company, Align Technology, Inc., reported strong quarterly results during the fourth quarter.

Detractors 

Detractors to Fund performance during the quarter included holdings in generic pharmaceutical manufacturers in Japan, which underperformed the benchmark due the absence of new legislative news flow during the quarter.

• One key detractor was Fund holding, Mitsubishi Tanabe. In November, the Japanese government set the price for their new treatment for HCV much lower than expectations. The stock fell in response.
• Fund holding, Illumina Inc. is involved in large-scale genetic sequencing. In October, as a result of both sequencing overcapacity and uncertainties surrounding NIH budgeting, Illumina pulled 2011 guidance and the stock price dropped accordingly.
• For another Fund holding, generic drug maker, Watson Pharmaceuticals, Inc., sentiment took a decidedly negative shift during the quarter for reasons including increased investor concerns over a January 2012 FDA advisory committee panel for a key pipeline product.

Investment Outlook And Fund Positioning 

Outlook for the broad markets remains decidedly mixed. In our opinion, S&P earnings look set to advance only modestly in 2012 and domestic European financial volatility could weigh on equities globally.

For health care, we are more optimistic versus the broader markets, but perhaps only in key subsectors. We believe stock selection remains critical to the potential for outperformance.

As of quarter end, the Fund remained overweight in the biotech sector as compared to the benchmark.

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. Because the Fund investments may be concentrated in a particular industry, the Fund share value may fluctuate more than that of a less concentrated fund. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. 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. Because the Fund investments may be concentrated in a particular industry, the Fund share value may fluctuate more than that of a less concentrated fund. 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. Smaller companies are generally subject to greater price fluctuations, limited liquidity, higher transaction costs and higher investment risk than larger, established companies. 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.