Why fight the Fed and the market? The case for loans as rates rise.

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1 EATON VANCE APRIL 2018 TIMELY THINKING Why fight the Fed and the market? The case for loans as rates rise. SUMMARY The recent federal tax cuts and budget agreement represent major stimulative fiscal measures, coming at a time of strong growth. Payson F. Swaffield, CFA Chief Income Investment Officer Eaton Vance Management Investors continue to anticipate relatively tame inflation, despite the stimulus, and the stagflation potential of tariffs and a possible trade war. Floating-rate loans have benefited from the rising-rate market, and have the potential to gain further if the Fed and the market s fed funds forecasts pan out. Eaton Vance Management research has demonstrated that active floating-rate loan managers on average have outperformed the passive ETF approach, since the largest ETF began in At Eaton Vance, we value independent thinking. In our experience, clients benefit from a range of distinctive, strongly argued perspectives. That s why we encourage our independent investment teams and strategists to share their views on pressing issues even when they run counter to conventional wisdom or the opinions of other investment managers. Timely Thinking. Timeless Values. Not FDIC Insured Not Bank Guaranteed May Lose Value

2 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 2 The first quarter might be summarized as the first time in quite a while that U.S. fiscal policy began to eclipse monetary policy as the main driver of the markets. The big question is whether the market is correctly assessing the landmark fiscal events of the quarter in terms of growth and inflationary impact. The fiscal measures include a $1.5 trillion federal tax-cut and a $1.3 trillion program that boosts federal spending by $300 billion over the first two years. Both are clearly stimulative, and potential drivers of growth and inflation. (The inflationary impact of the tax cuts has been the subject of debate. The supply-side perspective holds that the tax cuts will spark capital investment and productivity gains, increasing aggregate supply and dampening inflationary pressure. The contrary view is that stimulating an economy that is already near full capacity will fuel inflation.) We also saw President Trump introduce tariffs on aluminum and steel for selected countries. Trade wars have the potential to be contractionary in terms of economic impact, yet they can also be inflationary due to increased prices stemming from the tariffs. Of course, to the extent tariffs and trade wars fail to materialize, the case for growthdriven inflation gets stronger, as noted above. Real rates rise The bond market responded to this by pushing up the yield on the 10-year U.S. Treasury note by 33 basis points (bps) to 2.74% over the quarter (Exhibit A). This increase was roughly half what we had been anticipating for all of Besides the magnitude of the rise, what s surprising is that most of the increase reflected a rise in the real rate the difference between the nominal rate and inflation expectations. The 10-year break-even rate the level of inflation predicted by the pricing of U.S. TIPS barely budged, starting the quarter at 1.98% and ending at 2.06%. As a result, the 10-year real rate increased by 25 bps to 68 bps. Exhibit A 10-year U.S. Treasury yields rose, mostly due to the real rate component. 12/29/2017 3/31/2018 Change Nominal 2.41% 2.74% 0.33% Breakeven 1.98% 2.06% 0.08% Real 0.43% 0.68% 0.25% Sources: Bloomberg LLC and Eaton Vance, as of March 31, The entire yield curve told a similar story. Rates moved up across the curve in a modest flattening manner, with the difference between 10-year and 2-year Treasurys declining six bps to 47 bps. Investors weren t demanding a greater term premium at the end of the quarter than they were at the start. In other words, the bond market is expecting moderate growth with relatively tame inflation. The U.S. Federal Reserve and the market were also on the same page in terms of expected fed funds rate increases for the year, with a range of 2.00% to 2.25% expected in November 2018, based on the Fed's most recent dot plot and futures. This is unusual in recent years the market has been more skeptical of rate hikes than the Fed. The fiscal stimulus is coming at a time when global growth is still strong. Purchasing Managers' Indexes (PMI) remain above 50 in the U.S., eurozone and China, indicating economic expansion, though recent readings have ticked down in the eurozone and China. Exhibit B shows the growth in U.S. PMI and nonfarm payrolls for the past 15 months employment continues to increase, which so far has helped mitigate inflationary pressure.

3 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 3 Exhibit B U.S. employment and manufacturing point to stronger growth. Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Sources: Bloomberg LLC and Eaton Vance, as of March 31, Investment implications Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Change in NonFarm Payrolls (000s) (left scale) ISM Manufacturing Index (right scale) The current environment points to the appeal of a floatingrate asset class one that can deliver Libor plus a spread above that. If the market and the Fed are correct, an investment with a floating-rate feature has the potential to move up with short-term rates. If the Fed and the market have underestimated future inflation, as we believe to be the case, the floating-rate asset becomes even more valuable relative to fixed-income alternatives. Floating-rate loans (bank loans) may be the most widely recognized example of a floating-rate asset class. In the early stages of a rising-rate market, loans have already outperformed other fixed-income sectors. Exhibit C shows that loans are the only U.S. fixed-income sector with positive total return in the first quarter, based on the S&P/LSTA Leveraged Loan Index. The total return of 1.45% for loans was almost three points greater than the Bloomberg Barclays U.S. Aggregate Index. This is in contrast to last year, before the impact of Fed tightening activity was fully reflected, when loans were fourth among U.S. sectors Exhibit C Rising rates have pushed floating-rate bank loans to the lead of U.S. fixed-income sectors. Total Return 1Q18 1 EM (Local Currency) 4.44% 2 Global Aggregate Ex-U.S. 3.62% 3 Bank Loan 1.45% 4 High Yield -0.91% 5 Municipal -1.11% 6 Treasury -1.18% 7 MBS -1.19% 8 Investment Grade -2.32% Total Return EM (Local Currency) 15.21% 2 Global Aggregate Ex-U.S % 3 High Yield 7.48% 4 Investment Grade 6.42% 5 Municipal 5.45% 6 Bank Loan 4.12% 7 MBS 2.47% 8 Treasury 2.31% Source: Morningstar, Inc., as of March 31, Data provided are for informational use only. Past performance is no guarantee of future results. See end of report for important additional information. Investment Grade represented by Bloomberg Barclays U.S. Corporate Index. MBS represented by Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index. Treasury represented by Bloomberg Barclays U.S. Treasury Index. High Yield represented by ICE BofA/Merrill Lynch U.S. High Yield Master II Index. Municipal represented by Bloomberg Barclays Municipal Bond Index. Bank Loan represented by S&P/LSTA Leveraged Loan Index. Global Agg Ex USD represented by Bloomberg Barclays Global Aggregate Ex-USD Index. EM(Local Currency) represented by JPMorgan Government Bond Index- Emerging Markets (GBI-EM) Global Diversified.

4 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 4 The active edge Importantly, investors considering an allocation to bank loans have the choice of doing so through actively managed open-end mutual funds or passively managed ETFs. Eaton Vance Management (EVM) is conducting research on the relative performance of active, open-end, fixed-income mutual funds compared with fixed-income index ETFs. Below we discuss the findings as they pertain to floatingrate loans. The research can provide an important context for investors making this choice. Exhibit D compares the rolling, three-year weighted average performance of open-end mutual funds in Morningstar s bank loan category with the largest bank loan ETF PowerShares Senior Loan Portfolio (BKLN), which represents 65% of overall loan ETF assets as of December 31, The comparison shows 46 rolling three-year periods starting with BKLN s inception in March 2011 through December 31, Active managers in the open-end funds outperformed BKLN in 43 of the 46 periods, by an average of 77 basis points per year. The EVM analysis further determined that the key component of the outperformance by actively managed loan funds was that they were benchmarked to a broad index, like the S&P/LSTA Leveraged Loan Index (the Broad Index), which had 962 issuers as of December 31, 2017, versus the relatively narrow index used by BKLN the S&P/LSTA Leveraged Loan 100 Index (the Narrow Index). And the Narrow Index, which contains the largest, most liquid 100 issuers in the loan market, consistently underperformed the Broad Index. Using the Narrow Index allowed BKLN to better track its benchmark, which means it can have lower volatility relative to the Narrow Index. However, the ETF lost the Exhibit D Active, open-end loan funds have outperformed the largest loan ETF 93% of the time. Exhibit E The largest loan ETF has underperformed its own benchmark, and the broad index. ROLLING 3-YEAR TOTAL RETURN 8% 7% 6% 5% 4% 3% 2% 1% 0% Open-End Loan Funds PowerShares Senior Loan Portfolio ETF ROLLING 3-YEAR TOTAL RETURN 8% 7% 6% 5% 4% 3% 2% 1% 0% S&P/LSTA Leveraged Loan Index ETF Benchmark PowerShares Senior Loan Portfolio ETF -1% % Sources: Eaton Vance, Morningstar as of December 31, Compares the average annual total returns of Morningstar open-end floating-rate loan universe, asset weighted, with the market-price return of shares of the PowerShares Senior Loan Portfolio (BKLN) ETF, for 46 monthly rolling 3-year periods that start with the March 2011 inception date of BKLN. The comparison uses returns on the lowest-expense-ratio share class, because that share class represents the majority of funds in the Morningstar category on an asset-weighted basis. Results may vary if other share classes with higher expense ratios are used. The ETF benchmark is the S&P/ LSTA Leveraged Loan 100 Index. Past performance is no guarantee of future results. See end of report for important information. 1 The analysis focused on BKLN as the dominant ETF in Morningstar s floating-rate loan category, rather than an average of the ETFs in that category to avoid the complexities of having different ETF benchmarks in the mix. Our results should be considered illustrative rather than a definitive comparison between loan open-end funds and ETFs.

5 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 5 flexibility to seek alpha through issues that were less liquid and/or had lower outstanding debt than issuers in the Narrow Index. The results are seen in Exhibit E, in which BKLN underperforms not just the broad S&P/LSTA Leveraged Loan Index, but also its own narrow benchmark (due to ETF expenses). In summary, since inception in 2011, BKLN has underperformed the average active loan manager, and failed to provide investors with the return potential offered by the broad asset class. The first quarter of 2018 saw fiscal stimulus on an already strong U.S. economy, rising rates across the yield curve and a modest change in inflation expectations. In our view those expectations may not have fully adjusted to the impact of these government actions. We believe this is a favorable environment for floating-rate assets, and for floating-rate loans in particular. Based on our research, active managers are better positioned than passive index managers to capture the full potential of the loan asset class for investors.

6 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 6 Index definitions Bloomberg Barclays Aggregate Bond Ex USD Index is an unmanaged index of investment-grade bonds, including corporate, government and mortgage-backed securities issued outside the U.S. Bloomberg Barclays U.S. Treasury Index is an unmanaged index of U.S. Treasury securities, and a component of the Bloomberg Barclays U.S. Aggregate Bond Index. Bloomberg Barclays U.S. Mortgage-Backed Securities (MBS) Index measures agency mortgage-backed pass-through securities issued by GNMA, FNMA and FHLMC. ICE BofA/Merrill Lynch U.S. High-Yield Master II Index measures USD-denominated, noninvestment-grade corporate securities. Bloomberg Barclays Municipal Bond Index is an unmanaged index of municipal bonds traded in the U.S. S&P/LSTA Leveraged Loan Index is an unmanaged index of the institutional leveraged loan market. S&P/LSTA Leveraged Loan 100 Index is a subset of the S&P/LSTA Leveraged Loan Index that contains the largest, most liquid 100 issuers in the loan market. Bloomberg Barclays Global Aggregate Ex-USD Index is a broad-based measure of global investment-grade fixed-rate debt investments, excluding USD-denominated debt. JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified is an unmanaged index of local currency bonds with maturities of more than one year issued by emerging-market governments. Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as applicable. It is not possible to invest directly in an index. Historical performance of the index illustrates market trends and does not represent the past or future performance. ICE BofA/Merrill Lynch Indexes: BofA Merrill Lynch indexes not for redistribution or other uses; provided as is, without warranties, and with no liability. Eaton Vance has prepared this report, BofA/Merrill Lynch does not endorse it, or guarantee, review, or endorse Eaton Vance s products.

7 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 7 About Risk An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. The secondary market for loans is a private, unregulated interdealer or inter-bank resale market. Purchases and sales of loans are generally subject to contractual restrictions that must be satisfied before a loan can be bought or sold. These restrictions may impede a Strategy s ability to buy or sell loans and may negatively impact the transaction price. It may take longer than seven days for transactions in loans to settle. It is unclear whether U.S. federal securities law protections are available to an investment in a loan. In certain circumstances, loans may not be deemed to be securities, and in the event of fraud or misrepresentation by a borrower, lenders may not have the protection of the anti-fraud provisions of the federal securities laws. There can be no assurance that the liquidation of collateral securing a loan will satisfy the issuer s obligation in the event of nonpayment or that collateral can be readily liquidated. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher-rated investments. As interest rates rise, the value of certain income investments is likely to decline. Bank loans are subject to prepayment risk. 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. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged. No investment strategy is a complete investment program and you may lose money investing. Elements of this commentary include comparisons of different investment vehicles, each of which has distinct risk and return characteristics. Every investment carries risk, and principal values and performance will fluctuate with all asset classes shown, sometimes substantially. Investment vehicles shown are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. All Investment vehicles shown are subject to risks, including possible loss of principal invested. Costs and expenses associated with investing in Investment vehicles shown will vary, sometimes substantially, depending upon specific investment vehicles chosen. Unlike mutual funds, ETF shares trade on an exchange and are not individually redeemable from the fund. ETF shares are bought and sold at market-determined prices, which may vary throughout the trading day and may be higher or lower than net asset value (NAV). Lower minimums may apply to ETF trades than mutual fund purchases. Index ETFs typically have lower fees than actively managed mutual funds. ETFs utilizing in-kind redemptions may pay out lower capital gains distributions than similar mutual funds, reducing or deferring shareholder taxes. Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

8 APRIL 2018 TIMELY THINKING THE CASE FOR LOANS AS RATES RISE 8 About Eaton Vance Eaton Vance is a leading global asset manager whose history dates to With offices in North America, Europe, Asia and Australia, Eaton Vance and its affiliates offer individuals and institutions a broad array of investment strategies and wealth management solutions. The Company s long record of providing exemplary service, timely innovation and attractive returns through a variety of market conditions has made Eaton Vance the investment manager of choice for many of today s most discerning investors. For more information about Eaton Vance, visit eatonvance.com. This material is presented for informational and illustrative purposes only as the views and opinions of Eaton Vance as of the date hereof. It should not be construed as investment advice, a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third-party sources. Any current investment views and opinions/analyses expressed constitute judgments as of the date of this material and are subject to change at any time without notice. Different views may be expressed based on different investment styles, objectives, opinions or philosophies. This material may contain statements that are not historical facts, referred to as forward-looking statements. Future results may differ significantly from those stated in forward-looking statements, depending on factors such as changes in securities or financial markets or general economic conditions. Actual portfolio holdings will vary for each client. Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor. Prospective investors should read the prospectus carefully before investing. Our investment affiliates Not FDIC Insured Not Bank Guaranteed May Lose Value 2018 Eaton Vance Distributors, Inc. Member FINRA/SIPC Two International Place, Boston, MA eatonvance.com