Eaton Vance Worldwide Health Sciences Fund 4th Quarter Commentary

Review of markets and holdings

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Feb 14, 2017
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A Word On The Markets

Global stock markets delivered mixed performance in the fourth quarter of 2016. While U.S stocks rose sharply following the U.S. presidential election to finish the period with solid gains, major international markets recorded more subdued or negative returns.

Stocks opened the period on the downside amid retreating oil prices, uncertainty about the U.S. presidential election and fears of a possible interest rate increase by the U.S. Federal Reserve (the Fed). Donald Trump’s victory in the U.S. presidential election marked a turning point for U.S. stocks, which soared following the November 8 election. The rally continued into December before stalling in the final weeks of the period.

The broad”‘based “Trump Bump” particularly favored financial stocks, which received another boost in mid”‘December when the Fed raised its benchmark interest rate. The Fed move came in response to continued improvement in the nation’s economy, which helped boost stocks in the three”‘month period. Positive reports during the period included higher consumer spending, declining unemployment and stronger U.S. exports. While U.S. stocks surged following the presidential election, global markets lagged amid uncertainty about U.S. trade policy under President”‘elect Trump.

The MSCI World Index1 finished the quarter up 1.86%, driven by strong returns within financials, energy and telecommunication services. Healthcare, which was down significantly in October leading up to the election, was the second worst performing sector (behind real estate) in the index.

Performance Summary

For the third quarter of 2016, the Worldwide Health Sciences Fund Class A Shares underperformed the MSCI World Healthcare Index (the Index), returning ”‘7.74% at NAV, vs. ”‘5.35% for the Index.

-- The fourth quarter was difficult for nearly all of the industries within the healthcare sector. Pharmaceuticals, which was hit hard in October as investors predicted a Hillary Clinton presidential victory, pulled down Index returns for the quarter. Equipment and supplies, healthcare technology and biotech were also down significantly during the quarter.

-- Healthcare providers & services was the lone positive”‘performing industry within healthcare during the quarter, as insurers and providers rallied post”‘election.

-- For the quarter, both negative stock selection and sector positioning relative to the Index were overall detractors to Fund performance.

-- The Fund’s overweight to the United States helped performance, as the U.S. outperformed much of the world during the quarter.

Additionally, the Fund’s underweight to Japan and avoidance of

Australia aided relative returns.

Quarterly Attribution Analysis

Contributors

Positive contributors for the Fund’s performance include:

-- The Fund’s overweight to biotechnology, as well as strong stock selection within the group, was the largest contributor to performance.

-- The Fund’s avoidance of healthcare technology companies had a positive impact on performance in the fourth quarter.

-- The top stock contributor for the quarter was Actelion (XSWX:ATLN, Financial), a Swiss”‘based biotechnology company which was up significantly during the quarter as the company is likely an attractive merger opportunity. The Fund is overweight Actelion.

-- Also within biotech, the Fund’s overweight to Celgene Inc. (CELG, Financial) was additive during the quarter, as the company posted strong third quarter earnings results, as well as a solid outlook for 2017. Incyte Corporation, a biopharma company which focuses on oncology and autoimmune diseases, also saw strong returns post”‘election, which boosted relative returns.

-- Additional contributors included Zoetis Inc. (ZTS, Financial), an animal healthcare specialty company that announced a dividend increase and share repurchase program at the beginning of December, and non”‘index name, WellCare Health Plans, a U.S. based small”‘cap health care provider specializing in government”‘sponsored managed care services.

Detractors

Negative contributors for the Fund’s performance include:

-- Stock selection was negative overall for the quarter, led by healthcare equipment & supplies.

Selection within pharmaceuticals and life science tools was also a detractor to performance.

-- Relative performance was dampened by the Fund’s underweight to healthcare providers and services, which was the strongest area within healthcare during the month.

-- Stock detractors for the quarter included an overweight to Illumina, a biomedical device and services company which announced disappointing third quarter earnings. Other detractors included Zimmer Biomet Holdings, a healthcare equipment company that reported mixed third quarter results and lowered future guidance, and Santen Pharmaceuticals company, a Japanese”‘based pharma and medical device company that weakened during the quarter.

Investment Outlook And Fund Positioning

After months of hype surrounding the U.S. presidential election and discussions on what either a Hillary Clinton or Donald Trump presidency would mean for healthcare, all eyes now turn to President”‘elect Trump and his plans to overhaul the Affordable Care Act (ACA). Trump has said he wants to amend or repeal and replace the ACA, but even within the republican party, there is little agreement on exactly how to approach this extremely complex issue.

Our view is that the new administration will make a lot of noise about fulfilling its campaign pledge to repeal Obamacare, but

the details for a solution will take time to iron out. We expect much debate surrounding the health insurance exchanges. Although a repeal is imminent, there are elements of the ACA that will likely remain. Our research suggests that a new healthcare plan will take time to be agreed upon.

While it has been a very challenging year for investors in health care, we believe there are great opportunities going forward.

Biotechnology stocks were one of the weakest sectors this year and have been volatile in the weeks following the presidential election.

Although there is significant uncertainty about the future of the ACA and how the policies of the Trump administration could impact drug pricing, we believe the setup for a biotech recovery rally is looking positive. There are many different factors to weigh as the presidential administration turns over, but one thing is certain: There will always be a market for innovative solutions to the world’s health problems.

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.”