Management's Discussion of Fund Performance1
Economic and Market Conditions
The 12-month period that began September 1, 2019 (the period), included some of the best and worst equity performances in over a decade.
The period began with global equities rallying in the closing months of 2019, supported by interest rate reductions by many central banks worldwide. The previous July, the U.S. Federal Reserve (the Fed) had cut rates for the first time in over a decade, followed by two additional rate cuts in the first two months of the period. By the end of the third quarter of 2019, interest rates had been lowered by dozens of central banks around the world.
In January 2020, however, news of the novel coronavirus outbreak in China began to raise investor concerns. As the virus turned into a global pandemic in February and March, it ended the longest-ever U.S. economic expansion and brought most of the world's economies to a standstill. Economic activity declined dramatically and equity markets, along with credit markets, plunged in value amid unprecedented volatility.
In response, the Fed announced two emergency rate cuts in March — lowering the Federal Funds rate to 0.00%-0.25% — along with other measures designed to shore up the markets. Across the globe, other central banks and governments also commenced aggressive monetary and fiscal responses to help mitigate the economic effects of the virus.
These moves helped calm the markets and initiated a global equity rally that began in late March and lasted through the end of the period. In the second quarter of 2020, U.S. stocks reported their best quarterly returns since 1998 — on the heels of the worst first quarter for American stocks since the 2007-08 global financial crisis.
Overseas stock indexes also reflected investor optimism as economies started to emerge from coronavirus lockdowns and factories resumed production. As the period drew to a close, however, it remained unclear whether investor optimism was warranted, as the number of coronavirus cases remained high and the world waited to see if increased economic activity would allow the virus to surge again.
As might be expected, health care was one of the sectors most impacted by the COVID-19 epidemic. Many stocks in the sector plunged along with the broader market in March 2020. However, the urgent need for therapies, equipment, and a vaccine proved a tailwind for the sector for the rest of the period — with the health care technology, biotechnology, and life sciences tools & services industries performing especially well within the MSCI World Health Care Index (the Index).
For the 12-month period ended August 31, 2020, the MSCI World Index, a broad measure of global equities, returned 16.79%; while the S&P 500® Index, a broad measure of U.S. stocks, returned 21.94%; and the technology-laden Nasdaq Composite Index rose 49.33%. The MSCI EAFE Index of developed-market international equities returned 6.13%; while the MSCI Emerging Markets Index returned 14.49%.
Fund Performance
For the 12-month period ended August 31, 2020, Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio) (the Fund) returned 21.74% for Class A shares at net asset value (NAV), underperforming its primary benchmark, the Index, which returned 22.37%.
On an industry basis, the main detractors from Fund performance versus the Index were stock selections in biotechnology and an underweight position, relative to the Index, in health care technology. Within biotechnology, not owning Index component Regeneron Pharmaceuticals, Inc. (REGN, Financial) detracted from returns versus the Index. The firm's stock price rose sharply after it developed a promising potential therapy for COVID-19.
Elsewhere in biotechnology, an underweight position relative to the Index in pharmaceutical developer AbbVie, Inc. (ABBV, Financial) detracted from performance versus the Index as the company launched new treatments for arthritis and psoriasis. In health care technology, not owning Index component M3, Inc. (M3) (TSE:2413, Financial), a Japan-based technology provider to health care companies, detracted from relative performance as well. As with many technology firms during the pandemic, M3 saw increased sales as providers and patients brought more of their activity online.
In contrast, stock selections in the health care providers & services, pharmaceuticals, and life sciences tools & services industries contributed to performance versus the Index. Holding an overweight position relative to the Index in medical insurance provider Humana, Inc. (HUM, Financial) helped the Fund's performance versus the Index in the health care providers & services industry. Prior to the pandemic, the company's stock price rose, as potential competition from Medicare for All looked less likely should Joe Biden win the Democratic nomination. In addition, company expenses declined early in the pandemic, when covered procedures fell sharply as people avoided hospitals and doctors' offices.
In pharmaceuticals, not owning Index component Bayer AG (XTER:BAYN, Financial), a Germany-headquartered drug and chemical company, helped the Fund's performance versus the Index. Bayer's stock declined following its June 2020 settlement of litigation related to its Roundup weed killer product. An overweight position relative to the Index in Lonza Group AG (XSWX:LONN, Financial), a Swiss multinational contract manufacturer for drug companies, contributed to the Fund's returns versus the Index in the life sciences tools & services industry. Lonza's stock price rose on increased demand for its services from firms developing COVID-19 therapies and vaccines.
Past performance is no guarantee of future results. Returns are historical and are calculated by determining the percentage change in net asset value (NAV) or offering price (as applicable) with all distributions reinvested. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance for periods less than or equal to one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month-end, please refer to eatonvance.com.
The views expressed in this report are those of the 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 and the Fund(s) disclaim 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.
