Management’s Discussion of Fund Performance†
Economic and Market Conditions
The 12-month period starting September 1, 2021, was dominated by the ongoing effects of one black swan event — the COVID-19 pandemic — and new fallout from another — Russia’s unprovoked invasion of Ukraine.
In the opening months of the period, stock investors as well as consumers appeared to be taking a “glass is half full” approach. Despite the appearance of a new and more contagious COVID-19 variant, the highest inflation readings in nearly four decades, and the U.S. Federal Reserve’s (the Fed’s) announcement that it would begin tapering its bond purchases that had supported economic growth, major U.S. equity indexes repeatedly closed at new all-time highs during the final quarter of 2021.
In both the U.S. and Europe, consumers rushed to spend money saved during the early months of the pandemic. Mastercard, Inc. (MA, Financial) reported its highest retail sales on record during the 2021 holiday season. But as the new year began, investors appeared to re-evaluate the twin threats of inflation and interest rate hikes, and stock performance began to turn negative around the globe. In February, Russia’s invasion of Ukraine sent shock waves through markets worldwide, exacerbating inflationary pressures on energy and food costs.
As policymakers’ perceptions of inflation worsened from “transitory” to “persistent,” central banks around the world — including the Bank of England and the European Central Bank — initiated their first interest rate hikes in years. In Europe, looming energy shortages caused by Russia’s invasion of Ukraine pushed inflation rates higher and stock prices lower during the period.
In the U.S., the Fed admitted it may have been late in initiating rate hikes to quell inflation. Investors began to expect that the central bank would raise interest rates at every policy meeting in 2022 — and worried that aggressive rate hikes could tip the U.S. economy into recession. At its third and fourth meetings of 2022, the Fed hiked rates 0.75% each time — its first moves of that magnitude since 1994. Higher interest rates, inflation, and recessionary worries drove stock prices down, with rate-sensitive technology stocks — which had been star performers early in the pandemic — suffering some of the worst declines.
Meanwhile in the world’s second-largest economy, China’s zero-Covid policy and problems within its real estate sector severely restricted economic output. The MSCI Golden Dragon Index, a measure of Chinese large-cap and mid-cap stocks, was one of the worst-performing major indexes, declining 25.10% during the period.
Major equity indexes elsewhere also declined in value. For the period as a whole, the MSCI ACWI Index, a broad measure of global equities, returned -15.88%; the S&P 500 Index, a broad measure of U.S. stocks, lost 11.23%; and the technology-laden Nasdaq Composite Index fell 21.99%. The MSCI EAFE Index of developed-market international equities returned -19.80%, while the MSCI Emerging Markets Index returned -21.80% during the period.
While it still posted a negative return, the health care sector overall outperformed the broader equity market, in part because investors rotated toward sectors regarded as less cyclical and potentially less risky during the period. Within the sector, the health care services industry was the only industry to deliver a positive return during the period, as many medical insurance firms saw an increase in subscribers from strong job growth. In line with the general investor trend toward risk reduction, the pharmaceuticals industry outperformed the overall sector. In contrast, the health care equipment and life sciences tools & services industries underperformed significantly as rising interest rates had a greater impact on the higher valuation stocks in these industries during the period.
Fund Performance
For the 12-month period ended August 31, 2022, Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio) (the Fund) returned -11.32% for Class A shares at net asset value (NAV), underperforming its primary benchmark, the MSCI World Health Care Index (the Index), which returned -11.02%.
On an industry basis, the main detractors from Fund performance versus the Index during the period were stock selections and an underweight position in health care services, an overweight position in health care technology, and stock selections in health care supplies.
Within health care services, the Fund’s out-of-Index position in Accolade, Inc. (ACCD, Financial) (Accolade) detracted from performance versus the Index. Accolade provides health insurance concierge services for employers to help employees navigate the health care system. While its stock price had risen significantly early in the pandemic, it fell sharply during the period after competitors lowered their prices and Accolade lost a key early customer, calling into question the viability of its product. By period-end, the Fund sold its position in Accolade.
Within health care supplies, the Fund’s overweight positions in robotic surgical systems maker Intuitive Surgical, Inc. (ISRG, Financial) (Intuitive Surgical) and diversified medical technology firm Teleflex, Inc. (TFX, Financial) detracted from relative returns during the period. Both firms saw their share prices decline amid staffing shortages in health care, a slow recovery in elective surgeries after a steep decline early in the pandemic, and a market rotation away from high-valuation stocks. While Intuitive Surgical reported strong earnings growth early in the period, investors were disappointed by its future earnings outlook, which drove its share price lower during the period.
Elsewhere in the Fund, an out-of-Index position in PolyPeptide Group AG (XSWX:PPGN, Financial) (PolyPeptide) detracted from relative performance as well. The Swiss-headquartered contract developer of peptide-based drugs suffered a significant share price decline amid negative sentiment about its industry — life sciences tools & services — which was one of the worst-performing industry groups in health care in the first half of 2022. By period-end, the Fund sold its position in PolyPeptide.
In contrast, stock selections in the biotechnology industry, along with stock selections and an overweight position in the pharmaceuticals industry, contributed to Fund performance versus the Index. Within biotechnology, an underweight exposure to COVID-19 vaccine maker Moderna, Inc. (MRNA, Financial) (Moderna) helped relative returns as the firm’s stock — a strong performer early in the pandemic — plunged in value as new vaccinations slowed and investors rotated away from high-valuation stocks. By period-end, the Fund sold its position in Moderna.
Also in biotechnology, the Fund’s overweight position in AbbVie, Inc. (ABBV, Financial) rose in value as investors became more confident the firm was well positioned to grow sales of new products to compensate for the loss of exclusivity for its best-selling drug, Humira.
Elsewhere in the Fund, an overweight position in UnitedHealth Group, Inc. (UNH, Financial) contributed to relative performance. Its stock price rose after the health care provider announced strong earnings growth early in the period due to membership growth in its Medicare Advantage and commercial lines of business.
†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.
- MSCI World Health Care Index is an unmanaged index of health care sector equities within the MSCI World Index. MSCI indexes are net of foreign withholding taxes. Source: MSCI. MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder. S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. S&P Dow Jones Indices are a product of S&P Dow Jones Indices LLC (“S&P DJI”) and have been licensed for use. S&P and S&P 500 are registered trademarks of S&P DJI; Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); S&P DJI, Dow Jones and their respective affiliates do not sponsor, endorse, sell or promote the Fund, will not have any liability with respect thereto and do not have any liability for any errors, omissions, or interruptions of the S&P Dow Jones Indices. 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.
- Total Returns at NAV do not include applicable sales charges. If sales charges were deducted, the returns would be lower. Total Returns shown with maximum sales charge reflect the stated maximum sales charge. Unless otherwise stated, performance does not reflect the deduction of taxes on Fund distributions or redemptions of Fund shares. Effective November 5, 2020, Class C shares automatically convert to Class A shares eight years after purchase. The average annual total returns listed for Class C reflect conversion to Class A shares after eight years. Prior to November 5, 2020, Class C shares automatically converted to Class A shares ten years after purchase.
- Source: Fund prospectus. Net expense ratios reflect a contractual expense reimbursement that continues through 12/31/22. The expense ratios for the current reporting period can be found in the Financial Highlights section of this report. Performance reflects expenses waived and/or reimbursed, if applicable. Without such waivers and/or reimbursements, performance would have been lower.
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. Furthermore, returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the redemption of Fund shares. 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.
