Q: I'm sure you've been asked many times, but what distinguishes a tax-managed fund from a standard stock mutual fund? A: I believe manager focus is the key differentiator. As tax efficient investors, we’re focused on maximizing after-tax returns. Our Tax managed portfolio managers are compensated based on after tax returns. Studies have shown that about half of all mutual fund assets are held in taxable accounts. For taxpaying investors having a manager focused on limiting tax liabilities should be a key consideration. . Q: Returning to the study, did it determine why shareholders have roughly half of their money in taxable funds? A: Many investors max out their 401(k)s, and are left with additional money to invest, some of that flows to mutual funds. In managing taxable assets the importance of seeking a tax efficient manager can’t be over emphasized. Assume for a moment that over a long period of time an equity mutual fund averages a 10% annual return. By ignoring tax considerations, studies have shown you are likely to lose as much as 2.5% of that return to taxes. That means for each dollar earned you stand to lose 25 cents to Uncle Sam. At Eaton Vance we’re focused on helping taxable investors 'keep that quarter.' Q: I noticed the tax-managed fund had a turnover of 213% versus the 78% in the qualified version of the fund. Does the selling to offset capital gains explain the difference? A: In the tax efficient fund, we're very eager to harvest losses even if we’re not taking gains. We know that those losses will eventually be of value to our taxable shareholders. I jokingly say that over the last three years I’ve developed blisters from harvesting available tax losses. This has resulted in higher turnover but it has also produced a nice storehouse of realized losses that for a period of years will be available to offset future gains. Q: With the Eaton Vance Large Cap Value Fund, the Fund for qualified accounts, the story is different? A: True, here we don't have to be as aggressive in taking losses. But I'll say this. One thing we've learned at Eaton Vance is that principles of tax-managed investing and principles of good investing often run parallel. For example, if a stock falls a certain percentage below our cost in either of our large cap value funds, we move quickly to sell the holding. In the tax efficient fund the reasons for the sale is in part tax related. But there’s more to it than just taxes. We also want to stop the bleeding. For us it's not as much about being right or wrong; as it is about protecting our shareholders money and building their long term wealth.” Rather than stubbornly hold a loser, we’ve learned that it is generally better to step aside at least for a while. Selling a falling stock and moving to the sidelines gives our analysts an opportunity to reappraise their recommendations from a position of safety. I’ve got two small boys at home so I equate this selling discipline to giving Chris or Ryan a “time-out” and keeping them from getting into even more trouble! Q: Can you provide an example? A: Early in January of last year we bought shares of the Irish pharmaceutical company Elan at prices ranging from $39 to $44. By the end of January, the stock had fallen to the low 30s. Our “time-out” discipline triggered a sale. We got out at a price of $33. Shortly thereafter the accuracy of Elan’s financial statements came into question. By March, the shares were trading in the mid-teens. By July, they had fallen to about $2. Buying a stock at $40 and selling it at $33 is disappointing. But having the discipline to take an early loss keeps disappointments from becoming disasters. We believe that’s a good discipline for qualified as well as taxable investments. Q: You're describing the fund's investment style. Please continue. A: The philosophy behind the Eaton Vance Tax-Managed Value Fund and the Eaton Vance Large Cap Value Fund is very much the same. Basically we believe that by building a diversified portfolio made up of companies with strong business franchises and attractive growth prospects, and by being disciplined about only buying shares of those companies when they are available at valuation discounts relative to the S&P 500, that we will over time provide our investors with superior returns. Q: Wasn’t it hard for a value manager to find good values three years ago? A: Three years ago there were a lot of aggressively valued “new economy” stocks in the market. But at the same time there were many undervalued “old economy” stocks. Nokia and Anheuser-Busch were two stocks I recall looking back in the spring of 2000. Both companies then met our criteria for having strong business franchises and attractive growth prospects. Nokia shares, trading in the mid 50’s, were much too richly valued for our taste. Anheuser-Busch shares, on the other hand were available at about $30 a share and a meaningful multiple valuation discount versus the S&P 500. We saw BUD as a great company with its shares available at a great price. There were a lot of attractive value opportunities just like BUD available in early 2000. But you needed to have the courage to run against the “new economy” herd. Our well-defined value philosophy helped us find that courage. Q: You guys will sell when the value goes out of your range. A: We’re patient with our winners, but when a stock moves to a certain level of multiple valuation premium, we take profits. This keeps us true to our value style and limits the price risk associated with owning higher P/E stocks. Last fall, BUD shares advanced into the low 50s. At that level BUD shares were trading at about a 25% multiple premium to the S&P 500. We sold. Interestingly, as we were selling BUD, Nokia shares were trading at about $12. Now we’ve always believed Nokia was a great company and at $12 we became an owner. Companies like Nokia and Anheuser–Busch are market leaders. We gravitate towards market leaders as we believe they offer more competitive stability than mid-tier companies or new market entrants. Competitive stability limits business risk and we’re all about limiting risk. Buying stocks only when they trade at discount valuations limits risk. We wait very patiently to buy leading companies with good growth prospects at what we believe will prove to be great prices. Again, I believe patience is one of the keys to our investment success at Eaton Vance: Q: What is your view on the dividend elimination legislation in Washington? A: I believe elimination of the double taxation of dividends is greatly needed. It would encourage more rational corporate management practices. It’s an important ingredient to providing a needed and balanced fiscal stimulus to our economy. This recession is different than most in that it has not been consumer led. Rather, it’s been caused by a lack of investment spending, a hangover from the speculative bubble that developed in the late 90s and early 2000. To get rid of the hangover we need tax reduction designed to support the consumer but we also need something to boost investment, something that provides greater incentives to investors. I think the administration is right on target with the balanced package they’ve proposed. You know taxing dividends twice puts American corporations at a global disadvantage. I'm hopeful the double taxation of dividends is eliminated. It is an unneeded distortion that has many harmful ramifications. I believe it limits the growth potential of our economy. Q: How are your views on technology? A: We’re finding select opportunities in technology. Tech stocks have had a strong move recently. It’s become more difficult to find good companies selling at the levels we like. Most of the stocks owned in Tax-Managed Value and Large Cap Value have market capitalization of $9 billion or more. But in order to get adequate tech exposure we’ve had to dip down and buy some smaller cap names. Diebold is one such company. One thing we like about Diebold is that its technology isn't so cutting edge that its products become obsolete every 30 days. We regard it as more of a “Steady Eddy” grower. Q: You have set a tremendous goal to achieve. A: I’m optimistic about our prospects. I joined the firm a little over three years ago and my goal then was to build our large cap value products into a $10 billion product. We're planning on getting there by not only offering a tax efficient mutual fund, and a qualified mutual fund, but by moving into the separate account business and addressing the institutional market as well. The size of the large cap value market is in our favor. You know when we combine the assets held in just 12 of the biggest mutual funds in the large cap value category we come up with over $170 billion in assets. And since its December 1999 inception through the end of April, the Eaton Vance Tax-managed Value Fund has outperformed each of these funds by quite a considerable margin. If we could attract just 10% of the assets from these 12 funds we’d have $17 billion in assets. Can we achieve that? Well as important as past performance is, I believe the engines that create performance are even more critical. The engines that have driven performance of our large cap value product are a common sense philosophy, a disciplined process and an experienced and stable team of investment professionals. These engines should allow us to continue to build on our past record of creating wealth. As we do this I believe we will also be successful in building our asset base. Q: After a long career that included tenures at several asset management firms, what attracted you to Eaton Vance? A: Eaton Vance is known for its positive and collaborative corporate culture, its conservative investment approach and its commitment to fundamental research. When I joined here someone told me I was joining a “SWAN” firm. I asked what’s “SWAN”. They told me “Smart people who Work hard And are Nice.” I’ve found Eaton Vance to indeed be a beautiful swan! Thank you for your interest in our large cap value products.