UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number | 811-22049 | |||||||
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International Income Portfolio | ||||||||
(Exact name of registrant as specified in charter) | ||||||||
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The Eaton Vance Building, 255 State Street, Boston, Massachusetts |
| 02109 | ||||||
(Address of principal executive offices) |
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Maureen A. Gemma The Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109 | ||||||||
(Name and address of agent for service) | ||||||||
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Registrant’s telephone number, including area code: | (617) 482-8260 |
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Date of fiscal year end: | October 31 |
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Date of reporting period: | April 30, 2008 |
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Item 1. Reports to Stockholders
International Income Portfolio as of April 30, 2008
PORTFOLIO OF INVESTMENTS (Unaudited)
| Foreign Government Bonds — 58.2% | |||||||||||
| Security | Principal | U.S. $ Value | |||||||||
| Australia — 0.3% | |||||||||||
| Commonwealth of Australia, 6.50%, 5/15/13 | AUD | 105,000 | $ | 99,956 | |||||||
| Total Australia (identified cost $94,662) | $ | 99,956 | |||||||||
| Belgium — 3.8% | |||||||||||
| Kingdom of Belgium, 3.75%, 3/28/09 | EUR | 274,000 | $ | 424,851 | |||||||
| Kingdom of Belgium, 4.00%, 3/28/13 | EUR | 211,000 | 326,603 | ||||||||
| Kingdom of Belgium, 5.50%, 9/28/17 | EUR | 195,000 | 329,832 | ||||||||
| Kingdom of Belgium, 5.50%, 3/28/28 | EUR | 168,000 | 285,131 | ||||||||
| Total Belgium (identified cost $1,217,701) | $ | 1,366,417 | |||||||||
| Brazil — 1.1% | |||||||||||
| Letra Tesouro Nacional, 0.00%, 7/1/08 | BRL | 424,000 | $ | 246,011 | |||||||
| Nota Do Tesouro Nacional, 6.00%, 5/15/15(1) | BRL | 239,362 | 128,737 | ||||||||
| Total Brazil (identified cost $372,563) | $ | 374,748 | |||||||||
| Canada — 2.4% | |||||||||||
| Canada Government, 3.60%, 6/15/13 | CAD | 875,000 | $ | 864,357 | |||||||
| Total Canada (identified cost $871,109) | $ | 864,357 | |||||||||
| Costa Rica — 0.1% | |||||||||||
| Titulo Propiedad Ud, 1.63%, 7/13/16(3) | CRC | 4,151,396 | $ | 4,949 | |||||||
| Titulo Propiedad Ud, 1.00%, 1/12/22(2) | CRC | 35,977,344 | 45,718 | ||||||||
| Total Costa Rica (identified cost $45,423) | $ | 50,667 | |||||||||
| Czech Republic — 3.0% | |||||||||||
| Czech Republic, 4.125%, 3/18/20 | EUR | 730,000 | $ | 1,076,993 | |||||||
| Total Czech Republic (identified cost $1,102,187) | $ | 1,076,993 | |||||||||
| Denmark — 2.2% | |||||||||||
| Kingdom of Denmark, 6.00%, 11/15/09 | DKK | 1,470,000 | $ | 314,713 | |||||||
| Kingdom of Denmark, 5.00%, 11/15/13 | DKK | 938,000 | 203,449 | ||||||||
| Kingdom of Denmark, 4.00%, 11/15/15 | DKK | 215,000 | 43,986 | ||||||||
| Kingdom of Denmark, 4.00%, 11/15/17 | DKK | 1,008,000 | 204,194 | ||||||||
| Total Denmark (identified cost $667,707) | $ | 766,342 | |||||||||
| Security | Principal | U.S. $ Value | |||||||||
| France — 15.9% | |||||||||||
| Government of France, 4.00%, 4/25/09 | EUR | 1,055,000 | $ | 1,640,586 | |||||||
| Government of France, 4.00%, 10/25/13 | EUR | 905,000 | 1,405,008 | ||||||||
| Government of France, 4.00%, 4/25/14 | EUR | 570,000 | 883,590 | ||||||||
| Government of France, 3.75%, 4/25/17 | EUR | 420,000 | 629,866 | ||||||||
| Government of France, 5.50%, 4/25/29 | EUR | 641,000 | 1,100,177 | ||||||||
| Total France (identified cost $5,067,850) | $ | 5,659,227 | |||||||||
| Germany — 14.1% | |||||||||||
| Bundesschatzanweisungen, 3.75%, 3/13/09 | EUR | 1,280,000 | $ | 1,987,752 | |||||||
| Bundesrepub Deutschland, 3.75%, 7/4/13 | EUR | 1,056,000 | 1,632,116 | ||||||||
| Bundesrepub Deutschland, 6.25%, 1/4/30 | EUR | 732,000 | 1,381,198 | ||||||||
| Total Germany (identified cost $4,270,917) | $ | 5,001,066 | |||||||||
| Ghana — 0.4% | |||||||||||
| Ghanaian Government Bond, 13.69%, 3/15/10 | GHS | 140,000 | $ | 139,949 | |||||||
| Total Ghana (identified cost $145,651) | $ | 139,949 | |||||||||
| Iceland — 0.6% | |||||||||||
| Republic of Iceland, 9.50%, 6/13/08 | ISK | 16,672,000 | $ | 221,933 | |||||||
| Total Iceland (identified cost $225,932) | $ | 221,933 | |||||||||
| Netherlands — 3.8% | |||||||||||
| Government of Netherlands, 3.75%, 7/15/09 | EUR | 234,000 | $ | 363,124 | |||||||
| Government of Netherlands, 5.00%, 7/15/12 | EUR | 212,000 | 342,577 | ||||||||
| Government of Netherlands, 4.50%, 7/15/17 | EUR | 206,000 | 326,877 | ||||||||
| Government of Netherlands, 3.75%, 1/15/23 | EUR | 226,000 | 320,666 | ||||||||
| Total Netherlands (identified cost $1,203,951) | $ | 1,353,244 | |||||||||
| Nigeria — 0.3% | |||||||||||
| Nigerian Treasury Bond, 12.00%, 4/28/09 | NGN | 6,343,000 | $ | 55,529 | |||||||
| Nigerian Treasury Bond, 9.35%, 8/31/17 | NGN | 6,841,000 | 53,893 | ||||||||
| Total Nigeria (identified cost $108,438) | $ | 109,422 | |||||||||
| Peru — 0.3% | |||||||||||
| Republic of Peru, 12.25%, 8/10/11 | PEN | 243,000 | $ | 103,119 | |||||||
| Total Peru (identified cost $107,436) | $ | 103,119 | |||||||||
See notes to financial statements
11
International Income Portfolio as of April 30, 2008
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
| Security | Principal | U.S. $ Value | |||||||||
| Sri Lanka — 0.1% | |||||||||||
| Republic of Sri Lanka, 11.50%, 11/1/08 | LKR | 4,100,000 | $ | 36,849 | |||||||
| Total Sri Lanka (identified cost $36,892) | $ | 36,849 | |||||||||
| Sweden — 3.0% | |||||||||||
| Swedish Government, 5.00%, 1/28/09 | SEK | 470,000 | $ | 78,884 | |||||||
| Swedish Government, 6.75%, 5/5/14 | SEK | 395,000 | 75,292 | ||||||||
| Swedish Government, 3.75%, 8/12/17 | SEK | 5,510,000 | 895,877 | ||||||||
| Total Sweden (identified cost $933,790) | $ | 1,050,053 | |||||||||
| United Kingdom — 6.8% | |||||||||||
| United Kingdom Treasury Bond, 4.75%, 6/7/10 | GBP | 334,000 | $ | 666,121 | |||||||
| United Kingdom Treasury Bond, 5.00%, 3/7/12 | GBP | 321,000 | 650,289 | ||||||||
| United Kingdom Treasury Bond, 5.00%, 9/7/14 | GBP | 266,000 | 543,331 | ||||||||
| United Kingdom Treasury Bond, 4.75%, 3/7/20 | GBP | 285,000 | 562,806 | ||||||||
| Total United Kingdom (identified cost $2,446,859) | $ | 2,422,547 | |||||||||
| Total Foreign Government Bonds (identified cost $18,919,068) | $ | 20,696,889 | |||||||||
| Mortgage-Backed Securities — 25.1% | |||||||||||
| Collateralized Mortgage Obligations — 6.0% | |||||||||||
| Federal Home Loan Mortgage Corp., Series 2127, Class PG, 6.25%, 2/15/29 | $ | 918,754 | $ | 942,234 | |||||||
| Federal National Mortgage Association, Series 1991-139, Class PN, 7.50%, 10/25/21 | 1,119,754 | 1,198,268 | |||||||||
| Total Collateralized Mortgage Obligations (identified cost $2,129,252) | $ | 2,140,502 | |||||||||
| Mortgage Pass-Throughs — 19.1% | |||||||||||
| Federal National Mortgage Association: 6.00% with maturity at 2019 | $ | 480,715 | $ | 495,170 | |||||||
| 6.50% with maturity at 2017 | 1,238,126 | 1,288,954 | |||||||||
| $ | 1,784,124 | ||||||||||
| Government National Mortgage Association: 8.00% with maturity at 2016 | 2,374,959 | 2,524,520 | |||||||||
| 9.00% with various maturities to 2024(4) | 2,216,138 | 2,484,366 | |||||||||
| $ | 5,008,886 | ||||||||||
| U.S. $ Value | |||||||
| Total Mortgage Pass-Throughs (identified cost $6,698,275) | $ | 6,793,010 | |||||
| Total Mortgage-Backed Securities (identified cost $8,827,527) | $ | 8,933,512 | |||||
| Currency Options Purchased — 3.1% | |||||||
| Description | Principal Amount of Contracts (000's omitted) | Strike Price | Expiration Date | U.S. $ Value | |||||||||||||||
| Japanese Yen Call Option | JPY | 660,520 | 117.95 | 7/1/08 | $ | 868,709 | |||||||||||||
| Japanese Yen Put Option | JPY | 1,058,706 | 106.94 | 4/3/09 | 178,900 | ||||||||||||||
| South Korean Won Call Option | KRW | 452,600 | 905.2 | 7/28/09 | 1,132 | ||||||||||||||
| South Korean Won Put Option | KRW | 452,600 | 905.2 | 7/28/09 | 42,481 | ||||||||||||||
| Total Currency Options Purchased (identified cost $321,608) | $ | 1,091,222 | |||||||||||||||||
| Short-Term Investments — 12.6% | |||||||||||||||||||
| Foreign Government Securities — 9.7% | |||||||||||||||||||
| Security | Principal | U.S. $ Value | |||||||||
| Egypt — 6.0% | |||||||||||
| Egyptian Treasury Bill, 0.00%, 5/6/08 | EGP | 1,700,000 | $ | 315,975 | |||||||
| Egyptian Treasury Bill, 0.00%, 5/13/08 | EGP | 1,000,000 | 185,667 | ||||||||
| Egyptian Treasury Bill, 0.00%, 5/20/08 | EGP | 3,450,000 | 639,858 | ||||||||
| Egyptian Treasury Bill, 0.00%, 5/27/08 | EGP | 1,600,000 | 296,421 | ||||||||
| Egyptian Treasury Bill, 0.00%, 6/10/08 | EGP | 850,000 | 157,127 | ||||||||
| Egyptian Treasury Bill, 0.00%, 7/8/08 | EGP | 1,750,000 | 322,062 | ||||||||
| Egyptian Treasury Bill, 0.00%, 7/22/08 | EGP | 50,000 | 9,181 | ||||||||
| Egyptian Treasury Bill, 0.00%, 9/30/08 | EGP | 1,200,000 | 217,034 | ||||||||
| Total Egypt (identified cost $2,108,320) | $ | 2,143,325 | |||||||||
| Georgia — 1.0% | |||||||||||
| Bank of Georgia Group, 7.00%, 5/30/08(5) | GEL | 145,500 | $ | 99,341 | |||||||
| Bank of Georgia Group, 7.50%, 6/26/08(5) | GEL | 147,700 | 100,843 | ||||||||
| Bank of Georgia Group, 8.25%, 10/10/08(5) | GEL | 217,650 | 148,602 | ||||||||
| Total Georgia (identified cost $350,000) | $ | 348,786 | |||||||||
See notes to financial statements
12
International Income Portfolio as of April 30, 2008
PORTFOLIO OF INVESTMENTS (Unaudited) CONT'D
| Security | Principal | U.S. $ Value | |||||||||
| Peru — 2.7% | |||||||||||
| Peru Certificates of Deposit, 0.00%, 6/6/08 | PEN | 700,000 | $ | 244,223 | |||||||
| Peru Certificates of Deposit, 0.00%, 7/3/08 | PEN | 400,000 | 139,018 | ||||||||
| Peru Certificates of Deposit, 0.00%, 11/6/08 | PEN | 600,000 | 205,053 | ||||||||
| Peru Certificates of Deposit, 0.00%, 12/9/08 | PEN | 300,000 | 102,107 | ||||||||
| Peru Certificates of Deposit, 0.00%, 1/5/09 | PEN | 200,000 | 67,849 | ||||||||
| Peru Certificates of Deposit, 0.00%, 2/9/09 | PEN | 600,000 | 202,723 | ||||||||
| Total Peru (identified cost $923,500) | $ | 960,973 | |||||||||
| Total Foreign Government Securities (identified cost $3,381,820) | $ | 3,453,084 | |||||||||
| Other Securities — 2.9% | |||||||||||
| Description | Interest (000's omitted) | U.S. $ Value | |||||||||
| Investment in Cash Management Portfolio, 2.49%(6) | 1,029 | $ | 1,029,252 | ||||||||
| Total Other Securities (identified cost $1,029,252) | $ | 1,029,252 | |||||||||
| Total Short-Term Investments (identified cost $4,411,072) | $ | 4,482,336 | |||||||||
| Total Investments — 99.0% (identified cost $32,479,275) | $ | 35,203,959 | |||||||||
| Currency Options Written — (0.2)% | |||||||||||
Description | Principal Amount of Contracts (000's omitted) | Strike Price | Expiration Date | U.S. $ Value | |||||||||||||||
| Japanese Yen Call Option | JPY | 1,099,073 | 79.07 | 4/3/09 | $ | (75,950 | ) | ||||||||||||
| Total Currency Options Written (premiums received $117,803) | $ | (75,950 | ) | ||||||||||||||||
| Other Assets, Less Liabilities — 1.2% | $ | 422,674 | |||||||||||||||||
| Net Assets — 100.0% | $ | 35,550,683 | |||||||||||||||||
AUD - Australian Dollar
BRL - Brazilian Real
CAD - Canadian Dollar
CRC - Costa Rican Colon
DKK - Danish Krone
EGP - Egyptian Pound
EUR - Euro
GBP - British Pound
GEL - Georgian Lari
GHS - Ghanaian Cedi
ISK - Icelandic Krona
JPY - Japanese Yen
KRW - South Korean Won
LKR - Sri Lanka Rupee
NGN - Nigerian Naira
PEN - Peruvian Sol
SEK - Swedish Krona
(1) Bond pays a 6% coupon on the face at the end of the payment period. Principal is adjusted daily based on the ICPA (Amplified Consumer Price Index) as determined by the Brazilian Institute of Geography and Statistics. The original face is BRL 139,000 and the current face is BRL 239,362.
(2) Bond pays a 1% coupon on the face at the end of the payment period. Principal is adjusted daily based on Development Units (Unidades de Desarrollo) as calculated by the General Superintendent of Values. The original face is CRC 33,700,000 and the current face is CRC 35,977,344.
(3) Bond pays a 1.63% coupon on the face at the end of the payment period. Principal is adjusted daily based on Development Units (Unidades de Desarrollo) as calculated by the General Superintendent of Values. The original face is CRC 3,700,000 and the current face is CRC 4,151,396.
(4) Security (or a portion thereof) has been segregated to cover margin requirements on open financial futures contracts.
(5) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees.
(6) Affiliated investment company available to Eaton Vance portfolios and funds which invests in high quality, U.S. dollar denominated money market instruments. The rate shown is the annualized seven-day yield as of April 30, 2008.
See notes to financial statements
13
International Income Portfolio as of April 30, 2008
FINANCIAL STATEMENTS (Unaudited)
Statement of Assets and Liabilities
As of April 30, 2008
| Assets | |||||||
| Unaffiliated investments, at value (identified cost, $31,450,023) | $ | 34,174,707 | |||||
| Affiliated investment, at value (identified cost, $1,029,252) | 1,029,252 | ||||||
| Foreign currency, at value (identified cost, $185,471) | 185,420 | ||||||
| Interest receivable | 340,677 | ||||||
| Interest receivable from affiliated investment | 2,015 | ||||||
| Receivable for daily variation margin on open financial futures contracts | 2,420 | ||||||
| Receivable for open forward foreign currency contracts | 34,786 | ||||||
| Receivable for closed forward foreign currency contracts | 3,616 | ||||||
| Receivable for open swap contracts | 145,178 | ||||||
| Total assets | $ | 35,918,071 | |||||
| Liabilities | |||||||
| Payable for open forward foreign currency contracts | $ | 156,011 | |||||
| Payable for closed forward foreign currency contracts | 26,974 | ||||||
| Written options outstanding, at value (premiums received, $117,803) | 41,853 | ||||||
| Payable for investments purchased | 36,940 | ||||||
| Payable to affiliate for investment adviser fee | 15,047 | ||||||
| Payable for open swap contracts | 25,224 | ||||||
| Accrued expenses and other liabilities | 65,339 | ||||||
| Total liabilities | $ | 367,388 | |||||
| Net Assets applicable to investors' interest in Portfolio | $ | 35,550,683 | |||||
| Sources of Net Assets | |||||||
| Net proceeds from capital contributions and withdrawals | $ | 32,751,872 | |||||
| Net unrealized appreciation (computed on the basis of identified cost) | 2,798,811 | ||||||
| Total | $ | 35,550,683 | |||||
Statement of Operations
For the Six Months Ended
April 30, 2008
| Investment Income | |||||||
| Interest (net of foreign taxes, $409) | $ | 671,830 | |||||
| Interest income allocated from affiliated investment | 48,573 | ||||||
| Expenses allocated from affiliated investment | (5,577 | ) | |||||
| Total investment income | $ | 714,826 | |||||
| Expenses | |||||||
| Investment adviser fee | $ | 89,574 | |||||
| Trustees' fees and expenses | 50 | ||||||
| Custodian fee | 38,260 | ||||||
| Legal and accounting services | 34,480 | ||||||
| Miscellaneous | 1,302 | ||||||
| Total expenses | $ | 163,666 | |||||
| Deduct — Reduction of custodian fee | $ | 18 | |||||
| Total expense reductions | $ | 18 | |||||
| Net expenses | $ | 163,648 | |||||
| Net investment income | $ | 551,178 | |||||
| Realized and Unrealized Gain (Loss) | |||||||
| Net realized gain (loss) — Investment transactions (identified cost basis) | $ | 110,622 | |||||
| Financial futures contracts | 18,267 | ||||||
| Swap contracts | 13,953 | ||||||
| Foreign currency and forward foreign currency exchange contract transactions | 604,633 | ||||||
| Net realized gain | $ | 747,475 | |||||
| Change in unrealized appreciation (depreciation) — Investments (identified cost basis) | $ | 1,368,964 | |||||
| Financial futures contracts | (24,944 | ) | |||||
| Swap contracts | 118,010 | ||||||
| Written options | 75,950 | ||||||
| Foreign currency and forward foreign currency exchange contracts | (217,995 | ) | |||||
| Net change in unrealized appreciation (depreciation) | $ | 1,319,985 | |||||
| Net realized and unrealized gain | $ | 2,067,460 | |||||
| Net increase in net assets from operations | $ | 2,618,638 | |||||
See notes to financial statements
14
International Income Portfolio as of April 30, 2008
FINANCIAL STATEMENTS CONT'D
Statements of Changes in Net Assets
| Increase (Decrease) in Net Assets | Six Months Ended April 30, 2008 (Unaudited) | Period Ended October 31, 2007(1) | |||||||||
| From operations — Net investment income | $ | 551,178 | $ | 274,606 | |||||||
| Net realized gain from investment transactions, financial futures contracts, swap contracts, and foreign currency and forward foreign currency exchange contract transactions | 747,475 | 356,685 | |||||||||
| Net change in unrealized appreciation (depreciation) of investments, financial futures contracts, swap contracts, written options, and foreign currency and forward foreign currency exchange contracts | 1,319,985 | 1,478,826 | |||||||||
| Net increase in net assets from operations | $ | 2,618,638 | $ | 2,110,117 | |||||||
| Capital transactions — Contributions | $ | 10,129,177 | $ | 24,936,962 | |||||||
| Withdrawals | (776,963 | ) | (3,467,248 | ) | |||||||
| Net increase in net assets from capital transactions | $ | 9,352,214 | $ | 21,469,714 | |||||||
| Net increase in net assets | $ | 11,970,852 | $ | 23,579,831 | |||||||
| Net Assets | |||||||||||
| At beginning of period | $ | 23,579,831 | $ | — | |||||||
| At end of period | $ | 35,550,683 | $ | 23,579,831 | |||||||
(1) For the period from the start of business, June 27, 2007, to October 31, 2007.
See notes to financial statements
15
International Income Portfolio as of April 30, 2008
FINANCIAL STATEMENTS CONT'D
Supplementary Data
| Six Months Ended April 30, 2008 (Unaudited) | Period Ended October 31, 2007(1) | ||||||||||
| Ratios/Supplemental Data | |||||||||||
| Ratios (As a percentage of average daily net assets): | |||||||||||
| Expenses before custodian fee reduction(2) | 1.11 | %(3) | 1.35 | %(3) | |||||||
| Net investment income | 3.63 | %(3) | 3.75 | %(3) | |||||||
| Portfolio Turnover | 11 | % | 2 | % | |||||||
| Total Return | 9.72 | %(4) | 10.05 | %(4) | |||||||
| Net assets, end of period (000's omitted) | $ | 35,551 | $ | 23,580 | |||||||
(1) For the period from the start of business, June 27, 2007, to October 31, 2007.
(2) Excludes the effect of custody fee credits, if any, of less than 0.005%.
(3) Annualized.
(4) Not annualized.
See notes to financial statements
16
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1 Significant Accounting Policies
International Income Portfolio (the Portfolio) is a New York trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a non-diversified, open-end management investment company. The Portfolio's investment objective is to seek total return by investing in a global portfolio consisting primarily of high grade debt securities. The Declaration of Trust permits the Trustees to issue interests in the Portfolio. At April 30, 2008, Eaton Vance International Income Fund, Eaton Vance Medallion Strategic Income Fund and Eaton Vance Strategic Income Fund held an interest of 16.8%, 11.8% and 71.1%, respectively, in the Portfolio.
The following is a summary of significant accounting policies of the Portfolio. The policies are in conformity with accounting principles generally accepted in the United States of America.
A Investment Valuation — Debt obligations, including listed securities and securities for which quotations are available and forward contracts will normally be valued on the basis of market valuations provided by dealers or pricing services. The pricing services consider various factors relating to bonds and/or market transactions to determine market value. Most seasoned fixed rate 30-year mortgage-backed securities (MBS) are valued through the use of the investment adviser's matrix pricing system, which takes into account bond prices, yield differentials, anticipated prepayments and interest rates provided by dealers. Short-term debt securities with a remaining maturity of sixty days or less (excluding those that are non-U.S. dollar denominated which typically are valued by a pricing service or dealer quotes) are valued are amortized cost, which approximates market value. If short-term debt securities are acquired with a remaining maturity of more than sixty days, they will be valued by a pricing service. Foreign exchange rates for foreign exchange forward contracts and for the translation of non-U.S. dollar-denominated investments into U.S. dollars are obtained from a pricing service. Sovereign credit default swaps, foreign interest rate swaps and over-the-counter currency options are valued by a pricing service. Investments for which market quotations are not readily available and investments for which the price of the security is not believed to represent its fair market value, are valued at fair value using methods determined in good faith by or at the direction of the Trustees considering relevant factors, data and information including the market value of freely tradable securities of the same class in the principal market on which such securities are normally traded.
The Portfolio may invest in Cash Management Portfolio (Cash Management), an affiliated investment company managed by Boston Management and Research (BMR), a subsidiary of Eaton Vance Management (EVM). Cash Management values its investment securities utilizing the amortized cost valuation technique permitted by Rule 2a-7 of the 1940 Act. This technique involves initially valuing a portfolio security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium.
B Investment Transactions — Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized gains and losses on investments sold are determined on the basis of identified cost.
C Income — Interest income is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount.
D Federal Taxes — The Portfolio has elected to be treated as a partnership for federal tax purposes. No provision is made by the Portfolio for federal or state taxes on any taxable income of the Portfolio because each investor in the Portfolio is ultimately responsible for the payment of any taxes on its share of taxable income. Since at least one of the Portfolio's investors is a regulated investment company that invests all or substantially all of its assets in the Portfolio, the Portfolio normally must satisfy the applicable source of income and diversification requirements (under the Internal Revenue Code) in order for its investors to satisfy them. The Portfolio will allocate, at least annually among its investors, each investor's distributive share of the Portfolio' s net investment income, net realized capital gains and any other items of income, gain, loss, deduction or credit.
As of April 30, 2008, the Portfolio has no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. The Portfolio's initial year of operations from June 27, 2007 to October 31, 2007 remains subject to examination by the Internal Revenue Service.
E Expense Reduction — State Street Bank and Trust Company (SSBT) serves as custodian of the Portfolio. Pursuant to the custodian agreement, SSBT receives a fee reduced by credits, which are determined based on the average daily cash balance the Portfolio maintains with SSBT. All credit balances, if any, used to reduce the Portfolio's custodian fees are reported as a reduction of expenses in the Statement of Operations.
17
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
F Foreign Currency Translation — Investment valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange rates. Purchases and sales of foreign investment securities and income and expenses denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions. Recognized gains or losses on investment transactions attributable to changes in foreign currency exchange rates are recorded for financial statement purposes as net realized gains and losses on investments. That portion of unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
G Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
H Indemnifications — Under the Portfolio's organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Portfolio. Interestholders in the Portfolio are jointly and severally liable for the liabilities and obligations of the Portfolio in the event that the Portfolio fails to satisfy such liabilities and obligations; provided, however, that, to the extent assets are available in the Portfolio, the Portfolio may, under certain circumstances, indemnify interestholders from and against any claim or liability to which such holder may become subject by reason of being or having been an interestholder in the Portfolio. Additionally, in the normal course of business, the Portfo lio enters into agreements with service providers that may contain indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Portfolio that have not yet occurred.
I Financial Futures Contracts — The Portfolio may enter into financial futures contracts. The Portfolio's investment in financial futures contracts is designed for hedging against changes in interest rates or as substitute for the purchase of securities. Upon entering into a financial futures contract, the Portfolio is required to deposit with the broker, either in cash or securities an amount equal to a certain percentage of the purchase price (initial margin). Subsequent payments, known as variation margin, are made or received by the Portfolio each business day, depending on the daily fluctuations in the value of the underlying security, and are recorded as unrealized gains or losses by the Portfol io. Gains (losses) are realized upon the expiration or closing of the financial futures contracts. Should market conditions change unexpectedly, the Portfolio may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. In entering such contracts, the Portfolio bears the risk if the counterparties do not perform under the contracts' terms.
J Forward Foreign Currency Exchange Contracts — The Portfolio may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. The Portfolio enters into forward contracts for hedging purposes as well as non-hedging purposes. The forward foreign currency exchange contract is adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until such time as the contract has been closed or offset by another contract with the same broker for the same settlement date and currency. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from movements in the value of a foreign currency relative to the U.S. dollar.
K Written Options — Upon the writing of a call or a put option, the premium received by the Portfolio is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written, in accordance with the Portfolio's policies on investment valuations discussed above. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio, as a writer of an option, may have no control over whether the underlying securities or other assets may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities or other assets underlying the written option. The Portfolio may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
18
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
L Purchased Options — Upon the purchase of a call or put option, the premium paid by the Portfolio is included in the Statement of Assets and Liabilities as an investment. The amount of the investment is subsequently marked-to-market to reflect the current market value of the option purchased, in accordance with the Portfolio's policies on investment valuations discussed above. If an option which the Portfolio has purchased expires on the stipulated expiration date, the Portfolio will realize a loss in the amount of the cost of the option. If the Portfolio enters into a closing sale transaction, the Portfolio will realize a gain or loss, depending on whether the sales proceeds from the closing sale transaction are greater or less than the cost of the option. If the Portfo lio exercises a put option, it will realize a gain or loss from the sale of the underlying security, and the proceeds from such sale will be decreased by the premium originally paid. If the Portfolio exercises a call option, the cost of the security which the Portfolio purchases upon exercise will be increased by the premium originally paid.
M Interest Rate Swaps — The Portfolio may enter into interest rate swap agreements to enhance return, to hedge against fluctuations in securities prices or interest rates, or as substitution for the purchase or sale of securities. Pursuant to these agreements, the Portfolio makes periodic payments at a fixed interest rate and, in exchange, receives payments based on the interest rate of a benchmark industry index. Payments received or made are recorded as realized gains or losses. During the term of the outstanding swap agreement, changes in the underlying value of the swap are recorded as unrealized gains or losses. The value of the swap is determined by changes in the relationship between two rates of interest. The Portfolio is exposed to credit loss in the event of non - -performance by the swap counterparty. Risk may also arise from movements in interest rates.
N Credit Default Swaps — The Portfolio may enter into credit default swap contracts to buy or sell protection against default on an individual issuer or a basket of issuers of bonds. When the Portfolio is the buyer of a credit default swap contract, the Portfolio is entitled to receive the par (or other agreed-upon) value of a referenced debt obligation (or basket of debt obligations) from the counterparty to the contract in the event of default by a third party, such as a U.S. or foreign corporate issuer, on the debt obligation. In return, the Portfolio pays the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Portfolio would have spent the stream of payments and received no benefits from the contract. When the Portfolio is the seller of a credit default swap contract, it receives the stream of payments, but is obligated to pay upon default of the referenced debt obligation. As the seller, the Portfolio effectively adds leverage to its portfolio because, in addition to its total net assets, the Portfolio is subject to investment exposure on the notional amount of the swap. The interest fee paid or received on the swap contract, which is based on a specified interest rate on a fixed notional amount, is accrued daily as a component of unrealized appreciation (depreciation) and is recorded as realized gain upon receipt or realized loss upon payment. The Portfolio also records an increase or decrease to unrealized appreciation (depreciation) in an amount equal to the daily valuation. Up-front payments or receipts, if any, are recorded as other assets or other liabilities, respectively, and amortized over the li fe of the swap contract as realized gains or losses. The Portfolio segregates assets in the form of cash and cash equivalents in an amount equal to the aggregate market value of the credit default swaps of which it is the seller, marked to market on a daily basis. These transactions involve certain risks, including the risk that the seller may be unable to fulfill the transaction.
O Interim Financial Statements — The interim financial statements relating to April 30, 2008 and for the six months then ended have not been audited by an independent registered public accounting firm, but in the opinion of the Portfolio's management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial statements.
2 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by BMR as compensation for investment advisory services rendered to the Portfolio. The fee is computed at an annual rate of 0.625% of the Portfolio's average daily net assets up to $1 billion and at reduced rates as daily net assets exceed that level, and is payable monthly. The portion of the adviser fee payable by Cash Management on the Portfolio's investment of cash therein is credited against the Portfolio's adviser fee. For the six months ended April 30, 2008, the Portfolio's adviser fee totaled $94,728 of which $5,154 was allocated from Cash Management and $89,574 was paid or accrued directly by the Portfolio. For the six months ended April 30, 2008, the Portfolio's adviser fee, including the portion allocated from Cash Management, was 0.625% (annualized) of the Portfolio's average daily net assets.
Except for Trustees of the Portfolio who are not members of EVM's or BMR's organizations, officers and Trustees receive
19
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
remuneration for their services to the Portfolio out of the investment adviser fee. Trustees of the Portfolio who are not affiliated with the investment adviser may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the six months ended April 30, 2008, no significant amounts have been deferred. Certain officers and Trustees of the Portfolio are officers of the above organizations.
3 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations and including paydowns for the six months ended April 30, 2008 were as follows:
| Purchases | |||||||
| Investments (non-U.S. Government) | $ | 7,567,939 | |||||
| U.S. Government and Agency Securities | 2,884,906 | ||||||
| $ | 10,452,845 | ||||||
| Sales | |||||||
| Investments (non-U.S. Government) | $ | 1,818,205 | |||||
| U.S. Government and Agency Securities | 782,655 | ||||||
| $ | 2,600,860 | ||||||
4 Federal Income Tax Basis of Investments
The cost and unrealized appreciation (depreciation) of investments of the Portfolio at April 30, 2008, as determined on a federal income tax basis, were as follows:
| Aggregate cost | $ | 32,513,905 | |||||
| Gross unrealized appreciation | $ | 2,836,912 | |||||
| Gross unrealized depreciation | (146,858 | ) | |||||
| Net unrealized appreciation | $ | 2,690,054 | |||||
5 Financial Instruments
The Portfolio may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments may include forward foreign currency exchange contracts, interest rate swaps, credit default swaps, financial futures contracts, and written options and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Portfolio has in particular classes of financial instruments and does not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at April 30, 2008 is as follows:
Forward Foreign Currency Exchange Contracts
Sales
| Settlement Date | Deliver | In Exchange For | Net Unrealized Appreciation (Depreciation) | ||||||||||||
| 7/02/08 | Brazilian Real 424,000 | United States Dollar 246,154 | $ | (901 | ) | ||||||||||
| 5/06/08 | Canadian Dollar 394,000 | United States Dollar 388,135 | (3,070 | ) | |||||||||||
| 5/27/08 | Euro 148,400 | United States Dollar 236,707 | 5,866 | ||||||||||||
| 5/28/08 | New Zealand Dollar 225,000 | United States Dollar 178,585 | 3,467 | ||||||||||||
| 6/06/08 | Peruvian New Sol 700,000 | United States Dollar 238,420 | (8,012 | ) | |||||||||||
| 7/03/08 | Peruvian New Sol 400,000 | United States Dollar 136,286 | (4,741 | ) | |||||||||||
| 11/06/08 | Peruvian New Sol 300,000 | United States Dollar 101,902 | (4,363 | ) | |||||||||||
| 11/10/08 | Peruvian New Sol 300,000 | United States Dollar 101,850 | (4,428 | ) | |||||||||||
| 12/11/08 | Peruvian New Sol 300,000 | United States Dollar 101,902 | (4,471 | ) | |||||||||||
| 2/09/09 | Peruvian New Sol 600,000 | United States Dollar 203,114 | (9,990 | ) | |||||||||||
| 5/12/08 | South African Rand 4,741,457 | United States Dollar 616,783 | (10,317 | ) | |||||||||||
| 5/14/08 | Swedish Krona 4,732,000 | Euro 504,058 | (4,643 | ) | |||||||||||
| $ | (45,603 | ) | |||||||||||||
20
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
Purchases
| Settlement Date | In Exchange For | Deliver | Net Unrealized Appreciation (Depreciation) | ||||||||||||
| 5/27/08 | Botswana Pula 62,000 | United States Dollar 9,336 | $ | 285 | |||||||||||
| 5/30/08 | British Pound Sterling 102,339 | United States Dollar 203,646 | (1,339 | ) | |||||||||||
| 5/30/08 | Euro 469,311 | United States Dollar 733,262 | (3,321 | ) | |||||||||||
| 5/07/08 | Icelandic Krona 20,475,317 | Euro 178,590 | (4,648 | ) | |||||||||||
| 5/13/08 | Icelandic Krona 5,172,000 | Euro 45,253 | (1,413 | ) | |||||||||||
| 5/12/08 | Indian Rupee 3,876,000 | United States Dollar 96,779 | (1,191 | ) | |||||||||||
| 5/19/08 | Indian Rupee 4,268,000 | United States Dollar 106,807 | (1,613 | ) | |||||||||||
| 5/27/08 | Indian Rupee 11,425,000 | United States Dollar 285,696 | (4,290 | ) | |||||||||||
| 5/19/08 | Indonesian Rupiah 5,081,253,000 | United States Dollar 550,575 | (673 | ) | |||||||||||
| 5/12/08 | Japanese Yen 758,514,260 | United States Dollar 7,335,231 | (72,753 | ) | |||||||||||
| 5/19/08 | Kazakh Tenge 33,509,000 | United States Dollar 276,374 | 1,490 | ||||||||||||
| 6/18/08 | Kazakh Tenge 19,304,000 | United States Dollar 158,580 | 944 | ||||||||||||
| 5/27/08 | Kenyan Shilling 2,435,000 | United States Dollar 39,376 | (103 | ) | |||||||||||
| 5/08/08 | Malaysian Ringgit 575,000 | United States Dollar 180,403 | 1,609 | ||||||||||||
| 5/15/08 | Malaysian Ringgit 390,000 | United States Dollar 122,522 | 917 | ||||||||||||
| 5/22/08 | Malaysian Ringgit 560,000 | United States Dollar 177,947 | (719 | ) | |||||||||||
| 5/27/08 | Malaysian Ringgit 1,082,000 | United States Dollar 344,949 | (2,543 | ) | |||||||||||
| 5/30/08 | Malaysian Ringgit 670,000 | United States Dollar 214,016 | (1,999 | ) | |||||||||||
| 5/09/08 | Mexican Peso 727,000 | United States Dollar 68,950 | 203 | ||||||||||||
| 5/12/08 | Mexican Peso 1,059,179 | United States Dollar 101,114 | (401 | ) | |||||||||||
| 5/05/08 | New Turkish Lira 246,050 | United States Dollar 188,270 | 4,102 | ||||||||||||
| Settlement Date | In Exchange For | Deliver | Net Unrealized Appreciation (Depreciation) | ||||||||||||
| 5/20/08 | New Turkish Lira 247,000 | United States Dollar 183,466 | $ | 8,618 | |||||||||||
| 5/27/08 | New Turkish Lira 226,366 | United States Dollar 173,594 | 2,006 | ||||||||||||
| 5/12/08 | Philippine Peso 7,758,000 | United States Dollar 185,923 | (2,471 | ) | |||||||||||
| 5/12/08 | Polish Zloty 616,000 | Euro 178,146 | 232 | ||||||||||||
| 5/28/08 | Polish Zloty 346,000 | Euro 101,099 | (1,598 | ) | |||||||||||
| 6/05/08 | Polish Zloty 2,595,130 | Euro 750,103 | 304 | ||||||||||||
| 5/07/08 | Zambian Kwacha 139,390,000 | United States Dollar 35,860 | 4,235 | ||||||||||||
| 6/11/08 | Zambian Kwacha 26,000,000 | United States Dollar 6,917 | 508 | ||||||||||||
| $ | (75,622 | ) | |||||||||||||
At April 30, 2008, closed forward foreign currency purchases and sales contracts excluded above amounted to a receivable of $3,616 and a payable of $26,974.
Futures Contracts
| Expiration Date | Contracts | Position | Aggregate Cost | Value | Net Unrealized Depreciation | ||||||||||||||||||
| 6/08 | 4 Euro-Bund | Long | $ | 473,861 | $ | 456,280 | $ | (17,581 | ) | ||||||||||||||
| 6/08 | 12 U.K. Gilt | Long | 1,302,854 | 1,299,480 | (3,374 | ) | |||||||||||||||||
| 6/08 | 3 Canadian 10 Year Treasury Bond | Long | 358,859 | 354,870 | (3,989 | ) | |||||||||||||||||
| $ | (24,944 | ) | |||||||||||||||||||||
Interest Rate Swaps
| Counterparty | Notional Amount (000's omitted) | Portfolio Pays/ Receives Floating Rate | Floating Rate Index | Annual Fixed Rate | Termination Date | Net Unrealized Depreciation | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | BRL1,207 | Pay | Brazilian Interbank Deposit Rate | 11.34% | January 2, 2009 | $ | (5,714 | ) | |||||||||||||||||||
| $ | (5,714 | ) | |||||||||||||||||||||||||
BRL — Brazilian Real
21
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
Credit Default Swaps
| Counterparty | Reference Entity | Buy/ Sell | Notional Amount (000's omitted) | Pay/ Receive Annual Fixed Rate | Termination Date | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||||
| Barclays | Turkey (Republic of) | Buy | $ | 540 | 2.12 | % | 1/20/13 | $ | 4,022 | ||||||||||||||||||
| J.P. Morgan Chase, N.A. | Greece | Buy | 4,000 | 0.13 | 9/20/17 | 99,875 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 100 | 1.70 | 3/20/18 | 725 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 300 | 1.75 | 3/20/18 | 3,301 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 100 | 1.88 | 3/20/18 | 2,075 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 100 | 1.90 | 3/20/18 | 2,225 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 100 | 2.10 | 3/20/23 | 4,175 | |||||||||||||||||||||
| J.P. Morgan Chase, N.A. | Iceland (Republic of) | Sell | 100 | 2.45 | 3/20/18 | 7,559 | |||||||||||||||||||||
| Lehman Brothers, Inc. | Turkey (Republic of) | Buy | 843 | 1.45 | 7/20/12 | 21,221 | |||||||||||||||||||||
| Lehman Brothers, Inc. | CDX.EM.9 Index* | Buy | 1,100 | 2.65 | 6/30/13 | (19,510) | |||||||||||||||||||||
| $ | 125,668 | ||||||||||||||||||||||||||
* CDX.EM.9 Index is composed of issues from (i) Latin America; (ii) Eastern Europe, the Middle East and Africa; and (iii) Asia as determined by Markit Partners.
Written call option activity for the six months ended April 30, 2008 was as follows:
| Principal Amount of Contracts (000's omitted) | Premiums Received | ||||||||||
| Outstanding, beginning of period | — | $ | — | ||||||||
| Options written | 1,099,073 | 117,803 | |||||||||
| Outstanding, end of period | 1,099,073 | $ | 117,803 | ||||||||
At April 30, 2008, the Portfolio had sufficient cash and/or securities to cover commitments under these contracts.
6 Line of Credit
The Portfolio participates with other portfolios and funds managed by EVM and its affiliates in a $200 million unsecured line of credit agreement with a group of banks. Borrowings are made by the Portfolio solely to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Interest is charged to the Portfolio based on its borrowings at an amount above either the Eurodollar rate or Federal Funds rate. In addition, a fee computed at an annual rate of 0.07% on the daily unused portion of the line of credit is allocated among the participating portfolios and funds at the end of each quarter. The Portfolio did not have any significant borrowings or allocated fees during the six months ended April 30, 2008.
7 Risks Associated with Foreign Investments
Investing in securities issued by entities whose principal business activities are outside the United States may involve significant risks not present in domestic investments. For example, there is generally less publicly available information about foreign companies, particularly those not subject to the disclosure and reporting requirements of the U.S. securities laws. Certain foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitation on the removal of funds or other assets of the Portfolio, political or financial instability or diplomatic and other developments which could affect such investments. Foreign securities mark ets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable U.S. companies. In general, there is less overall governmental supervision and regulation of foreign securities markets, broker-dealers and issuers than in the United States.
8 Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (FAS 157), "Fair Value Measurements". FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. As of April 30, 2008, management does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements; however, additional disclosures may be required about the inputs used to develop the measurements of fair value and the effect of certain of the measurements on changes in net assets for the period.
22
International Income Portfolio as of April 30, 2008
NOTES TO FINANCIAL STATEMENTS (Unaudited) CONT'D
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (FAS 161), "Disclosures about Derivative Instruments and Hedging Activities". FAS 161 requires enhanced disclosures about an entity's derivative and hedging activities, including qualitative disclosures about the objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative instruments. FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the impact the adoption of FAS 161 will have on the Portfolio's financial statement disclosures.
23
Eaton Vance International Income Fund
BOARD OF TRUSTEES' ANNUAL APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT
Overview of the Contract Review Process
The Investment Company Act of 1940, as amended (the "1940 Act"), provides, in substance, that each investment advisory agreement between a fund and its investment adviser will continue in effect from year to year only if its continuance is approved at least annually by the fund's board of trustees, including by a vote of a majority of the trustees who are not "interested persons" of the fund ("Independent Trustees"), cast in person at a meeting called for the purpose of considering such approval.
At a meeting of the Boards of Trustees (each a "Board") of the Eaton Vance group of mutual funds (the "Eaton Vance Funds") held on April 21, 2008, the Board, including a majority of the Independent Trustees, voted to approve continuation of existing advisory and sub-advisory agreements for the Eaton Vance Funds for an additional one-year period. In voting its approval, the Board relied upon the affirmative recommendation of the Contract Review Committee of the Board (formerly the Special Committee), which is a committee comprised exclusively of Independent Trustees. Prior to making its recommendation, the Contract Review Committee reviewed information furnished for a series of meetings of the Contract Review Committee held in February, March and April 2008. Such information included, among other things, the following:
Information about Fees, Performance and Expenses
• An independent report comparing the advisory and related fees paid by each fund with fees paid by comparable funds;
• An independent report comparing each fund's total expense ratio and its components to comparable funds;
• An independent report comparing the investment performance of each fund to the investment performance of comparable funds over various time periods;
• Data regarding investment performance in comparison to relevant peer groups of funds and appropriate indices;
• Comparative information concerning fees charged by each adviser for managing other mutual funds and institutional accounts using investment strategies and techniques similar to those used in managing the fund;
• Profitability analyses for each adviser with respect to each fund;
Information about Portfolio Management
• Descriptions of the investment management services provided to each fund, including the investment strategies and processes employed, and any changes in portfolio management processes and personnel;
• Information concerning the allocation of brokerage and the benefits received by each adviser as a result of brokerage allocation, including information concerning the acquisition of research through "soft dollar" benefits received in connection with the funds' brokerage, and the implementation of a soft dollar reimbursement program established with respect to the funds;
• Data relating to portfolio turnover rates of each fund;
• The procedures and processes used to determine the fair value of fund assets and actions taken to monitor and test the effectiveness of such procedures and processes;
Information about each Adviser
• Reports detailing the financial results and condition of each adviser;
• Descriptions of the qualifications, education and experience of the individual investment professionals whose responsibilities include portfolio management and investment research for the funds, and information relating to their compensation and responsibilities with respect to managing other mutual funds and investment accounts;
• Copies of the Codes of Ethics of each adviser and its affiliates, together with information relating to compliance with and the administration of such codes;
• Copies of or descriptions of each adviser's proxy voting policies and procedures;
• Information concerning the resources devoted to compliance efforts undertaken by each adviser and its affiliates on behalf of the funds (including descriptions of various compliance programs) and their record of compliance with investment policies and restrictions, including policies with respect to market-timing, late trading and selective portfolio disclosure, and with policies on personal securities transactions;
• Descriptions of the business continuity and disaster recovery plans of each adviser and its affiliates;
Other Relevant Information
• Information concerning the nature, cost and character of the administrative and other non-investment management services provided by Eaton Vance Management and its affiliates;
• Information concerning management of the relationship with the custodian, subcustodians and fund accountants by each adviser or the funds' administrator; and
• The terms of each advisory agreement.
24
Eaton Vance International Income Fund
BOARD OF TRUSTEES' ANNUAL APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT CONT'D
In addition to the information identified above, the Contract Review Committee considered information provided from time to time by each adviser throughout the year at meetings of the Board and its committees. Over the course of the twelve-month period ended April 30, 2008, the Board met eleven times and the Contract Review Committee, the Audit Committee and the Governance Committee, each of which is a Committee comprised solely of Independent Trustees, met twelve, seven and five times, respectively. At such meetings, the Trustees received, among other things, presentations by the portfolio managers and other investment professionals of each adviser relating to the investment performance of each fund and the investment strategies used in pursuing the fund's investment objective. The Portfolio Management Committee and the Compliance Reports and Regulatory Matters Committee are newly established and did not meet during the twelve- month period ended April 30, 2008.
For funds that invest through one or more underlying portfolios, the Board considered similar information about the portfolio(s) when considering the approval of advisory agreements. In addition, in cases where the fund's investment adviser has engaged a sub-adviser, the Board considered similar information about the sub-adviser when considering the approval of any sub-advisory agreement.
The Contract Review Committee was assisted throughout the contract review process by Goodwin Procter LLP, legal counsel for the Independent Trustees. The members of the Contract Review Committee relied upon the advice of such counsel and their own business judgment in determining the material factors to be considered in evaluating each advisory and sub-advisory agreement and the weight to be given to each such factor. The conclusions reached with respect to each advisory and sub-advisory agreement were based on a comprehensive evaluation of all the information provided and not any single factor. Moreover, each member of the Contract Review Committee may have placed varying emphasis on particular factors in reaching conclusions with respect to each advisory and sub-advisory agreement.
Results of the Process
Based on its consideration of the foregoing, and such other information as it deemed relevant, including the factors and conclusions described below, the Contract Review Committee concluded that the continuance of the investment advisory agreement of the Eaton Vance International Income Fund (the "Fund") with Eaton Vance Management ("EVM"), as well as the terms of the investment advisory agreement of the International Income Portfolio (the "Portfolio"), the portfolio in which the Fund will invest substantially all of its assets, with Boston Management and Research ("BMR"), an affiliate of EVM (EVM, with respect to the Fund, and BMR, with respect to the Portfolio, are each referred to herein as the "Adviser"), including the fee structure of each agreement, is in the interests of shareholders and, therefore, the Contract Review Committee recommended to the Board approval of the agreements. The Board accepted the recommendation of the Contract Review Committee as well as the factors considered and conclusions reached by the Contract Review Committee with respect to the agreements. Accordingly, the Board, including a majority of the Independent Trustees, voted to approve the investment advisory agreements for the Fund and the Portfolio.
Nature, Extent and Quality of Services
In considering whether to approve the investment advisory agreements of the Fund and the Portfolio, the Board evaluated the nature, extent and quality of services to be provided to the Fund by EVM and the Portfolio by BMR.
The Board considered EVM's and BMR's management capabilities and investment process with respect to the types of investments to be held by the Fund and the Portfolio, including the education, experience and number of its investment professionals and other personnel who provide portfolio management, investment research, and similar services to the Portfolio and the Fund. The Board specifically noted EVM's and BMR's expertise with respect to global markets and in-house research capabilities. The Board also took into account the resources dedicated to portfolio management and other services, including the compensation paid to recruit and retain investment personnel, and the time and attention devoted to the Fund and Portfolio in the complex by senior management.
The Board noted that under the terms of the investment advisory agreement of the Fund, EVM may invest assets of the Fund directly in securities, for which it may receive a fee, or in the Portfolio, for which it receives no separate fee but for which BMR receives an advisory fee from the Portfolio. The Trustees considered the potential benefits to the Fund of the ability to make direct investments, such as an improved ability to: manage the Fund's duration, or other general market exposures, using certain derivatives; add exposure to specific market sectors or asset classes without changing the Portfolio's investments, which would affect any other fund investing in the Portfolio; hedge some of the general market risks of the Portfolio while retaining the value added by the individual manager; and hedge a portion of the exposures of the Portfolio while retaining others (e.g., hedging the U.S. government exposure of the Portfolio while retaining its exposure to high-grade corporate bonds).
The Board also reviewed the compliance programs of the Adviser and relevant affiliates thereof. Among other matters, the Board considered compliance and reporting matters relating to personal trading by investment personnel, selective disclosure of portfolio holdings, late trading, frequent trading, portfolio valuation, business continuity and the allocation of investment opportunities. The
25
Eaton Vance International Income Fund
BOARD OF TRUSTEES' ANNUAL APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT CONT'D
Board also evaluated the responses of the Adviser and its affiliates to requests from regulatory authorities such as the Securities and Exchange Commission.
The Board considered shareholder and other administrative services provided or managed by EVM and its affiliates, including transfer agency and accounting services. The Board evaluated the benefits to shareholders of investing in a fund that is a part of a large family of funds, including the ability, in many cases, to exchange an investment among different funds without incurring additional sales charges.
After consideration of the foregoing factors, among others, the Board concluded that the nature, extent and quality of services provided by the Adviser, taken as a whole, are appropriate and consistent with the terms of the investment advisory agreements.
Fund Performance
The Board compared the Fund's investment performance to a relevant universe of similarly managed funds identified by an independent data provider and appropriate benchmark indices. The Board reviewed comparative performance data for the period from inception (June 27, 2007) through September 30, 2007 for the Fund. In light of the Fund's relatively brief operating history, the Board concluded that additional time was required to evaluate Fund performance.
Management Fees and Expenses
The Board reviewed contractual investment advisory fee rates to be paid by the Fund directly or indirectly through its pro rata share of the expenses of the Portfolio (referred to as "management fees"). As part of its review, the Board considered the Fund's management fees and estimated expense ratio for the period from inception through September 30, 2007, as compared to a group of similarly managed funds selected by an independent data provider. The Board considered the fact that the Adviser had waived fees and/or paid expenses for the Fund.
After reviewing the foregoing information, and in light of the nature, extent and quality of the services provided by the Adviser, the Board concluded that the management fees proposed to be charged for advisory and related services and the Fund's total expense ratio are reasonable.
Profitability
The Board reviewed the level of profits realized by the Adviser and relevant affiliates thereof in providing investment advisory and administrative services to the Portfolio, the Fund and all Eaton Vance Funds as a group. The Board considered the level of profits realized without regard to revenue sharing or other payments by the Adviser and its affiliates to third parties in respect of distribution services. The Board also considered other direct or indirect benefits received by the Adviser and its affiliates in connection with its relationship with the Portfolio and the Fund.
The Board concluded that, in light of the foregoing factors and the nature, extent and quality of the services rendered, the profits realized by the Adviser and its affiliates are reasonable.
Economies of Scale
In reviewing management fees and profitability, the Board also considered the extent to which the Adviser and its affiliates, on the one hand, and the Fund and the Portfolio, on the other hand, can expect to realize benefits from economies of scale as the assets of the Fund and the Portfolios increase. The Board noted the structure of the advisory fee, which includes breakpoints at several asset levels both at the Fund and at the Portfolio level. Based upon the foregoing, the Board concluded that the Adviser and its affiliates and the Fund and the Portfolio can be expected to share such benefits equitably.
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Eaton Vance International Income Fund
OFFICERS AND TRUSTEES
Eaton Vance International Income Fund
| Officers Thomas E. Faust Jr. President and Trustee William H. Ahern, Jr. Vice President John R Baur Vice President Michael A. Cirami Vice President Cynthia J. Clemson Vice President Charles B. Gaffney Vice President Christine M. Johnston Vice President Aamer Khan Vice President Thomas H. Luster Vice President Michael R. Mach Vice President Robert B. MacIntosh Vice President Duncan W. Richardson Vice President Judith A. Saryan Vice President Susan Schiff Vice President Thomas Seto Vice President David M. Stein Vice President Mark S. Venezia Vice President Adam A. Weigold Vice President Barbara E. Campbell Treasurer Maureen A. Gemma Secretary Paul M. O'Neil Chief Compliance Officer | Trustees Ralph F. Verni Chairman Benjamin C. Esty Allen R. Freedman William H. Park Ronald A. Pearlman Norton H. Reamer Heidi L. Steiger Lynn A. Stout | ||||||
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Eaton Vance International Income Fund
OFFICERS AND TRUSTEES CONT'D
Eaton Vance International Income Portfolio
| Officers Mark S. Venezia President John R. Baur Vice President Michael A. Cirami Vice President Christine M. Johnston Vice President Susan Schiff Vice President Barbara E. Campbell Treasurer Maureen A. Gemma Secretary Paul M. O'Neil Chief Compliance Officer | Trustees Ralph F. Verni Chairman Benjamin C. Esty Thomas E. Faust Jr. Allen R. Freedman William H. Park Ronald A. Pearlman Norton H. Reamer Heidi L. Steiger Lynn A. Stout | ||||||
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Investment Adviser of International Income Portfolio
Boston Management and Research
The Eaton Vance Building
255 State Street
Boston, MA 02109
Investment Adviser and Administrator of Eaton Vance International Income Fund
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
Principal Underwriter
Eaton Vance Distributors, Inc.
The Eaton Vance Building
255 State Street
Boston, MA 02109
(617) 482-8260
Custodian
State Street Bank and Trust Company
200 Clarendon Street
Boston, MA 02116
Transfer Agent
PFPC Inc.
Attn: Eaton Vance Funds
P.O. Box 9653
Providence, RI 02940-9653
(800) 262-1122
Eaton Vance International Income Fund
The Eaton Vance Building
255 State Street
Boston, MA 02109
This report must be preceded or accompanied by a current prospectus. Before investing, investors should consider carefully the Fund's investment objective(s), risks, and charges and expenses. The Fund's current prospectus contains this and other information about the Fund and is available through your financial advisor. Please read the prospectus carefully before you invest or send money. For further information please call 1-800-225-6265.
3042-6/08 INTLISRC
Item 2. Code of Ethics
The registrant has adopted a code of ethics applicable to its Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-262-1122.
Item 3. Audit Committee Financial Expert
The registrant’s Board has designated William H. Park and Norton H. Reamer, each an independent trustee, as its audit committee financial experts. Mr. Park is a certified public accountant who is the Vice Chairman of Commercial Industrial Finance Corp (specialty finance company). Previously, he served as President and Chief Executive Officer of Prizm Capital Management, LLC (investment management firm) and as Executive Vice President and Chief Financial Officer of United Asset Management Corporation (“UAM”) (a holding company owning institutional investment management firms). Mr. Reamer is the President, Chief Executive Officer and a Director of Asset Management Finance Corp. (a specialty finance company serving the investment management industry) and is President of Unicorn Corporation (an investment and financial advisory services company). Formerly, Mr. Reamer was Chairman and Chief Operating Officer of Hellman, Jordan Management Co., Inc. (an investment management company) and Advisory Director of Berkshire Capital Corporation (an investment banking firm), Chairman of the Board of UAM and Chairman, President and Director of the UAM Funds (mutual funds).
Item 4. Principal Accountant Fees and Services
Not required in this filing
Item 5. Audit Committee of Listed registrants
Not required in this filing.
Item 6. Schedule of Investments
Please see schedule of investments contained in the Report to Stockholders included under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not required in this filing.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not required in this filing.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not required in this filing.
Item 10. Submission of Matters to a Vote of Security Holders.
No Material Changes.
Item 11. Controls and Procedures
(a) It is the conclusion of the registrant’s principal executive officer and principal financial officer that the effectiveness of the registrant’s current disclosure controls and procedures (such disclosure controls and procedures having been evaluated within 90 days of the date of this filing) provide reasonable assurance that the information required to be disclosed by the registrant has been recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms and that the information required to be disclosed by the registrant has been accumulated and communicated to the registrant’s principal executive officer and principal financial officer in order to allow timely decisions regarding required disclosure.
(b) There have been no changes in the registrant’s internal controls over financial reporting during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a)(1) |
| Registrant’s Code of Ethics – Not applicable (please see Item 2). |
(a)(2)(i) |
| Treasurer’s Section 302 certification. |
(a)(2)(ii) |
| President’s Section 302 certification. |
(b) |
| Combined Section 906 certification. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
International Income Portfolio | ||
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By: | /s/Mark S. Venezia |
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| Mark S. Venezia |
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| President |
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Date: | June 11, 2008 |
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/Barbara E. Campbell |
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| Barbara E. Campbell |
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| Treasurer |
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Date: | June 11, 2008 |
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By: | /s/Mark S. Venezia |
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| Mark S. Venezia |
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| President |
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Date: | June 11, 2008 |
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