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: 811-21563
Eaton Vance Short Duration Diversified Income Fund
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, Massachusetts 02110
(Address of Principal Executive Offices)
Maureen A. Gemma
Two International Place, Boston, Massachusetts 02110
(Name and Address of Agent for Services)
(617) 482-8260
(Registrant’s Telephone Number)
October 31
Date of Fiscal Year End
October 31, 2013
Date of Reporting Period
Item 1. Reports to Stockholders
Eaton Vance
Short Duration Diversified Income Fund (EVG)
Annual Report
October 31, 2013
Commodity Futures Trading Commission Registration. Effective December 31, 2012, the Commodity Futures Trading Commission (“CFTC”) adopted certain regulatory changes that subject registered investment companies and advisers to regulation by the CFTC if a fund invests more than a prescribed level of its assets in certain CFTC-regulated instruments (including futures, certain options and swap agreements) or markets itself as providing investment exposure to such instruments. The Fund is considered to be a commodity pool operator under CFTC regulations. The Fund’s adviser is registered with the CFTC as a commodity pool operator and a commodity trading advisor. The CFTC has neither reviewed nor approved the Fund’s investment strategies.
Managed Distribution Plan. Pursuant to an exemptive order issued by the Securities and Exchange Commission (Order), the Fund is authorized to distribute long-term capital gains to shareholders more frequently than once per year. Pursuant to the Order, the Fund’s Board of Trustees approved a Managed Distribution Plan (MDP) pursuant to which the Fund makes monthly cash distributions to common shareholders, stated in terms of a fixed amount per common share.
The Fund currently distributes monthly cash distributions equal to $0.09 per share in accordance with the MDP. You should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the MDP. The MDP will be subject to regular periodic review by the Fund’s Board of Trustees and the Board may amend or terminate the MDP at any time without prior notice to Fund shareholders. However, at this time there are no reasonably foreseeable circumstances that might cause the termination of the MDP.
The Fund may distribute more than its net investment income and net realized capital gains and, therefore, a distribution may include a return of capital. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.” With each distribution, the Fund will issue a notice to shareholders and a press release containing information about the amount and sources of the distribution and other related information. The amounts and sources of distributions contained in the notice and press release are only estimates and are not provided for tax purposes. The amounts and sources of the Fund’s distributions for tax purposes will be reported to shareholders on Form 1099-DIV for each calendar year.
Fund shares are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Shares are subject to investment risks, including possible loss of principal invested.
Annual Report October 31, 2013
Eaton Vance
Short Duration Diversified Income Fund
Table of Contents
| Management’s Discussion of Fund Performance |
2 | |||
| Performance |
3 | |||
| Fund Profile |
3 | |||
| Endnotes and Additional Disclosures |
4 | |||
| Consolidated Financial Statements |
5 | |||
| Report of Independent Registered Public Accounting Firm |
44 | |||
| Federal Tax Information |
45 | |||
| Dividend Reinvestment Plan |
46 | |||
| Management and Organization |
48 | |||
| Important Notices |
50 | |||
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Management’s Discussion of Fund Performance1
See Endnotes and Additional Disclosures in this report.
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 market price (as applicable) with all distributions reinvested and includes management fees and other expenses. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than 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 www.eatonvance.com.
| 2 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Performance2
Portfolio Managers Scott H. Page, CFA, Payson F. Swaffield, CFA, Catherine C. McDermott, Andrew Szczurowski, CFA and Eric A. Stein, CFA
| % Average Annual Total Returns | Inception Date | One Year | Five Years | Since Inception |
||||||||||||
| Fund at NAV |
02/28/2005 | 1.47 | % | 9.83 | % | 6.20 | % | |||||||||
| Fund at Market Price |
— | –5.72 | 11.29 | 4.93 | ||||||||||||
| % Premium/Discount to NAV3 | ||||||||||||||||
| –9.90 | % | |||||||||||||||
| Distributions4 | ||||||||||||||||
| Total Distributions per share for the period |
$ | 1.080 | ||||||||||||||
| Distribution Rate at NAV |
6.36 | % | ||||||||||||||
| Distribution Rate at Market Price |
7.06 | % | ||||||||||||||
| % Total Leverage5 | ||||||||||||||||
| Derivatives |
25.38 | % | ||||||||||||||
| Borrowings |
17.06 | |||||||||||||||
Fund Profile
| * | Net securities sold short. |
See Endnotes and Additional Disclosures in this report.
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 market price (as applicable) with all distributions reinvested and includes management fees and other expenses. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than 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 www.eatonvance.com.
| 3 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Endnotes and Additional Disclosures
| 4 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments
| 5 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 6 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 7 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 8 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 9 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 10 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 11 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 12 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 13 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 14 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 15 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 16 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 17 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 18 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 19 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 20 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 21 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Portfolio of Investments — continued
| 22 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Statement of Assets and Liabilities
| Assets | October 31, 2013 | |||
| Investments — |
||||
| Securities of unaffiliated issuers, at value (identified cost, $392,792,563) |
$ | 399,733,322 | ||
| Affiliated investment, at value (identified cost, $3,578,546) |
3,578,546 | |||
| Precious metals, at value (identified cost, $2,644,211) |
2,189,742 | |||
| Total Investments, at value (identified cost, $399,015,320) |
$ | 405,501,610 | ||
| Cash |
$ | 9,348,930 | ||
| Restricted cash* |
400,000 | |||
| Foreign currency, at value (identified cost, $2,169,074) |
2,165,415 | |||
| Interest receivable |
2,576,862 | |||
| Interest receivable from affiliated investment |
721 | |||
| Receivable for investments sold |
3,064,835 | |||
| Receivable for open forward foreign currency exchange contracts |
929,375 | |||
| Receivable for open swap contracts |
1,278,894 | |||
| Premium paid on open swap contracts |
772,094 | |||
| Tax reclaims receivable |
19,301 | |||
| Other assets |
5,044 | |||
| Total assets |
$ | 426,063,081 | ||
| Liabilities | ||||
| Notes payable |
$ | 95,000,000 | ||
| Cash collateral due to brokers |
400,000 | |||
| Written options outstanding, at value (premiums received, $146,704) |
49,859 | |||
| Payable for investments purchased |
6,570,460 | |||
| Payable for variation margin on open futures contracts |
82,898 | |||
| Payable for open forward foreign currency exchange contracts |
1,064,253 | |||
| Payable for open swap contracts |
1,100,863 | |||
| Payable for securities sold short, at value (proceeds, $430,612) |
426,570 | |||
| Payable to affiliates: |
||||
| Investment adviser fee |
340,118 | |||
| Trustees’ fees |
2,178 | |||
| Interest payable for securities sold short |
1,417 | |||
| Accrued expenses |
510,853 | |||
| Total liabilities |
$ | 105,549,469 | ||
| Net Assets |
$ | 320,513,612 | ||
| Sources of Net Assets | ||||
| Common shares, $0.01 par value, unlimited number of shares authorized, 18,886,596 shares issued and outstanding |
$ | 188,866 | ||
| Additional paid-in capital |
337,479,001 | |||
| Accumulated net realized loss |
(23,448,115 | ) | ||
| Accumulated distributions in excess of net investment income |
(321,218 | ) | ||
| Net unrealized appreciation |
6,615,078 | |||
| Net Assets |
$ | 320,513,612 | ||
| Net Asset Value | ||||
| ($320,513,612 ÷ 18,886,596 common shares issued and outstanding) |
$ | 16.97 | ||
| * | Represents restricted cash pledged for the benefit of the Fund for open derivative contracts. |
| 23 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Statement of Operations
| Investment Income | Year Ended October 31, 2013 |
|||
| Interest (net of foreign taxes, $117,258) |
$ | 22,155,918 | ||
| Dividends |
63,467 | |||
| Interest allocated from affiliated investment |
9,933 | |||
| Expenses allocated from affiliated investment |
(1,211 | ) | ||
| Total investment income |
$ | 22,228,107 | ||
| Expenses | ||||
| Investment adviser fee |
$ | 4,125,118 | ||
| Trustees’ fees and expenses |
20,887 | |||
| Custodian fee |
655,115 | |||
| Transfer and dividend disbursing agent fees |
18,372 | |||
| Legal and accounting services |
160,709 | |||
| Printing and postage |
145,890 | |||
| Interest expense and fees |
1,276,360 | |||
| Interest expense on securities sold short |
261,594 | |||
| Miscellaneous |
94,172 | |||
| Total expenses |
$ | 6,758,217 | ||
| Deduct — |
||||
| Reduction of investment adviser fee |
$ | 91,469 | ||
| Reduction of custodian fee |
1,338 | |||
| Total expense reductions |
$ | 92,807 | ||
| Net expenses |
$ | 6,665,410 | ||
| Net investment income |
$ | 15,562,697 | ||
| Realized and Unrealized Gain (Loss) | ||||
| Net realized gain (loss) — |
||||
| Investment transactions (including a gain of $534,700 from precious metals) |
$ | 3,949,713 | ||
| Investment transactions allocated from affiliated investment |
229 | |||
| Written options |
852,926 | |||
| Securities sold short |
(992,540 | ) | ||
| Futures contracts |
(1,011,379 | ) | ||
| Swap contracts |
(3,126,657 | ) | ||
| Forward commodity contracts |
(44,871 | ) | ||
| Foreign currency and forward foreign currency exchange contract transactions |
(2,477,808 | ) | ||
| Net realized loss |
$ | (2,850,387 | ) | |
| Change in unrealized appreciation (depreciation) — |
||||
| Investments (including net decrease of $803,642 from precious metals) |
$ | (11,330,902 | ) | |
| Written options |
(249,502 | ) | ||
| Securities sold short |
602,921 | |||
| Futures contracts |
144,196 | |||
| Swap contracts |
1,209,373 | |||
| Forward commodity contracts |
109,589 | |||
| Foreign currency and forward foreign currency exchange contracts |
312,707 | |||
| Net change in unrealized appreciation (depreciation) |
$ | (9,201,618 | ) | |
| Net realized and unrealized loss |
$ | (12,052,005 | ) | |
| Net increase in net assets from operations |
$ | 3,510,692 | ||
| 24 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Statements of Changes in Net Assets
| Year Ended October 31, | ||||||||
| Increase (Decrease) in Net Assets | 2013 | 2012 | ||||||
| From operations — |
||||||||
| Net investment income |
$ | 15,562,697 | $ | 16,376,795 | ||||
| Net realized gain (loss) from investment transactions, written options, securities sold short, futures contracts, swap contracts, forward commodity contracts, and foreign currency and forward foreign currency exchange contract transactions |
(2,850,387 | ) | 3,991,302 | |||||
| Net change in unrealized appreciation (depreciation) from investments, written options, securities sold short, futures contracts, swap contracts, forward commodity contracts, foreign currency and forward foreign currency exchange contracts |
(9,201,618 | ) | 1,265,177 | |||||
| Net increase in net assets from operations |
$ | 3,510,692 | $ | 21,633,274 | ||||
| Distributions to shareholders — |
||||||||
| From net investment income |
$ | (13,169,455 | ) | $ | (13,830,542 | ) | ||
| Tax return of capital |
(7,228,069 | ) | (6,566,982 | ) | ||||
| Total distributions |
$ | (20,397,524 | ) | $ | (20,397,524 | ) | ||
| Net increase (decrease) in net assets |
$ | (16,886,832 | ) | $ | 1,235,750 | |||
| Net Assets | ||||||||
| At beginning of year |
$ | 337,400,444 | $ | 336,164,694 | ||||
| At end of year |
$ | 320,513,612 | $ | 337,400,444 | ||||
| Accumulated undistributed (distributions in excess of) net investment income included in net assets |
||||||||
| At end of year |
$ | (321,218 | ) | $ | 52,043 | |||
| 25 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Statement of Cash Flows
| Cash Flows From Operating Activities | Year Ended October 31, 2013 |
|||
| Net increase in net assets from operations |
$ | 3,510,692 | ||
| Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: |
||||
| Investments purchased, including repurchases of securities sold short |
(226,318,003 | ) | ||
| Investments sold and principal repayments |
234,591,875 | |||
| Proceeds from securities sold short |
900,905 | |||
| Decrease in short-term investments, net, excluding foreign government securities |
20,182,460 | |||
| Net amortization/accretion of premium (discount) |
6,752,477 | |||
| Increase in restricted cash |
(140,000 | ) | ||
| Decrease in interest receivable |
321,730 | |||
| Increase in interest receivable from affiliated investment |
(55 | ) | ||
| Decrease in receivable for variation margin on open futures contracts |
28,922 | |||
| Decrease in receivable for open forward foreign currency exchange contracts |
251,876 | |||
| Decrease in receivable for closed forward foreign currency exchange contracts |
194,595 | |||
| Decrease in receivable for open swap contracts |
390,519 | |||
| Decrease in premium paid on open swap contracts |
2,462,450 | |||
| Increase in tax reclaims receivable |
(1,782 | ) | ||
| Decrease in other assets |
39,403 | |||
| Increase in cash collateral due to brokers |
400,000 | |||
| Decrease in written options outstanding, at value |
(233,097 | ) | ||
| Increase in payable for variation margin on open futures contracts |
82,898 | |||
| Decrease in payable for open forward commodity contracts |
(109,589 | ) | ||
| Decrease in payable for open forward foreign currency exchange contracts |
(577,860 | ) | ||
| Decrease in payable for closed forward foreign currency exchange contracts |
(161,920 | ) | ||
| Decrease in payable for open swap contracts |
(1,599,892 | ) | ||
| Decrease in premium payable for open swap contracts |
(282,183 | ) | ||
| Decrease in premium received on open swap contracts |
(669,759 | ) | ||
| Increase in payable to affiliate for investment adviser fee |
4,253 | |||
| Increase in payable to affiliate for Trustees’ fees |
1,040 | |||
| Decrease in interest payable for securities sold short |
(351,668 | ) | ||
| Increase in accrued expenses |
117,323 | |||
| Increase in unfunded loan commitments |
200,000 | |||
| Net change in unrealized (appreciation) depreciation from: |
||||
| Investments |
11,330,902 | |||
| Securities sold short |
(602,921 | ) | ||
| Net realized (gain) loss from: |
||||
| Investments |
(3,949,713 | ) | ||
| Securities sold short |
992,540 | |||
| Net cash provided by operating activities |
$ | 47,758,418 | ||
| Cash Flows From Financing Activities | ||||
| Distributions paid, net of reinvestments |
$ | (20,397,524 | ) | |
| Proceeds from notes payable |
46,000,000 | |||
| Repayment of notes payable |
(66,000,000 | ) | ||
| Net cash used in financing activities |
$ | (40,397,524 | ) | |
| Net increase in cash* |
$ | 7,360,894 | ||
| Cash at beginning of year(1) |
$ | 4,153,451 | ||
| Cash at end of year(1) |
$ | 11,514,345 | ||
| Supplemental disclosure of cash flow information | ||||
| Cash paid for interest and fees |
$ | 1,887,144 | ||
| (1) | Balance includes foreign currency, at value. |
| * | Includes net change in unrealized appreciation (depreciation) on foreign currency of $(5,868). |
| 26 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Consolidated Financial Highlights
| Year Ended October 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Net asset value — Beginning of year |
$ | 17.860 | $ | 17.800 | $ | 18.270 | $ | 17.660 | $ | 14.970 | ||||||||||
| Income (Loss) From Operations | ||||||||||||||||||||
| Net investment income(1) |
$ | 0.824 | $ | 0.867 | $ | 0.822 | $ | 1.051 | $ | 1.130 | ||||||||||
| Net realized and unrealized gain (loss) |
(0.634 | ) | 0.273 | (0.132 | ) | 0.639 | 2.670 | |||||||||||||
| Total income from operations |
$ | 0.190 | $ | 1.140 | $ | 0.690 | $ | 1.690 | $ | 3.800 | ||||||||||
| Less Distributions | ||||||||||||||||||||
| From net investment income |
$ | (0.697 | ) | $ | (0.732 | ) | $ | (1.160 | ) | $ | (1.080 | ) | $ | (1.001 | ) | |||||
| Tax return of capital |
(0.383 | ) | (0.348 | ) | — | — | (0.109 | ) | ||||||||||||
| Total distributions |
$ | (1.080 | ) | $ | (1.080 | ) | $ | (1.160 | ) | $ | (1.080 | ) | $ | (1.110 | ) | |||||
| Net asset value — End of year |
$ | 16.970 | $ | 17.860 | $ | 17.800 | $ | 18.270 | $ | 17.660 | ||||||||||
| Market value — End of year |
$ | 15.290 | $ | 17.320 | $ | 16.350 | $ | 17.600 | $ | 15.570 | ||||||||||
| Total Investment Return on Net Asset Value(2) |
1.47 | % | 6.92 | % | 4.35 | % | 10.26 | % | 28.04 | % | ||||||||||
| Total Investment Return on Market Value(2) |
(5.72 | )% | 12.87 | % | (0.51 | )% | 20.48 | % | 33.90 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (000’s omitted) |
$ | 320,514 | $ | 337,400 | $ | 336,165 | $ | 345,073 | $ | 333,484 | ||||||||||
| Ratios (as a percentage of average daily net assets): |
||||||||||||||||||||
| Expenses excluding interest and fees(3) |
1.55 | % | 1.47 | % | 1.38 | % | 1.27 | % | 1.22 | % | ||||||||||
| Interest and fee expense(4) |
0.47 | % | 0.55 | % | 0.51 | % | 0.46 | % | 0.41 | % | ||||||||||
| Total expenses(3) |
2.02 | % | 2.02 | % | 1.89 | % | 1.73 | % | 1.63 | % | ||||||||||
| Net investment income |
4.72 | % | 4.87 | % | 4.52 | % | 5.81 | % | 7.17 | % | ||||||||||
| Portfolio Turnover |
48 | % | 42 | % | 35 | % | 21 | % | 32 | % | ||||||||||
| Senior Securities: |
||||||||||||||||||||
| Total notes payable outstanding (in 000’s) |
$ | 95,000 | $ | 115,000 | $ | 98,000 | $ | 98,000 | $ | 111,000 | ||||||||||
| Asset coverage per $1,000 of notes payable(5) |
$ | 4,374 | $ | 3,934 | $ | 4,430 | $ | 4,521 | $ | 4,004 | ||||||||||
| (1) | Computed using average common shares outstanding. |
| (2) | Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. |
| (3) | Excludes the effect of custody fee credits, if any, of less than 0.005%. |
| (4) | Interest expense relates to borrowings for the purpose of financial leverage (see Note 8) and securities sold short. |
| (5) | Calculated by subtracting the Fund’s total liabilities (not including the notes payable) from the Fund’s total assets, and dividing the result by the notes payable balance in thousands. |
| 27 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements
1 Significant Accounting Policies
Eaton Vance Short Duration Diversified Income Fund (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Fund’s primary investment objective is to provide a high level of current income, with a secondary objective of seeking capital appreciation to the extent consistent with its primary goal.
The Fund seeks to gain exposure to the commodity markets, in whole or in part, through investments in Eaton Vance EVG Commodity Subsidiary, Ltd. (the Subsidiary), a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands with the same objective and investment policies and restrictions as the Fund. The Fund may invest up to 25% of its total assets in the Subsidiary. The net assets of the Subsidiary at October 31, 2013 were $8,685,458 or 2.7% of the Fund’s consolidated net assets. The accompanying consolidated financial statements include the accounts of the Subsidiary. Intercompany balances and transactions have been eliminated in consolidation.
The following is a summary of significant accounting policies of the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America.
A Investment Valuation — The following methodologies are used to determine the market value or fair value of investments.
Senior Floating-Rate Loans. Interests in senior floating-rate loans (Senior Loans) for which reliable market quotations are readily available are valued generally at the average mean of bid and ask quotations obtained from a third party pricing service. Other Senior Loans are valued at fair value by the investment adviser under procedures approved by the Trustees. In fair valuing a Senior Loan, the investment adviser utilizes one or more of the valuation techniques described in (i) through (iii) below to assess the likelihood that the borrower will make a full repayment of the loan underlying such Senior Loan relative to yields on other Senior Loans issued by companies of comparable credit quality. If the investment adviser believes that there is a reasonable likelihood of full repayment, the investment adviser will determine fair value using a matrix pricing approach that considers the yield on the Senior Loan. If the investment adviser believes there is not a reasonable likelihood of full repayment, the investment adviser will determine fair value using analyses that include, but are not limited to: (i) a comparison of the value of the borrower’s outstanding equity and debt to that of comparable public companies; (ii) a discounted cash flow analysis; or (iii) when the investment adviser believes it is likely that a borrower will be liquidated or sold, an analysis of the terms of such liquidation or sale. In certain cases, the investment adviser will use a combination of analytical methods to determine fair value, such as when only a portion of a borrower’s assets are likely to be sold. In conducting its assessment and analyses for purposes of determining fair value of a Senior Loan, the investment adviser will use its discretion and judgment in considering and appraising relevant factors. Fair value determinations are made by the portfolio managers of the Fund based on information available to such managers. The portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may not possess the same information about a Senior Loan borrower as the portfolio managers of the Fund. At times, the fair value of a Senior Loan determined by the portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may vary from the fair value of the same Senior Loan determined by the portfolio managers of the Fund. The fair value of each Senior Loan is periodically reviewed and approved by the investment adviser’s Valuation Committee and by the Trustees based upon procedures approved by the Trustees. Junior Loans (i.e., subordinated loans and second lien loans) are valued in the same manner as Senior Loans.
Debt Obligations. Debt obligations (including short-term obligations with a remaining maturity of more than sixty days and excluding most seasoned, fixed-rate 30-year mortgage-backed securities as noted below) are generally valued on the basis of valuations provided by third party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. Most seasoned, fixed-rate 30-year mortgage-backed securities 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 obligations purchased 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 generally valued at amortized cost, which approximates market value.
Equity Securities. Equity securities (including common shares of closed-end investment companies) listed on a U.S. securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and asked prices therefore on the exchange where such securities are principally traded. Equity securities listed on the NASDAQ Global or Global Select Market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or closing quotations are not available are valued at the mean between the latest available bid and asked prices.
Commodities. Precious metals are valued at the New York composite mean quotation reported by Bloomberg at the valuation time.
Derivatives. Exchange-traded options are valued at the mean between the bid and asked prices at valuation time as reported by the Options Price Reporting Authority for U.S. listed options or by the relevant exchange or board of trade for non-U.S. listed options. Over-the-counter options (including options on securities, indices and foreign currencies) are valued by a third party pricing service using techniques that consider factors including the value of the underlying instrument, the volatility of the underlying instrument and the period of time until option expiration. Financial and commodities futures contracts are valued at the closing settlement price established by the board of trade or exchange on which they are traded. Forward foreign currency exchange contracts are generally valued at the mean of the average bid and average asked prices that are reported by currency dealers to a third party pricing service at the valuation time. Such third party pricing service valuations are supplied for specific settlement periods and the Fund’s forward foreign currency exchange contracts are valued at an interpolated rate between the closest preceding and subsequent settlement period reported by the third party pricing service. Forward commodity contracts are generally valued based on the price of the underlying futures or forward contract provided by the
| 28 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
exchange on which the underlying instruments are traded or if unavailable, based on forward rates provided by broker/dealers. Swaps are normally valued using valuations provided by a third party pricing service. Such pricing service valuations are based on the present value of fixed and projected floating rate cash flows over the term of the swap contract, or in the case of credit default swaps, based on credit spread quotations obtained from broker/dealers and expected default recovery rates determined by the pricing service using proprietary models. In the case of total return swaps, the pricing service valuations are based on the value of the underlying index or instrument and reference interest rate. Future cash flows are discounted to their present value using swap rates provided by electronic data services or by broker/dealers.
Foreign Securities and Currencies. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rate quotations supplied by a third party pricing service. The pricing service uses a proprietary model to determine the exchange rate. Inputs to the model include reported trades and implied bid/ask spreads.
Affiliated Fund. The Fund may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an affiliated investment company managed by Eaton Vance Management (EVM). The value of the Fund’s investment in Cash Reserves Fund reflects the Fund’s proportionate interest in its net assets. Cash Reserves Fund generally values its investment securities utilizing the amortized cost valuation technique in accordance with Rule 2a-7 under 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. If amortized cost is determined not to approximate fair value, Cash Reserves Fund may value its investment securities in the same manner as debt obligations described above.
Fair Valuation. Investments for which valuations or market quotations are not readily available or are deemed unreliable are valued at fair value using methods determined in good faith by or at the direction of the Trustees of the Fund in a manner that fairly reflects the security’s value, or the amount that the Fund might reasonably expect to receive for the security upon its current sale in the ordinary course. Each such determination is based on a consideration of relevant factors, which are likely to vary from one pricing context to another. These factors may include, but are not limited to, the type of security, the existence of any contractual restrictions on the security’s disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations or relevant information obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the company’s or entity’s financial condition, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.
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. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Fees associated with loan amendments are recognized immediately. Inflation adjustments to the principal amount of inflation-adjusted bonds and notes are reflected as interest income. Withholding taxes on foreign interest have been provided for in accordance with the Fund’s understanding of the applicable countries’ tax rules and rates.
D Federal Taxes — The Fund’s policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its net investment income, and all or substantially all of its net realized capital gains. Accordingly, no provision for federal income or excise tax is necessary.
The Subsidiary is treated as a controlled foreign corporation under the Internal Revenue Code and is not expected to be subject to U.S. federal income tax. The Fund is treated as a U.S. shareholder of the Subsidiary. As a result, the Fund is required to include in gross income for U.S. federal tax purposes all of the Subsidiary’s income, whether or not such income is distributed by the Subsidiary. If a net loss is realized by the Subsidiary, such loss is not generally available to offset the income earned by the Fund.
At October 31, 2013, the Fund, for federal income tax purposes, had a capital loss carryforward of $21,577,188 and deferred capital losses of $254,328 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue Code, and thus will reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Fund of any liability for federal income or excise tax. The capital loss carryforward will expire on October 31, 2016 ($14,101,233), October 31, 2017 ($738,126), October 31, 2018 ($5,165,932) and October 31, 2019 ($1,571,897). The deferred capital losses are treated as arising on the first day of the Fund’s next taxable year and are treated as realized prior to the utilization of the capital loss carryforward.
As of October 31, 2013, the Fund had no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. The Fund files a U.S. federal income tax return annually after its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three years from the date of filing.
E Expense Reduction — State Street Bank and Trust Company (SSBT) serves as custodian of the Fund. Pursuant to the custodian agreement, SSBT receives a fee reduced by credits, which are determined based on the average daily cash balance the Fund maintains with SSBT. All credit balances, if any, used to reduce the Fund’s custodian fees are reported as a reduction of expenses in the Consolidated Statement of Operations.
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
| 29 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
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 Unfunded Loan Commitments — The Fund may enter into certain credit agreements all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrower’s discretion. These commitments, if any, are disclosed in the accompanying Consolidated Portfolio of Investments. At October 31, 2013, the Fund had sufficient cash and/or securities to cover these commitments.
H Use of Estimates — The preparation of the consolidated 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 consolidated financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
I Indemnifications — Under the Fund’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 Fund. Under Massachusetts law, if certain conditions prevail, shareholders of a Massachusetts business trust (such as the Fund) could be deemed to have personal liability for the obligations of the Fund. However, the Fund’s Declaration of Trust contains an express disclaimer of liability on the part of Fund shareholders and the By-laws provide that the Fund shall assume the defense on behalf of any Fund shareholders. Moreover, the By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
J Financial and Commodities Futures Contracts — Upon entering into a financial or commodities futures contract, the Fund is required to deposit with the broker, either in cash or securities, an amount equal to a certain percentage of the contract amount (initial margin). Subsequent payments, known as variation margin, are made or received by the Fund each business day, depending on the daily fluctuations in the value of the underlying security, commodity or currency, and are recorded as unrealized gains or losses by the Fund. Gains (losses) are realized upon the expiration or closing of the financial or commodities futures contracts. Should market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the financial or commodities futures contracts and may realize a loss. Futures contracts have minimal counterparty risk as they are exchange traded and the clearinghouse for the exchange is substituted as the counterparty, guaranteeing counterparty performance.
K Forward Foreign Currency Exchange and Forward Commodity Contracts — The Fund 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 forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until such time as the contracts have been closed. Unrealized and realized gains and losses on forward commodity contracts, which are entered into for the purchase or sale of a specific commodity at a fixed price on a future date, are accounted for as described above. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and, in the case of forward foreign currency exchange contracts, from movements in the value of a foreign currency relative to the U.S. dollar.
L Written Options — Upon the writing of a call or a put option, the premium received by the Fund is included in the Consolidated 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 Fund’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. When an index option is exercised, the Fund is required to deliver an amount of cash determined by the excess of the strike price of the option over the value of the index (in the case of a put) or the excess of the value of the index over the strike price of the option (in the case of a call) at contract termination. If a put option on a security is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, 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 Fund may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
M Purchased Options — Upon the purchase of a call or put option, the premium paid by the Fund is included in the Consolidated 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 Fund’s policies on investment valuations discussed above. As the purchaser of an index option, the Fund has the right to receive a cash payment equal to any depreciation in the value of the index below the strike price of the option (in the case of a put) or equal to any appreciation in the value of the index over the strike price of the option (in the case of a call) as of the valuation date of the option. If an option which the Fund had purchased expires on the stipulated expiration date, the Fund will realize a loss in the amount of the cost of the option. If the Fund enters into a closing sale transaction, the Fund 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 Fund exercises a put option on a security, 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 Fund exercises a call option on a security, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid. The risk associated with purchasing options is limited to the premium originally paid.
| 30 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
N Interest Rate Swaps — Pursuant to interest rate swap agreements, the Fund either makes floating-rate payments to the counterparty based on a benchmark interest rate in exchange for fixed-rate payments or the Fund makes fixed-rate payments in exchange for payments on a floating benchmark interest rate. 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 Fund is exposed to credit loss in the event of non-performance by the swap counterparty. Risk may also arise from movements in interest rates.
O Cross-Currency Swaps — Cross-currency swaps are interest rate swaps in which interest cash flows are exchanged between two parties based on the notional amounts of two different currencies. The notional amounts are typically determined based on the spot exchange rates at the inception of the trade. Cross-currency swaps also involve the exchange of the notional amounts at the start of the contract at the current spot rate with an agreement to re-exchange such amounts at a later date at either the same exchange rate, a specified rate or the then current spot rate. The entire principal value of a cross-currency swap is subject to the risk that the counterparty to the swap will default on its contractual delivery obligations.
P Credit Default Swaps — When the Fund is the buyer of a credit default swap contract, the Fund 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 if a credit event by a third party, such as a U.S. or foreign corporate issuer or sovereign issuer, on the debt obligation occurs. In return, the Fund pays the counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no credit event occurs, the Fund would have spent the stream of payments and received no proceeds from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments, but is obligated to pay to the buyer of the protection an amount up to the notional amount of the swap and in certain instances take delivery of securities of the reference entity upon the occurrence of a credit event, as defined under the terms of that particular swap agreement. Credit events are contract specific but may include bankruptcy, failure to pay, restructuring, obligation acceleration and repudiation/moratorium. If the Fund is a seller of protection and a credit event occurs, the maximum potential amount of future payments that the Fund could be required to make would be an amount equal to the notional amount of the agreement. This potential amount would be partially offset by any recovery value of the respective referenced obligation, or net amount received from the settlement of a buy protection credit default swap agreement entered into by the Fund for the same referenced obligation. As the seller, the Fund may create economic leverage to its portfolio because, in addition to its total net assets, the Fund 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 Fund also records an increase or decrease to unrealized appreciation (depreciation) in an amount equal to the daily valuation. Upfront payments or receipts, if any, are recorded as other assets or other liabilities, respectively, and amortized over the life of the swap contract as realized gains or losses. For financial reporting purposes, unamortized upfront payments, if any, are netted with unrealized appreciation or depreciation on swap contracts to determine the market value of swaps as presented in Notes 7 and 10. The Fund segregates assets in the form of cash or liquid securities in an amount equal to the notional amount of the credit default swaps of which it is the seller. The Fund segregates assets in the form of cash or liquid securities in an amount equal to any unrealized depreciation of the credit default swaps of which it is the buyer, 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.
Q Total Return Swaps — In a total return swap, the buyer receives a periodic return equal to the total return of a specified security, securities or index for a specified period of time. In return, the buyer pays the counterparty a variable stream of payments, typically based upon short-term interest rates, possibly plus or minus an agreed upon spread. During the term of the outstanding swap agreement, changes in the underlying value of the swap are recorded as unrealized gains and losses. Periodic payments received or made are recorded as realized gains or losses. The Fund is exposed to credit loss in the event of nonperformance by the swap counterparty. Risk may also arise from the unanticipated movements in value of exchange rates, interest rates, securities, or the index.
R Repurchase Agreements — A repurchase agreement is the purchase by the Fund of securities from a counterparty in exchange for cash that is coupled with an agreement to resell those securities to the counterparty at a specified date and price. When a repurchase agreement is entered, the Fund typically receives securities with a value that equals or exceeds the repurchase price, including any accrued interest earned on the agreement. The value of such securities will be marked to market daily, and cash or additional securities will be exchanged between the parties as needed. Except in the case of a repurchase agreement entered to settle a short sale, the value of the securities delivered to the Fund will be at least equal to 90% of the repurchase price during the term of the repurchase agreement. The terms of a repurchase agreement entered to settle a short sale may provide that the cash purchase price paid by the Fund is more than the value of purchased securities that effectively collateralize the repurchase price payable by the counterparty. Since in such a transaction, the Fund normally will have used the purchased securities to settle the short sale, the Fund will segregate liquid assets equal to the marked to market value of the purchased securities that it is obligated to return to the counterparty under the repurchase agreement. In the event of insolvency of the counterparty to a repurchase agreement, recovery of the repurchase price owed to the Fund may be delayed. Such an insolvency also may result in a loss to the extent that the value of the purchased securities decreases during the delay or that value has otherwise not been maintained at an amount at least equal to the repurchase price.
S Securities Sold Short — A short sale is a transaction in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer with an obligation to replace such borrowed security at a later date. Until the security is replaced, the Fund is required to repay the lender any interest, which accrues during the period of the loan. The proceeds received from a short sale are recorded as a liability and the Fund records an unrealized gain or loss to the extent of the difference between the proceeds received and the value of the open short position on the day of determination. A gain, limited to the price at which the Fund sold the security
| 31 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
short, or a loss, potentially unlimited as there is no upward limit on the price of a security, is recorded when the short position is terminated. Interest payable on securities sold short is recorded as an expense.
T Stripped Mortgage-Backed Securities — The Fund may invest in Interest Only (IO) and Principal Only (PO) securities, a form of stripped mortgage-backed securities, whereby the IO security receives all the interest and the PO security receives all the principal on a pool of mortgage assets. The yield to maturity on an IO security is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the yield to maturity from these securities. If the underlying mortgages experience greater than anticipated prepayments of principal, the Fund may fail to recoup its initial investment in an IO security. The market value of IO and PO securities can be unusually volatile to changes in interest rates.
U Consolidated Statement of Cash Flows — The cash amount shown in the Consolidated Statement of Cash Flows of the Fund is the amount included in the Fund’s Consolidated Statement of Assets and Liabilities and represents the unrestricted cash on hand at its custodian and does not include any short-term investments.
2 Distributions to Shareholders
Subject to its Managed Distribution Plan, the Fund intends to make monthly distributions to shareholders and to distribute all or substantially all of its net realized capital gains (reduced by available capital loss carryforwards from prior years). In its distributions, the Fund intends to include amounts attributable to the imputed interest on foreign currency exposures through long and short positions in forward currency exchange contracts (represented by the difference between the foreign currency spot rate and the foreign currency forward rate) and the imputed interest derived from certain other derivative positions. Distributions are recorded on the ex-dividend date. The Fund distinguishes between distributions on a tax basis and a financial reporting basis. Accounting principles generally accepted in the United States of America require that only distributions in excess of tax basis earnings and profits be reported in the consolidated financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary income. In certain circumstances, a portion of distributions to shareholders may include a return of capital component.
The tax character of distributions declared for the years ended October 31, 2013 and October 31, 2012 was as follows:
| Year Ended October 31, | ||||||||
| 2013 | 2012 | |||||||
| Distributions declared from: |
||||||||
| Ordinary income |
$ | 13,169,455 | $ | 13,830,542 | ||||
| Tax return of capital |
7,228,069 | 6,566,982 | ||||||
During the year ended October 31, 2013, accumulated net realized loss was decreased by $3,354,706, accumulated distributions in excess of net investment income was increased by $2,766,503 and paid-in capital was decreased by $588,203 due to differences between book and tax accounting, primarily for foreign currency gain (loss), paydown gain (loss), premium amortization, swap contracts, mixed straddles and investment in the Subsidiary. These reclassifications had no effect on the net assets or net asset value per share of the Fund.
As of October 31, 2013, the components of distributable earnings (accumulated losses) and unrealized appreciation (depreciation) on a tax basis were as follows:
| Capital loss carryforward and deferred capital losses |
$ | (21,831,516 | ) | |
| Net unrealized appreciation |
$ | 4,677,261 |
The differences between components of distributable earnings (accumulated losses) on a tax basis and the amounts reflected in the Consolidated Statement of Assets and Liabilities are primarily due to wash sales, foreign currency transactions, premium amortization, futures contracts and swap contracts.
3 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for investment advisory services rendered to the Fund and the Subsidiary. Pursuant to the investment advisory agreement and subsequent fee reduction agreement between the Fund and EVM and the investment advisory agreement between the Subsidiary and EVM, the Fund and Subsidiary each pay EVM a fee at an annual rate of 0.75% of its respective average daily total leveraged assets (excluding its interest in the Subsidiary in the case of the Fund), subject to the limitation described below, and is payable monthly. Total leveraged assets
| 32 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
as referred to herein represent net assets plus liabilities or obligations attributable to investment leverage and the notional value of long and short forward currency contracts, futures contracts and swaps held by the Fund. The notional value of a contract for purposes of calculating total leveraged assets is the stated dollar value of the underlying reference instrument at the time the derivative position is entered into and remains constant throughout the life of the derivative contract. However, the derivative contracts are marked to market daily and any unrealized appreciation or depreciation is reflected in the Fund’s net assets. When the Fund holds both long and short forward currency contracts in the same foreign currency, the offsetting positions are netted for purposes of determining total leveraged assets. When the Fund holds other long and short positions in foreign obligations denominated in the same currency, total leveraged assets are calculated by excluding the smaller of the long or short position.
The advisory agreements provide that if investment leverage exceeds 40% of the Fund’s total leveraged assets, EVM will not receive a management fee on total leveraged assets in excess of this amount. As of October 31, 2013, the Fund’s investment leverage was 42% of its total leveraged assets. For the year ended October 31, 2013, the Fund’s investment adviser fee amounted to $4,125,118 or 0.65% of the Fund’s average daily total leveraged assets and 1.25% of the Fund’s average daily net assets. The Fund invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. EVM also serves as administrator of the Fund, but receives no compensation.
In addition, EVM has contractually agreed to reimburse the Fund for fees and other expenses at an annual rate of 0.20% of the Fund’s average daily total leveraged assets during the first five full years of the Fund’s operations, 0.15% of the Fund’s average daily total leveraged assets in year six, 0.10% in year seven and 0.05% in year eight. The Fund concluded its first eight full years of operations on February 28, 2013. Pursuant to this agreement, EVM waived $91,469 of its investment adviser fee for the year ended October 31, 2013.
Trustees and officers of the Fund who are members of EVM’s organization receive remuneration for their services to the Fund out of the investment adviser fee. Trustees of the Fund who are not affiliated with EVM 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 year ended October 31, 2013, no significant amounts have been deferred. Certain officers and Trustees of the Fund are officers of EVM.
4 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations and including maturities, paydowns, principal repayments on Senior Loans and securities sold short, for the year ended October 31, 2013 were as follows:
| Purchases | Sales | |||||||
| Investments (non-U.S. Government) |
$ | 143,928,973 | $ | 147,309,807 | ||||
| U.S. Government and Agency Securities |
40,980,475 | 34,991,146 | ||||||
| $ | 184,909,448 | $ | 182,300,953 | |||||
5 Common Shares of Beneficial Interest
The Fund may issue common shares pursuant to its dividend reinvestment plan. There were no transactions in common shares by the Fund for the years ended October 31, 2013 and October 31, 2012.
6 Federal Income Tax Basis of Investments
The cost and unrealized appreciation (depreciation) of investments of the Fund at October 31, 2013, as determined on a federal income tax basis, were as follows:
| Aggregate cost |
$ | 400,646,777 | ||
| Gross unrealized appreciation |
$ | 9,604,839 | ||
| Gross unrealized depreciation |
(4,750,006 | ) | ||
| Net unrealized appreciation |
$ | 4,854,833 | ||
| 33 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
7 Financial Instruments
The Fund may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include forward commodity contracts, forward foreign currency exchange contracts, futures contracts, swap 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 Fund has in particular classes of financial instruments and do 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 written options at October 31, 2013 is included in the Consolidated Portfolio of Investments.
A summary of obligations under these financial instruments at October 31, 2013 is as follows:
| Forward Foreign Currency Exchange Contracts | ||||||||||||||||||
| Settlement Date |
Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 11/5/13 | Indian Rupee 27,732,000 |
United States Dollar 451,588 |
Citibank NA | $ | 331 | $ | — | $ | 331 | |||||||||
| 11/5/13 | United States Dollar 451,956 |
Indian Rupee 27,732,000 |
Citibank NA | — | (699 | ) | (699 | ) | ||||||||||
| 11/6/13 | Philippine Peso 19,043,000 |
United States Dollar 441,659 |
Goldman Sachs International | 1,002 | — | 1,002 | ||||||||||||
| 11/6/13 | United States Dollar 421,001 |
Philippine Peso 18,303,000 |
Barclays Bank PLC | 2,533 | — | 2,533 | ||||||||||||
| 11/6/13 | United States Dollar 753,932 |
Philippine Peso 32,450,000 |
Goldman Sachs International | — | (3,035 | ) | (3,035 | ) | ||||||||||
| 11/12/13 | Euro 5,770,258 |
United States Dollar 7,586,648 |
Bank of America | — | (248,053 | ) | (248,053 | ) | ||||||||||
| 11/12/13 | Euro 1,038,694 |
United States Dollar 1,365,550 |
Goldman Sachs International | — | (44,761 | ) | (44,761 | ) | ||||||||||
| 11/13/13 | Romanian Leu 1,633,000 |
Euro 366,801 |
Standard Chartered Bank | — | (1,606 | ) | (1,606 | ) | ||||||||||
| 11/18/13 | United States Dollar 2,354,405 |
South Korean Won 2,626,339,000 |
Bank of America | 113,108 | — | 113,108 | ||||||||||||
| 11/18/13 | United States Dollar 2,143,772 |
Colombian Peso 4,069,844,000 |
Bank of America | 4,328 | — | 4,328 | ||||||||||||
| 11/18/13 | United States Dollar 3,578,809 |
Colombian Peso 6,789,000,000 |
Citibank NA | 4,486 | — | 4,486 | ||||||||||||
| 11/18/13 | United States Dollar 450,049 |
Indian Rupee 27,732,000 |
Citibank NA | — | (2,875 | ) | (2,875 | ) | ||||||||||
| 11/18/13 | United States Dollar 2,474,711 |
South Korean Won 2,800,507,000 |
HSBC Bank USA | 156,437 | — | 156,437 | ||||||||||||
| 11/18/13 | United States Dollar 3,758,738 |
Indian Rupee 231,963,000 |
JPMorgan Chase Bank | — | (18,375 | ) | (18,375 | ) | ||||||||||
| 11/18/13 | United States Dollar 1,471,246 |
South Korean Won 1,654,490,147 |
Toronto-Dominion Bank | 83,190 | — | 83,190 | ||||||||||||
| 11/18/13 | United States Dollar 800,953 |
South Korean Won 906,518,515 |
Toronto-Dominion Bank | 50,745 | — | 50,745 | ||||||||||||
| 11/20/13 | Chilean Peso 722,070,000 |
United States Dollar 1,398,807 |
BNP Paribas | — | (7,503 | ) | (7,503 | ) | ||||||||||
| 11/20/13 | United States Dollar 178,730 |
Chilean Peso 93,011,000 |
JPMorgan Chase Bank | 2,419 | — | 2,419 | ||||||||||||
| 11/20/13 | United States Dollar 2,386,196 |
Chilean Peso 1,213,977,000 |
Nomura International PLC | — | (21,843 | ) | (21,843 | ) | ||||||||||
| 11/20/13 | United States Dollar 412,433 |
Chilean Peso 214,465,290 |
Standard Chartered Bank | 5,261 | — | 5,261 | ||||||||||||
| 34 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date |
Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 11/25/13 | Euro 1,266,709 |
United States Dollar 1,748,153 |
Australia and New Zealand Banking Group Limited | $ | 28,200 | $ | — | $ | 28,200 | |||||||||
| 11/25/13 | United States Dollar 1,591,413 |
New Taiwan Dollar 47,543,470 |
BNP Paribas | 24,318 | — | 24,318 | ||||||||||||
| 11/25/13 | United States Dollar 3,974,085 |
Israeli Shekel 14,031,700 |
Standard Chartered Bank | 3,628 | — | 3,628 | ||||||||||||
| 11/29/13 | British Pound Sterling 454,766 |
United States Dollar 705,410 |
Goldman Sachs International | — | (23,625 | ) | (23,625 | ) | ||||||||||
| 11/29/13 | Euro 3,321,624 |
United States Dollar 4,428,522 |
Citibank NA | — | (81,660 | ) | (81,660 | ) | ||||||||||
| 11/29/13 | United States Dollar 400,859 |
New Zealand Dollar 485,840 |
JPMorgan Chase Bank | — | (240 | ) | (240 | ) | ||||||||||
| 12/3/13 | United States Dollar 590,341 |
Philippine Peso 26,323,320 |
Deutsche Bank | 17,833 | — | 17,833 | ||||||||||||
| 12/9/13 | United States Dollar 5,518,911 |
Mexican Peso 70,642,060 |
Nomura International PLC | — | (119,507 | ) | (119,507 | ) | ||||||||||
| 12/11/13 | United States Dollar 398,861 |
Nigerian Naira 65,134,000 |
Standard Chartered Bank | 6,790 | — | 6,790 | ||||||||||||
| 12/13/13 | Euro 3,645,502 |
Norwegian Krone 28,879,300 |
Australia and New Zealand Banking Group Limited | — | (105,808 | ) | (105,808 | ) | ||||||||||
| 12/13/13 | Euro 2,383,327 |
Swedish Krona 20,615,775 |
Nomura International PLC | — | (57,751 | ) | (57,751 | ) | ||||||||||
| 12/16/13 | United States Dollar 747,169 |
Singapore Dollar 935,000 |
Bank of America | 5,549 | — | 5,549 | ||||||||||||
| 12/16/13 | United States Dollar 671,600 |
Russian Ruble 22,324,000 |
Credit Suisse International | 19,332 | — | 19,332 | ||||||||||||
| 12/16/13 | United States Dollar 356,506 |
Russian Ruble 11,549,000 |
Credit Suisse International | 938 | — | 938 | ||||||||||||
| 12/16/13 | United States Dollar 288,856 |
Russian Ruble 9,351,000 |
Goldman Sachs International | 559 | — | 559 | ||||||||||||
| 12/17/13 | United States Dollar 375,409 |
Nigerian Naira 61,323,000 |
Standard Bank | 5,843 | — | 5,843 | ||||||||||||
| 12/18/13 | Euro 3,014,911 |
Polish Zloty 12,818,948 |
Deutsche Bank | 56,635 | — | 56,635 | ||||||||||||
| 12/23/13 | United States Dollar 4,284,638 |
Singapore Dollar 5,317,000 |
Standard Chartered Bank | — | (4,180 | ) | (4,180 | ) | ||||||||||
| 12/31/13 | British Pound Sterling 190,418 |
United States Dollar 304,821 |
Citibank NA | — | (364 | ) | (364 | ) | ||||||||||
| 12/31/13 | Euro 467,982 |
United States Dollar 631,116 |
HSBC Bank USA | — | (4,340 | ) | (4,340 | ) | ||||||||||
| 1/9/14 | Euro 523,612 |
Czech Koruna 13,409,000 |
JPMorgan Chase Bank | — | (5,066 | ) | (5,066 | ) | ||||||||||
| 1/9/14 | Euro 205,721 |
Czech Koruna 5,250,000 |
Standard Chartered Bank | — | (2,951 | ) | (2,951 | ) | ||||||||||
| 1/9/14 | Euro 839,126 |
Czech Koruna 21,477,000 |
Standard Chartered Bank | — | (8,744 | ) | (8,744 | ) | ||||||||||
| 1/9/14 | Euro 796,005 |
Czech Koruna 20,322,000 |
Standard Chartered Bank | — | (10,998 | ) | (10,998 | ) | ||||||||||
| 1/15/14 | United States Dollar 5,559,524 |
Yuan Offshore Renminbi 34,091,000 |
Bank of America | 22,190 | — | 22,190 | ||||||||||||
| 35 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date |
Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 1/21/14 | United States Dollar 153,986 |
Nigerian Naira 25,400,000 |
Deutsche Bank | $ | 2,333 | $ | — | $ | 2,333 | |||||||||
| 1/29/14 | Euro 950,000 |
United States Dollar 1,311,143 |
Australia and New Zealand Banking Group Limited | 21,114 | — | 21,114 | ||||||||||||
| 1/29/14 | Euro 527,643 |
United States Dollar 727,813 |
Goldman Sachs International | 11,313 | — | 11,313 | ||||||||||||
| 1/31/14 | British Pound Sterling 624,499 |
United States Dollar 1,001,465 |
HSBC Bank USA | 818 | — | 818 | ||||||||||||
| 2/5/14 | Euro 4,240,540 |
United States Dollar 5,852,594 |
Australia and New Zealand Banking Group Limited | 94,187 | — | 94,187 | ||||||||||||
| 2/12/14 | Euro 2,091,307 |
United States Dollar 2,885,926 |
Bank of America | 46,014 | — | 46,014 | ||||||||||||
| 2/12/14 | Euro 982,886 |
United States Dollar 1,350,652 |
Goldman Sachs International | 15,932 | — | 15,932 | ||||||||||||
| 2/12/14 | United States Dollar 1,634,384 |
Euro 1,184,182 |
Australia and New Zealand Banking Group Limited | — | (26,312 | ) | (26,312 | ) | ||||||||||
| 2/12/14 | United States Dollar 4,641,486 |
Euro 3,364,922 |
Goldman Sachs International | — | (72,054 | ) | (72,054 | ) | ||||||||||
| 2/18/14 | United States Dollar 3,755,941 |
Indonesian Rupiah 41,375,443,000 |
BNP Paribas | — | (99,754 | ) | (99,754 | ) | ||||||||||
| 3/6/14 | United States Dollar 5,475,097 |
Peruvian New Sol 15,500,000 |
Bank of America | 42,594 | — | 42,594 | ||||||||||||
| 3/10/14 | United States Dollar 790,082 |
Kazakhstani Tenge 125,623,000 |
Citibank NA | 5,963 | — | 5,963 | ||||||||||||
| 3/13/14 | United States Dollar 396,376 |
Azerbaijani Manat 315,000 |
VTB Capital PLC | — | (846 | ) | (846 | ) | ||||||||||
| 4/2/14 | Croatian Kuna 1,825,000 |
Euro 236,828 |
Citibank NA | — | (2,851 | ) | (2,851 | ) | ||||||||||
| 4/3/14 | Croatian Kuna 1,786,000 |
Euro 232,069 |
Citibank NA | — | (2,376 | ) | (2,376 | ) | ||||||||||
| 4/3/14 | Euro 470,244 |
Croatian Kuna 3,611,000 |
Citibank NA | 3,393 | — | 3,393 | ||||||||||||
| 4/11/14 | United States Dollar 668,193 |
Kenyan Shilling 61,574,000 |
Standard Chartered Bank | 29,586 | — | 29,586 | ||||||||||||
| 6/10/14 | United States Dollar 792,678 |
Kazakhstani Tenge 127,859,000 |
Deutsche Bank | 3,024 | — | 3,024 | ||||||||||||
| 7/17/14 | United States Dollar 1,151,016 |
Armenian Dram 504,260,000 |
VTB Capital PLC | 32,583 | — | 32,583 | ||||||||||||
| 8/14/14 | United States Dollar 2,449,955 |
Indonesian Rupiah 27,831,494,048 |
Barclays Bank PLC | — | (83,693 | ) | (83,693 | ) | ||||||||||
| 8/20/14 | Indonesian Rupiah 4,962,396,000 |
United States Dollar 426,359 |
Standard Chartered Bank | 4,866 | — | 4,866 | ||||||||||||
| 9/15/14 | United States Dollar 394,186 |
Azerbaijani Manat 320,000 |
VTB Capital PLC | — | (1,548 | ) | (1,548 | ) | ||||||||||
| 10/9/14 | United States Dollar 147,239 |
Azerbaijani Manat 120,000 |
VTB Capital PLC | — | (414 | ) | (414 | ) | ||||||||||
| 10/9/14 | United States Dollar 122,775 |
Azerbaijani Manat 100,000 |
VTB Capital PLC | — | (421 | ) | (421 | ) | ||||||||||
| $ | 929,375 | $ | (1,064,253 | ) | $ | (134,878 | ) | |||||||||||
| 36 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
| Futures Contracts | ||||||||||||||||
| Expiration Month/Year |
Contracts | Position | Aggregate Cost | Value | Net Unrealized Appreciation (Depreciation) |
|||||||||||
| 12/13 | 24 Gold |
Long | $ | 3,190,080 | $ | 3,176,880 | $ | (13,200 | ) | |||||||
| 12/13 | 4 U.S. 10-Year Deliverable Interest Rate Swap |
Short | (374,958 | ) | (391,313 | ) | (16,355 | ) | ||||||||
| 1/14 | 14 Platinum |
Long | 997,226 | 1,013,880 | 16,654 | |||||||||||
| $ | (12,901 | ) | ||||||||||||||
| Interest Rate Swaps | ||||||||||||||||||
| Counterparty | Notional Amount (000’s omitted) |
Fund Pays/Receives Floating Rate |
Floating Rate Index |
Annual Fixed Rate |
Termination Date |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| Bank of America | HUF 139,000 | Pays | 6-month HUF BUBOR | 5.13 | % | 12/21/16 | $ | 25,397 | ||||||||||
| Bank of America | HUF 117,000 | Pays | 6-month HUF BUBOR | 6.95 | 1/17/17 | 69,808 | ||||||||||||
| Bank of America | HUF 117,000 | Receives | 6-month HUF BUBOR | 7.91 | 1/17/17 | (88,598 | ) | |||||||||||
| Bank of America | PLN 838 | Pays | 6-month PLN WIBOR | 4.34 | 7/30/17 | 10,161 | ||||||||||||
| Bank of America | PLN 838 | Receives | 6-month PLN WIBOR | 3.35 | 7/30/17 | (184 | ) | |||||||||||
| Bank of America | PLN 2,560 | Pays | 6-month PLN WIBOR | 3.83 | 11/14/17 | 31,315 | ||||||||||||
| Bank of America | PLN 2,560 | Receives | 6-month PLN WIBOR | 3.61 | 11/14/17 | (13,932 | ) | |||||||||||
| Bank of America | PLN 2,900 | Receives | 6-month PLN WIBOR | 3.52 | 11/16/17 | (17,506 | ) | |||||||||||
| Barclays Bank PLC | PLN 2,900 | Pays | 6-month PLN WIBOR | 3.81 | 11/16/17 | 34,738 | ||||||||||||
| Barclays Bank PLC | PLN 4,890 | Pays | 6-month PLN WIBOR | 3.82 | 11/19/17 | 60,162 | ||||||||||||
| Barclays Bank PLC | PLN 4,890 | Receives | 6-month PLN WIBOR | 3.53 | 11/19/17 | (21,446 | ) | |||||||||||
| BNP Paribas | PLN 2,147 | Pays | 6-month PLN WIBOR | 4.25 | 8/7/17 | 23,516 | ||||||||||||
| BNP Paribas | PLN 2,147 | Receives | 6-month PLN WIBOR | 3.60 | 8/7/17 | (6,751 | ) | |||||||||||
| BNP Paribas | PLN 400 | Pays | 6-month PLN WIBOR | 3.85 | 11/13/17 | 4,989 | ||||||||||||
| BNP Paribas | PLN 400 | Receives | 6-month PLN WIBOR | 3.38 | 11/13/17 | (785 | ) | |||||||||||
| Citibank NA | PLN 2,130 | Pays | 6-month PLN WIBOR | 3.82 | 11/19/17 | 25,917 | ||||||||||||
| Citibank NA | PLN 2,130 | Receives | 6-month PLN WIBOR | 3.60 | 11/19/17 | (11,805 | ) | |||||||||||
| Credit Suisse International | HUF 46,530 | Pays | 6-month HUF BUBOR | 6.93 | 12/16/16 | 28,493 | ||||||||||||
| Credit Suisse International | HUF 46,530 | Receives | 6-month HUF BUBOR | 7.32 | 12/16/16 | (31,115 | ) | |||||||||||
| Credit Suisse International | HUF 80,000 | Pays | 6-month HUF BUBOR | 5.12 | 1/16/17 | 23,432 | ||||||||||||
| Credit Suisse International | HUF 80,000 | Receives | 6-month HUF BUBOR | 7.63 | 1/16/17 | (57,038 | ) | |||||||||||
| Credit Suisse International | HUF 67,000 | Pays | 6-month HUF BUBOR | 5.87 | 1/20/17 | 28,340 | ||||||||||||
| Credit Suisse International | HUF 67,000 | Receives | 6-month HUF BUBOR | 7.75 | 1/20/17 | (49,194 | ) | |||||||||||
| Deutsche Bank | HUF 69,250 | Pays | 6-month HUF BUBOR | 7.01 | 1/19/17 | 43,715 | ||||||||||||
| Deutsche Bank | HUF 69,250 | Receives | 6-month HUF BUBOR | 7.98 | 1/19/17 | (53,162 | ) | |||||||||||
| Deutsche Bank | PLN 550 | Pays | 6-month PLN WIBOR | 3.79 | 11/16/17 | 6,422 | ||||||||||||
| Deutsche Bank | PLN 550 | Receives | 6-month PLN WIBOR | 3.60 | 11/16/17 | (2,969 | ) | |||||||||||
| JPMorgan Chase Bank | HUF 173,000 | Pays | 6-month HUF BUBOR | 6.93 | 12/19/16 | 105,851 | ||||||||||||
| JPMorgan Chase Bank | HUF 173,000 | Receives | 6-month HUF BUBOR | 7.26 | 12/19/16 | (114,237 | ) | |||||||||||
| JPMorgan Chase Bank | HUF 103,000 | Pays | 6-month HUF BUBOR | 6.94 | 12/20/16 | 61,711 | ||||||||||||
| JPMorgan Chase Bank | HUF 103,000 | Receives | 6-month HUF BUBOR | 7.34 | 12/20/16 | (69,342 | ) | |||||||||||
| 37 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
| Interest Rate Swaps (continued) | ||||||||||||||||||
| Counterparty | Notional Amount (000’s omitted) |
Fund Pays/Receives Floating Rate |
Floating Rate Index |
Annual Fixed Rate |
Termination Date |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| JPMorgan Chase Bank | HUF 139,000 | Receives | 6-month HUF BUBOR | 7.36 | % | 12/21/16 | $ | (94,017 | ) | |||||||||
| JPMorgan Chase Bank | HUF 80,000 | Pays | 6-month HUF BUBOR | 6.99 | 12/22/16 | 49,684 | ||||||||||||
| JPMorgan Chase Bank | HUF 80,000 | Receives | 6-month HUF BUBOR | 7.30 | 12/22/16 | (53,352 | ) | |||||||||||
| JPMorgan Chase Bank | HUF 78,000 | Pays | 6-month HUF BUBOR | 5.10 | 12/27/16 | 21,643 | ||||||||||||
| JPMorgan Chase Bank | HUF 78,000 | Receives | 6-month HUF BUBOR | 7.37 | 12/27/16 | (52,597 | ) | |||||||||||
| JPMorgan Chase Bank | HUF 82,000 | Pays | 6-month HUF BUBOR | 5.09 | 1/20/17 | 23,591 | ||||||||||||
| JPMorgan Chase Bank | HUF 82,000 | Receives | 6-month HUF BUBOR | 7.75 | 1/20/17 | (60,208 | ) | |||||||||||
| Morgan Stanley & Co. International PLC | HUF 72,000 | Pays | 6-month HUF BUBOR | 6.94 | 12/19/16 | 44,116 | ||||||||||||
| Morgan Stanley & Co. International PLC | HUF 72,000 | Receives | 6-month HUF BUBOR | 7.26 | 12/19/16 | (47,544 | ) | |||||||||||
| $ | (122,781 | ) | ||||||||||||||||
| HUF | – | Hungarian Forint | ||
| PLN | – | Polish Zloty |
| Credit Default Swaps — Buy Protection | ||||||||||||||||||||||||||
| Reference Entity |
Counterparty | Notional Amount (000’s omitted) |
Contract Annual Fixed Rate* |
Termination Date |
Market Value |
Unamortized Upfront Payments Received (Paid) |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||||||||
| Austria | Barclays Bank PLC | $ | 2,200 | 0.44 | % | 12/20/13 | $ | (2,309 | ) | $ | — | $ | (2,309 | ) | ||||||||||||
| Austria | Barclays Bank PLC | 1,000 | 1.42 | 3/20/14 | (6,959 | ) | — | (6,959 | ) | |||||||||||||||||
| China | Bank of America | 500 | 1.00 | (1) | 3/20/17 | (9,386 | ) | (10,102 | ) | (19,488 | ) | |||||||||||||||
| China | Barclays Bank PLC | 863 | 1.00 | (1) | 3/20/17 | (16,201 | ) | (15,867 | ) | (32,068 | ) | |||||||||||||||
| China | Deutsche Bank | 316 | 1.00 | (1) | 3/20/17 | (5,932 | ) | (5,522 | ) | (11,454 | ) | |||||||||||||||
| China | Deutsche Bank | 369 | 1.00 | (1) | 3/20/17 | (6,927 | ) | (6,448 | ) | (13,375 | ) | |||||||||||||||
| Croatia | BNP Paribas | 870 | 1.00 | (1) | 12/20/17 | 69,532 | (48,464 | ) | 21,068 | |||||||||||||||||
| Croatia | Citibank NA | 1,500 | 1.00 | (1) | 12/20/17 | 119,882 | (82,559 | ) | 37,323 | |||||||||||||||||
| Egypt | Bank of America | 1,400 | 1.00 | (1) | 9/20/15 | 133,349 | (25,267 | ) | 108,082 | |||||||||||||||||
| Egypt | Citibank NA | 300 | 1.00 | (1) | 6/20/20 | 82,231 | (22,068 | ) | 60,163 | |||||||||||||||||
| Egypt | Deutsche Bank | 350 | 1.00 | (1) | 6/20/20 | 95,936 | (25,869 | ) | 70,067 | |||||||||||||||||
| Egypt | Deutsche Bank | 300 | 1.00 | (1) | 6/20/20 | 82,231 | (19,623 | ) | 62,608 | |||||||||||||||||
| Egypt | Deutsche Bank | 300 | 1.00 | (1) | 6/20/20 | 82,231 | (22,203 | ) | 60,028 | |||||||||||||||||
| Guatemala | Citibank NA | 1,286 | 1.00 | (1) | 9/20/20 | 124,943 | (68,007 | ) | 56,936 | |||||||||||||||||
| Lebanon | Barclays Bank PLC | 500 | 1.00 | (1) | 12/20/14 | 3,748 | (8,731 | ) | (4,983 | ) | ||||||||||||||||
| Lebanon | Barclays Bank PLC | 100 | 1.00 | (1) | 3/20/15 | 1,343 | (1,985 | ) | (642 | ) | ||||||||||||||||
| Lebanon | Barclays Bank PLC | 100 | 1.00 | (1) | 3/20/15 | 1,343 | (2,271 | ) | (928 | ) | ||||||||||||||||
| Lebanon | Barclays Bank PLC | 300 | 1.00 | (1) | 3/20/15 | 4,029 | (5,851 | ) | (1,822 | ) | ||||||||||||||||
| Lebanon | Citibank NA | 1,200 | 3.30 | 9/20/14 | (21,850 | ) | — | (21,850 | ) | |||||||||||||||||
| Lebanon | Citibank NA | 350 | 1.00 | (1) | 12/20/14 | 2,624 | (5,989 | ) | (3,365 | ) | ||||||||||||||||
| Lebanon | Citibank NA | 500 | 1.00 | (1) | 12/20/14 | 3,749 | (8,732 | ) | (4,983 | ) | ||||||||||||||||
| Lebanon | Citibank NA | 1,000 | 1.00 | (1) | 12/20/14 | 7,497 | (17,726 | ) | (10,229 | ) | ||||||||||||||||
| Lebanon | Citibank NA | 300 | 1.00 | (1) | 3/20/15 | 4,030 | (5,213 | ) | (1,183 | ) | ||||||||||||||||
| 38 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
| Credit Default Swaps — Buy Protection (continued) | ||||||||||||||||||||||||||
| Reference Entity |
Counterparty | Notional Amount (000’s omitted) |
Contract Annual Fixed Rate* |
Termination Date |
Market Value |
Unamortized Upfront Payments Received (Paid) |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||||||||
| Lebanon | Credit Suisse International | $ | 200 | 1.00 | %(1) | 3/20/15 | $ | 2,686 | $ | (3,921 | ) | $ | (1,235 | ) | ||||||||||||
| Lebanon | Credit Suisse International | 800 | 1.00 | (1) | 3/20/15 | 10,744 | (15,595 | ) | (4,851 | ) | ||||||||||||||||
| Lebanon | Credit Suisse International | 100 | 1.00 | (1) | 6/20/15 | 1,941 | (2,158 | ) | (217 | ) | ||||||||||||||||
| Lebanon | Deutsche Bank | 200 | 1.00 | (1) | 3/20/15 | 2,686 | (3,620 | ) | (934 | ) | ||||||||||||||||
| Lebanon | Deutsche Bank | 100 | 1.00 | (1) | 6/20/15 | 1,942 | (2,158 | ) | (216 | ) | ||||||||||||||||
| Lebanon | HSBC Bank USA | 1,250 | 1.00 | (1) | 12/20/17 | 123,068 | (147,276 | ) | (24,208 | ) | ||||||||||||||||
| Philippines | Barclays Bank PLC | 1,100 | 1.85 | 12/20/14 | (23,881 | ) | — | (23,881 | ) | |||||||||||||||||
| Philippines | Barclays Bank PLC | 655 | 1.00 | (1) | 3/20/15 | (8,017 | ) | (5,258 | ) | (13,275 | ) | |||||||||||||||
| Philippines | Citibank NA | 800 | 1.84 | 12/20/14 | (17,267 | ) | — | (17,267 | ) | |||||||||||||||||
| Philippines | JPMorgan Chase Bank | 656 | 1.00 | (1) | 3/20/15 | (8,030 | ) | (5,266 | ) | (13,296 | ) | |||||||||||||||
| Thailand | Barclays Bank PLC | 1,900 | 0.97 | 9/20/19 | 18,533 | — | 18,533 | |||||||||||||||||||
| Thailand | Citibank NA | 1,600 | 0.86 | 12/20/14 | (13,308 | ) | — | (13,308 | ) | |||||||||||||||||
| Thailand | Citibank NA | 900 | 0.95 | 9/20/19 | 9,799 | — | 9,799 | |||||||||||||||||||
| Thailand | JPMorgan Chase Bank | 800 | 0.87 | 12/20/14 | (6,755 | ) | — | (6,755 | ) | |||||||||||||||||
| Tunisia | Barclays Bank PLC | 350 | 1.00 | (1) | 9/20/17 | 30,341 | (24,997 | ) | 5,344 | |||||||||||||||||
| Tunisia | Citibank NA | 360 | 1.00 | (1) | 9/20/17 | 31,207 | (26,944 | ) | 4,263 | |||||||||||||||||
| Tunisia | Deutsche Bank | 500 | 1.00 | (1) | 6/20/17 | 40,051 | (28,775 | ) | 11,276 | |||||||||||||||||
| Tunisia | Goldman Sachs International | 300 | 1.00 | (1) | 9/20/17 | 26,007 | (18,913 | ) | 7,094 | |||||||||||||||||
| Tunisia | Nomura International PLC | 400 | 1.00 | (1) | 12/20/17 | 37,234 | (33,855 | ) | 3,379 | |||||||||||||||||
| Uruguay | Citibank NA | 300 | 1.00 | (1) | 6/20/20 | 16,218 | (15,191 | ) | 1,027 | |||||||||||||||||
| Uruguay | Deutsche Bank | 600 | 1.00 | (1) | 6/20/20 | 32,435 | (29,670 | ) | 2,765 | |||||||||||||||||
| $ | 1,056,768 | $ | (772,094 | ) | $ | 284,674 | ||||||||||||||||||||
| * | The contract annual fixed rate represents the fixed rate of interest received by the Fund (as a seller of protection) or paid by the Fund (as a buyer of protection) annually on the notional amount of the credit default swap contract. |
| (1) | Upfront payment is exchanged with the counterparty as a result of the standardized trading coupon. |
| Total Return Swaps | ||||||||||||
| Counterparty | Fund Receives | Fund Pays | Termination Date |
Net Unrealized Appreciation |
||||||||
| Citibank NA | Total return on GTQ 2,350,000 Banco de Guatemala, 0%, due 12/3/13 |
3-month USD-LIBOR-BBA + 50bp on $290,020 (Notional Amount) plus Notional Amount at termination date |
12/5/13 | $ | 4,726 | |||||||
| Citibank NA | Total return on GTQ 17,500,000 Banco de Guatemala, 0%, due 6/3/14 | 3-month USD-LIBOR-BBA + 50bp on $2,141,980 (Notional Amount) plus Notional Amount at termination date |
6/5/14 | 11,412 | ||||||||
| $ | 16,138 | |||||||||||
| GTQ | – | Guatemalan Quetzal |
| 39 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
Written options activity for the year ended October 31, 2013 was as follows:
| Principal Amount of Contracts (000’s omitted) |
Principal Amount of Contracts (000’s omitted) |
Principal Amount of Contracts (000’s omitted) |
Premiums Received |
|||||||||||||
| Outstanding, beginning of year |
INR 975,700 | KRW — | GBP — | $ | 629,303 | |||||||||||
| Options written |
838,173 | 9,433,760 | 10,151 | 370,327 | ||||||||||||
| Options expired |
(1,588,513 | ) | (9,433,760 | ) | — | (852,926 | ) | |||||||||
| Outstanding, end of year |
INR 225,360 | KRW — | GBP 10,151 | $ | 146,704 | |||||||||||
| GBP | – | British Pound Sterling | ||
| INR | – | Indian Rupee | ||
| KRW | – | South Korean Won |
At October 31, 2013, the Fund had sufficient cash and/or securities to cover commitments under these contracts.
In the normal course of pursuing its investment objectives, the Fund is subject to the following risks:
Commodity Risk: The Fund invests in commodities-linked derivative investments, including commodity futures contracts and options thereon and forward commodity contracts, that provide exposure to the investment returns of certain commodities. Commodities-linked derivative investments are used to enhance total return and/or as a substitute for the purchase or sale of commodities.
Credit Risk: The Fund enters into credit default swap contracts to manage certain investment risks and/or to enhance total return.
Foreign Exchange Risk: The Fund engages in forward foreign currency exchange contracts, options on currencies, total return swaps and cross-currency swaps to enhance total return, to seek to hedge against fluctuations in currency exchange rates and/or as a substitute for the purchase or sale of securities or currencies.
Interest Rate Risk: The Fund utilizes various interest rate derivatives including futures, interest rate swaps and cross-currency swaps to enhance total return, to seek to hedge against fluctuations in interest rates, and/or to change the effective duration of its portfolio.
The Fund enters into swap contracts, over-the-counter written options and forward foreign currency exchange contracts that may contain provisions whereby the counterparty may terminate the contract under certain conditions, including but not limited to a decline in the Fund’s net assets below a certain level over a certain period of time, which would trigger a payment by the Fund for those derivatives in a liability position. At October 31, 2013, the fair value, excluding upfront payments, of derivatives with credit-related contingent features in a net liability position was $2,214,975. The Fund may be required to pledge collateral in the form of cash or securities for the benefit of a counterparty if the net amount due to the counterparty exceeds a certain threshold. Collateral pledged for the benefit of a counterparty for over-the-counter derivatives is held in a segregated account by the Fund’s custodian. Securities pledged as collateral, if any, are identified in the Consolidated Portfolio of Investments. Cash pledged as collateral, if any, is included in restricted cash on the Consolidated Statement of Assets and Liabilities. The aggregate fair value of assets pledged as collateral by the Fund for such liability was $635,200 at October 31, 2013.
The non-exchange traded derivatives in which the Fund invests, including swap contracts, over-the-counter options and forward foreign currency exchange contracts, are subject to the risk that the counterparty to the contract fails to perform its obligations under the contract. The Fund is not subject to counterparty credit risk with respect to its written options as the Fund, not the counterparty, is obligated to perform under such derivatives. At October 31, 2013, the maximum amount of loss the Fund would incur due to counterparty risk was $2,226,661, with the highest amount from any one counterparty being $479,679. Such maximum amount would be reduced by any unamortized upfront payments received by the Fund. Such amount would be increased by any unamortized upfront payments made by the Fund. To mitigate this risk, the Fund (and Subsidiary) has entered into master netting agreements with substantially all of its derivative counterparties, which allows it and a counterparty to aggregate amounts owed by each of them for derivative transactions under the agreement into a single net amount payable by either the Fund (and Subsidiary) or the counterparty. At October 31, 2013, the maximum amount of loss the Fund would incur due to counterparty risk would be reduced by approximately $1,496,000 due to master netting agreements. Counterparties may be required to pledge collateral in the form of cash, U.S. Government securities or highly-rated bonds for the benefit of the Fund if the net amount due from the counterparty with respect to a derivative contract exceeds a certain threshold. The amount of collateral posted by the counterparties with respect to such contracts would also reduce the amount of any loss incurred. Collateral pledged for the benefit of the Fund is held in a segregated account by the Fund’s custodian. The portion of such collateral representing cash is reflected as restricted cash with a corresponding liability on the Consolidated Statement of Assets and Liabilities. The carrying amount of the liability at October 31, 2013 approximated its fair value. If measured at fair value, the liability for cash collateral due to broker would have been considered as Level 2 in the fair value hierarchy (see Note 10) at October 31, 2013. Because the Subsidiary is not registered under the 1940 Act, it may not be able to negotiate terms with its counterparties that are equivalent to those a registered fund may negotiate. As a result, the Subsidiary may have greater exposure to those counterparties than a registered fund.
| 40 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) by risk exposure at October 31, 2013 was as follows:
| Fair Value | ||||||||||||||||
| Consolidated Statement of Assets and Liabilities Caption | Credit | Foreign Exchange |
Interest Rate |
Commodity | ||||||||||||
| Securities of unaffiliated issuers, at value |
$ | — | $ | 18,392 | $ | — | $ | — | ||||||||
| Net unrealized appreciation* |
— | — | — | 16,654 | ||||||||||||
| Receivable for open forward foreign currency exchange contracts |
— | 929,375 | — | — | ||||||||||||
| Receivable for open swap contracts; Premium paid on open swap contracts |
1,203,590 | 16,138 | 723,001 | — | ||||||||||||
| Total Asset Derivatives |
$ | 1,203,590 | $ | 963,905 | $ | 723,001 | $ | 16,654 | ||||||||
| Written options outstanding, at value |
$ | — | $ | (49,859 | ) | $ | — | $ | — | |||||||
| Net unrealized appreciation* |
— | — | (16,355 | ) | (13,200 | ) | ||||||||||
| Payable for open forward foreign currency exchange contracts |
— | (1,064,253 | ) | — | — | |||||||||||
| Payable for open swap contracts; Premium paid on open swap contracts |
(146,822 | ) | — | (845,782 | ) | — | ||||||||||
| Total Liability Derivatives |
$ | (146,822 | ) | $ | (1,114,112 | ) | $ | (862,137 | ) | $ | (13,200 | ) | ||||
| * | Amount represents cumulative unrealized appreciation or (depreciation) on futures contracts in the Futures Contracts table above. Only the current day’s variation margin on open futures contracts is reported within the Consolidated Statement of Assets and Liabilities as Receivable or Payable for variation margin, as applicable. |
The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Consolidated Statement of Operations by risk exposure for the year ended October 31, 2013 was as follows:
| Consolidated Statement of Operations Caption | Credit | Foreign Exchange |
Interest Rate |
Commodity | ||||||||||||
| Net realized gain (loss) — |
||||||||||||||||
| Investment transactions |
$ | — | $ | (541,989 | ) | $ | — | $ | (121,910 | ) | ||||||
| Written options |
— | 852,926 | — | — | ||||||||||||
| Futures contracts |
— | — | (271,492 | ) | (739,887 | ) | ||||||||||
| Swap contracts |
(2,620,649 | ) | (1,176 | ) | (504,832 | ) | — | |||||||||
| Forward commodity contracts |
— | — | — | (44,871 | ) | |||||||||||
| Foreign currency and forward foreign currency exchange contract transactions |
— | (1,902,970 | ) | — | — | |||||||||||
| Total |
$ | (2,620,649 | ) | $ | (1,593,209 | ) | $ | (776,324 | ) | $ | (906,668 | ) | ||||
| Change in unrealized appreciation (depreciation) — |
||||||||||||||||
| Investments |
$ | — | $ | (323,500 | ) | $ | — | $ | 2,480 | |||||||
| Written options |
— | (249,502 | ) | — | — | |||||||||||
| Futures contracts |
— | — | 41,456 | 102,740 | ||||||||||||
| Swap contracts |
792,932 | 16,138 | 400,303 | — | ||||||||||||
| Forward commodity contracts |
— | — | — | 109,589 | ||||||||||||
| Foreign currency and forward foreign currency exchange contracts |
— | 325,984 | — | — | ||||||||||||
| Total |
$ | 792,932 | $ | (230,880 | ) | $ | 441,759 | $ | 214,809 | |||||||
| 41 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
The average notional amounts of futures contracts, forward commodity contracts, forward foreign currency exchange contracts and swap contracts outstanding during the year ended October 31, 2013, which are indicative of the volume of these derivative types, were approximately $10,668,000, $526,000, $175,146,000 and $103,940,000, respectively.
The average principal amount of purchased currency options contracts and average number of purchased commodity options contracts outstanding during the year ended October 31, 2013, which are indicative of the volume of these derivative types, were approximately $42,604,000 and 14 contracts, respectively.
8 Credit Agreement
The Fund has entered into a Credit Agreement (the Agreement) with a bank to borrow up to a limit of $150 million pursuant to a 364-day revolving line of credit. Borrowings under the Agreement are secured by the assets of the Fund. Interest is charged at a rate above the London Interbank Offered Rate (LIBOR) and is payable monthly. Under the terms of the Agreement, the Fund pays a commitment fee of 0.15% on the borrowing limit. The Fund is required to maintain certain net asset levels during the term of the Agreement. At October 31, 2013, the Fund had borrowings outstanding under the Agreement of $95,000,000 at an interest rate of 0.93%. Based on the short-term nature of the borrowings under the Agreement and the variable interest rate, the carrying amount of the borrowings at October 31, 2013 approximated its fair value. If measured at fair value, borrowings under the Agreement would have been considered as Level 2 in the fair value hierarchy (see Note 10) at October 31, 2013. For the year ended October 31, 2013, the average borrowings under the Agreement and the average interest rate (excluding fees) were $105,704,110 and 0.99%, respectively.
9 Risks Associated with Foreign Investments
Investing in securities issued by companies 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 Fund, political or financial instability or diplomatic and other developments which could affect such investments. Foreign securities markets, 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.
10 Fair Value Measurements
Under generally accepted accounting principles for fair value measurements, a three-tier hierarchy to prioritize the assumptions, referred to as inputs, is used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
| Ÿ | Level 1 – quoted prices in active markets for identical investments |
| Ÿ | Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ | Level 3 – significant unobservable inputs (including a fund’s own assumptions in determining the fair value of investments) |
In cases where the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level disclosed is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
| 42 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Notes to Consolidated Financial Statements — continued
At October 31, 2013, the hierarchy of inputs used in valuing the Fund’s investments and open derivative instruments, which are carried at value, were as follows:
| Asset Description | Level 1 | Level 2 | Level 3* | Total | ||||||||||||
| Senior Floating-Rate Interests (Less Unfunded Loan Commitments) |
$ | — | $ | 159,429,506 | $ | 180,740 | $ | 159,610,246 | ||||||||
| Collateralized Mortgage Obligations |
— | 48,054,718 | — | 48,054,718 | ||||||||||||
| Commercial Mortgage-Backed Securities |
— | 11,617,638 | — | 11,617,638 | ||||||||||||
| Mortgage Pass-Throughs |
— | 94,591,938 | — | 94,591,938 | ||||||||||||
| Asset-Backed Securities |
— | 473,048 | — | 473,048 | ||||||||||||
| Corporate Bonds & Notes |
— | 2,567,924 | — | 2,567,924 | ||||||||||||
| Foreign Government Bonds |
— | 41,508,035 | — | 41,508,035 | ||||||||||||
| U.S. Treasury Obligations |
— | 9,544,920 | — | 9,544,920 | ||||||||||||
| Common Stocks |
— | 1,470,096 | 1,388,379 | 2,858,475 | ||||||||||||
| Precious Metals |
2,189,742 | — | — | 2,189,742 | ||||||||||||
| Currency Call Options Purchased |
— | 14,769 | — | 14,769 | ||||||||||||
| Currency Put Options Purchased |
— | 3,623 | — | 3,623 | ||||||||||||
| Short-Term Investments — |
||||||||||||||||
| Foreign Government Securities |
— | 24,715,798 | — | 24,715,798 | ||||||||||||
| U.S. Treasury Obligations |
— | 3,749,842 | — | 3,749,842 | ||||||||||||
| Repurchase Agreements |
— | 422,348 | — | 422,348 | ||||||||||||
| Other |
— | 3,578,546 | — | 3,578,546 | ||||||||||||
| Total Investments |
$ | 2,189,742 | $ | 401,742,749 | $ | 1,569,119 | $ | 405,501,610 | ||||||||
| Forward Foreign Currency Exchange Contracts |
$ | — | $ | 929,375 | $ | — | $ | 929,375 | ||||||||
| Futures Contracts |
16,654 | — | — | 16,654 | ||||||||||||
| Swap Contracts |
— | 1,942,729 | — | 1,942,729 | ||||||||||||
| Total |
$ | 2,206,396 | $ | 404,614,853 | $ | 1,569,119 | $ | 408,390,368 | ||||||||
| Liability Description |
||||||||||||||||
| Currency Put Options Written |
$ | — | $ | (49,859 | ) | $ | — | $ | (49,859 | ) | ||||||
| Securities Sold Short |
— | (426,570 | ) | — | (426,570 | ) | ||||||||||
| Forward Foreign Currency Exchange Contracts |
— | (1,064,253 | ) | — | (1,064,253 | ) | ||||||||||
| Futures Contracts |
(29,555 | ) | — | — | (29,555 | ) | ||||||||||
| Swap Contracts |
— | (992,604 | ) | — | (992,604 | ) | ||||||||||
| Total |
$ | (29,555 | ) | $ | (2,533,286 | ) | $ | — | $ | (2,562,841 | ) | |||||
| * | None of the unobservable inputs for Level 3 assets, individually or collectively, had a material impact on the Fund. |
Level 3 investments at the beginning and/or end of the period in relation to net assets were not significant and accordingly, a reconciliation of Level 3 assets for the year ended October 31, 2013 is not presented.
At October 31, 2013, there were no investments transferred between Level 1 and Level 2 during the year then ended.
| 43 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Report of Independent Registered Public Accounting Firm
To the Trustees and Shareholders of Eaton Vance Short Duration Diversified Income Fund:
We have audited the accompanying consolidated statement of assets and liabilities of Eaton Vance Short Duration Diversified Income Fund and subsidiary (the “Fund”), including the consolidated portfolio of investments, as of October 31, 2013, and the related consolidated statements of operations and cash flows for the year then ended, the consolidated statements of changes in net assets for each of the two years in the period then ended, and the consolidated financial highlights for each of the five years in the period then ended. These consolidated financial statements and consolidated financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and consolidated financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities and senior loans owned as of October 31, 2013, by correspondence with the custodian, brokers and selling or agent banks; where replies were not received from brokers and selling or agent banks, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and consolidated financial highlights referred to above present fairly, in all material respects, the financial position of Eaton Vance Short Duration Diversified Income Fund and subsidiary as of October 31, 2013, the results of their operations and their cash flows for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 16, 2013
| 44 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Federal Tax Information (Unaudited)
The Form 1099-DIV you receive in January 2014 will show the tax status of all distributions paid to your account in calendar year 2013. Shareholders are advised to consult their own tax adviser with respect to the tax consequences of their investment in the Fund.
| 45 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Dividend Reinvestment Plan
The Fund offers a dividend reinvestment plan (Plan) pursuant to which shareholders may elect to have distributions automatically reinvested in common shares (Shares) of the Fund. You may elect to participate in the Plan by completing the Dividend Reinvestment Plan Application Form. If you do not participate, you will receive all distributions in cash paid by check mailed directly to you by American Stock Transfer & Trust Company (AST) as dividend paying agent. On the distribution payment date, if the NAV per Share is equal to or less than the market price per Share plus estimated brokerage commissions, then new Shares will be issued. The number of Shares shall be determined by the greater of the NAV per Share or 95% of the market price. Otherwise, Shares generally will be purchased on the open market by AST, the Plan agent (Agent). Distributions subject to income tax (if any) are taxable whether or not Shares are reinvested.
If your Shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the Plan on your behalf. If the nominee does not offer the Plan, you will need to request that the Fund’s transfer agent re-register your Shares in your name or you will not be able to participate.
The Agent’s service fee for handling distributions will be paid by the Fund. Plan participants will be charged their pro rata share of brokerage commissions on all open-market purchases.
Plan participants may withdraw from the Plan at any time by writing to the Agent at the address noted on the following page. If you withdraw, you will receive Shares in your name for all Shares credited to your account under the Plan. If a participant elects by written notice to the Agent to sell part or all of his or her Shares and remit the proceeds, the Agent is authorized to deduct a $5.00 fee plus brokerage commissions from the proceeds.
If you wish to participate in the Plan and your Shares are held in your own name, you may complete the form on the following page and deliver it to the Agent. Any inquiries regarding the Plan can be directed to the Agent at 1-866-439-6787.
| 46 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Application for Participation in Dividend Reinvestment Plan
This form is for shareholders who hold their common shares in their own names. If your common shares are held in the name of a brokerage firm, bank, or other nominee, you should contact your nominee to see if it will participate in the Plan on your behalf. If you wish to participate in the Plan, but your brokerage firm, bank, or nominee is unable to participate on your behalf, you should request that your common shares be re-registered in your own name which will enable your participation in the Plan.
The following authorization and appointment is given with the understanding that I may terminate it at any time by terminating my participation in the Plan as provided in the terms and conditions of the Plan.
Please print exact name on account:
Shareholder signature Date
Shareholder signature Date
Please sign exactly as your common shares are registered. All persons whose names appear on the share certificate must sign.
YOU SHOULD NOT RETURN THIS FORM IF YOU WISH TO RECEIVE YOUR DISTRIBUTIONS IN CASH. THIS IS NOT A PROXY.
This authorization form, when signed, should be mailed to the following address:
Eaton Vance Short Duration Diversified Income Fund
c/o American Stock Transfer & Trust Company
P.O. Box 922
Wall Street Station
New York, NY 10269-0560
Number of Employees
The Fund is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company and has no employees.
Number of Shareholders
As of October 31, 2013, Fund records indicate that there are 12 registered shareholders and approximately 14,579 shareholders owning the Fund shares in street name, such as through brokers, banks, and financial intermediaries.
If you are a street name shareholder and wish to receive Fund reports directly, which contain important information about the Fund, please write or call:
Eaton Vance Distributors, Inc.
Two International Place
Boston, MA 02110
1-800-262-1122
New York Stock Exchange symbol
The New York Stock Exchange symbol is EVG.
| 47 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Management and Organization
Fund Management. The Trustees of Eaton Vance Short Duration Diversified Income Fund (the Fund) are responsible for the overall management and supervision of the Fund’s affairs. The Trustees and officers of the Fund are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. The “Noninterested Trustees” consist of those Trustees who are not “interested persons” of the Fund, as that term is defined under the 1940 Act. The business address of each Trustee and officer is Two International Place, Boston, Massachusetts 02110. As used below, “EVC” refers to Eaton Vance Corp., “EV” refers to Eaton Vance, Inc., “EVM” refers to Eaton Vance Management, “BMR” refers to Boston Management and Research and “EVD” refers to Eaton Vance Distributors, Inc. EVC and EV are the corporate parent and trustee, respectively, of EVM and BMR. EVD is a wholly-owned subsidiary of EVC. Each officer affiliated with Eaton Vance may hold a position with other Eaton Vance affiliates that is comparable to his or her position with EVM listed below. Each Trustee oversees 190 portfolios in the Eaton Vance Complex (including all master and feeder funds in a master feeder structure). Each officer serves as an officer of certain other Eaton Vance funds. Each Trustee serves for a three year term. Each officer serves until his or her successor is elected.
| Name and Year of Birth | Position(s) with the |
Term of Office; Length of |
Principal Occupation(s) and Directorships During Past Five Years and Other Relevant Experience | |||
| Interested Trustee |
||||||
| Thomas E. Faust Jr. 1958 |
Class I Trustee |
Until 2015. 3 years. Trustee since 2008. |
Chairman, Chief Executive Officer and President of EVC, Director and President of EV, Chief Executive Officer and President of EVM and BMR, and Director of EVD. Trustee and/or officer of 190 registered investment companies. Mr. Faust is an interested person because of his positions with EVM, BMR, EVD, EVC and EV, which are affiliates of the Fund. Directorships in the Last Five Years.(1) Director of EVC and Hexavest Inc. | |||
| Noninterested Trustees |
||||||
| Scott E. Eston 1956 |
Class I Trustee |
Until 2015. 3 years. Trustee since 2011. |
Private investor. Formerly held various positions at Grantham, Mayo, Van Otterloo and Co., L.L.C. (investment management firm) (1997-2009), including Chief Operating Officer (2002-2009), Chief Financial Officer (1997-2009) and Chairman of the Executive Committee (2002-2008); President and Principal Executive Officer, GMO Trust (open-end registered investment company) (2006-2009). Former Partner, Coopers and Lybrand L.L.P. (now PricewaterhouseCoopers) (public accounting firm) (1987-1997). Directorships in the Last Five Years. None. | |||
| Benjamin C. Esty 1963 |
Class I Trustee |
Until 2015. 3 years. Trustee since 2005. |
Roy and Elizabeth Simmons Professor of Business Administration and Finance Unit Head, Harvard University Graduate School of Business Administration. Directorships in the Last Five Years.(1) None. | |||
| Allen R. Freedman 1940 |
Class I Trustee |
Until 2015. 3 years. Trustee since 2007. |
Private Investor. Former Chairman (2002-2004) and a Director (1983-2004) of Systems & Computer Technology Corp. (provider of software to higher education). Formerly, a Director of Loring Ward International (fund distributor) (2005-2007). Former Chairman and a Director of Indus International, Inc. (provider of enterprise management software to the power generating industry) (2005-2007). Former Chief Executive Officer of Assurant, Inc. (insurance provider) (1979-2000). Directorships in the Last Five Years.(1) Director of Stonemor Partners, L.P. (owner and operator of cemeteries). Formerly, Director of Assurant, Inc. (insurance provider) (1979-2011). | |||
| William H. Park 1947 |
Class II Trustee |
Until 2016. 3 years. Trustee since 2004. |
Consultant and private investor. Formerly, Chief Financial Officer, Aveon Group L.P. (investment management firm) (2010-2011). Formerly, Vice Chairman, Commercial Industrial Finance Corp. (specialty finance company) (2006-2010). Formerly, President and Chief Executive Officer, Prizm Capital Management, LLC (investment management firm) (2002-2005). Formerly, Executive Vice President and Chief Financial Officer, United Asset Management Corporation (investment management firm) (1982-2001). Formerly, Senior Manager, Price Waterhouse (now PricewaterhouseCoopers) (an independent registered public accounting firm) (1972-1981). Directorships in the Last Five Years.(1) None. | |||
| Ronald A. Pearlman 1940 |
Class II Trustee |
Until 2016. 3 years. Trustee since 2004. |
Professor of Law, Georgetown University Law Center. Formerly, Deputy Assistant Secretary (Tax Policy) and Assistant Secretary (Tax Policy), U.S. Department of the Treasury (1983-1985). Formerly, Chief of Staff, Joint Committee on Taxation, U.S. Congress (1988-1990). Directorships in the Last Five Years.(1) None. | |||
| 48 |
Eaton Vance
Short Duration Diversified Income Fund
October 31, 2013
Management and Organization — continued
| Name and Year of Birth | Position(s) with the |
Term of Office; Length of |
Principal Occupation(s) and Directorships During Past Five Years and Other Relevant Experience | |||
| Noninterested Trustees (continued) | ||||||
| Helen Frame Peters 1948 |
Class III Trustee |
Until 2014. 3 years. Trustee since 2008. |
Professor of Finance, Carroll School of Management, Boston College. Formerly, Dean, Carroll School of Management, Boston College (2000-2002). Formerly, Chief Investment Officer, Fixed Income, Scudder Kemper Investments (investment management firm) (1998-1999). Formerly, Chief Investment Officer, Equity and Fixed Income, Colonial Management Associates (investment management firm) (1991-1998). Directorships in the Last Five Years.(1) Formerly, Director of BJ’s Wholesale Club, Inc. (wholesale club retailer) (2004-2011). Formerly, Trustee of SPDR Index Shares Funds and SPDR Series Trust (exchange traded funds) (2000-2009). Formerly, Director of Federal Home Loan Bank of Boston (a bank for banks) (2007-2009). | |||
| Lynn A. Stout 1957 |
Class III Trustee |
Until 2014. 3 years. Trustee since 2005. |
Distinguished Professor of Corporate and Business Law, Jack G. Clarke Business Law Institute, Cornell University Law School. Formerly, the Paul Hastings Professor of Corporate and Securities Law (2006-2012) and Professor of Law (2001-2006), University of California at Los Angeles School of Law. Directorships in the Last Five Years.(1) None. | |||
| Harriett Tee Taggart 1948 |
Class II Trustee |
Until 2016. 3 years. Trustee since 2011. |
Managing Director, Taggart Associates (a professional practice firm). Formerly, Partner and Senior Vice President, Wellington Management Company, LLP (investment management firm) (1983-2006). Directorships in the Last Five Years. Director of Albemarle Corporation (chemicals manufacturer) (since 2007) and The Hanover Group (specialty property and casualty insurance company) (since 2009). Formerly, Director of Lubrizol Corporation (specialty chemicals) (2007-2011). | |||
| Ralph F. Verni 1943 |
Chairman of the Board and Class III Trustee |
Until 2014. 3 years. Chairman of the Board since 2007 and Trustee since 2005. |
Consultant and private investor. Formerly, Chief Investment Officer (1982-1992), Chief Financial Officer (1988-1990) and Director (1982-1992), New England Life. Formerly, Chairperson, New England Mutual Funds (1982-1992). Formerly, President and Chief Executive Officer, State Street Management & Research (1992-2000). Formerly, Chairperson, State Street Research Mutual Funds (1992-2000). Formerly, Director, W.P. Carey, LLC (1998-2004) and First Pioneer Farm Credit Corp. (2002-2006). Directorships in the Last Five Years.(1) None. | |||
| Principal Officers who are not Trustees | ||||||
| Name and Year of Birth | Position(s) with the Fund |
Length of Service |
Principal Occupation(s) During Past Five Years | |||
| Payson F. Swaffield 1956 |
President | Since 2007 | Vice President and Chief Income Investment Officer of EVM and BMR. | |||
| Maureen A. Gemma 1960 |
Vice President, Secretary and Chief Legal Officer | Vice President since 2011, Secretary since 2007 and Chief Legal Officer since 2008 | Vice President of EVM and BMR. | |||
| James F. Kirchner(2) 1967 |
Treasurer | Since 2013 | Vice President of EVM and BMR. | |||
| Paul M. O’Neil 1953 |
Chief Compliance Officer | Since 2004 | Vice President of EVM and BMR. | |||
| (1) | During their respective tenures, the Trustees (except Mr. Eston and Ms. Taggart) also served as Board members of one or more of the following Eaton Vance funds (which operated in the years noted): Eaton Vance Credit Opportunities Fund (launched in 2005 and terminated in 2010); Eaton Vance Insured Florida Plus Municipal Bond Fund (launched in 2002 and terminated in 2009); and Eaton Vance National Municipal Income Trust (launched in 1998 and terminated in 2009). |
| (2) | Prior to 2013, Mr. Kirchner served as Assistant Treasurer of the Fund since 2007. |
| 49 |
Eaton Vance Funds
IMPORTANT NOTICES
Privacy. The Eaton Vance organization is committed to ensuring your financial privacy. Each of the financial institutions identified below has in effect the following policy (“Privacy Policy”) with respect to nonpublic personal information about its customers:
| Ÿ | Only such information received from you, through application forms or otherwise, and information about your Eaton Vance fund transactions will be collected. This may include information such as name, address, social security number, tax status, account balances and transactions. |
| Ÿ | None of such information about you (or former customers) will be disclosed to anyone, except as permitted by law (which includes disclosure to employees necessary to service your account). In the normal course of servicing a customer’s account, Eaton Vance may share information with unaffiliated third parties that perform various required services such as transfer agents, custodians and broker-dealers. |
| Ÿ | Policies and procedures (including physical, electronic and procedural safeguards) are in place that are designed to protect the confidentiality of such information. |
| Ÿ | We reserve the right to change our Privacy Policy at any time upon proper notification to you. Customers may want to review our Privacy Policy periodically for changes by accessing the link on our homepage: www.eatonvance.com. |
Our pledge of privacy applies to the following entities within the Eaton Vance organization: the Eaton Vance Family of Funds, Eaton Vance Management, Eaton Vance Investment Counsel, Eaton Vance Distributors, Inc., Eaton Vance Trust Company, Eaton Vance Management’s Real Estate Investment Group and Boston Management and Research. In addition, our Privacy Policy applies only to those Eaton Vance customers who are individuals and who have a direct relationship with us. If a customer’s account (i.e., fund shares) is held in the name of a third-party financial advisor/broker-dealer, it is likely that only such advisor’s privacy policies apply to the customer. This notice supersedes all previously issued privacy disclosures. For more information about Eaton Vance’s Privacy Policy, please call 1-800-262-1122.
Delivery of Shareholder Documents. The Securities and Exchange Commission (SEC) permits funds to deliver only one copy of shareholder documents, including prospectuses, proxy statements and shareholder reports, to fund investors with multiple accounts at the same residential or post office box address. This practice is often called “householding” and it helps eliminate duplicate mailings to shareholders. Eaton Vance, or your financial advisor, may household the mailing of your documents indefinitely unless you instruct Eaton Vance, or your financial advisor, otherwise. If you would prefer that your Eaton Vance documents not be householded, please contact Eaton Vance at 1-800-262-1122, or contact your financial advisor. Your instructions that householding not apply to delivery of your Eaton Vance documents will be effective within 30 days of receipt by Eaton Vance or your financial advisor.
Portfolio Holdings. Each Eaton Vance Fund and its underlying Portfolio(s) (if applicable) will file a schedule of portfolio holdings on Form N-Q with the SEC for the first and third quarters of each fiscal year. The Form N-Q will be available on the Eaton Vance website at www.eatonvance.com, by calling Eaton Vance at 1-800-262-1122 or in the EDGAR database on the SEC’s website at www.sec.gov. Form N-Q may also be reviewed and copied at the SEC’s public reference room in Washington, D.C. (call 1-800-732-0330 for information on the operation of the public reference room).
Proxy Voting. From time to time, funds are required to vote proxies related to the securities held by the funds. The Eaton Vance Funds or their underlying Portfolios (if applicable) vote proxies according to a set of policies and procedures approved by the Funds’ and Portfolios’ Boards. You may obtain a description of these policies and procedures and information on how the Funds or Portfolios voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge, upon request, by calling 1-800-262-1122 and by accessing the SEC’s website at www.sec.gov.
Share Repurchase Program. On November 11, 2013, the Fund’s Board of Trustees approved a share repurchase program authorizing the Fund to repurchase up to 10% of its currently outstanding common shares in open-market transactions at a discount to net asset value. The repurchase program does not obligate the Fund to purchase a specific amount of shares. The Fund’s repurchase activity, including the number of shares purchased, average price and average discount to net asset value, will be disclosed in the Fund’s annual and semi-annual reports to shareholders.
Additional Notice to Shareholders. If applicable, a Fund may also redeem or purchase its outstanding auction preferred shares (APS) in order to maintain compliance with regulatory requirements, borrowing or rating agency requirements or for other purposes as it deems appropriate or necessary.
Closed-End Fund Information. Eaton Vance closed-end funds make fund performance data and certain information about portfolio characteristics available on the Eaton Vance website shortly after the end of each month. The funds’ net asset value per share is readily accessible on the Eaton Vance website. Portfolio holdings for the most recent month-end are also posted to the website approximately 30 days following the end of the month. This information is available at www.eatonvance.com on the fund information pages under “Individual Investors — Closed-End Funds”.
| 50 |
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| 2319-12/13 | CE-SDDISRC |
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, an independent trustee, as its audit committee financial expert. Mr. Park is a certified public accountant who is a consultant and private investor. Previously, he served as the Chief Financial Officer of Aveon Group, L.P. (an investment management firm), as the Vice Chairman of Commercial Industrial Finance Corp. (specialty finance company), as President and Chief Executive Officer of Prizm Capital Management, LLC (investment management firm), as Executive Vice President and Chief Financial Officer of United Asset Management Corporation (an institutional investment management firm) and as a Senior Manager at Price Waterhouse (now PricewaterhouseCoopers) (an independent registered public accounting firm).
Item 4. Principal Accountant Fees and Services
(a) –(d)
The following table presents the aggregate fees billed to the registrant for the registrant’s fiscal years ended October 31, 2012 and October 31, 2013 by the registrant’s principal accountant, Deloitte & Touche LLP (“D&T”), for professional services rendered for the audit of the registrant’s annual financial statements and fees billed for other services rendered by D&T during such periods.
| Fiscal Years Ended |
10/31/12 | 10/31/13 | ||||||
| Audit Fees |
$ | 88,710 | $ | 95,110 | ||||
| Audit-Related Fees(1) |
$ | 0 | $ | 0 | ||||
| Tax Fees(2) |
$ | 31,710 | $ | 40,050 | ||||
| All Other Fees(3) |
$ | 7,940 | $ | 0 | ||||
|
|
|
|
|
|||||
| Total |
$ | 128,360 | $ | 135,160 | ||||
|
|
|
|
|
|||||
| (1) | Audit-related fees consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under the category of audit fees. |
| (2) | Tax fees consist of the aggregate fees billed for professional services rendered by the principal accountant relating to tax compliance, tax advice, and tax planning and specifically include fees for tax return preparation and other related tax compliance/planning matters. |
| (3) | All other fees consist of the aggregate fees billed for products and services provided by the principal accountant other than audit, audit-related, and tax services. |
(e)(1) The registrant’s audit committee has adopted policies and procedures relating to the pre-approval of services provided by the registrant’s principal accountant (the “Pre-Approval Policies”). The Pre-Approval Policies establish a framework intended to assist the audit committee in the proper discharge of its pre-approval responsibilities. As a general matter, the Pre-Approval Policies (i) specify certain types of audit, audit-related, tax, and other services determined to be pre-approved by the audit committee; and (ii) delineate specific procedures governing the mechanics of the pre-approval process, including the approval and monitoring of audit and non-audit service fees. Unless a service is specifically pre-approved under the Pre-Approval Policies, it must be separately pre-approved by the audit committee.
The Pre-Approval Policies and the types of audit and non-audit services pre-approved therein must be reviewed and ratified by the registrant’s audit committee at least annually. The registrant’s audit committee maintains full responsibility for the appointment, compensation, and oversight of the work of the registrant’s principal accountant.
(e)(2) No services described in paragraphs (b)-(d) above were approved by the registrant’s audit committee pursuant to the “de minimis exception” set forth in Rule 2-01 (c)(7)(i)(C) of Regulation S-X.
(f) Not applicable.
(g) The following table presents (i) the aggregate non-audit fees (i.e., fees for audit-related, tax, and other services) billed to the registrant by D&T for the registrant’s fiscal years ended October 31, 2012 and October 31, 2013; and (ii) the aggregate non-audit fees (i.e., fees for audit-related, tax, and other services) billed to the Eaton Vance organization by D&T for the same time periods.
| Fiscal Years Ended |
10/31/12 | 10/31/13 | ||||||
| Registrant |
$ | 39,650 | $ | 40,050 | ||||
| Eaton Vance(1) |
$ | 566,619 | $ | 526,385 | ||||
| (1) | The investment adviser to the registrant, as well as any of its affiliates that provide ongoing services to the registrant, are subsidiaries of Eaton Vance Corp. |
(h) The registrant’s audit committee has considered whether the provision by the registrant’s principal accountant of non-audit services to the registrant’s investment adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant that were not pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X is compatible with maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants
The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934, as amended. William H. Park (Chair), Scott E. Eston, Ronald A. Pearlman, Helen Frame Peters and Ralph F. Verni are the members of the registrant’s audit committee.
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
The Board of Trustees of the Trust has adopted a proxy voting policy and procedure (the “Fund Policy”), pursuant to which the Trustees have delegated proxy voting responsibility to the Fund’s investment adviser and adopted the investment adviser’s proxy voting policies and procedures (the “Policies”) which are described below. The Trustees will review the Fund’s proxy voting records from time to time and will annually consider approving the Policies for the upcoming year. In the event that a conflict of interest arises between the Fund’s shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund, the investment adviser will generally refrain from voting the proxies related to the companies giving rise to such conflict until it consults with the Board’s Special Committee except as contemplated under the Fund Policy. The Board’s Special Committee will instruct the investment adviser on the appropriate course of action.
The Policies are designed to promote accountability of a company’s management to its shareholders and to align the interests of management with those shareholders. An independent proxy voting service (“Agent”), currently Institutional Shareholder Services, Inc., has been retained to assist in the voting of proxies through the provision of vote analysis, implementation and recordkeeping and disclosure services. The investment adviser will generally vote proxies through the Agent. The Agent is required to vote all proxies and/or refer them back to the investment adviser pursuant to the Policies. It is generally the policy of the investment adviser to vote in accordance with the recommendation of the Agent. The Agent shall refer to the investment adviser proxies relating to mergers and restructurings, and the disposition of assets, termination, liquidation and mergers contained in mutual fund proxies. The investment adviser will normally vote against anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions, except in the case of closed-end management investment companies. The investment adviser generally supports management on social and environmental proposals. The investment adviser may abstain from voting from time to time where it determines that the costs associated with voting a proxy outweighs the benefits derived from exercising the right to vote or the economic effect on shareholders interests or the value of the portfolio holding is indeterminable or insignificant.
In addition, the investment adviser will monitor situations that may result in a conflict of interest between the Fund’s shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund by maintaining a list of significant existing and prospective corporate clients. The investment adviser’s personnel responsible for reviewing and voting proxies on behalf of the Fund will report any proxy received or expected to be received from a company included on that list to the personnel of the investment adviser identified in the Policies. If such personnel expects to instruct the Agent to vote such proxies in a manner inconsistent with the guidelines of the Policies or the recommendation of the Agent, the personnel will consult with members of senior management of the investment adviser to determine if a material conflict of interests exists. If it is determined that a material conflict does exist, the investment adviser will seek instruction on how to vote from the Special Committee.
Information on how the Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30 is available (1) without charge, upon request, by calling 1-800-262-1122, and (2) on the Securities and Exchange Commission’s website at http://www.sec.gov.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Scott H. Page, Payson F. Swaffield, Catherine M. McDermott, Eric A. Stein and Andrew Szczurowski and other Eaton Vance Management (“EVM”) investment professionals comprise the investment team responsible for the overall and day-to-day management of the Fund’s investments as well as allocations among the Fund’s three principal investment categories.
Mr. Page has been an EVM portfolio manager since 1996 and is a Vice President. He is head of EVM’s Bank Loan Investment Group. Mr. Swaffield is Chief Income Investment Officer of EVM and has been a portfolio manager since 1996. Ms. McDermott has been with EVM since 2000 and is a Vice President. Mr. Stein became a portfolio manager at EVM in December 2012, is a Vice President and co-manages other EVM funds and portfolios. Mr. Stein originally joined EVM in July 2002. Prior to rejoining EVM in 2008, Mr. Stein worked at the Federal Reserve Bank of New York (2007-2008) and attended business school in Chicago, Illinois. Mr. Szczurowski became a portfolio manager at EVM in November 2011 and is a Vice President. He has been a member of the MBS group at EVM since 2007 and an analyst since 2008. This information is provided as of the date of filing of this report.
The following table shows, as of the Fund’s most recent fiscal year end, the number of accounts each portfolio manager managed in each of the listed categories and the total assets (in millions of dollars), in the accounts managed within each category. The table also shows the number of accounts with respect to which the advisory fee is based on the performance of the account, if any, and the total assets (in millions of dollars) in those accounts.
| Number of All Accounts |
Total Assets of All Accounts |
Number of Paying a |
Total assets of Performance Fee |
|||||||||||||
| Scott H. Page |
||||||||||||||||
| Registered Investment Companies |
16 | $ | 35,225.0 | 0 | $ | 0 | ||||||||||
| Other Pooled Investment Vehicles |
8 | $ | 9,079.2 | 1 | $ | 253.3 | ||||||||||
| Other Accounts |
2 | $ | 1,510.1 | 0 | $ | 0 | ||||||||||
| Payson F. Swaffield |
||||||||||||||||
| Registered Investment Companies |
2 | $ | 2,265.3 | 0 | $ | 0 | ||||||||||
| Other Pooled Investment Vehicles |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Other Accounts |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Catherine C. McDermott |
||||||||||||||||
| Registered Investment Companies |
2 | $ | 3,544.1 | 0 | $ | 0 | ||||||||||
| Other Pooled Investment Vehicles |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Other Accounts |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Eric A. Stein* |
||||||||||||||||
| Registered Investment Companies |
13 | $ | 24,810.3 | 0 | $ | 0 | ||||||||||
| Other Pooled Investment Vehicles |
3 | $ | 680.8 | 0 | $ | 0 | ||||||||||
| Other Accounts |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| Andrew Szczurowski |
||||||||||||||||
| Registered Investment Companies |
3 | $ | 5,860.2 | 0 | $ | 0 | ||||||||||
| Other Pooled Investment Vehicles |
1 | $ | 447.4 | 0 | $ | 0 | ||||||||||
| Other Accounts |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
| * | This portfolio manager serves as portfolio manager of one or more registered investment companies that invest in one or more underlying registered investment companies in the Eaton Vance fund family. The underlying investment companies may be managed by this portfolio manager or another portfolio manager(s). |
The following table shows the dollar range of Fund shares beneficially owned by each portfolio manager as of the Fund’s most recent fiscal year end.
| Portfolio Manager | Dollar Range of Equity Securities Owned in the Fund | |
| Scott H. Page |
None | |
| Payson F. Swaffield |
None | |
| Catherine M. McDermott |
None | |
| Eric A. Stein |
$1 - $10,000 | |
| Andrew Szczurowski |
None | |
Potential for Conflicts of Interest. It is possible that conflicts of interest may arise in connection with a portfolio manager’s management of the Fund’s investments on the one hand and investments of other accounts for which a portfolio manager is responsible on the other. For example, a portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Fund and other accounts he or she advises. In addition, due to differences in the investment strategies or restrictions between the Fund and the other accounts, a portfolio manager may take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by a portfolio manager may compensate the investment adviser based on the performance of the securities held by that account. The existence of such a performance based fee may create additional conflicts of interest for a portfolio manager in the allocation of management time, resources and investment opportunities. Whenever conflicts of interest arise, a portfolio manager will endeavor to exercise his or her discretion in a manner that he or she believes is equitable to all interested persons. EVM has adopted several policies and procedures designed to address these potential conflicts including a code of ethics and policies which govern the investment adviser’s trading practices, including among other things the aggregation and allocation of trades among clients, brokerage allocation, cross trades and best execution.
Compensation Structure for EVM
Compensation of EVM’s portfolio managers and other investment professionals has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) annual stock-based compensation consisting of options to purchase shares of EVC’s nonvoting common stock and/or restricted shares of EVC’s nonvoting common stock. EVM’s investment professionals also receive certain retirement, insurance and other benefits that are broadly available to EVM’s employees. Compensation of EVM’s investment professionals is reviewed primarily on an annual basis. Cash bonuses, stock-based compensation awards, and adjustments in base salary are typically paid or put into effect at or shortly after the October 31st fiscal year end of EVC.
Method to Determine Compensation. EVM compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities and the total return performance of managed funds and accounts versus the benchmark(s) stated in the prospectus, as well as an appropriate peer group (as described below). In addition to rankings within peer groups of funds on the basis of absolute performance, consideration may also be given to relative risk-adjusted performance. Risk-adjusted performance measures include, but are not limited to, the Sharpe Ratio. Performance is normally based on periods ending on the September 30th preceding fiscal year end. Fund performance is normally evaluated primarily versus peer groups of funds as determined by Lipper Inc. and/or Morningstar, Inc. When a fund’s peer group as determined by Lipper or Morningstar is deemed by EVM’s management not to provide a fair comparison, performance may instead be evaluated primarily
against a custom peer group or market index. In evaluating the performance of a fund and its manager, primary emphasis is normally placed on three-year performance, with secondary consideration of performance over longer and shorter periods. For funds that are tax-managed or otherwise have an objective of after-tax returns, performance is measured net of taxes. For other funds, performance is evaluated on a pre-tax basis. For funds with an investment objective other than total return (such as current income), consideration will also be given to the fund’s success in achieving its objective. For managers responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis, based on averages or weighted averages among managed funds and accounts. Funds and accounts that have performance-based advisory fees are not accorded disproportionate weightings in measuring aggregate portfolio manager performance.
The compensation of portfolio managers with other job responsibilities (such as heading an investment group or providing analytical support to other portfolios) will include consideration of the scope of such responsibilities and the managers’ performance in meeting them.
EVM seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. EVM participates in investment-industry compensation surveys and utilizes survey data as a factor in determining salary, bonus and stock-based compensation levels for portfolio managers and other investment professionals. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of EVM and its parent company. The overall annual cash bonus pool is based on a substantially fixed percentage of pre-bonus operating income. While the salaries of EVM’s portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in manager performance and other factors as described herein. For a high performing portfolio manager, cash bonuses and stock-based compensation may represent a substantial portion of total compensation.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
No such purchases this period.
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. | |
| (c) | Registrant’s notices to shareholders pursuant to Registrant’s exemptive order granting an exemption from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder regarding distributions paid pursuant to the Registrant’s Managed Distribution Plan. | |
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.
Eaton Vance Short Duration Diversified Income Fund
| By: | /s/ Payson F. Swaffield | |
| Payson F. Swaffield | ||
| President | ||
| Date: | December 6, 2013 | |
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/ James F. Kirchner | |
| James F. Kirchner | ||
| Treasurer | ||
| Date: | December 6, 2013 | |
| By: | /s/ Payson F. Swaffield | |
| Payson F. Swaffield | ||
| President | ||
| Date: | December 6, 2013 | |