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
April 30, 2015
Date of Reporting Period
Item 1. Reports to Stockholders
Eaton Vance
Short Duration Diversified Income Fund (EVG)
Semiannual Report
April 30, 2015
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.
Semiannual Report April 30, 2015
Eaton Vance
Short Duration Diversified Income Fund
Table of Contents
| Performance |
2 | |||
| Fund Profile |
2 | |||
| Endnotes and Additional Disclosures |
3 | |||
| Consolidated Financial Statements |
4 | |||
| Annual Meeting of Shareholders |
44 | |||
| Board of Trustees’ Contract Approval |
45 | |||
| Officers and Trustees |
48 | |||
| Important Notices |
49 | |||
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Performance1
Portfolio Managers Scott H. Page, CFA, Payson F. Swaffield, CFA, Catherine C. McDermott, Andrew Szczurowski, CFA and Eric Stein, CFA
| % Average Annual Total Returns | Inception Date | Six Months | One Year | Five Years | Ten Years | |||||||||||||||
| Fund at NAV |
02/28/2005 | 2.59 | % | 4.76 | % | 4.35 | % | 6.11 | % | |||||||||||
| Fund at Market Price |
— | 5.43 | 4.62 | 3.38 | 5.58 | |||||||||||||||
| % Premium/Discount to NAV2 | ||||||||||||||||||||
| –9.23 | % | |||||||||||||||||||
| Distributions3 | ||||||||||||||||||||
| Total Distributions per share for the period |
$ | 0.540 | ||||||||||||||||||
| Distribution Rate at NAV |
6.64 | % | ||||||||||||||||||
| Distribution Rate at Market Price |
7.32 | % | ||||||||||||||||||
| % Total Leverage4 | ||||||||||||||||||||
| Derivatives |
22.86 | % | ||||||||||||||||||
| Borrowings |
20.90 | |||||||||||||||||||
Fund Profile
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 eatonvance.com.
| 2 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Endnotes and Additional Disclosures
| 3 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited)
| 4 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 5 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 6 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 7 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 8 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 9 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 10 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 11 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 12 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 13 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 14 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 15 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 16 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 17 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 18 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 19 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 20 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Portfolio of Investments (Unaudited) — continued
| 21 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Statement of Assets and Liabilities (Unaudited)
| Assets | April 30, 2015 | |||
| Unaffiliated investments, at value (identified cost, $390,904,717) |
$ | 393,830,668 | ||
| Affiliated investment, at value (identified cost, $7,217,235) |
7,217,235 | |||
| Cash |
2,413,132 | |||
| Restricted cash* |
121 | |||
| Foreign currency, at value (identified cost, $1,025,083) |
1,030,957 | |||
| Interest receivable |
2,306,291 | |||
| Interest receivable from affiliated investment |
1,208 | |||
| Receivable for investments sold |
201,224 | |||
| Receivable for variation margin on open centrally cleared swap contracts |
35 | |||
| Receivable for open forward foreign currency exchange contracts |
1,624,994 | |||
| Receivable for open swap contracts |
443,362 | |||
| Premium paid on open non-centrally cleared swap contracts |
409,330 | |||
| Tax reclaims receivable |
18,157 | |||
| Prepaid upfront fees on notes payable |
32,902 | |||
| Other assets |
11,868 | |||
| Total assets |
$ | 409,541,484 | ||
| Liabilities | ||||
| Notes payable |
$ | 110,000,000 | ||
| Payable for investments purchased |
498,571 | |||
| Payable for open forward foreign currency exchange contracts |
2,032,572 | |||
| Payable for open swap contracts |
483,834 | |||
| Payable to affiliates: |
||||
| Investment adviser fee |
304,791 | |||
| Trustees’ fees |
2,025 | |||
| Accrued expenses |
265,128 | |||
| Total liabilities |
$ | 113,586,921 | ||
| Net Assets |
$ | 295,954,563 | ||
| Sources of Net Assets | ||||
| Common shares, $0.01 par value, unlimited number of shares authorized, 18,201,396 shares issued and outstanding |
$ | 182,014 | ||
| Additional paid-in capital |
320,227,836 | |||
| Accumulated net realized loss |
(24,106,330 | ) | ||
| Accumulated distributions in excess of net investment income |
(2,831,830 | ) | ||
| Net unrealized appreciation |
2,482,873 | |||
| Net Assets |
$ | 295,954,563 | ||
| Net Asset Value | ||||
| ($295,954,563 ÷18,201,396 common shares issued and outstanding) |
$ | 16.26 | ||
| * | Represents restricted cash on deposit at the broker for open derivative contracts. |
| 22 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Statement of Operations (Unaudited)
| Investment Income | Six Months Ended April 30, 2015 |
|||
| Interest (net of foreign taxes, $75,007) |
$ | 10,438,927 | ||
| Dividends |
71,161 | |||
| Interest allocated from affiliated investment |
6,721 | |||
| Expenses allocated from affiliated investment |
(727 | ) | ||
| Total investment income |
$ | 10,516,082 | ||
| Expenses | ||||
| Investment adviser fee |
$ | 1,849,748 | ||
| Trustees’ fees and expenses |
12,185 | |||
| Custodian fee |
215,413 | |||
| Transfer and dividend disbursing agent fees |
9,029 | |||
| Legal and accounting services |
90,460 | |||
| Printing and postage |
48,492 | |||
| Interest expense and fees |
697,583 | |||
| Miscellaneous |
26,242 | |||
| Total expenses |
$ | 2,949,152 | ||
| Deduct — |
||||
| Reduction of custodian fee |
$ | 46 | ||
| Total expense reductions |
$ | 46 | ||
| Net expenses |
$ | 2,949,106 | ||
| Net investment income |
$ | 7,566,976 | ||
| Realized and Unrealized Gain (Loss) | ||||
| Net realized gain (loss) — |
||||
| Investment transactions |
$ | (1,985,397 | ) | |
| Investment transactions allocated from affiliated investment |
17 | |||
| Swap contracts |
(223,760 | ) | ||
| Foreign currency and forward foreign currency exchange contract transactions |
867,672 | |||
| Net realized loss |
$ | (1,341,468 | ) | |
| Change in unrealized appreciation (depreciation) — |
||||
| Investments |
$ | 451,948 | ||
| Swap contracts |
144,872 | |||
| Foreign currency and forward foreign currency exchange contracts |
(1,423,518 | ) | ||
| Net change in unrealized appreciation (depreciation) |
$ | (826,698 | ) | |
| Net realized and unrealized loss |
$ | (2,168,166 | ) | |
| Net increase in net assets from operations |
$ | 5,398,810 | ||
| 23 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Statements of Changes in Net Assets
| Increase (Decrease) in Net Assets | Six Months Ended April 30, 2015 (Unaudited) |
Year Ended October 31, 2014 |
||||||
| From operations — |
||||||||
| Net investment income |
$ | 7,566,976 | $ | 15,125,886 | ||||
| Net realized loss from investment transactions, written options, securities sold short, futures contracts, swap contracts, and foreign currency and forward foreign currency exchange contract transactions |
(1,341,468 | ) | (1,595,319 | ) | ||||
| Net change in unrealized appreciation (depreciation) from investments, written options, securities sold short, futures contracts, swap contracts, foreign currency and forward foreign currency exchange contracts |
(826,698 | ) | (3,305,507 | ) | ||||
| Net increase in net assets from operations |
$ | 5,398,810 | $ | 10,225,060 | ||||
| Distributions to shareholders — |
||||||||
| From net investment income |
$ | (9,897,478 | )* | $ | (14,281,714 | ) | ||
| Tax return of capital |
— | (6,033,550 | ) | |||||
| Total distributions |
$ | (9,897,478 | ) | $ | (20,315,264 | ) | ||
| Capital share transactions — |
||||||||
| Cost of shares repurchased (see Note 5) |
$ | (5,757,080 | ) | $ | (4,213,097 | ) | ||
| Net decrease in net assets from capital share transactions |
$ | (5,757,080 | ) | $ | (4,213,097 | ) | ||
| Net decrease in net assets |
$ | (10,255,748 | ) | $ | (14,303,301 | ) | ||
| Net Assets | ||||||||
| At beginning of period |
$ | 306,210,311 | $ | 320,513,612 | ||||
| At end of period |
$ | 295,954,563 | $ | 306,210,311 | ||||
| Accumulated distributions in excess of net investment income included in net assets |
||||||||
| At end of period |
$ | (2,831,830 | ) | $ | (501,328 | ) | ||
| * | A portion of the distributions may be deemed a tax return of capital at year-end. See Note 2. |
| 24 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Statement of Cash Flows (Unaudited)
| Cash Flows From Operating Activities | Six Months Ended April 30, 2015 |
|||
| Net increase in net assets from operations |
$ | 5,398,810 | ||
| Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: |
||||
| Investments purchased |
(66,745,996 | ) | ||
| Investments sold |
89,704,359 | |||
| Increase in short-term investments, net, excluding foreign government securities |
(1,044,898 | ) | ||
| Net amortization/accretion of premium (discount) |
3,965,217 | |||
| Amortization of prepaid upfront fees on notes payable |
4,598 | |||
| Decrease in restricted cash |
295,163 | |||
| Decrease in interest receivable |
169,283 | |||
| Decrease in interest receivable from affiliated investment |
482 | |||
| Increase in receivable for variation margin on open centrally cleared swap contracts |
(35 | ) | ||
| Decrease in receivable for open forward foreign currency exchange contracts |
1,185,992 | |||
| Decrease in receivable for open swap contracts |
115,938 | |||
| Decrease in premium paid on open non-centrally cleared swap contracts |
93,881 | |||
| Decrease in tax reclaims receivable |
3,261 | |||
| Increase in other assets |
(6,615 | ) | ||
| Decrease in cash collateral due to brokers |
(295,074 | ) | ||
| Decrease in payable for variation margin on open centrally cleared swap contracts |
(350 | ) | ||
| Increase in payable for open forward foreign currency exchange contracts |
251,187 | |||
| Decrease in payable for open swap contracts |
(250,917 | ) | ||
| Decrease in payable to affiliate for investment adviser fee |
(21,361 | ) | ||
| Increase in payable to affiliate for Trustees’ fees |
25 | |||
| Decrease in accrued expenses |
(118,186 | ) | ||
| Decrease in unfunded loan commitments |
(246,124 | ) | ||
| Net change in unrealized (appreciation) depreciation from investments |
(451,948 | ) | ||
| Net realized loss from investments |
1,985,397 | |||
| Net cash provided by operating activities |
$ | 33,992,089 | ||
| Cash Flows From Financing Activities | ||||
| Distributions paid, net of reinvestments |
$ | (9,897,478 | ) | |
| Repurchase of common shares |
(5,765,835 | ) | ||
| Payment of prepaid upfront fees on notes payable |
(37,500 | ) | ||
| Proceeds from notes payable |
13,000,000 | |||
| Repayment of notes payable |
(31,000,000 | ) | ||
| Net cash used in financing activities |
$ | (33,700,813 | ) | |
| Net increase in cash* |
$ | 291,276 | ||
| Cash at beginning of period(1) |
$ | 3,152,813 | ||
| Cash at end of period(1) |
$ | 3,444,089 | ||
| Supplemental disclosure of cash flow information | ||||
| Cash paid for interest and fees |
$ | 741,721 | ||
| (1) | Balance includes foreign currency, at value. |
| * | Includes net change in unrealized appreciation (depreciation) on foreign currency of $20,595. |
| 25 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Consolidated Financial Highlights
| Six Months Ended April 30, 2015 (Unaudited) |
Year Ended October 31, | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||||||
| Net asset value — Beginning of period |
$ | 16.460 | $ | 16.970 | $ | 17.860 | $ | 17.800 | $ | 18.270 | $ | 17.660 | ||||||||||||
| Income (Loss) From Operations | ||||||||||||||||||||||||
| Net investment income(1) |
$ | 0.412 | $ | 0.804 | $ | 0.824 | $ | 0.867 | $ | 0.822 | $ | 1.051 | ||||||||||||
| Net realized and unrealized gain (loss) |
(0.114 | ) | (0.261 | ) | (0.634 | ) | 0.273 | (0.132 | ) | 0.639 | ||||||||||||||
| Total income from operations |
$ | 0.298 | $ | 0.543 | $ | 0.190 | $ | 1.140 | $ | 0.690 | $ | 1.690 | ||||||||||||
| Less Distributions | ||||||||||||||||||||||||
| From net investment income |
$ | (0.540 | )* | $ | (0.759 | ) | $ | (0.697 | ) | $ | (0.732 | ) | $ | (1.160 | ) | $ | (1.080 | ) | ||||||
| Tax return of capital |
— | (0.321 | ) | (0.383 | ) | (0.348 | ) | — | — | |||||||||||||||
| Total distributions |
$ | (0.540 | ) | $ | (1.080 | ) | $ | (1.080 | ) | $ | (1.080 | ) | $ | (1.160 | ) | $ | (1.080 | ) | ||||||
| Anti-dilutive effect of share repurchase program (see Note 5)(1) |
$ | 0.042 | $ | 0.027 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Net asset value — End of period |
$ | 16.260 | $ | 16.460 | $ | 16.970 | $ | 17.860 | $ | 17.800 | $ | 18.270 | ||||||||||||
| Market value — End of period |
$ | 14.760 | $ | 14.530 | $ | 15.290 | $ | 17.320 | $ | 16.350 | $ | 17.600 | ||||||||||||
| Total Investment Return on Net Asset Value(2) |
2.59 | %(3) | 4.10 | % | 1.47 | % | 6.92 | % | 4.35 | % | 10.26 | % | ||||||||||||
| Total Investment Return on Market Value(2) |
5.43 | %(3) | 2.05 | % | (5.72 | )% | 12.87 | % | (0.51 | )% | 20.48 | % | ||||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||||||
| Net assets, end of period (000’s omitted) |
$ | 295,955 | $ | 306,210 | $ | 320,514 | $ | 337,400 | $ | 336,165 | $ | 345,073 | ||||||||||||
| Ratios (as a percentage of average daily net assets): |
||||||||||||||||||||||||
| Expenses excluding interest and fees(4) |
1.52 | %(5) | 1.53 | % | 1.55 | % | 1.47 | % | 1.38 | % | 1.27 | % | ||||||||||||
| Interest and fee expense(6) |
0.47 | %(5) | 0.36 | % | 0.47 | % | 0.55 | % | 0.51 | % | 0.46 | % | ||||||||||||
| Total expenses(4) |
1.99 | %(5) | 1.89 | % | 2.02 | % | 2.02 | % | 1.89 | % | 1.73 | % | ||||||||||||
| Net investment income |
5.11 | %(5) | 4.80 | % | 4.72 | % | 4.87 | % | 4.52 | % | 5.81 | % | ||||||||||||
| Portfolio Turnover |
15 | %(3) | 41 | % | 48 | % | 42 | % | 35 | % | 21 | % | ||||||||||||
| Senior Securities: |
||||||||||||||||||||||||
| Total notes payable outstanding (in 000’s) |
$ | 110,000 | $ | 128,000 | $ | 95,000 | $ | 115,000 | $ | 98,000 | $ | 98,000 | ||||||||||||
| Asset coverage per $1,000 of notes payable(7) |
$ | 3,690 | $ | 3,392 | $ | 4,374 | $ | 3,934 | $ | 4,430 | $ | 4,521 | ||||||||||||
| (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) | Not annualized. |
| (4) | Excludes the effect of custody fee credits, if any, of less than 0.005%. |
| (5) | Annualized. |
| (6) | Interest and fee expense relates to borrowings for the purpose of financial leverage (see Note 7) and securities sold short. |
| (7) | 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. |
| * | A portion of the distributions may be deemed a tax return of capital at year-end. See Note 2. |
| 26 | See Notes to Consolidated Financial Statements. |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited)
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.
Prior to April 7, 2015, the Fund sought 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. As of the close of business on April 6, 2015, the Fund fully redeemed its investment in the Subsidiary. Net assets of the Subsidiary at such date, consisting primarily of cash and investments, were transferred to the Fund with no gain or loss for financial reporting purposes. The Fund is in the process of dissolving the Subsidiary with the Cayman Islands authorities and it is scheduled to dissolve on or about October 31, 2015. The accompanying consolidated financial statements include the accounts of the Subsidiary through April 6, 2015. 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 (U.S. GAAP). The Fund is an investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946.
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) 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, interest rates, anticipated prepayments, 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. 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 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. Swaps (other than centrally cleared) are normally valued using valuations provided by a third party pricing service. Such pricing service
| 27 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
valuations are based on the present value of fixed and projected floating rate cash flows over the term of the swap contract, and 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 on swaps are discounted to their present value using swap rates provided by electronic data services or by broker/dealers. Centrally cleared swaps are valued at the daily settlement price provided by the central clearing counterparty.
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.
As of April 30, 2015, 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 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 loan or 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.
| 28 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
H Use of Estimates — The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 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. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from movements in the value of a foreign currency relative to the U.S. dollar.
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.
N Interest Rate Swaps — Swap contracts are privately negotiated agreements between the Fund and a counterparty. Certain swap contracts may be centrally cleared (“centrally cleared swaps”), whereby all payments made or received by the Fund pursuant to the contract are with a central clearing party (CCP) rather than the original counterparty. The CCP guarantees the performance of the original parties to the contract. Upon entering into centrally cleared swaps, the Fund is required to deposit with the CCP, either in cash or securities, an amount of initial margin determined by the CCP, which is subject to adjustment.
Pursuant to interest rate swap agreements, the Fund either makes floating-rate payments to the counterparty (or CCP in the case of centrally cleared swaps) based on a benchmark interest rate in exchange for fixed-rate payments or the Fund makes fixed-rate payments to the counterparty (or CCP in the case of a centrally cleared swap) 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
| 29 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
losses. For centrally cleared swaps, the daily change in valuation is recorded as a receivable or payable for variation margin and settled in cash with the CCP daily. 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. In the case of centrally cleared swaps, counterparty risk is minimal due to protections provided by the CCP. Risk may also arise from movements in interest rates.
O 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 6 and 9. 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.
P 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.
Q 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.
R 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. When making a short sale, the Fund segregates liquid assets with the custodian equal to its obligations under the short sale. 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 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.
S 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
| 30 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
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 due to changes in interest rates.
T 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.
U Interim Consolidated Financial Statements — The interim consolidated financial statements relating to April 30, 2015 and for the six months then ended have not been audited by an independent registered public accounting firm, but in the opinion of the Fund’s management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the consolidated financial statements.
2 Distributions to Shareholders and Income Tax Information
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. Distributions to shareholders are determined in accordance with income tax regulations, which may differ from U.S. GAAP. As required by U.S. GAAP, only distributions in excess of tax basis earnings and profits are 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. For the six months ended April 30, 2015, the amount of distributions estimated to be a tax return of capital was approximately $1,653,000. The final determination of tax characteristics of the Fund’s distributions will occur at the end of the year, at which time it will be reported to the shareholders.
At October 31, 2014, the Fund, for federal income tax purposes, had capital loss carryforwards of $21,088,086 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. Such capital loss carryforwards will expire on October 31, 2016 ($13,612,131), October 31, 2017 ($738,126), October 31, 2018 ($5,165,932) and October 31, 2019 ($1,571,897) and their character is short-term. Under tax regulations, capital losses incurred in taxable years beginning after December 2010 are considered deferred capital losses and are treated as arising on the first day of the Fund’s next taxable year, retaining the same short-term or long-term character as when originally deferred. Deferred capital losses are required to be used prior to capital loss carryforwards, which carry an expiration date. As a result of this ordering rule, capital loss carryforwards may be more likely to expire unused.
The cost and unrealized appreciation (depreciation) of investments of the Fund at April 30, 2015, as determined on a federal income tax basis, were as follows:
| Aggregate cost |
$ | 399,729,100 | ||
| Gross unrealized appreciation |
$ | 10,276,338 | ||
| Gross unrealized depreciation |
(8,957,535 | ) | ||
| Net unrealized appreciation |
$ | 1,318,803 | ||
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 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.
| 31 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
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 April 30, 2015, the Fund’s investment leverage was 44% of its total leveraged assets. For the six months ended April 30, 2015, the Fund’s investment adviser fee amounted to $1,849,748, or 0.68% (annualized) of the Fund’s average daily total leveraged assets and 1.25% (annualized) 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.
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 six months ended April 30, 2015, 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 and principal repayments on Senior Loans, for the six months ended April 30, 2015 were as follows:
| Purchases | Sales | |||||||
| Investments (non-U.S. Government) |
$ | 24,522,971 | $ | 26,462,509 | ||||
| U.S. Government and Agency Securities |
33,604,463 | 34,761,843 | ||||||
| $ | 58,127,434 | $ | 61,224,352 | |||||
5 Common Shares of Beneficial Interest
The Fund may issue common shares pursuant to its dividend reinvestment plan. There were no common shares issued by the Fund for the six months ended April 30, 2015 and the year ended October 31, 2014.
On November 11, 2013, the Board of Trustees of the Fund authorized the repurchase by the Fund of up to 10% of its then currently outstanding common shares in open-market transactions at a discount to net asset value (NAV). The repurchase program does not obligate the Fund to purchase a specific amount of shares. During the six months ended April 30, 2015 and the year ended October 31, 2014, the Fund repurchased 401,100 and 284,100, respectively, of its common shares under the share repurchase program at a cost, including brokerage commissions, of $5,757,080 and $4,213,097, respectively, and an average price per share of $14.35 and $14.83, respectively. The weighted average discount per share to NAV on these repurchases amounted to 11.83% and 10.75% for the six months ended April 30, 2015 and the year ended October 31, 2014, respectively.
6 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 foreign currency exchange contracts and swap contracts 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 obligations under these financial instruments at April 30, 2015 is as follows:
| Forward Foreign Currency Exchange Contracts | ||||||||||||||||||
| Settlement Date | Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 5/4/15 | Euro 6,173,965 |
Polish Zloty 24,896,948 | Standard Chartered Bank | $ | — | $ | (16,329 | ) | $ | (16,329 | ) | |||||||
| 5/4/15 | Euro 2,410,281 |
Swedish Krona 22,193,000 | BNP Paribas | — | (43,229 | ) | (43,229 | ) | ||||||||||
| 5/4/15 | Euro 828,279 |
Swedish Krona 7,791,000 | Morgan Stanley & Co. International PLC | 4,885 | — | 4,885 | ||||||||||||
| 32 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date | Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 5/4/15 | Euro 721,620 |
Swedish Krona 6,782,000 | Standard Chartered Bank | $ | 3,568 | $ | — | $ | 3,568 | |||||||||
| 5/4/15 | Philippine Peso 26,830,000 |
United States Dollar 603,111 | Goldman Sachs International | 596 | — | 596 | ||||||||||||
| 5/4/15 | Polish Zloty 14,040,948 |
Euro 3,497,123 |
Bank of America, N.A. | 26,318 | — | 26,318 | ||||||||||||
| 5/4/15 | Polish Zloty 10,856,000 |
Euro 2,705,208 |
Standard Chartered Bank | 21,861 | — | 21,861 | ||||||||||||
| 5/4/15 | Swedish Krona 36,766,000 |
Euro 3,968,610 |
Deutsche Bank AG | 44,242 | — | 44,242 | ||||||||||||
| 5/4/15 | United States Dollar 606,890 |
Philippine Peso 26,830,000 | Goldman Sachs International | — | (4,375 | ) | (4,375 | ) | ||||||||||
| 5/11/15 | United States Dollar 3,735,485 |
Yuan Renminbi Offshore 23,612,000 | Bank of America, N.A. | 65,449 | — | 65,449 | ||||||||||||
| 5/12/15 | Mexican Peso 27,779,000 |
United States Dollar 1,770,784 | BNP Paribas | — | (38,946 | ) | (38,946 | ) | ||||||||||
| 5/12/15 | Mexican Peso 2,162,000 |
United States Dollar 138,523 | Standard Chartered Bank | — | (2,326 | ) | (2,326 | ) | ||||||||||
| 5/12/15 | United States Dollar 943,857 |
Mexican Peso 14,104,060 | Bank of America, N.A. | — | (25,014 | ) | (25,014 | ) | ||||||||||
| 5/12/15 | United States Dollar 1,721,947 |
Mexican Peso 25,750,000 | HSBC Bank USA, N.A. | — | (44,401 | ) | (44,401 | ) | ||||||||||
| 5/12/15 | United States Dollar 2,762,443 |
Mexican Peso 42,664,000 | Standard Chartered Bank | 17,007 | — | 17,007 | ||||||||||||
| 5/13/15 | Indonesian Rupiah 32,994,135,000 |
United States Dollar 2,493,888 | Citibank, N.A. | — | (45,777 | ) | (45,777 | ) | ||||||||||
| 5/13/15 | Indonesian Rupiah 4,962,396,000 |
United States Dollar 381,811 |
Deutsche Bank AG | — | (161 | ) | (161 | ) | ||||||||||
| 5/13/15 | United States Dollar 1,559,393 |
Indonesian Rupiah 20,194,136,000 | BNP Paribas | — | (4,985 | ) | (4,985 | ) | ||||||||||
| 5/13/15 | United States Dollar 1,370,555 |
Indonesian Rupiah 17,762,395,000 | Goldman Sachs International | — | (3,327 | ) | (3,327 | ) | ||||||||||
| 5/18/15 | Euro 3,968,966 |
Swedish Krona 36,766,000 | Deutsche Bank AG | — | (44,303 | ) | (44,303 | ) | ||||||||||
| 5/19/15 | United States Dollar 966,961 |
Chilean Peso 605,124,000 | BNP Paribas | 21,013 | — | 21,013 | ||||||||||||
| 5/19/15 | United States Dollar 560,260 |
Mexican Peso 8,370,000 | JPMorgan Chase Bank, N.A. | — | (15,244 | ) | (15,244 | ) | ||||||||||
| 5/19/15 | United States Dollar 549,816 |
Mexican Peso 8,217,000 | Morgan Stanley & Co. International PLC | — | (14,763 | ) | (14,763 | ) | ||||||||||
| 5/21/15 | New Turkish Lira 8,058,000 |
United States Dollar 3,360,599 | BNP Paribas | 360,567 | — | 360,567 | ||||||||||||
| 5/21/15 | United States Dollar 40,957 |
New Turkish Lira 107,500 | Deutsche Bank AG | — | (934 | ) | (934 | ) | ||||||||||
| 5/21/15 | United States Dollar 5,534,049 |
New Turkish Lira 13,409,000 | Standard Chartered Bank | — | (541,814 | ) | (541,814 | ) | ||||||||||
| 5/26/15 | United States Dollar 1,394,109 |
Indian Rupee 88,060,000 | Bank of America, N.A. | — | (15,312 | ) | (15,312 | ) | ||||||||||
| 33 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date | Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 5/26/15 | United States Dollar 1,527,143 |
Indian Rupee 96,462,000 | Deutsche Bank AG | $ | — | $ | (16,792 | ) | $ | (16,792 | ) | |||||||
| 5/27/15 | Euro 6,151,354 |
United States Dollar 6,947,954 | Bank of America, N.A. | 38,947 | — | 38,947 | ||||||||||||
| 5/27/15 | Euro 12,873 |
United States Dollar 13,658 | Standard Chartered Bank | — | (801 | ) | (801 | ) | ||||||||||
| 5/27/15 | United States Dollar 733,465 |
Euro 677,122 |
BNP Paribas | 27,058 | — | 27,058 | ||||||||||||
| 5/27/15 | United States Dollar 1,656,967 |
Euro 1,461,000 |
Goldman Sachs International | — | (16,018 | ) | (16,018 | ) | ||||||||||
| 5/27/15 | United States Dollar 473,207 |
Euro 419,003 |
Standard Chartered Bank | — | (2,596 | ) | (2,596 | ) | ||||||||||
| 5/27/15 | United States Dollar 1,182,423 |
Singapore Dollar 1,595,591 | Standard Chartered Bank | 22,886 | — | 22,886 | ||||||||||||
| 5/27/15 | United States Dollar 1,055,567 |
Singapore Dollar 1,424,409 | Standard Chartered Bank | 20,431 | — | 20,431 | ||||||||||||
| 5/29/15 | Euro 3,634,379 |
United States Dollar 4,131,108 | Goldman Sachs International | 48,981 | — | 48,981 | ||||||||||||
| 5/29/15 | United States Dollar 1,493,636 |
Euro 1,372,197 |
Citibank, N.A. | 47,612 | — | 47,612 | ||||||||||||
| 6/2/15 | United States Dollar 1,158,872 |
Brazilian Real 3,796,000 | Standard Chartered Bank | 88,648 | — | 88,648 | ||||||||||||
| 6/4/15 | Euro 2,658,813 |
British Pound Sterling 1,941,000 |
Standard Chartered Bank | — | (7,811 | ) | (7,811 | ) | ||||||||||
| 6/4/15 | United States Dollar 710,992 |
Kenyan Shilling 66,300,000 | Citibank, N.A. | — | (14,013 | ) | (14,013 | ) | ||||||||||
| 6/4/15 | United States Dollar 2,782,516 |
Kenyan Shilling 261,000,000 | Citibank, N.A. | — | (38,754 | ) | (38,754 | ) | ||||||||||
| 6/5/15 | Euro 113,122 |
United States Dollar 128,866 | Goldman Sachs International | 1,796 | — | 1,796 | ||||||||||||
| 6/5/15 | Euro 4,421,063 |
United States Dollar 5,050,667 | Standard Chartered Bank | 84,487 | — | 84,487 | ||||||||||||
| 6/5/15 | Euro 978,847 |
United States Dollar 1,115,367 | Standard Chartered Bank | 15,828 | — | 15,828 | ||||||||||||
| 6/8/15 | United States Dollar 1,228,053 |
Philippine Peso 54,773,000 | Citibank, N.A. | — | (1,986 | ) | (1,986 | ) | ||||||||||
| 6/9/15 | United States Dollar 464,979 |
Indian Rupee 29,290,000 | Deutsche Bank AG | — | (7,909 | ) | (7,909 | ) | ||||||||||
| 6/9/15 | United States Dollar 592,804 |
Indian Rupee 37,342,000 | Standard Chartered Bank | — | (10,083 | ) | (10,083 | ) | ||||||||||
| 6/11/15 | Euro 3,491,036 |
Polish Zloty 14,040,948 | Bank of America, N.A. | — | (26,246 | ) | (26,246 | ) | ||||||||||
| 6/11/15 | Euro 2,700,484 |
Polish Zloty 10,856,000 | Standard Chartered Bank | — | (21,786 | ) | (21,786 | ) | ||||||||||
| 6/11/15 | United States Dollar 309,444 |
Zambian Kwacha 2,310,000 | Standard Chartered Bank | — | (4,895 | ) | (4,895 | ) | ||||||||||
| 6/12/15 | United States Dollar 671,835 |
Singapore Dollar 935,000 | Barclays Bank PLC | 34,260 | — | 34,260 | ||||||||||||
| 6/12/15 | United States Dollar 191,934 |
Zambian Kwacha 1,404,000 | Citibank, N.A. | — | (6,911 | ) | (6,911 | ) | ||||||||||
| 34 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date | Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 6/12/15 | United States Dollar 127,284 |
Zambian Kwacha 906,900 | Citibank, N.A. | $ | — | $ | (7,770 | ) | $ | (7,770 | ) | |||||||
| 6/12/15 | United States Dollar 310,948 |
Zambian Kwacha 2,186,900 | Citibank, N.A. | — | (22,752 | ) | (22,752 | ) | ||||||||||
| 6/15/15 | United States Dollar 2,369,549 |
Ugandan Shilling 6,570,760,006 | Citibank, N.A. | — | (201,717 | ) | (201,717 | ) | ||||||||||
| 6/17/15 | United States Dollar 919,424 |
Zambian Kwacha 7,150,000 | Standard Chartered Bank | 20,817 | — | 20,817 | ||||||||||||
| 6/17/15 | United States Dollar 307,517 |
Zambian Kwacha 2,265,000 | Standard Chartered Bank | — | (9,665 | ) | (9,665 | ) | ||||||||||
| 6/18/15 | Euro 1,987,065 |
Norwegian Krone 17,250,000 | BNP Paribas | 55,619 | — | 55,619 | ||||||||||||
| 6/18/15 | United States Dollar 1,625,654 |
Chilean Peso 1,043,751,000 | BNP Paribas | 73,719 | — | 73,719 | ||||||||||||
| 6/18/15 | United States Dollar 638,238 |
Chilean Peso 411,408,000 | BNP Paribas | 31,592 | — | 31,592 | ||||||||||||
| 6/18/15 | United States Dollar 1,287,044 |
Chilean Peso 799,383,290 | BNP Paribas | 14,464 | — | 14,464 | ||||||||||||
| 6/18/15 | United States Dollar 179,806 |
Zambian Kwacha 1,311,000 | Standard Chartered Bank | — | (7,480 | ) | (7,480 | ) | ||||||||||
| 6/18/15 | United States Dollar 421,527 |
Zambian Kwacha 3,084,300 | Standard Chartered Bank | — | (16,107 | ) | (16,107 | ) | ||||||||||
| 6/22/15 | United States Dollar 2,043,874 |
Indian Rupee 128,738,000 | BNP Paribas | — | (39,707 | ) | (39,707 | ) | ||||||||||
| 6/22/15 | United States Dollar 1,080,343 |
Indian Rupee 68,060,000 | Goldman Sachs International | — | (20,799 | ) | (20,799 | ) | ||||||||||
| 6/23/15 | United States Dollar 2,996,551 |
Yuan Renminbi Offshore 18,682,000 | Bank of America, N.A. | — | (675 | ) | (675 | ) | ||||||||||
| 6/25/15 | United States Dollar 598,298 |
Zambian Kwacha 4,253,900 | Barclays Bank PLC | — | (40,802 | ) | (40,802 | ) | ||||||||||
| 6/30/15 | British Pound Sterling 1,004,796 |
United States Dollar 1,493,529 | Goldman Sachs International | — | (48,232 | ) | (48,232 | ) | ||||||||||
| 6/30/15 | Euro 2,350,545 |
Romanian Leu 10,421,141 | BNP Paribas | 764 | — | 764 | ||||||||||||
| 7/8/15 | United States Dollar 2,344,615 |
Colombian Peso 5,955,323,000 | BNP Paribas | 140,963 | — | 140,963 | ||||||||||||
| 7/8/15 | United States Dollar 2,133,063 |
Colombian Peso 5,315,593,000 | BNP Paribas | 85,511 | — | 85,511 | ||||||||||||
| 7/15/15 | Euro 1,266,709 |
United States Dollar 1,366,170 | Standard Chartered Bank | — | (57,489 | ) | (57,489 | ) | ||||||||||
| 7/15/15 | United States Dollar 39,920 |
Euro 37,149 |
BNP Paribas | 1,832 | — | 1,832 | ||||||||||||
| 7/24/15 | United States Dollar 624,387 |
Azerbaijani Manat 509,000 | Standard Bank PLC | — | (118,824 | ) | (118,824 | ) | ||||||||||
| 8/4/15 | United States Dollar 300,631 |
Philippine Peso 13,440,000 | Australia and New Zealand Banking Group Limited | — | (664 | ) | (664 | ) | ||||||||||
| 8/4/15 | United States Dollar 299,512 |
Philippine Peso 13,390,000 | Nomura International PLC | — | (662 | ) | (662 | ) | ||||||||||
| 8/26/15 | Euro 287,450 |
Serbian Dinar 36,670,000 | Citibank, N.A. | 14,967 | — | 14,967 | ||||||||||||
| 35 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
| Forward Foreign Currency Exchange Contracts (continued) | ||||||||||||||||||
| Settlement Date | Deliver | In Exchange For | Counterparty | Unrealized Appreciation |
Unrealized (Depreciation) |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| 9/21/15 | United States Dollar 1,422,343 |
Mauritian Rupee 52,200,000 | Standard Chartered Bank | $ | 84,316 | $ | — | $ | 84,316 | |||||||||
| 9/28/15 | United States Dollar 913,284 |
Uruguayan Peso 24,750,000 | HSBC Bank USA, N.A. | — | (14,145 | ) | (14,145 | ) | ||||||||||
| 10/8/15 | United States Dollar 899,484 |
Azerbaijani Manat 732,000 | Standard Bank PLC | — | (179,508 | ) | (179,508 | ) | ||||||||||
| 10/13/15 | Euro 549,381 |
Serbian Dinar 71,914,000 | Citibank, N.A. | 41,068 | — | 41,068 | ||||||||||||
| 10/13/15 | Euro 67,310 |
Serbian Dinar 8,784,000 | Deutsche Bank AG | 4,785 | — | 4,785 | ||||||||||||
| 10/26/15 | United States Dollar 648,999 |
Uruguayan Peso 18,000,000 | HSBC Bank USA, N.A. | — | (547 | ) | (547 | ) | ||||||||||
| 10/28/15 | United States Dollar 588,637 |
Zambian Kwacha 4,741,000 | Standard Chartered Bank | — | (3,996 | ) | (3,996 | ) | ||||||||||
| 1/13/16 | New Turkish Lira 817,000 |
United States Dollar 296,450 | BNP Paribas | 10,960 | — | 10,960 | ||||||||||||
| 1/13/16 | New Turkish Lira 461,000 |
United States Dollar 169,348 | BNP Paribas | 8,258 | — | 8,258 | ||||||||||||
| 1/13/16 | New Turkish Lira 1,248,320 |
United States Dollar 443,374 | BNP Paribas | 7,166 | — | 7,166 | ||||||||||||
| 1/13/16 | New Turkish Lira 937,000 |
United States Dollar 343,977 | Standard Chartered Bank | 16,555 | — | 16,555 | ||||||||||||
| 1/13/16 | United States Dollar 1,090,107 |
New Turkish Lira 2,674,000 | Bank of America, N.A. | — | (155,714 | ) | (155,714 | ) | ||||||||||
| 1/13/16 | United States Dollar 323,293 |
New Turkish Lira 789,320 | Deutsche Bank AG | — | (47,476 | ) | (47,476 | ) | ||||||||||
| 1/29/16 | Euro 2,525,943 |
Serbian Dinar 323,446,991 | Citibank, N.A. | 15,198 | — | 15,198 | ||||||||||||
| $ | 1,624,994 | $ | (2,032,572 | ) | $ | (407,578 | ) | |||||||||||
| Centrally Cleared 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) |
||||||||||||
| LCH.Clearnet | HUF | 80,000 | Pays | 6-month HUF BUBOR | 5.12 | % | 1/16/17 | $ | 18,942 | |||||||||
| LCH.Clearnet | HUF | 80,000 | Receives | 6-month HUF BUBOR | 7.63 | 1/16/17 | (33,407 | ) | ||||||||||
| $ | (14,465 | ) | ||||||||||||||||
| HUF | – | Hungarian Forint |
| 36 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
| 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, N.A. | HUF | 139,000 | Pays | 6-month HUF BUBOR | 5.13 | % | 12/21/16 | $ | 33,152 | |||||||||
| Bank of America, N.A. | PLN | 838 | Pays | 6-month PLN WIBOR | 4.34 | 7/30/17 | 19,486 | |||||||||||
| Bank of America, N.A. | PLN | 838 | Receives | 6-month PLN WIBOR | 3.35 | 7/30/17 | (12,691 | ) | ||||||||||
| Bank of America, N.A. | PLN | 2,560 | Pays | 6-month PLN WIBOR | 3.83 | 11/14/17 | 40,529 | |||||||||||
| Bank of America, N.A. | PLN | 2,560 | Receives | 6-month PLN WIBOR | 3.61 | 11/14/17 | (35,980 | ) | ||||||||||
| Bank of America, N.A. | PLN | 2,900 | Receives | 6-month PLN WIBOR | 3.52 | 11/16/17 | (38,548 | ) | ||||||||||
| Barclays Bank PLC | PLN | 2,900 | Pays | 6-month PLN WIBOR | 3.81 | 11/16/17 | 45,508 | |||||||||||
| Barclays Bank PLC | PLN | 4,890 | Pays | 6-month PLN WIBOR | 3.82 | 11/19/17 | 77,105 | |||||||||||
| Barclays Bank PLC | PLN | 4,890 | Receives | 6-month PLN WIBOR | 3.53 | 11/19/17 | (65,356 | ) | ||||||||||
| BNP Paribas | PLN | 2,147 | Pays | 6-month PLN WIBOR | 4.25 | 8/7/17 | 48,226 | |||||||||||
| BNP Paribas | PLN | 2,147 | Receives | 6-month PLN WIBOR | 3.60 | 8/7/17 | (36,915 | ) | ||||||||||
| BNP Paribas | PLN | 400 | Pays | 6-month PLN WIBOR | 3.85 | 11/13/17 | 6,416 | |||||||||||
| BNP Paribas | PLN | 400 | Receives | 6-month PLN WIBOR | 3.38 | 11/13/17 | (4,912 | ) | ||||||||||
| Citibank, N.A. | PLN | 2,130 | Pays | 6-month PLN WIBOR | 3.82 | 11/19/17 | 33,431 | |||||||||||
| Citibank, N.A. | PLN | 2,130 | Receives | 6-month PLN WIBOR | 3.60 | 11/19/17 | (29,711 | ) | ||||||||||
| Deutsche Bank AG | PLN | 550 | Pays | 6-month PLN WIBOR | 3.79 | 11/16/17 | 8,542 | |||||||||||
| Deutsche Bank AG | PLN | 550 | Receives | 6-month PLN WIBOR | 3.60 | 11/16/17 | (7,692 | ) | ||||||||||
| JPMorgan Chase Bank, N.A. | HUF | 139,000 | Receives | 6-month HUF BUBOR | 7.36 | 12/21/16 | (55,567 | ) | ||||||||||
| JPMorgan Chase Bank, N.A. | HUF | 82,000 | Pays | 6-month HUF BUBOR | 5.09 | 1/20/17 | 19,276 | |||||||||||
| JPMorgan Chase Bank, N.A. | HUF | 82,000 | Receives | 6-month HUF BUBOR | 7.75 | 1/20/17 | (35,064 | ) | ||||||||||
| $ | 9,235 | |||||||||||||||||
| 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) |
|||||||||||||||||||
| China | Bank of America, N.A. | $ | 500 | 1.00 | %(1) | 3/20/17 | $ | (6,842 | ) | $ | (5,636 | ) | $ | (12,478 | ) | |||||||||||
| China | Barclays Bank PLC | 863 | 1.00 | (1) | 3/20/17 | (11,809 | ) | (8,852 | ) | (20,661 | ) | |||||||||||||||
| China | Deutsche Bank AG | 316 | 1.00 | (1) | 3/20/17 | (4,324 | ) | (3,080 | ) | (7,404 | ) | |||||||||||||||
| China | Deutsche Bank AG | 369 | 1.00 | (1) | 3/20/17 | (5,049 | ) | (3,597 | ) | (8,646 | ) | |||||||||||||||
| Croatia | BNP Paribas | 870 | 1.00 | (1) | 12/20/17 | 20,358 | (30,940 | ) | (10,582 | ) | ||||||||||||||||
| Croatia | Citibank, N.A. | 1,500 | 1.00 | (1) | 12/20/17 | 35,101 | (52,707 | ) | (17,606 | ) | ||||||||||||||||
| Egypt | Bank of America, N.A. | 1,400 | 1.00 | (1) | 9/20/15 | 3,290 | (5,215 | ) | (1,925 | ) | ||||||||||||||||
| Egypt | Citibank, N.A. | 300 | 1.00 | (1) | 6/20/20 | 29,568 | (17,095 | ) | 12,473 | |||||||||||||||||
| Egypt | Deutsche Bank AG | 350 | 1.00 | (1) | 6/20/20 | 34,497 | (20,040 | ) | 14,457 | |||||||||||||||||
| Egypt | Deutsche Bank AG | 300 | 1.00 | (1) | 6/20/20 | 29,568 | (15,201 | ) | 14,367 | |||||||||||||||||
| Egypt | Deutsche Bank AG | 300 | 1.00 | (1) | 6/20/20 | 29,568 | (17,200 | ) | 12,368 | |||||||||||||||||
| Guatemala | Citibank, N.A. | 1,286 | 1.00 | (1) | 9/20/20 | 111,269 | (53,243 | ) | 58,026 | |||||||||||||||||
| Lebanon | Credit Suisse International | 100 | 1.00 | (1) | 6/20/15 | (39 | ) | (181 | ) | (220 | ) | |||||||||||||||
| Lebanon | Deutsche Bank AG | 100 | 1.00 | (1) | 6/20/15 | (39 | ) | (181 | ) | (220 | ) | |||||||||||||||
| 37 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — 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 | HSBC Bank USA, N.A. | $ | 1,250 | 1.00 | %(1) | 12/20/17 | $ | 59,957 | $ | (94,023 | ) | $ | (34,066 | ) | ||||||||||||
| Thailand | Barclays Bank PLC | 1,900 | 0.97 | 9/20/19 | (9,788 | ) | — | (9,788 | ) | |||||||||||||||||
| Thailand | Citibank, N.A. | 900 | 0.95 | 9/20/19 | (3,850 | ) | — | (3,850 | ) | |||||||||||||||||
| Tunisia | Barclays Bank PLC | 350 | 1.00 | (1) | 9/20/17 | 8,927 | (15,379 | ) | (6,452 | ) | ||||||||||||||||
| Tunisia | Citibank, N.A. | 360 | 1.00 | (1) | 9/20/17 | 9,182 | (16,577 | ) | (7,395 | ) | ||||||||||||||||
| Tunisia | Deutsche Bank AG | 500 | 1.00 | (1) | 6/20/17 | 10,319 | (16,935 | ) | (6,616 | ) | ||||||||||||||||
| Tunisia | Goldman Sachs International |
300 | 1.00 | (1) | 9/20/17 | 7,652 | (11,636 | ) | (3,984 | ) | ||||||||||||||||
| Tunisia | Nomura International PLC | 400 | 1.00 | (1) | 12/20/17 | 12,107 | (21,612 | ) | (9,505 | ) | ||||||||||||||||
| $ | 359,623 | $ | (409,330 | ) | $ | (49,707 | ) | |||||||||||||||||||
| * | 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. |
At April 30, 2015, 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:
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 to enhance total return and 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 interest rate swaps to enhance total return to seek to hedge against fluctuations in interest rates.
The Fund enters into swap contracts (other than centrally cleared swaps) 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 April 30, 2015, the fair value of derivatives with credit-related contingent features in a net liability position was $2,396,748. The aggregate fair value of assets pledged as collateral by the Fund for such liability was $1,365,918 at April 30, 2015.
The over-the-counter (OTC) derivatives in which the Fund invests are subject to the risk that the counterparty to the contract fails to perform its obligations under the contract. To mitigate this risk, the Fund has entered into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with substantially all its derivative counterparties. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs certain OTC derivatives and typically contains, among other things, set-off provisions in the event of a default and/or termination event as defined under the relevant ISDA Master Agreement. Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy or insolvency. Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the counterparty to accelerate payment by the Fund of any net liability owed to it.
The collateral requirements for derivatives traded under an ISDA Master Agreement are governed by a Credit Support Annex to the ISDA Master Agreement. Collateral requirements are determined at the close of business each day and are typically based on changes in market values for each transaction under an ISDA Master Agreement and netted into one amount for such agreement. Generally, the amount of collateral due from or to a counterparty is subject to a minimum transfer threshold amount before a transfer is required, which may vary by counterparty. Collateral pledged for the benefit of the Fund and/or counterparty is held in segregated accounts by the Fund’s custodian and cannot be sold, re-pledged, assigned or otherwise used while pledged. The portion of such collateral representing cash, if any, is reflected as restricted cash and, in the case of cash pledged by a counterparty for the benefit of the Fund, a
| 38 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
corresponding liability on the Consolidated Statement of Assets and Liabilities. Securities pledged by the Fund as collateral, if any, are identified as such in the Consolidated Portfolio of Investments.
The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) by risk exposure at April 30, 2015 was as follows:
| Fair Value | ||||||||||||||||
| Consolidated Statement of Assets and Liabilities Caption | Credit | Foreign Exchange |
Interest Rate |
Total | ||||||||||||
| Net unrealized appreciation* |
$ | — | $ | — | $ | 18,942 | $ | 18,942 | ||||||||
| Receivable for open forward foreign currency exchange contracts |
— | 1,624,994 | — | 1,624,994 | ||||||||||||
| Receivable for open swap contracts; Premium paid on open non-centrally cleared swap contracts |
401,363 | — | 331,671 | 733,034 | ||||||||||||
| Total Asset Derivatives |
$ | 401,363 | $ | 1,624,994 | $ | 350,613 | $ | 2,376,970 | ||||||||
| Derivatives not subject to master netting or similar agreements |
$ | — | $ | — | $ | 18,942 | $ | 18,942 | ||||||||
| Total Asset Derivatives subject to master netting or similar agreements |
$ | 401,363 | $ | 1,624,994 | $ | 331,671 | $ | 2,358,028 | ||||||||
| Credit | Foreign Exchange |
Interest Rate |
Total | |||||||||||||
| Net unrealized appreciation* |
$ | — | $ | — | $ | (33,407 | ) | $ | (33,407 | ) | ||||||
| Payable for open forward foreign currency exchange contracts |
— | (2,032,572 | ) | — | (2,032,572 | ) | ||||||||||
| Payable for open swap contracts; Premium paid on open non-centrally cleared swap contracts |
(41,740 | ) | — | (322,436 | ) | (364,176 | ) | |||||||||
| Total Liability Derivatives |
$ | (41,740 | ) | $ | (2,032,572 | ) | $ | (355,843 | ) | $ | (2,430,155 | ) | ||||
| Derivatives not subject to master netting or similar agreements |
$ | — | $ | — | $ | (33,407 | ) | $ | (33,407 | ) | ||||||
| Total Liability Derivatives subject to master netting or similar agreements |
$ | (41,740 | ) | $ | (2,032,572 | ) | $ | (322,436 | ) | $ | (2,396,748 | ) | ||||
| * | Amount represents cumulative unrealized appreciation or (depreciation) on centrally cleared swap contracts in the Centrally Cleared Swaps Contracts table above. Only the current day’s variation margin on open centrally cleared swap contracts is reported within the Consolidated Statement of Assets and Liabilities as Receivable or Payable for variation margin, as applicable. |
| 39 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
The Fund’s derivative assets and liabilities at fair value by risk, which are reported gross in the Consolidated Statement of Assets and Liabilities, are presented in the table above. The following tables present the Fund’s derivative assets and liabilities by counterparty, net of amounts available for offset under a master netting agreement and net of the related collateral received by the Fund for assets and pledged by the Fund for liabilities as of April 30, 2015.
| Counterparty | Derivative Assets Subject to Master Netting Agreement |
Derivatives Available for Offset |
Non-cash Collateral Received(a) |
Cash Collateral Received(a) |
Net Amount of Derivative Assets(b) |
|||||||||||||||
| Bank of America, N.A. |
$ | 227,171 | $ | (227,171 | ) | $ | — | $ | — | $ | — | |||||||||
| Barclays Bank PLC |
165,800 | (127,755 | ) | — | — | 38,045 | ||||||||||||||
| BNP Paribas |
914,486 | (168,694 | ) | (630,614 | ) | — | 115,178 | |||||||||||||
| Citibank, N.A. |
337,396 | (337,396 | ) | — | — | — | ||||||||||||||
| Deutsche Bank AG |
161,521 | (134,679 | ) | — | — | 26,842 | ||||||||||||||
| Goldman Sachs International |
59,025 | (59,025 | ) | — | — | — | ||||||||||||||
| HSBC Bank USA, N.A. |
59,957 | (59,093 | ) | (864 | ) | — | — | |||||||||||||
| JPMorgan Chase Bank, N.A. |
19,276 | (19,276 | ) | — | — | — | ||||||||||||||
| Morgan Stanley & Co. International PLC |
4,885 | (4,885 | ) | — | — | — | ||||||||||||||
| Nomura International PLC |
12,107 | (662 | ) | (11,445 | ) | — | — | |||||||||||||
| Standard Chartered Bank |
396,404 | (396,404 | ) | — | — | — | ||||||||||||||
| $ | 2,358,028 | $ | (1,535,040 | ) | $ | (642,923 | ) | $ | — | $ | 180,065 | |||||||||
| Counterparty | Derivative Liabilities Subject to Master Netting Agreement |
Derivatives Available for Offset |
Non-cash Collateral Pledged(a) |
Cash Collateral Pledged(a) |
Net Amount of Derivative Liabilities(c) |
|||||||||||||||
| Australia and New Zealand Banking Group Limited |
$ | (664 | ) | $ | — | $ | — | $ | — | $ | (664 | ) | ||||||||
| Bank of America, N.A. |
(317,022 | ) | 227,171 | — | — | (89,851 | ) | |||||||||||||
| Barclays Bank PLC |
(127,755 | ) | 127,755 | — | — | — | ||||||||||||||
| BNP Paribas |
(168,694 | ) | 168,694 | — | — | — | ||||||||||||||
| Citibank, N.A. |
(373,241 | ) | 337,396 | 35,845 | — | — | ||||||||||||||
| Credit Suisse International |
(39 | ) | — | 39 | — | — | ||||||||||||||
| Deutsche Bank AG |
(134,679 | ) | 134,679 | — | — | — | ||||||||||||||
| Goldman Sachs International |
(92,751 | ) | 59,025 | 33,726 | — | — | ||||||||||||||
| HSBC Bank USA, N.A. |
(59,093 | ) | 59,093 | — | — | — | ||||||||||||||
| JPMorgan Chase Bank, N.A. |
(105,875 | ) | 19,276 | 86,599 | — | — | ||||||||||||||
| Morgan Stanley & Co. International PLC |
(14,763 | ) | 4,885 | — | — | (9,878 | ) | |||||||||||||
| Nomura International PLC |
(662 | ) | 662 | — | — | — | ||||||||||||||
| Standard Bank PLC |
(298,332 | ) | — | 298,332 | — | — | ||||||||||||||
| Standard Chartered Bank |
(703,178 | ) | 396,404 | 51,001 | — | (255,773 | ) | |||||||||||||
| $ | (2,396,748 | ) | $ | 1,535,040 | $ | 505,542 | $ | — | $ | (356,166 | ) | |||||||||
| (a) | In some instances, the actual collateral received and/or pledged may be more than the amount shown due to overcollateralization. |
| (b) | Net amount represents the net amount due from the counterparty in the event of default. |
| (c) | Net amount represents the net amount payable to the counterparty in the event of default. |
| 40 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
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 six months ended April 30, 2015 was as follows:
| Consolidated Statement of Operations Caption | Credit | Foreign Exchange |
Interest Rate |
|||||||||
| Net realized gain (loss) — |
||||||||||||
| Swap contracts |
$ | (201,917 | ) | $ | — | $ | (21,843 | ) | ||||
| Foreign currency and forward foreign currency exchange contract transactions |
— | 941,630 | — | |||||||||
| Total |
$ | (201,917 | ) | $ | 941,630 | $ | (21,843 | ) | ||||
| Change in unrealized appreciation (depreciation) — |
||||||||||||
| Swap contracts |
$ | 124,260 | $ | — | $ | 20,612 | ||||||
| Foreign currency and forward foreign currency exchange contracts |
— | (1,437,179 | ) | — | ||||||||
| Total |
$ | 124,260 | $ | (1,437,179 | ) | $ | 20,612 | |||||
The average notional amounts of derivative contracts outstanding during the six months ended April 30, 2015, which are indicative of the volume of these derivative types, were as follows:
| Forward Foreign Currency Exchange Contracts |
|
Swap Contracts |
| |||
| $127,959,000 |
$ | 30,245,000 |
7 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, which is in effect through March 22, 2016. 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 also paid a renewal fee of $37,500, which is being amortized to interest expense over a period of one year through March 2016. The unamortized balance at April 30, 2015 is $32,902 and is included in prepaid upfront fees on notes payable in the Consolidated Statement of Assets and Liabilities. The Fund is required to maintain certain net asset levels during the term of the Agreement. At April 30, 2015, the Fund had borrowings outstanding under the Agreement of $110,000,000 at an interest rate of 0.95%. Based on the short-term nature of the borrowings under the Agreement and the variable interest rate, the carrying amount of the borrowings at April 30, 2015 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 9) at April 30, 2015. For the six months ended April 30, 2015, the average borrowings under the Agreement and the average annual interest rate (excluding fees) were $123,397,790 and 0.95%, respectively.
8 Risks Associated with Foreign Investments
The Fund’s investments in foreign instruments can be adversely affected by changes in currency exchange rates and political, economic and market developments abroad. In emerging or less developed countries, these risks can be more significant. Investment markets in emerging market countries are typically substantially smaller, less liquid and more volatile than the major markets in developed countries. Emerging market countries may have relatively unstable governments and economies. Emerging market investments often are subject to speculative trading, which typically contributes to volatility. The Fund may have difficulties enforcing its legal or contractual rights in a foreign country. Economic data as reported by foreign governments and other issuers may be delayed, inaccurate or fraudulent. In the event of a default by a sovereign entity, there are typically no assets to be seized or cash flows to be attached. Furthermore, the willingness or ability of a foreign government to renegotiate defaulted debt may be limited.
| 41 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
9 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.
At April 30, 2015, 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 |
$ | — | $ | 163,209,028 | $ | 60,914 | $ | 163,269,942 | ||||||||
| Collateralized Mortgage Obligations |
— | 61,206,015 | — | 61,206,015 | ||||||||||||
| Commercial Mortgage-Backed Securities |
— | 21,952,713 | — | 21,952,713 | ||||||||||||
| Mortgage Pass-Throughs |
— | 72,812,096 | — | 72,812,096 | ||||||||||||
| Asset-Backed Securities |
— | 14,360,877 | — | 14,360,877 | ||||||||||||
| Corporate Bonds & Notes |
— | 2,543,227 | — | 2,543,227 | ||||||||||||
| Foreign Corporate Bonds |
— | 679,695 | — | 679,695 | ||||||||||||
| Foreign Government Bonds |
— | 31,588,321 | — | 31,588,321 | ||||||||||||
| U.S. Treasury Obligations |
— | 9,971,090 | — | 9,971,090 | ||||||||||||
| Common Stocks |
— | 331,450 | 881,803 | 1,213,253 | ||||||||||||
| Convertible Preferred Stocks |
— | 69,804 | — | 69,804 | ||||||||||||
| Short-Term Investments — |
||||||||||||||||
| Foreign Government Securities |
— | 11,163,566 | — | 11,163,566 | ||||||||||||
| U.S. Treasury Obligations |
— | 3,000,069 | — | 3,000,069 | ||||||||||||
| Other |
— | 7,217,235 | — | 7,217,235 | ||||||||||||
| Total Investments |
$ | — | $ | 400,105,186 | $ | 942,717 | $ | 401,047,903 | ||||||||
| Forward Foreign Currency Exchange Contracts |
$ | — | $ | 1,624,994 | $ | — | $ | 1,624,994 | ||||||||
| Swap Contracts |
— | 751,976 | — | 751,976 | ||||||||||||
| Total |
$ | — | $ | 402,482,156 | $ | 942,717 | $ | 403,424,873 | ||||||||
| Liability Description |
||||||||||||||||
| Forward Foreign Currency Exchange Contracts |
$ | — | $ | (2,032,572 | ) | $ | — | $ | (2,032,572 | ) | ||||||
| Swap Contracts |
— | (397,583 | ) | — | (397,583 | ) | ||||||||||
| Total |
$ | — | $ | (2,430,155 | ) | $ | — | $ | (2,430,155 | ) | ||||||
| * | 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 six months ended April 30, 2015 is not presented.
At April 30, 2015, there were no investments transferred between Level 1 and Level 2 during the six months then ended.
| 42 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Notes to Consolidated Financial Statements (Unaudited) — continued
10 Legal Proceedings
In May 2015, the Fund was served with an amended complaint filed in an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York. The adversary proceeding was filed by the Motors Liquidation Company Avoidance Action Trust (“AAT”) against the former holders of a $1.5 billion term loan issued by General Motors Corp. (“GM”) in 2006 (the “Term Loan Lenders”) who received a full repayment of the term loan pursuant to a court order in the GM bankruptcy proceeding. The court order was made with the understanding that the term loan was fully secured at the time of GM’s bankruptcy filing in June 2009. The AAT is seeking (1) a determination from the Bankruptcy Court that the security interest held by the Term Loan Lenders was not perfected at the time GM filed for Chapter 11 Bankruptcy protection and thus the Term Loan Lenders should have been treated in the same manner as GM’s unsecured creditors, (2) disgorgement of any interest payments made to the Term Loan Lenders within ninety days of GM’s filing for Chapter 11 Bankruptcy protection, and (3) disgorgement of the $1.5 billion term loan repayment that was made to the Term Loan Lenders. The value of the payment received under the term loan agreement by the Fund is approximately $899,000 (equal to 0.30% of net assets at April 30, 2015). The Fund cannot predict the outcome of these proceedings or the effect, if any, on the Fund’s net asset value. The attorneys’ fees and costs related to these actions will be expensed by the Fund as incurred.
| 43 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Annual Meeting of Shareholders (Unaudited)
The Fund held its Annual Meeting of Shareholders on February 19, 2015. The following action was taken by the shareholders:
Item 1: The election of Scott E. Eston, Thomas E. Faust Jr. and Cynthia E. Frost as Class I Trustees of the Fund, each for a three-year term expiring in 2018.
| Nominee for Trustee Elected by All Shareholders |
Number of Shares | |||||||
| For | Withheld | |||||||
| Scott E. Eston |
16,965,465 | 356,649 | ||||||
| Thomas E. Faust Jr. |
16,968,552 | 353,562 | ||||||
| Cynthia E. Frost |
16,956,657 | 365,457 | ||||||
| 44 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Board of Trustees’ Contract Approval
Overview of the Contract Review Process
The Investment Company Act of 1940, as amended (the “1940 Act”), provides, in substance, that each investment advisory agreement between a fund and its investment adviser will continue in effect from year to year only if its continuation is approved at least annually by the fund’s board of trustees, including by a vote of a majority of the trustees who are not “interested persons” of the fund (“Independent Trustees”), cast in person at a meeting called for the purpose of considering such approval.
At a meeting of the Boards of Trustees (each a “Board”) of the registered investment companies advised, administered and/or distributed by Eaton Vance Management or its affiliates (the “Eaton Vance Funds”) held on April 27, 2015, the Board, including a majority of the Independent Trustees, voted to approve continuation of existing investment advisory and sub-advisory agreements for the Eaton Vance Funds for an additional one-year period. In voting its approval, the Board relied upon the affirmative recommendation of its Contract Review Committee, which is a committee comprised exclusively of Independent Trustees. Prior to making its recommendation, the Contract Review Committee reviewed information furnished by each adviser to the Eaton Vance Funds (including information specifically requested by the Board) for a series of meetings of the Contract Review Committee held between February and April 2015. The Contract Review Committee also considered information received at prior meetings of the Board and its committees, as relevant to its annual evaluation of the investment advisory and sub-advisory agreements.
The information that the Board considered included, among other things, the following:
Information about Fees, Performance and Expenses
| Ÿ | A report from an independent data provider comparing the advisory and related fees paid by each fund with fees paid by comparable funds as identified by the data provider (“comparable funds”); |
| Ÿ | A report from an independent data provider comparing each fund’s total expense ratio and its components to comparable funds; |
| Ÿ | A report from an independent data provider comparing the investment performance of each fund (including, where relevant, yield data, Sharpe ratios and information ratios) to the investment performance of comparable funds over various time periods; |
| Ÿ | Data regarding investment performance in comparison to benchmark indices and customized peer groups identified by the adviser in consultation with the Board; |
| Ÿ | For each fund, comparative information concerning the fees charged and the services provided by each adviser in managing other accounts (including mutual funds, other collective investment funds and institutional accounts) using investment strategies and techniques similar to those used in managing such fund; |
| Ÿ | Profitability analyses for each adviser with respect to each fund; |
Information about Portfolio Management and Trading
| Ÿ | Descriptions of the investment management services provided to each fund, including the investment strategies and processes it employs; |
| Ÿ | The procedures and processes used to determine the fair value of fund assets and actions taken to monitor and test the effectiveness of such procedures and processes; |
| Ÿ | Information about each adviser’s policies and practices with respect to trading, including each adviser’s processes for monitoring best execution of portfolio transactions; |
| Ÿ | Information about the allocation of brokerage transactions and the benefits received by each adviser as a result of brokerage allocation, including information concerning the acquisition of research through client commission arrangements and policies with respect to “soft dollars”; |
| Ÿ | Data relating to portfolio turnover rates of each fund; |
Information about each Adviser
| Ÿ | Reports detailing the financial results and condition of each adviser; |
| Ÿ | Descriptions of the qualifications, education and experience of the individual investment professionals whose responsibilities include portfolio management and investment research for the funds, and information relating to their compensation and responsibilities with respect to managing other mutual funds and investment accounts; |
| Ÿ | The Code of Ethics of each adviser and its affiliates, together with information relating to compliance with and the administration of such codes; |
| Ÿ | Policies and procedures relating to proxy voting and the handling of corporate actions and class actions; |
| Ÿ | Information concerning the resources devoted to compliance efforts undertaken by each adviser and its affiliates (including descriptions of various compliance programs) and their record of compliance; |
| Ÿ | Descriptions of the business continuity and disaster recovery plans of each adviser and its affiliates; |
| Ÿ | A description of Eaton Vance Management’s procedures for overseeing third party advisers and sub-advisers, including with respect to regulatory and compliance issues, investment management and other matters; |
| 45 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Board of Trustees’ Contract Approval — continued
Other Relevant Information
| Ÿ | Information concerning the nature, cost and character of the administrative and other non-investment management services provided by Eaton Vance Management and its affiliates; |
| Ÿ | Information concerning management of the relationship with the custodian, subcustodians and fund accountants by each adviser or the funds’ administrator; and |
| Ÿ | The terms of each investment advisory agreement. |
Over the course of the twelve-month period ended April 30, 2015, with respect to one or more funds, the Board met nine times and the Contract Review Committee, the Audit Committee, the Governance Committee, the Portfolio Management Committee and the Compliance Reports and Regulatory Matters Committee, each of which is a Committee comprised solely of Independent Trustees, met eight, seventeen, seven, eleven and thirteen times, respectively. At such meetings, the Trustees participated in investment and performance reviews with the portfolio managers and other investment professionals of each adviser relating to each fund, and considered the investment and trading strategies used in pursuing each fund’s investment objective, including, where relevant, the use of derivative instruments, as well as processes for monitoring best execution of portfolio transactions and risk management techniques. The Board and its Committees also evaluated issues pertaining to industry and regulatory developments, compliance procedures, fund governance and other issues with respect to the funds, and received and participated in reports and presentations provided by Eaton Vance Management and other fund advisers with respect to such matters. In addition to the formal meetings of the Board and its Committees, the Independent Trustees hold regular teleconferences in between meetings to discuss, among other topics, matters relating to the continuation of investment advisory and sub-advisory agreements.
For funds that invest through one or more underlying portfolios, the Board considered similar information about the portfolio(s) when considering the approval of investment advisory agreements. In addition, in cases where the fund’s investment adviser has engaged a sub-adviser, the Board considered similar information about the sub-adviser when considering the approval of any sub-advisory agreement.
The Contract Review Committee was assisted throughout the contract review process by Goodwin Procter LLP, legal counsel for the Independent Trustees. The members of the Contract Review Committee relied upon the advice of such counsel and their own business judgment in determining the material factors to be considered in evaluating each investment advisory and sub-advisory agreement and the weight to be given to each such factor. The conclusions reached with respect to each investment advisory and sub-advisory agreement were based on a comprehensive evaluation of all the information provided and not any single factor. Moreover, each member of the Contract Review Committee may have placed varying emphasis on particular factors in reaching conclusions with respect to each investment advisory and sub-advisory agreement. In evaluating each investment advisory and sub-advisory agreement, including the specific fee structures and other terms of the agreements, the Contract Review Committee was informed by multiple years of analysis and discussion among the Independent Trustees and the Eaton Vance Funds’ advisers and sub-advisers.
Results of the Process
Based on its consideration of the foregoing, and such other information as it deemed relevant, including the factors and conclusions described below, the Contract Review Committee concluded that the continuation of the investment advisory agreement of Eaton Vance Short Duration Diversified Income Fund (the “Fund”) with Eaton Vance Management (the “Adviser”), including its fee structure, is in the interests of shareholders and, therefore, the Contract Review Committee recommended to the Board approval of the agreement. The Board accepted the recommendation of the Contract Review Committee as well as the factors considered and conclusions reached by the Contract Review Committee with respect to the agreement. Accordingly, the Board, including a majority of the Independent Trustees, voted to approve continuation of the investment advisory agreement for the Fund.
Nature, Extent and Quality of Services
In considering whether to approve the investment advisory agreement of the Fund, the Board evaluated the nature, extent and quality of services provided to the Fund by the Adviser.
The Board considered the Adviser’s management capabilities and investment process with respect to the types of investments held by the Fund, including the education, experience and number of its investment professionals and other personnel who provide portfolio management, investment research, and similar services to the Fund. In particular, the Board considered the abilities and experience of such investment personnel in analyzing factors such as credit risk and special considerations relevant to investing in senior, secured floating rate loans, foreign debt obligations, including debt of emerging market issuers, and mortgage-backed securities. The Board considered the Adviser’s in-house research capabilities as well as other resources available to personnel of the Adviser. The Board also took into account the resources dedicated to portfolio management and other services, as well as the compensation methods of the Adviser and other factors, such as the reputation and resources of the Adviser to recruit and retain investment personnel. In addition, the Board considered the time and attention devoted to the Fund by senior management, as well as the infrastructure, operational capabilities and support staff in place to assist in the management of the Fund, including the provision of administrative services.
The Board considered the compliance programs of the Adviser and relevant affiliates thereof. Among other matters, the Board considered compliance and reporting matters relating to personal trading by investment personnel, selective disclosure of portfolio holdings, late trading, frequent trading, portfolio
| 46 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Board of Trustees’ Contract Approval — continued
valuation, business continuity and the allocation of investment opportunities. The Board also considered the responses of the Adviser and its affiliates to requests in recent years from regulatory authorities such as the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
The Board considered shareholder and other administrative services provided or managed by Eaton Vance Management and its affiliates, including transfer agency and accounting services. The Board evaluated the benefits to shareholders of investing in a fund that is a part of a large family of funds.
After consideration of the foregoing factors, among others, the Board concluded that the nature, extent and quality of services provided by the Adviser, taken as a whole, are appropriate and consistent with the terms of the investment advisory agreement.
Fund Performance
The Board compared the Fund’s investment performance to that of comparable funds and appropriate benchmark indices. The Board’s review included comparative performance data for the one-, three- and five-year periods ended September 30, 2014 for the Fund. The Board concluded that the performance of the Fund was satisfactory.
Management Fees and Expenses
The Board considered contractual fee rates payable by the Fund for advisory and administrative services (referred to collectively as “management fees”). As part of its review, the Board considered the Fund’s management fees and total expense ratio for the year ended September 30, 2014, as compared to those of comparable funds, before and after giving effect to any undertaking to waive fees or reimburse expenses. The Board noted that the Fund has established a wholly-owned subsidiary to accommodate the Fund’s commodity-related investments. The subsidiary is managed pursuant to a separate investment advisory agreement that is subject to annual approval by the Board. The subsidiary’s fee rates are the same as those charged to the Fund, and the Fund will not pay any additional management fees with respect to its assets invested in the subsidiary. The Board also considered factors that had an impact on Fund expense ratios, as identified by management in response to inquiries from the Contract Review Committee, as well as actions taken by management in recent years to reduce expenses at the fund complex level.
After considering the foregoing information, and in light of the nature, extent and quality of the services provided by the Adviser, the Board concluded that the management fees charged for advisory and related services are reasonable.
Profitability
The Board considered the level of profits realized by the Adviser and relevant affiliates thereof in providing investment advisory and administrative services to the Fund and to all Eaton Vance Funds as a group. The Board considered the level of profits realized without regard to revenue sharing or other payments by the Adviser and its affiliates to third parties in respect of distribution services. The Board also considered other direct or indirect benefits received by the Adviser and its affiliates in connection with their relationships with the Fund, including the benefits of research services that may be available to the Adviser as a result of securities transactions effected for the Fund and other investment advisory clients.
The Board concluded that, in light of the foregoing factors and the nature, extent and quality of the services rendered, the profits realized by the Adviser and its affiliates are reasonable.
Economies of Scale
In reviewing management fees and profitability, the Board also considered the extent to which the Adviser and its affiliates, on the one hand, and the Fund, on the other hand, can expect to realize benefits from economies of scale as the assets of the Fund increase. The Board acknowledged the difficulty in accurately measuring the benefits resulting from the economies of scale with respect to the management of any specific fund or group of funds. The Board reviewed data summarizing the increases and decreases in the assets of the Fund and of all Eaton Vance Funds as a group over various time periods, and evaluated the extent to which the total expense ratio of the Fund and the profitability of the Adviser and its affiliates may have been affected by such increases or decreases. Based upon the foregoing, the Board concluded that the Fund currently shares in the benefits from economies of scale. The Board also considered the fact that the Fund is not continuously offered and that the Fund’s assets are not expected to increase materially in the foreseeable future. The Board concluded that, in light of the level of the Adviser’s profits with respect to the Fund, the implementation of breakpoints in the advisory fee schedule is not warranted at this time.
| 47 |
Eaton Vance
Short Duration Diversified Income Fund
April 30, 2015
Officers and Trustees
Officers of Eaton Vance Short Duration Diversified Income Fund
Trustees of Eaton Vance Short Duration Diversified Income Fund
| * | Interested Trustee |
| ** | Ms. Sutherland began serving as a Trustee effective May 1, 2015. |
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 April 30, 2015, Fund records indicate that there are 9 registered shareholders and approximately 9,889 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.
| 48 |
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. The Fund’s Board of Trustees has approved a share repurchase program authorizing the Fund to repurchase up to 10% of its outstanding common shares as of the approved date 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, is 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 preferred shares 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. Other information about the funds is available on the website. 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”.
| 49 |
This Page Intentionally Left Blank
This Page Intentionally Left Blank
This Page Intentionally Left Blank
| 7741 4.30.15 |
Item 2. Code of Ethics
Not required in this filing.
Item 3. Audit Committee Financial Expert
Not required in this filing.
Item 4. Principal Accountant Fees and Services
Not required in this filing.
Item 5. Audit Committee of Listed Registrants
Not required in this filing.
Item 6. Schedule of Investments
Please see schedule of investments contained in the Report to Stockholders included under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not required in this filing.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not required in this filing.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
REGISTRANT PURCHASES OF EQUITY SECURITIES
| Period* |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Programs* |
||||||||||||
| November 2014 |
86,900 | $ | 14.46 | 86,900 | 1,517,660 | |||||||||||
| December 2014 |
200,000 | $ | 14.24 | 200,000 | 1,317,660 | |||||||||||
| January 2015 |
4,500 | $ | 14.27 | 4,500 | 1,313,160 | |||||||||||
| February 2015 |
20,000 | $ | 14.39 | 20,000 | 1,293,160 | |||||||||||
| March 2015 |
41,500 | $ | 14.33 | 41,500 | 1,251,660 | |||||||||||
| April 2015 |
48,200 | $ | 14.63 | 48,200 | 1,203,460 | |||||||||||
| Total |
401,100 | $ | 14.35 | 401,100 | ||||||||||||
| * | 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 then currently outstanding common shares in open-market transactions at a discount to net asset value. The repurchase program was announced on November 15, 2013. |
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: | June 10, 2015 | |
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: | June 10, 2015 | |
| By: | /s/ Payson F. Swaffield | |
| Payson F. Swaffield | ||
| President | ||
| Date: | June 10, 2015 | |