NATIONAL SURVEY:

Large Capital Gains Distributions in a Year of NegativeReturns Has Mutual Fund Investors More Concerned About Investment TaxesShareholders Remain Bullish in Their Investment Outlook Popularity of Index Funds Drops Significantly

The nation-wide survey of investors, conducted by Penn, Schoen and BerlandAssociates, indicates that an overwhelming majority of investors (84%)considers the impact of taxes on their stock mutual funds to be an importantconsideration when making investment decisions. Nearly 60% (58%) ofinvestors say that the impact of taxes on their investment returns hasincreased in importance over the past year.

"Investors who had been less aware of mutual fund taxes had a rude awakeningin 2000, when many funds had low or negative returns but still paid outlarge taxable distributions," observed Duncan W. Richardson, senior vicepresident of Eaton Vance and portfolio manager of The Eaton VanceTax-Managed Growth Fund. "The combination of strong built-up gains carriedover from prior years, high portfolio turnover in a volatile market and aninsensitivity to tax considerations on the part of most fund managerscreated a "Perfect Storm" that dumped large capital gains distributions onmany unsuspecting shareholders. Many shareholders who in the past might havebeen dismissive about fund taxes were horrified to learn they will be payingtaxes on fund investments on which they lost money last year."

Consistent with the growing concern regarding fund taxes, 82% of investorsconsider disclosure by mutual fund organizations of the tax implications offund investing to be important. Nearly nine in ten (85%) investors say theycarefully examine their investment statements to determine the degree towhich taxes affect their returns and three out of five investors (60%)believe the U.S. government should require mutual fund providers to stateafter-tax returns for stock mutual funds, supporting the objective of theSecurities and Exchange Commission1s new after-tax return disclosurerequirement. Although the new SEC rule requiring disclosure of after-taxreturns was finalized only last month and does not fully go into effectuntil the first quarter of 2002, 30% of investors are already aware of thiscoming requirement for all long-term mutual funds.

While Investment Taxes May Be Considered Important, Understanding all of the Subject is Still Low

Although most investors recognize the importance of tax considerations, theyhave only a limited understanding of investment-related tax issues. One infour investors (25%) do not know their current federal income tax bracket.One in four investors (26%) are unfamiliar with the concept of"tax-efficient" investing, and one in three investors (33%) are unable tocite any investments that offer high tax efficiency.

When asked whether they would be more inclined to hold municipal bonds andmunicipal bond funds in a qualified retirement plan such as an IRA or 401(K)plan or outside such a plan, survey respondents were equally likely to saythey would hold such investments within a qualified plan (39%) as outside aqualified plan (40%.) Similar questions addressing investments in variableannuities and tax-managed stock funds received similar responses. Surveyrespondents were equally likely to favor use of variable annuities within aqualified plan (39%) versus outside a qualified plan (40%), and onlysomewhat more in favor of using tax-managed stock funds outside of aqualified plan (49%) versus inside a qualified plan (38%).

"In reality, each of these tax-free or tax-deferred investments isparticularly well suited to being held outside of a qualified retirementplan," commented Thomas E. Faust Jr., executive vice president and chiefequity investment officer at Eaton Vance. "Investors should utilize withintheir qualified retirement plans investments that would otherwise be subjectto current tax on income and realized gains. It is clear from the surveyresults that only a minority of American investors are sophisticated enoughin their understanding of investment taxes to make intelligent choices abouthow best to hold assets of different character."

Although the state of investors' understanding of tax issues remainsdiscouraging, the situation has improved in the past year. Compared to lastyear's survey, nearly twice as many respondents (23% vs. 12%) correctlyassociated tax efficiency with minimizing the difference between returnsbefore and after taxes. Also in the past year, investors' familiarity withtax-managed mutual funds that have an objective of after-tax returnsincreased substantially. In this year's survey, 35% of respondents said theywere familiar with tax-managed funds, versus only 20% who were familiar withthis investment product a year ago. Also nearly double last year1s results,27% said they understand the difference between tax-efficient funds that aremanaged passively versus actively, up from 15% last year.

"Former SEC Chairman Arthur Levitt has identified taxes as the singlelargest expense associated with mutual fund investing, reducing the averagestock fund's returns by more than 2.5% per year," commented Mr. Faust. "Weare encouraged that investors are taking increased notice of tax-managedfunds that are designed to minimize the tax bite and managed toward a goalof after-tax returns."

Recognizing the importance of tax considerations andtheir lack of understanding in this area, many investors turn toprofessional advisors or financial consultants for assistance. In thisyear's survey, fully 70% of respondents said they use a broker or financialadvisor for help with investing, and 22% of those who have previouslyinvested strictly on their own indicate that they are very likely (10%) orsomewhat likely (12%) to use a financial professional in the next year. Ofinvestors who use a broker or financial advisor, 72% say they discuss thetax implications of their investments to at least a limited extent.Financial advisors have a key role to play in educating investors about taxconsiderations and ensuring that they hold appropriate investments in theirtaxable and non-taxable investment accounts.

Investors are Long-Term Focused, Mostly Bullish About the Stock Market for 2001.

Nine in 10 investors (90%) say they have solely a long-term investment focus(55%) or an investment focus that is more long-term than short-term (35%).

"We are encouraged again by the stated long-term horizon expressed byinvestors in this year1s survey. We feel a long-term perspective isnecessary to maximize the potential for equity investors to accumulatewealth," said Mr. Faust. "Too often people who should be investors act liketraders, exposing themselves unnecessarily to the dual drags on performancefrom trading costs and capital gains taxes."

Recent volatility in equity markets prompted only 15% of surveyed investorsto change the amount they have invested in mutual funds, with 36% of thosemaking changes increasing their investments and 59% decreasing theirinvestments. Only 11% of investors reallocated their investments in bondsfor this reason. While more than half (54%) of surveyed investors said theyhave less appetite for risk going forward given recent stock marketdevelopments, 22% of those surveyed now have a greater appetite for risk and18% the same amount of appetite for risk (6% are unsure).

When asked how they deal with a loss in a stock or mutual fund, 43% ofsurvey respondents said they typically do nothing; 18% said they tend to buymore since the investment is cheaper; and 17% indicated they tend to donothing immediately but typically would sell the investment when it getsback to the break-even point. Only 16% of survey respondents said they wouldtend to sell the investment right away to capture the tax value of the loss.

"The loss aversion seen in the study is consistent with the behavioralfinance analysis done by Professors Terrance Odean of the Graduate School ofManagement at the University of California, Davis and Richard Thaler at theUniversity of Chicago Graduate School of Business," said Mr. Richardson."Their work suggests that investment behavior is influenced by natural humantendencies which cause investors to overtrade and to not admit mistakes.Unfortunately these traits often frustrate achieving higher after-taxreturns."

In their outlook for the market over the next year, investors aremore bullish (57%) than bearish (30%). Nearly two-thirds of surveyedinvestors (62%) think the return of the S&P 500 index will be positive in2001. Among these investors, more than half (61%) think the return willexceed 6% in 2001, and 22% think the return will exceed 10%. More than halfof surveyed investors (52%) think the return of the NASDAQ Composite Indexwill be positive in 2001. Among these investors, nearly half (46%) think thereturn will exceed 10%. Nearly 60% of investors do not think the U.S. willexperience a recession in 2001; 34% think there will be a recession and 7%are uncertain.

When asked what they think might be the biggest surprise for investors in2001, a strong market rebound was mentioned by the highest number of thosesurveyed (17%). Tying for second at 4% each were: a good economy withoutrecession; rebounding of technology stocks; further downturn in the market;and President Bush1s tax plan being passed.

41% of surveyed investors identify themselves as "momentum" investors and28% consider themselves "contrarian" investors, with the remainder nothaving a specific style or not knowing how to identify their style.

Investors are Split Over Technology Stocks for the Coming Year but Most FeelThey are a Good Longer-Term Investment / Most Investors Have Not ReducedTheir Exposure to Technology Stocks

Investors are of two minds when it comes to the expected performance oftechnology stocks for the current year, but most believe they will reboundwithin the next three years and represent a good longer-term investment.One in five surveyed investors (21%) predicts technology will be the bestperforming investment area or industry sector in 2001, but nearly twice asmany (38%) think technology will be the worst performing sector for theyear. Energy (8%) and pharmaceuticals (8%) were tied for second best bets.Automotive (5%) and utilities (5%) were tied for second worst groups toinvest in.

"When asked about different market sectors, the investment area thatelicited by far the strongest sentiment for better or worse wastechnology," observed Mr. Richardson. "Love or hate the sector in theshort-term, it is clearly one that the public feels will continue to be amajor market force to be reckoned with."

One in three surveyed investors (33%) said that technology stocks will be agood investment and 43% said they will be a fair investment in 2001. One infive investors (20%) said technology stocks will be a poor investment thisyear. More than six in 10 investors (61%) said that technology stocks willbe a good investment over the next three years and 30% said they will be afair investment over this time period. Only 6% of investors said technologystocks will be a poor investment over the next three years.

Investors' attitudes toward technology stocks reflect their long-termoptimism about investing and the stock market. Many investors who haveexpressed concerns about the outlook for technology stocks have not takenaction to reduce their exposure to the sector. More investors (31%) haveincreased their exposure to technology stocks over the past 12 months thanhave decreased their exposure (24%). The largest group-38% of investors-made no change.

Popularity of Index Fund Investing May Be Peaking

One of the most popular investment products of the 1990s-passively managedindex funds that mimic the movements of major market indices-may havereached a peak in their popularity. When asked whether they will be morelikely or less likely to invest in index funds in the next couple of years,a majority of survey respondents (51%) said they are less likely to do so(29% more likely; 20% the same or no response). Among investors who saidthey were less likely to purchase index funds, the most commonly citedreason (31%) was higher market volatility.

"Data from the survey supports Eaton Vance1s view that we are past the peakof popularity for passive investing," commented Mr. Richardson. "The year2000 partially exposed the fatal flaw of indexing-the fact that indices areconstructed without applying any valuation discipline or investmentjudgment. In the results of 2000, investors experienced the risks of thisapproach and are now beginning to vote with their feet."

The survey revealed that investors have a poor understanding of how majorstock market indices are constructed. When asked what criteria are mostimportant to Standard & Poor's in selecting stocks for its indices, nearlyhalf of all surveyed investors (44%) said, incorrectly, that stocks areselected on the basis of their investment merits or the attractiveness oftheir valuations. Only 24% of surveyed investors correctly identified theprimary basis for inclusion in an S&P index, which is that adding thecompany to the index would make the index more representative of the U.S.economy.

This study represents a detailed portrait of American investors' attitudesand practices, specifically with reference to the tax implications ofinvesting. The study was conducted by Penn, Schoen & Berland Associates,Inc. for Eaton Vance Corp. in February 2001. The study was based on acomprehensive, nationally representative telephone survey of 500 U.S.residents who have invested in both qualified retirement plans andinvestments outside of qualified retirement plans (stock mutual funds, bondmutual funds, individual stocks, individual bonds, variable annuities ormoney market funds). The median annual income of survey respondents was$100,000. The margin of error for the study was +/- 4.4% at the 95%confidence level.

Penn, Schoen & Berland Associates, Inc. (PSB) is a Washington DC-basedfull-service strategic polling and market research firm whose clients haveincluded numerous senators, congressmen, other national and internationalpolitical leaders, over 20 Fortune 100 companies and numerous tradeassociations.

Eaton Vance Corp., a Boston-based investment management firm, is traded onthe New York Stock Exchange under the symbol EV.

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