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Mach explained that more conservative investors tend to like large-cap stocks, which currently offer substantial relative value over smaller capitalization issues. Historically, small-cap stocks have tended to be more attractively valued than their large-cap brethren.
However, due to an extended period of strong performance, he believes small-caps are now overvalued on a historical basis. By contrast, large-cap stocks may be well positioned for capital appreciation.
"It is time for investors to consider adding to holdings of large-cap, blue chip stocks, as we believe large caps are about to take over market leadership," said Mach. "Higher-quality stocks provide a level of assurance in a more volatile market environment, offering lower volatility, stronger balance sheets, and greater competitive stability."
The economy's strength, since the tax cuts of 2003 bolstered the strong growth of low-quality stocks. However, as economic growth has slowed, the earnings growth advantage that small caps have enjoyed over larger firms has begun to narrow dramatically. As earnings growth continues to moderate in response to the slowing economy, history suggests higher-quality stocks are likely to outperform. Of course, past performance is not a guarantee of future results.
More conservative investors may also tend to favor domestic stocks because of a familiarity with accounting rules, the legal environment, regulatory environment and corporate governance mechanisms. However, domestic stocks have underperformed overseas stocks in recent years. Last year, about 91 percent of $158 billion invested in equity mutual fund flows went into non-U.S. stocks, according to the Leuthold Group. In fact, during some periods of 2006, flows for domestic stock funds were actually negative.
"The increase in non-U.S. stock flows is a signal that investors should shift their focus from international to domestic stocks," said Mr. Mach. "As Sir John Templeton has often said: avoid what others are aggressively buying and buy what others are despondently selling."
Eaton Vance Corp. is a Boston-based investment management firm whose stock trades on the New York Stock Exchange under the symbol EV. Eaton Vance and its affiliates managed over $135.5 billion in assets as of January 31, 2007, for more than 100 investment companies, as well as individual and institutional accounts, including those of corporations, hospitals, retirement plans, universities, foundations and trusts.
Before investing in any Eaton Vance Fund, prospective investors should consider carefully the Fund's investment objectives, risks, charges and expenses. The Fund's current prospectus contains this and other information about the Fund and is available through your financial advisor. Read the prospectus carefully before you invest or send money.
Eaton Vance Distributors, Inc., The Eaton Vance Building, 255 State Street,
Boston, MA 02109
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