Eaton Vance Risk-Managed Diversified Equity Income Fund

 

 

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: 811-22044

 

 

Eaton Vance Risk-Managed Diversified Equity 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)

December 31

Date of Fiscal Year End

December 31, 2012

Date of Reporting Period

 

 

 


Item 1. Reports to Stockholders


 

Eaton Vance

Risk-Managed

Diversified Equity

Income Fund (ETJ)

 

Annual Report

December 31, 2012

 

 

LOGO  

 

 

 

 

 

LOGO


 

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 quarterly cash distributions to common shareholders, stated in terms of a fixed amount per common share.

As of December 31, 2012, the Fund distributed quarterly cash distributions equal to $0.2790 per share in accordance with the MDP. The Fund’s distribution frequency changed to monthly beginning in January 2013. You should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the MDP. The MDP will be subject to regular periodic review by the Fund’s Board of Trustees and the Board may amend or terminate the MDP at any time without prior notice to Fund shareholders. However, at this time there are no reasonably foreseeable circumstances that might cause the termination of the MDP.

The Fund may distribute more than its net investment income and net realized capital gains and, therefore, a distribution may include a return of capital. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.” With each distribution, the Fund will issue a notice to shareholders and a press release containing information about the amount and sources of the distribution and other related information. The amounts and sources of distributions contained in the notice and press release are only estimates and are not provided for tax purposes. The amounts and sources of the Fund’s distributions for tax purposes will be reported to shareholders on Form 1099-DIV for each calendar year.

Fund shares are not insured by the FDIC and are not deposits or other obligations of, or guaranteed by, any depository institution. Shares are subject to investment risks, including possible loss of principal invested.


Annual Report December 31, 2012

Eaton Vance

Risk-Managed Diversified Equity Income Fund

Table of Contents

 

Management’s Discussion of Fund Performance

     2   

Performance

     4   

Fund Profile

     4   

Endnotes and Additional Disclosures

     5   

Financial Statements

     6   

Report of Independent Registered Public Accounting Firm

     19   

Federal Tax Information

     20   

Notice to Shareholders

     21   

Dividend Reinvestment Plan

     22   

Management and Organization

     24   

Important Notices

     26   


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Management’s Discussion of Fund Performance1

 

 

Economic and Market Conditions

Early in the 12-month period ended December 31, 2012, U.S. stocks began a rally that continued through early April 2012. Equities were generally fueled by stronger economic growth, falling unemployment and what the markets perceived as a successful restructuring of Greek debt, which lowered the potential for European contagion. Then in May 2012, the third consecutive mid-year economic slowdown arrived amid renewed concerns over Europe, slowing growth in China and continuing political uncertainty in the United States ahead of the elections.

However, despite a slowdown in consumer spending, weakening employment data and downward revisions of growth expectations, U.S. stocks rallied from June 2012 through early October 2012. Several catalysts appeared to be driving a market rally that defied U.S. economic data. First, investors anticipated that worsening economic news would prompt the U.S. Federal Reserve to initiate another round of quantitative easing to stimulate the economy — which it did in September 2012. Second, many of the investors who were hunting for yield in a historically low interest-rate environment were driven to stocks that offered higher yields than bonds. Finally, Europe’s ongoing debt crisis and a slowdown in Chinese growth made the United States, despite its problems, look relatively attractive to many global investors.

In the final months of the fiscal year, however, from early October 2012 through December 2012, U.S. stocks gave back some of their gains amid elevated market volatility. With the U.S. elections leaving Congress still divided on economic issues, investors grew increasingly worried about a political deadlock on tax and spending policies — an impasse that left the United States rushing toward a so-called “fiscal cliff” that threatened to drag down its economy. On the positive side, investors appeared to be encouraged by improving employment numbers, signs of an accelerating recovery in the housing market, and the European Central Bank’s efforts to strengthen and centralize the European banking system.

 

Fund Snapshot at December 31, 20126

  Objective   The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.
   
   
  Strategy  

The Fund invests in a diversified portfolio of common stocks and purchases out-of-the-money, short-dated S&P 500 Index put options and sells out-of-the-money S&P 500 Index call options of the same term as the put options with roll dates that are staggered across the options portfolio. The Fund evaluates returns on an after tax basis and seeks to minimize and defer federal income taxes incurred by shareholders in connection with their investment in the Fund.

     Options Strategy  

Write Index Covered Calls;

Buy Index Puts

  Equity Benchmark2   S&P 500 Index
  Morningstar Category   Large Blend
  Distribution Frequency   Quarterly*
  Common Stock Portfolio    
  Positions Held   80
  % US / Non-US   97.5/2.5
  Avg. Market Cap   $81.5 Billion
  Call Options    
  % Portfolio with Call Options   94
  Average Days to Expiration   15 days
  Weighted Average %   2.03%
  of Strike Prices:   out-of-the-money
  Put Options    
  % Portfolio with Put Options   94
  Average Days to Expiration   15 days
  Weighted Average %   4.99%
  of Strike Prices:   out-of-the-money

 

* Distribution is changed from quarterly to monthly. See page 3 for additional details.
 

 

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. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month end, please refer to www.eatonvance.com.

 

  2  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Management’s Discussion of Fund Performance1continued

 

 

Fund Performance

For the fiscal year ending December 31, 2012, Eaton Vance Risk-Managed Diversified Equity Income Fund (the Fund) shares at net asset value (NAV) had a total return of 5.42%, underperforming the 16.00% return of the S&P 500 Index (the Index)2 and outperforming the 5.20% return of the CBOE S&P 500 BuyWrite Index. While the Fund’s underlying common stock portfolio underperformed the common stock Index during the period, the Fund’s options overlay strategy was a larger detractor from Fund performance relative to the Index.

In the Fund’s underlying common stock portfolio, stock selection in the financials sector, as well as an underweighting in the sector, detracted from Fund performance relative to the Index during the period. Relative Fund returns were also hurt by stock selection and an overweighting in the energy sector. And in a generally rising market during the period, the Fund’s cash position was a relative detractor from Fund performance versus the Index during the period as well. In contrast, stock selection in the information technology, health care, and consumer discretionary sectors helped relative Fund performance versus the Index during the period.

The Fund employs an options strategy that can be beneficial during times of market weakness such as we saw in May 2012, but detract during periods of market strength. When the market was trending upward, as it was for most of the fiscal year, the Fund’s writing of call options and purchasing of put options held back Fund returns versus the Index, as premium income from selling call options was relatively low and some short calls and purchases of put options ended in losses. For the period as a whole, the Fund’s options program detracted from relative Fund returns versus the Index.

Beginning in early October 2012, the Fund began the process of modifying the implementation of its “collared” options strategy, which consists of purchasing out-of-the-money S&P 500 Index put options and selling out-of-the-money S&P 500 Index call options on all or substantially all of the value of the Fund’s common stock portfolio. Purchasing index put options provides protection against loss of principal value during periods of market weakness, and selling index call options generates premium income. Going forward, the Fund generally intends to purchase short-dated (generally 28-day) index put options and sell index call options of the same term, staggering roll dates across the options portfolio. Management believes that, under normal market conditions, this approach should result in a more consistent level of market exposure and market protection than the historical implementation of the Fund’s options strategy.

In January 2013, the Fund began paying distributions to shareholders on a monthly basis instead of quarterly. As a result of this change, beginning in January 2013 you will receive each month a distribution equal to one-twelfth of the Fund’s planned distribution for the calendar year, rather than receiving one-quarter of that total amount four times a year. In October 2012, you received a quarterly distribution of $0.2790 per share. In January 2013, you received a distribution of $0.0930 per share as your first monthly distribution, followed by expected distributions in the same amount in February, March and so on. The Fund’s distribution rate is determined by the investment adviser based on its current assessment of the Fund’s long-term return potential. As portfolio and market conditions change, the rate of distributions paid by the Fund could change. Additional information about the Fund, including the change in distribution frequency, is available on the Eaton Vance website (www.eatonvance.com).

 

 

 

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. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month end, please refer to www.eatonvance.com.

 

  3  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Performance2

 

Portfolio Managers Walter A. Row III, CFA, CMT, Michael A. Allison, CFA and Kevin J. Amell

 

% Average Annual Total Returns    Inception Date      One Year      Five Years      Since
Inception
 

Fund at NAV3

     07/31/2007         5.42      1.27      2.51

Fund at Market Price3

             11.20         –0.13         –0.05   

S&P 500 Index

     07/31/2007         16.00      1.66      1.86

CBOE S&P 500 BuyWrite Index

     07/31/2007         5.20         1.13         1.94   
           
% Premium/Discount to NAV                                
              –12.79
           
Distributions4                                

Total Distributions per share for the period

            $ 1.157   

Distribution Rate at NAV

              9.33

Distribution Rate at Market Price

              10.70

Fund Profile

 

 

Sector Allocation (% of total investments)5

 

 

LOGO

Top 10 Holdings (% of total investments)5

 

Exxon Mobil Corp.

    3.7

Apple, Inc.

    3.3   

International Business Machines Corp.

    2.5   

Google, Inc., Class A

    2.4   

Wells Fargo & Co.

    2.3   

Amazon.com, Inc.

    2.3   

Gilead Sciences, Inc.

    2.2   

Pfizer, Inc.

    2.1   

eBay, Inc.

    1.9   

Bank of America Corp.

    1.9   

Total

    24.6
 

 

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. Fund performance at market price will differ from its results at NAV due to factors such as changing perceptions about the Fund, market conditions, fluctuations in supply and demand for Fund shares, or changes in Fund distributions. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance less than one year is cumulative. Performance is for the stated time period only; due to market volatility, current Fund performance may be lower or higher than the quoted return. For performance as of the most recent month end, please refer to www.eatonvance.com.

 

  4  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Endnotes and Additional Disclosures

 

 

1 

The views expressed in this report are those of the portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance and the Fund(s) disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as “forward looking statements”. The Fund’s actual future results may differ significantly from those stated in any forward looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund’s filings with the Securities and Exchange Commission.

 

2 

S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. CBOE S&P 500 BuyWrite Index measures the performance of a hypothetical buy-write strategy on the S&P 500 Index. Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as applicable. It is not possible to invest directly in an index.

 

3 

During the year ended December 31, 2008, the Fund elected to retain a portion of its realized long-term gains and pay the required federal corporate income tax on such amount. The total returns include the economic benefit to common shareholders of the tax credit or refund available to them, which equaled their pro rata share of the tax paid by the Fund. If this benefit was not included, the returns for five years would have been 0.57% (at NAV) and -0.82% (at Market Price) and the returns for since inception would have been 1.85% (at NAV) and -0.68% (at Market Price).

 

4 

The Distribution Rate is based on the Fund’s last regular distribution per share in the period (annualized) divided by the Fund’s NAV or market price at the end of the period. The Fund’s distributions may be composed of ordinary income, tax-exempt income, net realized capital gains and return of capital. In recent years, a significant portion of the Fund’s distributions has been characterized as a return of capital. The Fund’s distribution rate is determined by the investment adviser based on its current assessment of the Fund’s long-term return potential. As portfolio and market conditions change, the rate of distributions paid by the Fund could change.

 

5 

Depictions do not reflect the Fund’s option positions. Excludes cash and cash equivalents.

6 

The following terms as used in the Fund snapshot:

Average Market Cap: The average market capitalization of the companies that have issued the common stocks owned by a Fund. Market Cap is determined by multiplying the price of a share of a company’s common stock by the number of shares outstanding.

Call Option: For a call option on a security, the option buyer has the right to purchase, and the option seller (or writer) has the obligation to sell, a specified security at a specified price (exercise price or strike price) on or before a specified date (option expiration date). For an index call option, the buyer has the right to receive from the seller a cash payment at the option expiration date equal to any positive difference between the value of the index at contract expiration and the exercise price. The buyer of a call option makes a cash payment (premium) to the seller (writer) of the option upon entering into the option contract.

Covered Call Strategy: A strategy of owning a portfolio of common stocks and writing call options on all or a portion of such stocks to generate current earnings from option premium.

Index Put Option: Gives the option buyer the right to receive from the option seller (writer) a cash payment if the value of the index exceeds a specified value (exercise price or strike price) on or before a specified date (option expiration date). The buyer makes a cash payment (premium) to the seller of the option upon entering into the contract.

Out-of-the-Money: For a call option on an index, the extent to which the exercise price of the option exceeds the current price of the value of the index.

Fund snapshot and profile subject to change due to active management.

Important Notice to Shareholders

On August 6, 2012, the Fund’s Board of Trustees adopted a share repurchase program for the Fund and authorized it to repurchase up to 10% of its then currently outstanding common shares in open-market transactions at a discount to net asset value. Establishing the repurchase program does not obligate the Fund to purchase specific amounts of shares. For more information on the Fund’s share repurchase program, please see Note 5 in the Fund’s Notes to Financial Statements.

Effective October 5, 2012, Kevin J. Amell became a portfolio manager of the Fund, joining current managers Walter A. Row III and Michael A. Allison. Going forward, Mr. Row and Mr. Allison will continue to manage the Fund’s common stock portfolio, while Mr. Amell will manage the Fund’s options overlay program and collaborate with the other managers to direct the Fund’s overall investment program. Mr. Amell joined Eaton Vance Management as an equity options trader in 2009. He was previously a senior trader at Numeric Investors and Jacobs Levy Equity Management.

 

 

  5  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Portfolio of Investments

 

 

Common Stocks — 99.3%   
   
Security   Shares     Value  
   

Aerospace & Defense — 2.5%

  

Boeing Co. (The)

    166,130      $ 12,519,557   

United Technologies Corp.

    103,866        8,518,050   
                 
    $ 21,037,607   
                 

Automobiles — 0.7%

  

Bayerische Motoren Werke AG

    58,194      $ 5,662,915   
                 
    $ 5,662,915   
                 

Beverages — 2.1%

  

Beam, Inc.

    84,050      $ 5,134,615   

Coca-Cola Co. (The)

    335,932        12,177,535   
                 
    $ 17,312,150   
                 

Biotechnology — 3.6%

  

Celgene Corp.(1)

    157,419      $ 12,392,024   

Gilead Sciences, Inc.(1)

    248,005        18,215,967   
                 
    $ 30,607,991   
                 

Capital Markets — 0.8%

  

Goldman Sachs Group, Inc. (The)

    50,381      $ 6,426,600   
                 
    $ 6,426,600   
                 

Chemicals — 2.9%

  

LyondellBasell Industries NV, Class A

    139,045      $ 7,938,079   

Monsanto Co.

    156,779        14,839,133   

PPG Industries, Inc.

    13,561        1,835,481   
                 
    $ 24,612,693   
                 

Commercial Banks — 4.2%

  

PNC Financial Services Group, Inc.

    151,102      $ 8,810,757   

Regions Financial Corp.

    982,098        6,992,538   

Wells Fargo & Co.

    580,067        19,826,690   
                 
    $ 35,629,985   
                 

Communications Equipment — 0.8%

  

QUALCOMM, Inc.

    101,068      $ 6,268,237   
                 
    $ 6,268,237   
                 

Computers & Peripherals — 4.3%

  

Apple, Inc.

    51,998      $ 27,716,494   

EMC Corp.(1)

    320,697        8,113,634   
                 
    $ 35,830,128   
                 
Security   Shares     Value  
   

Consumer Finance — 1.1%

  

American Express Co.

    165,526      $ 9,514,434   
                 
    $ 9,514,434   
                 

Diversified Financial Services — 5.5%

  

Bank of America Corp.

    1,383,956      $ 16,053,890   

Citigroup, Inc.

    373,190        14,763,396   

JPMorgan Chase & Co.

    343,986        15,125,064   
                 
    $ 45,942,350   
                 

Diversified Telecommunication Services — 2.5%

  

AT&T, Inc.

    364,108      $ 12,274,080   

CenturyLink, Inc.

    221,423        8,662,068   
                 
    $ 20,936,148   
                 

Electric Utilities — 3.0%

  

American Electric Power Co., Inc.

    114,868      $ 4,902,566   

Duke Energy Corp.

    65,511        4,179,602   

Edison International

    103,463        4,675,493   

PPL Corp.

    162,448        4,650,886   

Southern Co. (The)

    153,691        6,579,512   
                 
    $ 24,988,059   
                 

Electrical Equipment — 1.3%

  

Emerson Electric Co.

    210,973      $ 11,173,130   
                 
    $ 11,173,130   
                 

Energy Equipment & Services — 1.7%

  

Halliburton Co.

    215,263      $ 7,467,473   

National Oilwell Varco, Inc.

    102,553        7,009,498   
                 
    $ 14,476,971   
                 

Food & Staples Retailing — 1.6%

  

Costco Wholesale Corp.

    135,745      $ 13,407,534   
                 
    $ 13,407,534   
                 

Food Products — 2.2%

  

Hershey Co. (The)

    86,446      $ 6,243,130   

Kraft Foods Group, Inc.

    137,608        6,257,036   

Mondelez International, Inc., Class A

    244,492        6,227,211   
                 
    $ 18,727,377   
                 

Health Care Equipment & Supplies — 2.9%

  

Abbott Laboratories

    190,727      $ 12,492,618   

Covidien PLC

    211,609        12,218,304   
                 
    $ 24,710,922   
                 
 

 

  6   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Portfolio of Investments — continued

 

 

Security   Shares     Value  
   

Health Care Providers & Services — 0.6%

  

Express Scripts Holding Co.(1)

    92,895      $ 5,016,330   
                 
    $ 5,016,330   
                 

Hotels, Restaurants & Leisure — 1.5%

  

McDonald’s Corp.

    144,219      $ 12,721,558   
                 
    $ 12,721,558   
                 

Household Products — 3.2%

  

Colgate-Palmolive Co.

    127,405      $ 13,318,919   

Procter & Gamble Co.

    199,928        13,573,112   
                 
    $ 26,892,031   
                 

Industrial Conglomerates — 3.4%

  

Danaher Corp.

    233,877      $ 13,073,724   

General Electric Co.

    750,112        15,744,851   
                 
    $ 28,818,575   
                 

Insurance — 1.5%

  

ACE, Ltd.

    78,029      $ 6,226,714   

Aflac, Inc.

    125,325        6,657,264   
                 
    $ 12,883,978   
                 

Internet & Catalog Retail — 2.3%

  

Amazon.com, Inc.(1)

    77,638      $ 19,498,007   
                 
    $ 19,498,007   
                 

Internet Software & Services — 4.4%

  

eBay, Inc.(1)

    319,527      $ 16,302,268   

Google, Inc., Class A(1)

    29,033        20,595,139   
                 
    $ 36,897,407   
                 

IT Services — 6.3%

  

Accenture PLC, Class A

    210,160      $ 13,975,640   

International Business Machines Corp.

    110,453        21,157,272   

Teradata Corp.(1)

    34,044        2,106,983   

Visa, Inc., Class A

    100,318        15,206,203   
                 
    $ 52,446,098   
                 

Machinery — 1.1%

  

Deere & Co.

    104,137      $ 8,999,520   
                 
    $ 8,999,520   
                 
Security   Shares     Value  
   

Media — 3.8%

  

Comcast Corp., Class A

    395,091      $ 14,768,501   

Virgin Media, Inc.

    63,160        2,321,130   

Walt Disney Co. (The)

    297,220        14,798,584   
                 
    $ 31,888,215   
                 

Metals & Mining — 0.4%

  

Freeport-McMoRan Copper & Gold, Inc.

    105,470      $ 3,607,074   
                 
    $ 3,607,074   
                 

Multi-Utilities — 0.6%

  

Sempra Energy

    69,500      $ 4,930,330   
                 
    $ 4,930,330   
                 

Multiline Retail — 2.0%

  

Dollar General Corp.(1)

    229,966      $ 10,139,201   

Macy’s, Inc.

    179,029        6,985,712   
                 
    $ 17,124,913   
                 

Oil, Gas & Consumable Fuels — 9.6%

  

Anadarko Petroleum Corp.

    79,015      $ 5,871,605   

Apache Corp.

    72,873        5,720,531   

Chevron Corp.

    67,182        7,265,061   

ConocoPhillips

    262,044        15,195,932   

Exxon Mobil Corp.

    356,018        30,813,358   

Occidental Petroleum Corp.

    111,789        8,564,155   

Phillips 66

    131,022        6,957,268   
                 
    $ 80,387,910   
                 

Pharmaceuticals — 4.9%

  

Allergan, Inc.

    131,661      $ 12,077,264   

Johnson & Johnson

    156,091        10,941,979   

Pfizer, Inc.

    713,340        17,890,567   
                 
    $ 40,909,810   
                 

Real Estate Investment Trusts (REITs) — 1.7%

  

AvalonBay Communities, Inc.

    54,354      $ 7,369,859   

Boston Properties, Inc.

    65,336        6,913,202   
                 
    $ 14,283,061   
                 

Road & Rail — 1.6%

  

Union Pacific Corp.

    107,172      $ 13,473,664   
                 
    $ 13,473,664   
                 
 

 

  7   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Portfolio of Investments — continued

 

 

Security   Shares     Value  
   

Semiconductors & Semiconductor Equipment — 0.3%

  

Broadcom Corp., Class A

    63,776      $ 2,118,001   
                 
    $ 2,118,001   
                 

Software — 2.9%

  

Microsoft Corp.

    526,642      $ 14,077,141   

Oracle Corp.

    313,357        10,441,055   
                 
    $ 24,518,196   
                 

Specialty Retail — 0.8%

  

Home Depot, Inc. (The)

    112,056      $ 6,930,664   
                 
    $ 6,930,664   
                 

Textiles, Apparel & Luxury Goods — 1.1%

  

NIKE, Inc., Class B

    171,616      $ 8,855,386   
                 
    $ 8,855,386   
                 

Tobacco — 1.0%

  

Philip Morris International, Inc.

    98,727      $ 8,257,526   
                 
    $ 8,257,526   
                 

Wireless Telecommunication Services — 0.6%

  

Rogers Communications, Inc., Class B

    104,606      $ 4,761,665   
                 
    $ 4,761,665   
                 

Total Common Stocks
(identified cost $638,550,623)

    $ 833,485,150   
                 
Put Options Purchased — 0.4%   
       
Description   Number of
Contracts
    Strike
Price
    Expiration
Date
    Value  
       

S&P 500 Index

    465      $ 1,360        1/4/13      $ 59,288   

S&P 500 Index

    465        1,360        1/11/13        174,375   

S&P 500 Index

    465        1,360        1/19/13        253,425   

S&P 500 Index

    455        1,335        1/25/13        216,125   

S&P 500 Index FLEX

    465        1,355        1/2/13        1,244   

S&P 500 Index FLEX

    465        1,365        1/7/13        102,233   

S&P 500 Index FLEX

    465        1,370        1/9/13        172,114   

S&P 500 Index FLEX

    465        1,360        1/14/13        235,488   

S&P 500 Index FLEX

    465        1,385        1/16/13        482,987   

S&P 500 Index FLEX

    460        1,356        1/22/13        376,753   

S&P 500 Index FLEX

    465        1,360        1/23/13        430,258   

S&P 500 Index FLEX

    462        1,335        1/28/13        272,071   
                                 

Total Put Options Purchased
(identified cost $4,691,039)

   

    $ 2,776,361   
                                 
Short-Term Investments — 0.9%   
Description   Interest
(000’s omitted)
    Value  
   

Eaton Vance Cash Reserves Fund, LLC, 0.12%(2)

  $ 7,661      $ 7,661,071   
                 

Total Short-Term Investments
(identified cost $7,661,071)

    $ 7,661,071   
                 

Total Investments — 100.6%
(identified cost $650,902,733)

    $ 843,922,582   
                 
Call Options Written — (0.5)%   
       
Description   Number of
Contracts
    Strike
Price
    Expiration
Date
    Value  
       

S&P 500 Index

    465      $ 1,450        1/4/13      $ (123,225

S&P 500 Index

    465        1,450        1/11/13        (334,800

S&P 500 Index

    465        1,460        1/19/13        (292,950

S&P 500 Index

    455        1,450        1/25/13        (598,325

S&P 500 Index FLEX

    465        1,442        1/2/13        (75,927

S&P 500 Index FLEX

    465        1,450        1/7/13        (207,738

S&P 500 Index FLEX

    465        1,467        1/9/13        (120,546

S&P 500 Index FLEX

    465        1,456        1/14/13        (321,179

S&P 500 Index FLEX

    465        1,480        1/16/13        (152,991

S&P 500 Index FLEX

    460        1,458        1/22/13        (461,401

S&P 500 Index FLEX

    465        1,462        1/23/13        (433,436

S&P 500 Index FLEX

    462        1,445        1/28/13        (675,566
                                 

Total Call Options Written
(premiums received $4,805,536)

   

    $ (3,798,084
                                 

Other Assets, Less Liabilities — (0.1)%

  

    $ (421,899
                                 

Net Assets — 100.0%

  

    $ 839,702,599   
                                 

The percentage shown for each investment category in the Portfolio of Investments is based on net assets.

 

FLEX     FLexible EXchange traded option, representing a customized option contract with negotiated contract terms.

 

(1)

Non-income producing security.

 

(2)

Affiliated investment company available to Eaton Vance portfolios and funds which invests in high quality, U.S. dollar denominated money market instruments. The rate shown is the annualized seven-day yield as of December 31, 2012.

 

 

  8   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Statement of Assets and Liabilities

 

 

Assets   December 31, 2012  

Unaffiliated investments, at value (identified cost, $643,241,662)

  $ 836,261,511   

Affiliated investment, at value (identified cost, $7,661,071)

    7,661,071   

Dividends receivable

    824,308   

Interest receivable from affiliated investment

    1,131   

Receivable for investments sold

    461,293   

Tax reclaims receivable

    190,902   

Total assets

  $ 845,400,216   
Liabilities        

Written options outstanding, at value (premiums received, $4,805,536)

  $ 3,798,084   

Payable for investments purchased

    462,707   

Payable for Fund shares repurchased

    534,583   

Payable to affiliates:

 

Investment adviser fee

    710,086   

Trustees’ fees

    8,893   

Accrued expenses

    183,264   

Total liabilities

  $ 5,697,617   

Net Assets

  $ 839,702,599   
Sources of Net Assets        

Common shares, $0.01 par value, unlimited number of shares authorized, 70,262,683 shares issued and outstanding

  $ 702,627   

Additional paid-in capital

    1,034,541,032   

Accumulated net realized loss

    (389,648,142

Accumulated undistributed net investment income

    45,743   

Net unrealized appreciation

    194,061,339   

Net Assets

  $ 839,702,599   
Net Asset Value        

($839,702,599 ÷ 70,262,683 common shares issued and outstanding)

  $ 11.95   

 

  9   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Statement of Operations

 

 

Investment Income   Year Ended
December 31, 2012
 

Dividends (net of foreign taxes, $74,666)

  $ 19,114,539   

Interest income allocated from affiliated investment

    31,149   

Expenses allocated from affiliated investment

    (4,183

Total investment income

  $ 19,141,505   
Expenses        

Investment adviser fee

  $ 8,837,657   

Trustees’ fees and expenses

    37,486   

Custodian fee

    338,569   

Transfer and dividend disbursing agent fees

    18,569   

Legal and accounting services

    148,895   

Printing and postage

    159,890   

Miscellaneous

    106,425   

Total expenses

  $ 9,647,491   

Deduct —

 

Reduction of custodian fee

  $ 577   

Total expense reductions

  $ 577   

Net expenses

  $ 9,646,914   

Net investment income

  $ 9,494,591   
Realized and Unrealized Gain (Loss)        

Net realized gain (loss) —

 

Investment transactions

  $ 7,976,174   

Investment transactions allocated from affiliated investment

    442   

Written options

    (39,631,863

Foreign currency transactions

    13,368   

Net realized loss

  $ (31,641,879

Change in unrealized appreciation (depreciation) —

 

Investments

  $ 44,981,943   

Written options

    7,145,696   

Foreign currency

    (1,123

Net change in unrealized appreciation (depreciation)

  $ 52,126,516   

Net realized and unrealized gain

  $ 20,484,637   

Net increase in net assets from operations

  $ 29,979,228   

 

  10   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Statements of Changes in Net Assets

 

 

    Year Ended December 31,  
Increase (Decrease) in Net Assets   2012     2011  

From operations —

   

Net investment income

  $ 9,494,591      $ 5,652,356   

Net realized loss from investment transactions, written options and foreign currency transactions

    (31,641,879     (7,826,893

Net change in unrealized appreciation (depreciation) from investments, written options and foreign currency

    52,126,516        (38,340,598

Net increase (decrease) in net assets from operations

  $ 29,979,228      $ (40,515,135

Distributions to shareholders —

   

From net investment income

  $ (9,367,917   $ (5,569,829

Tax return of capital

    (74,596,079     (87,671,496

Total distributions

  $ (83,963,996   $ (93,241,325

Capital share transactions —

   

Cost of shares repurchased (see Note 5)

  $ (28,538,342   $   

Net decrease in net assets from capital share transactions

  $ (28,538,342   $   

Net decrease in net assets

  $ (82,523,110   $ (133,756,460
Net Assets   

At beginning of year

  $ 922,225,709      $ 1,055,982,169   

At end of year

  $ 839,702,599      $ 922,225,709   

Accumulated undistributed net investment income

included in net assets

  

  

At end of year

  $ 45,743      $ 48,848   

 

  11   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Financial Highlights

 

 

    Year Ended December 31,  
     2012     2011     2010     2009     2008  

Net asset value — Beginning of year

  $ 12.640      $ 14.470      $ 16.410      $ 17.340      $ 20.000   
Income (Loss) From Operations                                        

Net investment income(1)

  $ 0.131      $ 0.077      $ 0.113      $ 0.161      $ 0.159   

Net realized and unrealized gain (loss)

    0.281        (0.629     (0.253     0.709        (1.020 )(2) 

Total income (loss) from operations

  $ 0.412      $ (0.552   $ (0.140   $ 0.870      $ (0.861
Less Distributions                                        

From net investment income

  $ (0.129   $ (0.076   $ (0.113   $ (0.161   $ (0.164

From net realized gain

                         (0.010     (1.636

Tax return of capital

    (1.028     (1.202     (1.687     (1.629       

Total distributions

  $ (1.157   $ (1.278   $ (1.800   $ (1.800   $ (1.800

Anti-dilutive effect of share repurchase program (see Note 5)(1)

  $ 0.055      $      $      $      $   

Offering costs charged to paid-in capital(1)

  $      $      $      $      $ 0.001   

Net asset value — End of year

  $ 11.950      $ 12.640      $ 14.470      $ 16.410      $ 17.340   

Market value — End of year

  $ 10.430      $ 10.450      $ 13.280      $ 16.660      $ 17.980   

Total Investment Return on Net Asset Value(3)

    5.42     (2.79 )%      (0.48 )%      5.68     (1.17 )%(4) 

Total Investment Return on Market Value(3)

    11.20     (12.43 )%      (10.03 )%      3.47     9.60 %(4) 
Ratios/Supplemental Data                                        

Net assets, end of year (000’s omitted)

  $ 839,703      $ 922,226      $ 1,055,982      $ 1,183,154      $ 1,227,477   

Ratios (as a percentage of average daily net assets):

         

Expenses(5)

    1.09     1.09     1.07     1.08     1.06

Net investment income

    1.07     0.57     0.76     0.99     0.85

Portfolio Turnover

    48     103     39     59     100

 

(1) 

Computed using average shares outstanding.

 

(2) 

Includes per share federal corporate income tax on long-term capital gains retained by the Fund of $(0.612).

 

(3) 

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. During the year ended December 31, 2008, the Fund elected to retain a portion of its realized long-term gains and pay the required federal corporate income tax on such amount. The total returns for the year ended December 31, 2008, presented in the table, include the economic benefit to common shareholders of the tax credit or refund available to them, which equaled their pro rata share of the tax paid by the Fund. If this benefit were not included in the returns, the Total Investment Return on Net Asset Value would have been (4.54)% and the Total Investment Return on Market Value would have been 5.87%.

 

(4) 

During the year ended December 31, 2008, the Fund realized a gain on the disposal of an investment security which did not meet investment guidelines. The gain was less than $0.001 per share and had no effect on total return for the year ended December 31, 2008.

 

(5) 

Excludes the effect of custody fee credits, if any, of less than 0.005%.

 

  12   See Notes to Financial Statements.


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements

 

 

1  Significant Accounting Policies

Eaton Vance Risk-Managed Diversified Equity 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 current income and gains, with a secondary objective of capital appreciation.

The following is a summary of significant accounting policies of the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America.

A  Investment Valuation — Equity securities (including common shares of closed-end investment companies) listed on a U.S. securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and asked prices therefore on the exchange where such securities are principally traded. Equity securities listed on the NASDAQ Global or Global Select Market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or closing quotations are not available are valued at the mean between the latest available bid and asked prices or, in the case of preferred equity securities that are not listed or traded in the over-the-counter market, by a third party pricing service that will use various techniques that consider factors including, but not limited to, prices or yields of securities with similar characteristics, benchmark yields, broker/dealer quotes, quotes of underlying common stock, issuer spreads, as well as industry and economic events. Exchange-traded options (other than FLexible 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) and FLexible EXchange traded options traded at the Chicago Board Options Exchange 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. Short-term obligations purchased with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. 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. The daily valuation of exchange-traded foreign securities generally is determined as of the close of trading on the principal exchange on which such securities trade. Events occurring after the close of trading on foreign exchanges may result in adjustments to the valuation of foreign securities to more accurately reflect their fair value as of the close of regular trading on the New York Stock Exchange. When valuing foreign equity securities that meet certain criteria, the Fund’s Trustees have approved the use of a fair value service that values such securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other instruments that have a strong correlation to the fair-valued securities. 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.

The Fund may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an affiliated investment company managed by Eaton Vance Management (EVM). 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 based on available market quotations provided by a third party pricing service.

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 — Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. However, if the ex-dividend date has passed, certain dividends from foreign securities are recorded as the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the Fund’s understanding of the applicable countries’ tax rules and rates. Interest income is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount.

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.

At December 31, 2012, the Fund, for federal income tax purposes, had a capital loss carryforward of $332,065,202 and current year deferred capital losses of $54,234,022 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 carryforward will expire on December 31, 2017 ($232,948,451) and

 

  13  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements — continued

 

 

December 31, 2018 ($99,116,751). The current year deferred capital losses are treated as arising on the first day of the Fund’s next taxable year and are treated as realized prior to the utilization of the capital loss carryforward.

As of December 31, 2012, 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 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  Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.

H  Indemnifications — Under the 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.

I  Written Options — Upon the writing of a call or put option, the premium received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written, in accordance with the 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.

J  Purchased Options — Upon the purchase of a call or put option, the premium paid by the Fund is included in the Statement of Assets and Liabilities as an investment. The amount of the investment is subsequently marked-to-market to reflect the current market value of the option purchased, in accordance with the 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.

2  Distributions to Shareholders

Subject to its Managed Distribution Plan, the Fund makes quarterly distributions (monthly distributions beginning in January 2013) from its cash available for distribution, which consists of the Fund’s dividends and interest income after payment of Fund expenses, net option premiums and net realized and unrealized gains on stock investments. The Fund intends to distribute all or substantially all of its net realized capital gains (reduced by available capital loss carryforwards from prior years, if any). Distributions are recorded on the ex-dividend date. The Fund distinguishes between distributions on a tax basis and a financial reporting basis. Accounting principles generally accepted in the United States of America require that only distributions in excess of tax

 

  14  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements — continued

 

 

basis earnings and profits be reported in the 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. Distributions in any year may include a substantial return of capital component.

The tax character of distributions declared for the years ended December 31, 2012 and December 31, 2011 was as follows:

 

    Year Ended December 31,  
     2012      2011  

Distributions declared from:

    

Ordinary income

  $ 9,367,917       $ 5,569,829   

Tax return of capital

  $ 74,596,079       $ 87,671,496   

During the year ended December 31, 2012, accumulated net realized loss was decreased by $129,779 and accumulated undistributed net investment income was decreased by $129,779 due to differences between book and tax accounting, primarily for investments in partnerships, distributions from real estate investment trusts (REITs) and foreign currency gain (loss). These reclassifications had no effect on the net assets or net asset value per share of the Fund.

As of December 31, 2012, the components of distributable earnings (accumulated losses) and unrealized appreciation (depreciation) on a tax basis were as follows:

 

Capital carryfoward and deferred capital losses

  $ (386,299,224

Net unrealized appreciation

  $ 190,758,164   

The differences between components of distributable earnings (accumulated losses) on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to wash sales, purchased and written options contracts, distributions from REITs and investments in partnerships.

3  Investment Adviser Fee and Other Transactions with Affiliates

The investment adviser fee is earned by EVM as compensation for management and investment advisory services rendered to the Fund. The fee is computed at an annual rate of 1.00% of the Fund’s average daily gross assets and is payable monthly. Gross assets as referred to herein represent net assets plus obligations attributable to investment leverage, if any. The Fund invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. For the year ended December 31, 2012, the Fund’s investment adviser fee amounted to $8,837,657. 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 year ended December 31, 2012, 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, aggregated $408,258,195 and $561,787,147, respectively, for the year ended December 31, 2012.

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 years ended December 31, 2012 and December 31, 2011.

On August 6, 2012, 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). During the year ended December 31, 2012, the Fund repurchased 2,696,100 of its common shares under the share repurchase program at a cost, including brokerage commissions, of $28,538,342 and an average price of $10.59 per share. The weighted average discount per share to NAV on these repurchases amounted to 12.12%.

 

  15  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements — continued

 

 

6  Federal Income Tax Basis of Investments

The cost and unrealized appreciation (depreciation) of investments of the Fund at December 31, 2012, as determined on a federal income tax basis, were as follows:

 

Aggregate cost

  $ 655,113,134   

Gross unrealized appreciation

  $ 196,732,974   

Gross unrealized depreciation

    (7,923,526

Net unrealized appreciation

  $ 188,809,448   

7  Financial Instruments

The Fund may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include written options and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. A summary of written options at December 31, 2012 is included in the Portfolio of Investments.

Written options activity for the year ended December 31, 2012 was as follows:

 

     Number of
Contracts
     Premiums
Received
 

Outstanding, beginning of year

    4,035       $ 13,370,981   

Options written

    108,703         137,490,163   

Options terminated in closing purchase transactions

    (76,395      (124,845,208

Options expired

    (30,781      (21,210,400

Outstanding, end of year

    5,562       $ 4,805,536   

All of the assets of the Fund are subject to segregation to satisfy the requirements of the escrow agent. At December 31, 2012, the Fund had sufficient cash and/or securities to cover commitments under these contracts.

The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. During the year ended December 31, 2012, the Fund entered into a combination of stand-alone purchased and written option transactions on individual securities, indices or exchange-traded funds to enhance return, to reduce the Fund’s exposure to market risk and volatility and/or to generate premium income. The Fund also pursued a “collared” options strategy which consists of buying S&P 500 index put options below the current value of the index and writing S&P 500 index call options above the current value of the index with the same expiration. The strategy uses the premium income from the written call options to buy an equal number of put options. In buying put options on an index, the Fund in effect, acquires protection against decline in the value of the applicable index below the exercise price in exchange for the option premium paid. In writing index call options, the Fund in effect, sells potential appreciation in the value of the applicable index above the exercise price. The Fund retains the risk of lost appreciation, minus the premium received, should the price of the underlying index rise above the strike price. Under normal market conditions, the Fund’s use of option collars is expected to provide a more consistent level of market exposure and market protection.

 

  16  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements — continued

 

 

The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is equity price risk at December 31, 2012 was as follows:

 

    Fair Value  
Derivative   Asset Derivative      Liability Derivative  

Purchased options

  $ 2,776,361 (1)     $   

Written options

            (3,798,084 )(2) 

 

(1) 

Statement of Assets and Liabilities location: Unaffiliated investments, at value.

 

(2)

Statement of Assets and Liabilities location: Written options outstanding, at value.

The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary underlying risk exposure is equity price risk for the year ended December 31, 2012 was as follows:

 

Derivative  

Realized Gain (Loss)

on Derivatives Recognized

in Income(1)

    

Change in Unrealized

Appreciation (Depreciation) on

Derivatives Recognized in Income(2)

 

Purchased options

  $ (70,700,929    $ 9,372,745   

Written options

    (39,631,863      7,145,696   

 

(1) 

Statement of Operations location: Net realized gain (loss) – Investment transactions and Written options, respectively.

 

(2) 

Statement of Operations location: Change in unrealized appreciation (depreciation) – Investments and Written options, respectively.

The average number of purchased options contracts outstanding during the year ended December 31, 2012, which is indicative of the volume of this derivative type, was approximately 18,000 contracts.

8  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.

 

  17  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notes to Financial Statements — continued

 

 

At December 31, 2012, 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  

Common Stocks

          

Consumer Discretionary

  $ 97,018,743       $ 5,662,915       $         —       $ 102,681,658   

Consumer Staples

    84,596,618                         84,596,618   

Energy

    94,864,881                         94,864,881   

Financials

    124,680,408                         124,680,408   

Health Care

    101,245,053                         101,245,053   

Industrials

    83,502,496                         83,502,496   

Information Technology

    158,078,067                         158,078,067   

Materials

    28,219,767                         28,219,767   

Telecommunication Services

    25,697,813                         25,697,813   

Utilities

    29,918,389                         29,918,389   

Total Common Stocks

  $ 827,822,235       $ 5,662,915    $       $ 833,485,150   

Put Options Purchased

  $ 703,213       $ 2,073,148       $       $ 2,776,361   

Short-Term Investments

            7,661,071                 7,661,071   

Total Investments

  $ 828,525,448       $ 15,397,134       $       $ 843,922,582   

Liability Description

                                  

Call Options Written

  $ (1,349,300    $ (2,448,784    $       $ (3,798,084

Total

  $ (1,349,300    $ (2,448,784    $       $ (3,798,084

 

* Includes foreign equity securities whose values were adjusted to reflect market trading of comparable securities or other correlated instruments that occurred after the close of trading in their applicable foreign markets.

The Fund held no investments or other financial instruments as of December 31, 2011 whose fair value was determined using Level 3 inputs. At December 31, 2012, there were no investments transferred between Level 1 and Level 2 during the year then ended.

 

  18  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Report of Independent Registered Public Accounting Firm

 

 

To the Trustees and Shareholders of Eaton Vance Risk-Managed Diversified Equity Income Fund:

We have audited the accompanying statement of assets and liabilities of Eaton Vance Risk-Managed Diversified Equity Income Fund (the “Fund”), including the portfolio of investments, as of December 31, 2012, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Eaton Vance Risk-Managed Diversified Equity Income Fund as of December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Boston, Massachusetts

February 18, 2013

 

  19  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Federal Tax Information (Unaudited)

 

 

The Form 1099-DIV you received in January 2013 showed the tax status of all distributions paid to your account in calendar year 2012. Shareholders are advised to consult their own tax adviser with respect to the tax consequences of their investment in the Fund. As required by the Internal Revenue Code and/or regulations, shareholders must be notified regarding the status of qualified dividend income for individuals and the dividends received deduction for corporations.

Qualified Dividend Income.  The Fund designates approximately $18,077,238 or up to the maximum amount of such dividends allowable pursuant to the Internal Revenue Code, as qualified dividend income eligible for the reduced tax rate of 15%.

Dividends Received Deduction.  Corporate shareholders are generally entitled to take the dividends received deduction on the portion of the Fund’s dividend distribution that qualifies under tax law. For the Fund’s fiscal 2012 ordinary income dividends, 100% qualifies for the corporate dividends received deduction.

 

  20  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Notice to Shareholders (Unaudited)

 

 

In November 2012, the Fund changed its frequency of regular Fund distributions from quarterly to monthly. Beginning in January 2013, Fund shareholders will receive one-third of the current quarterly distribution on a monthly basis rather than the full current distribution once every three months. Total distribution amounts paid over the calendar year will not be affected.

In October 2012, the Fund announced that it was in the process of modifying the implementation of its “collared” options strategy, which consists of purchasing out-of-the-money S&P 500 Index put options and selling out-of-the-money S&P 500 Index call options on all or substantially all of the value of the Fund’s common stock portfolio. Purchasing index put options provides protection against loss of principal value during periods of market weakness and selling index call options generates premium income. Going forward, the Fund generally intends to purchase short-dated (generally 28-day) index put options and sell index call options of the same term, staggering roll dates across the options portfolio. Eaton Vance Management believes that, under normal market conditions, this should result in a more consistent level of market exposure and market protection than the historical implementation of the Fund’s options strategy. There can be no assurance that the Fund’s investment program as a whole or its options strategy will be successful.

The Fund is managed to achieve a primary objective of current income and gains and a secondary objective of capital appreciation. Relative to other equity income funds, the Fund seeks to provide less volatile returns and reduced exposure to loss of value during stock market declines. The Fund evaluates returns on an after-tax basis, seeking to minimize and defer shareholder federal income taxes. There can be no assurance that the Fund will achieve its objectives.

EVM believes that the Fund may be appropriate for investors seeking an investment vehicle that combines regular distributions, the use of risk management techniques to protect against loss of principal value in a stock market decline and potential for capital appreciation. An investment in the Fund may not be appropriate for all investors.

 

  21  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Dividend Reinvestment Plan

 

 

The Fund offers a dividend reinvestment plan (Plan) pursuant to which shareholders automatically have distributions reinvested in common shares (Shares) of the Fund unless they elect otherwise through their investment dealer. On the distribution payment date, if the NAV per Share is equal to or less than the market price per Share plus estimated brokerage commissions, then new Shares will be issued. The number of Shares shall be determined by the greater of the NAV per Share or 95% of the market price. Otherwise, Shares generally will be purchased on the open market by American Stock Transfer & Trust Company, the Plan agent (Agent). Distributions subject to income tax (if any) are taxable whether or not shares are reinvested.

If your Shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the Plan on your behalf. If the nominee does not offer the Plan, you will need to request that the Fund’s transfer agent re-register your Shares in your name or you will not be able to participate.

The Agent’s service fee for handling distributions will be paid by the Fund. Plan participants will be charged their pro rata share of brokerage commissions on all open-market purchases.

Plan participants may withdraw from the Plan at any time by writing to the Agent at the address noted on the following page. If you withdraw, you will receive Shares in your name for all Shares credited to your account under the Plan. If a participant elects by written notice to the Agent to sell part or all of his or her Shares and remit the proceeds, the Agent is authorized to deduct a $5.00 fee plus brokerage commissions from the proceeds.

If you wish to participate in the Plan and your Shares are held in your own name, you may complete the form on the following page and deliver it to the Agent. Any inquiries regarding the Plan can be directed to the Agent at 1-866-439-6787.

 

  22  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Application for Participation in Dividend Reinvestment Plan

 

 

 

This form is for shareholders who hold their common shares in their own names. If your common shares are held in the name of a brokerage firm, bank, or other nominee, you should contact your nominee to see if it will participate in the Plan on your behalf. If you wish to participate in the Plan, but your brokerage firm, bank, or nominee is unable to participate on your behalf, you should request that your common shares be re-registered in your own name which will enable your participation in the Plan.

The following authorization and appointment is given with the understanding that I may terminate it at any time by terminating my participation in the Plan as provided in the terms and conditions of the Plan.

 

 

Please print exact name on account:

 

Shareholder signature                                                           Date

 

Shareholder signature                                                           Date

Please sign exactly as your common shares are registered. All persons whose names appear on the share certificate must sign.

YOU SHOULD NOT RETURN THIS FORM IF YOU WISH TO RECEIVE YOUR DISTRIBUTIONS IN CASH. THIS IS NOT A PROXY.

This authorization form, when signed, should be mailed to the following address:

Eaton Vance Risk-Managed Diversified Equity Income Fund

c/o American Stock Transfer & Trust Company

P.O. Box 922

Wall Street Station

New York, NY 10269-0560

 

 

Number of Employees

The Fund is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company and has no employees.

Number of Shareholders

As of December 31, 2012, Fund records indicate that there are 22 registered shareholders and approximately 32,873 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 ETJ.

 

  23  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Management and Organization

 

 

Fund Management.  The Trustees of Eaton Vance Risk-Managed Diversified Equity Income Fund (the Fund) are responsible for the overall management and supervision of the Fund’s affairs. The Trustees and officers of the Fund are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. The “Noninterested Trustees” consist of those Trustees who are not “interested persons” of the Fund, as that term is defined under the 1940 Act. The business address of each Trustee and officer is Two International Place, Boston, Massachusetts 02110. As used below, “EVC” refers to Eaton Vance Corp., “EV” refers to Eaton Vance, Inc., “EVM” refers to Eaton Vance Management, “BMR” refers to Boston Management and Research and “EVD” refers to Eaton Vance Distributors, Inc. EVC and EV are the corporate parent and trustee, respectively, of EVM and BMR. EVD is a wholly-owned subsidiary of EVC. Each officer affiliated with Eaton Vance may hold a position with other Eaton Vance affiliates that is comparable to his or her position with EVM listed below. Each Trustee oversees 188 portfolios in the Eaton Vance Complex (including all master and feeder funds in a master feeder structure). Each officer serves as an officer of certain other Eaton Vance funds. Each Trustee serves for a three year term. Each officer serves until his or her successor is elected.

 

Name and Year of Birth   

Position(s)

with the
Fund

    

Term of
Office;

Length of
Service

    

Principal Occupation(s) and Directorships

During Past Five Years and Other Relevant Experience

Interested Trustee

            

Thomas E. Faust Jr.

1958

  

Class I

Trustee

    

Until 2014.

3 years.

Trustee since 2007.

    

Chairman, Chief Executive Officer and President of EVC, Director and President of EV, Chief Executive Officer and President of EVM and BMR, and Director of EVD. Trustee and/or officer of 188 registered investment companies. Mr. Faust is an interested person because of his positions with EVM, BMR, EVD, EVC and EV, which are affiliates of the Fund.

Directorships in the Last Five Years.(1) Director of EVC and Hexavest Inc.

            

Noninterested Trustees

            

Scott E. Eston

1956

  

Class I

Trustee

    

Until 2014.

2 years.

Trustee since 2011.

    

Private investor. Formerly held various positions at Grantham, Mayo, Van Otterloo and Co., L.L.C. (investment management firm) (1997-2009), including Chief Operating Officer (2002-2009), Chief Financial Officer (1997-2009) and Chairman of the Executive Committee (2002-2008); President and Principal Executive Officer, GMO Trust (open-end registered investment company) (2006-2009). Former Partner, Coopers and Lybrand L.L.P. (now PricewaterhouseCoopers) (public accounting firm) (1987-1997).

Directorships in the Last Five Years. None.

Benjamin C. Esty

1963

  

Class I

Trustee

    

Until 2014.

3 years.

Trustee since 2007.

    

Roy and Elizabeth Simmons Professor of Business Administration and Finance Unit Head, Harvard University Graduate School of Business Administration.

Directorships in the Last Five Years.(1) None.

Allen R. Freedman

1940

  

Class I

Trustee

    

Until 2014.

3 years.

Trustee since 2007.

    

Private Investor. Former Chairman (2002-2004) and a Director (1983-2004) of Systems & Computer Technology Corp. (provider of software to higher education). Formerly, a Director of Loring Ward International (fund distributor) (2005-2007). Former Chairman and a Director of Indus International, Inc. (provider of enterprise management software to the power generating industry) (2005-2007). Former Chief Executive Officer of Assurant, Inc. (insurance provider) (1979-2000).

Directorships in the Last Five Years.(1) Director of Stonemor Partners, L.P. (owner and operator of cemeteries). Formerly, Director of Assurant, Inc. (insurance provider) (1979-2011).

William H. Park

1947

  

Class II

Trustee

    

Until 2015.

3 years.

Trustee since 2007.

    

Consultant and private investor. Formerly, Chief Financial Officer, Aveon Group L.P. (investment management firm) (2010-2011). Formerly, Vice Chairman, Commercial Industrial Finance Corp. (specialty finance company) (2006-2010). Formerly, President and Chief Executive Officer, Prizm Capital Management, LLC (investment management firm) (2002-2005). Formerly, Executive Vice President and Chief Financial Officer, United Asset Management Corporation (investment management firm) (1982-2001). Formerly, Senior Manager, Price Waterhouse (now PricewaterhouseCoopers) (an independent registered public accounting firm) (1972-1981).

Directorships in the Last Five Years.(1) None.

Ronald A. Pearlman

1940

  

Class II

Trustee

    

Until 2015.

3 years.

Trustee since 2007.

    

Professor of Law, Georgetown University Law Center. Formerly, Deputy Assistant Secretary (Tax Policy) and Assistant Secretary (Tax Policy), U.S. Department of the Treasury (1983-1985). Formerly, Chief of Staff, Joint Committee on Taxation, U.S. Congress (1988-1990).

Directorships in the Last Five Years.(1) None.

 

  24  


Eaton Vance

Risk-Managed Diversified Equity Income Fund

December 31, 2012

 

Management and Organization — continued

 

 

Name and Year of Birth   

Position(s)

with the
Fund

    

Term of
Office;

Length of
Service

    

Principal Occupation(s) and Directorships

During Past Five Years and Other Relevant Experience

Noninterested Trustees (continued)

    

Helen Frame Peters

1948

  

Class II

Trustee

    

Until 2015.

3 years.

Trustee since 2008.

    

Professor of Finance, Carroll School of Management, Boston College. Formerly, Dean, Carroll School of Management, Boston College (2000-2002). Formerly, Chief Investment Officer, Fixed Income, Scudder Kemper Investments (investment management firm) (1998-1999). Formerly, Chief Investment Officer, Equity and Fixed Income, Colonial Management Associates (investment management firm) (1991-1998).

Directorships in the Last Five Years.(1) Formerly, Director of BJ’s Wholesale Club, Inc. (wholesale club retailer) (2004-2011). Formerly, Trustee of SPDR Index Shares Funds and SPDR Series Trust (exchange traded funds) (2000-2009). Formerly, Director of Federal Home Loan Bank of Boston (a bank for banks) (2007-2009).

Lynn A. Stout

1957

  

Class III

Trustee

    

Until 2013.

3 years.

Trustee since 2007.

    

Distinguished Professor of Corporate and Business Law, Jack G. Clarke Business Law Institute, Cornell University Law School. Formerly, the Paul Hastings Professor of Corporate and Securities Law (2006-2012) and Professor of Law (2001-2006), University of California at Los Angeles School of Law.

Directorships in the Last Five Years.(1) None.

Harriett Tee Taggart

1948

  

Class III

Trustee

    

Until 2013.

1 year.

Trustee since 2011.

    

Managing Director, Taggart Associates (a professional practice firm). Formerly, Partner and Senior Vice President, Wellington Management Company, LLP (investment management firm) (1983-2006).

Directorships in the Last Five Years. Director of Albemarle Corporation (chemicals manufacturer) (since 2007) and The Hanover Group (specialty property and casualty insurance company) (since 2009). Formerly, Director of Lubrizol Corporation (specialty chemicals) (2007-2011).

Ralph F. Verni

1943

  

Chairman of the Board and

Class III

Trustee

    

Until 2013.

3 years.

Chairman of the Board and Trustee since 2007.

    

Consultant and private investor. Formerly, Chief Investment Officer (1982-1992), Chief Financial Officer (1988-1990) and Director (1982-1992), New England Life. Formerly, Chairperson, New England Mutual Funds (1982-1992). Formerly, President and Chief Executive Officer, State Street Management & Research (1992-2000). Formerly, Chairperson, State Street Research Mutual Funds (1992-2000). Formerly, Director, W.P. Carey, LLC (1998-2004) and First Pioneer Farm Credit Corp. (2002-2006).

Directorships in the Last Five Years.(1) None.

            

Principal Officers who are not Trustees

    
Name and Year of Birth    Position(s)
with the
Fund
    

Length of

Service

    

Principal Occupation(s)

During Past Five Years

Walter A. Row, III

1957

   President      Since 2011      Vice President of EVM and BMR.

Duncan W. Richardson

1957

   Vice President      Since 2011      Director of EVC and Executive Vice President and Chief Equity Investment Officer of EVC, EVM and BMR.

Barbara E. Campbell

1957

   Treasurer      Since 2007      Vice President of EVM and BMR.

Maureen A. Gemma

1960

   Vice President, Secretary and Chief Legal Officer      Vice President since 2011, Secretary since 2007 and Chief Legal Officer since 2008      Vice President of EVM and BMR.

Paul M. O’Neil

1953

   Chief Compliance Officer      Since 2007      Vice President of EVM and BMR.

 

(1) 

During their respective tenures, the Trustees (except Mr. Eston and Ms. Taggart) also served as trustees of one or more of the following Eaton Vance funds (which operated in the years noted): Eaton Vance Credit Opportunities Fund (launched in 2005 and terminated in 2010); Eaton Vance Insured Florida Plus Municipal Bond Fund (launched in 2002 and terminated in 2009); and Eaton Vance National Municipal Income Trust (launched in 1998 and terminated in 2009).

 

  25  


Eaton Vance Funds

 

IMPORTANT NOTICES

 

 

Privacy.  The Eaton Vance organization is committed to ensuring your financial privacy. Each of the financial institutions identified below has in effect the following policy (“Privacy Policy”) with respect to nonpublic personal information about its customers:

 

Ÿ  

Only such information received from you, through application forms or otherwise, and information about your Eaton Vance fund transactions will be collected. This may include information such as name, address, social security number, tax status, account balances and transactions.

 

Ÿ  

None of such information about you (or former customers) will be disclosed to anyone, except as permitted by law (which includes disclosure to employees necessary to service your account). In the normal course of servicing a customer’s account, Eaton Vance may share information with unaffiliated third parties that perform various required services such as transfer agents, custodians and broker-dealers.

 

Ÿ  

Policies and procedures (including physical, electronic and procedural safeguards) are in place that are designed to protect the confidentiality of such information.

 

Ÿ  

We reserve the right to change our Privacy Policy at any time upon proper notification to you. Customers may want to review our Privacy Policy periodically for changes by accessing the link on our homepage: www.eatonvance.com.

Our pledge of privacy applies to the following entities within the Eaton Vance organization: the Eaton Vance Family of Funds, Eaton Vance Management, Eaton Vance Investment Counsel, Eaton Vance Distributors, Inc., Eaton Vance Trust Company, Eaton Vance Management’s Real Estate Investment Group and Boston Management and Research. In addition, our Privacy Policy applies only to those Eaton Vance customers who are individuals and who have a direct relationship with us. If a customer’s account (i.e., fund shares) is held in the name of a third-party financial advisor/broker-dealer, it is likely that only such advisor’s privacy policies apply to the customer. This notice supersedes all previously issued privacy disclosures. For more information about Eaton Vance’s Privacy Policy, please call 1-800-262-1122.

Delivery of Shareholder Documents.  The Securities and Exchange Commission (SEC) permits funds to deliver only one copy of shareholder documents, including prospectuses, proxy statements and shareholder reports, to fund investors with multiple accounts at the same residential or post office box address. This practice is often called “householding” and it helps eliminate duplicate mailings to shareholders. Eaton Vance, or your financial advisor, may household the mailing of your documents indefinitely unless you instruct Eaton Vance, or your financial advisor, otherwise. If you would prefer that your Eaton Vance documents not be householded, please contact Eaton Vance at 1-800-262-1122, or contact your financial advisor. Your instructions that householding not apply to delivery of your Eaton Vance documents will be effective within 30 days of receipt by Eaton Vance or your financial advisor.

Portfolio Holdings.  Each Eaton Vance Fund and its underlying Portfolio(s) (if applicable) will file a schedule of portfolio holdings on Form N-Q with the SEC for the first and third quarters of each fiscal year. The Form N-Q will be available on the Eaton Vance website at www.eatonvance.com, by calling Eaton Vance at 1-800-262-1122 or in the EDGAR database on the SEC’s website at www.sec.gov. Form N-Q may also be reviewed and copied at the SEC’s public reference room in Washington, D.C. (call 1-800-732-0330 for information on the operation of the public reference room).

Proxy Voting.  From time to time, funds are required to vote proxies related to the securities held by the funds. The Eaton Vance Funds or their underlying Portfolios (if applicable) vote proxies according to a set of policies and procedures approved by the Funds’ and Portfolios’ Boards. You may obtain a description of these policies and procedures and information on how the Funds or Portfolios voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, without charge, upon request, by calling 1-800-262-1122 and by accessing the SEC’s website at www.sec.gov.

Share Repurchase Program.  On August 6, 2012, the Fund’s Board of Trustees approved a share repurchase program authorizing the Fund to repurchase up to 10% of its currently outstanding common shares in open-market transactions at a discount to net asset value. The repurchase program does not obligate the Fund to purchase a specific amount of shares. The Fund’s repurchase activity, including the number of shares purchased, average price and average discount to net asset value, is disclosed in the Fund’s annual and semi-annual reports to shareholders.

Closed-End Fund Information.  The Eaton Vance closed-end funds make certain fund performance data and information about portfolio characteristics (such as top holdings and asset allocation) available on the Eaton Vance website after the end of each month. Certain fund performance data for the funds, including total returns, are posted to the website shortly after the end of each month. 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”.

 

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Investment Adviser and Administrator

Eaton Vance Management

Two International Place

Boston, MA 02110

Custodian

State Street Bank and Trust Company

200 Clarendon Street

Boston, MA 02116

Transfer Agent

American Stock Transfer & Trust Company

59 Maiden Lane

Plaza Level

New York, NY 10038

Independent Registered Public Accounting Firm

Deloitte & Touche LLP

200 Berkeley Street

Boston, MA 02116-5022

Fund Offices

Two International Place

Boston, MA 02110

 


LOGO

 

3079-2/13   CE-ETJSRC


Item 2. Code of Ethics

Not required in this filing.

Item 3. Audit Committee Financial Expert

The registrant’s Board has designated William H. Park, an independent trustee, as its audit committee financial expert. Mr. Park is a certified public accountant who is a consultant and private investor. Previously, he served as the Chief Financial Officer of Aveon Group, L.P. (an investment management firm), as the Vice Chairman of Commercial Industrial Finance Corp. (specialty finance company), as President and Chief Executive Officer of Prizm Capital Management, LLC (investment management firm), as Executive Vice President and Chief Financial Officer of United Asset Management Corporation (an institutional investment management firm) and as a Senior Manager at Price Waterhouse (now PricewaterhouseCoopers) (an independent registered public accounting firm).


Item 4. Principal Accountant Fees and Services

(a) –(d)

The following table presents the aggregate fees billed to the registrant for the registrant’s fiscal years ended December 31, 2011 and December 31, 2012 by the registrant’s principal accountant, Deloitte & Touche LLP (“D&T”), for professional services rendered for the audit of the registrant’s annual financial statements and fees billed for other services rendered by D&T during such periods.

 

Fiscal Years Ended

   12/31/11      12/31/12  

Audit Fees

   $ 59,590       $ 61,900   

Audit-Related Fees(1)

   $ 0       $ 0   

Tax Fees(2)

   $ 9,470       $ 10,030   

All Other Fees(3)

   $ 1,200       $ 0   
  

 

 

    

 

 

 

Total

   $ 70,260       $ 71,930   
  

 

 

    

 

 

 

 

(1)

Audit-related fees consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit of financial statements and are not reported under the category of audit fees.

(2) 

Tax fees consist of the aggregate fees billed for professional services rendered by the principal accountant relating to tax compliance, tax advice, and tax planning and specifically include fees for tax return preparation.

(3) 

All other fees consist of the aggregate fees billed for products and services provided by the principal accountant other than audit, audit-related, and tax services.

(e)(1) The registrant’s audit committee has adopted policies and procedures relating to the pre-approval of services provided by the registrant’s principal accountant (the “Pre-Approval Policies”). The Pre-Approval Policies establish a framework intended to assist the audit committee in the proper discharge of its pre-approval responsibilities. As a general matter, the Pre-Approval Policies (i) specify certain types of audit, audit-related, tax, and other services determined to be pre-approved by the audit committee; and (ii) delineate specific procedures governing the mechanics of the pre-approval process, including the approval and monitoring of audit and non-audit service fees. Unless a service is specifically pre-approved under the Pre-Approval Policies, it must be separately pre-approved by the audit committee.

The Pre-Approval Policies and the types of audit and non-audit services pre-approved therein must be reviewed and ratified by the registrant’s audit committee at least annually. The registrant’s audit committee maintains full responsibility for the appointment, compensation, and oversight of the work of the registrant’s principal accountant.

(e)(2) No services described in paragraphs (b)-(d) above were approved by the registrant’s audit committee pursuant to the “de minimis exception” set forth in Rule 2-01(c)(7)(i)(C) of Regulation S-X.

(f) Not applicable.

(g) The following table presents (i) the aggregate non-audit fees (i.e., fees for audit-related, tax, and other services) billed to the registrant by D&T for the registrant’s fiscal years ended December 31, 2011 and December 31, 2012; and (ii) the aggregate non-audit fees (i.e., fees for audit-related, tax, and other services) billed to the Eaton Vance organization by D&T for the same time periods.


Fiscal Years Ended

   12/31/11      12/31/12  

Registrant

   $ 10,670       $ 10,030   

Eaton Vance(1)

   $ 334,561       $ 615,489   

 

(1) The investment adviser to the registrant, as well as any of its affiliates that provide ongoing services to the registrant, are subsidiaries of Eaton Vance Corp.

(h) The registrant’s audit committee has considered whether the provision by the registrant’s principal accountant of non-audit services to the registrant’s investment adviser and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant that were not pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X is compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants

The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934, as amended. William H. Park (Chair), Scott E. Eston, Helen Frame Peters, Lynn A. Stout and Ralph F. Verni are the members of the registrant’s audit committee.

Item 6. Schedule of Investments

Please see schedule of investments contained in the Report to Stockholders included under Item 1 of this Form N-CSR.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies

The Board of Trustees of the Trust has adopted a proxy voting policy and procedure (the “Fund Policy”), pursuant to which the Trustees have delegated proxy voting responsibility to the Fund’s investment adviser and adopted the investment adviser’s proxy voting policies and procedures (the “Policies”) which are described below. The Trustees will review the Fund’s proxy voting records from time to time and will annually consider approving the Policies for the upcoming year. In the event that a conflict of interest arises between the Fund’s shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund, the investment adviser will generally refrain from voting the proxies related to the companies giving rise to such conflict until it consults with the Board’s Special Committee except as contemplated under the Fund Policy. The Board’s Special Committee will instruct the investment adviser on the appropriate course of action.

The Policies are designed to promote accountability of a company’s management to its shareholders and to align the interests of management with those shareholders. An independent proxy voting service (“Agent”), currently Institutional Shareholder Services, Inc., has been retained to assist in the voting of proxies through the provision of vote analysis, implementation and recordkeeping and disclosure services. The investment adviser will generally vote proxies through the Agent. The Agent is required to vote all proxies and/or refer them back to the investment adviser pursuant to the Policies. It is generally the policy of the investment adviser to vote in accordance with the recommendation of the Agent. The Agent shall refer to the investment adviser proxies relating to mergers and restructurings,


and the disposition of assets, termination, liquidation and mergers contained in mutual fund proxies. The investment adviser will normally vote against anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions, except in the case of closed-end management investment companies. The investment adviser generally supports management on social and environmental proposals. The investment adviser may abstain from voting from time to time where it determines that the costs associated with voting a proxy outweighs the benefits derived from exercising the right to vote or the economic effect on shareholders interests or the value of the portfolio holding is indeterminable or insignificant.

In addition, the investment adviser will monitor situations that may result in a conflict of interest between the Fund’s shareholders and the investment adviser, the administrator, or any of their affiliates or any affiliate of the Fund by maintaining a list of significant existing and prospective corporate clients. The investment adviser’s personnel responsible for reviewing and voting proxies on behalf of the Fund will report any proxy received or expected to be received from a company included on that list to the personnel of the investment adviser identified in the Policies. If such personnel expects to instruct the Agent to vote such proxies in a manner inconsistent with the guidelines of the Policies or the recommendation of the Agent, the personnel will consult with members of senior management of the investment adviser to determine if a material conflict of interests exists. If it is determined that a material conflict does exist, the investment adviser will seek instruction on how to vote from the Special Committee.

Information on how the Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30 is available (1) without charge, upon request, by calling 1-800-262-1122, and (2) on the Securities and Exchange Commission’s website at http://www.sec.gov.

Item 8. Portfolio Managers of Closed-End Management Investment Companies

Walter A. Row, Michael A. Allison, Kevin J. Amell and other Eaton Vance Management (“EVM”) investment professionals comprise the investment team responsible for the overall management of the Fund’s investments. Messrs. Row, Allison and Amell are the portfolio managers responsible for the day-to-day management of EVM’s responsibilities with respect to the Fund’s investment portfolio. Mr. Row is a Vice President and Head of Structured Equity Portfolios at EVM. He is a member of EVM’s Equity Strategy Committee and co-manages other Eaton Vance registered investment companies. He joined Eaton Vance’s equity group in 1996. Mr. Allison is a Vice President of EVM and a co-portfolio manager for other Eaton Vance registered investment companies. He is a member of EVM’s Equity Strategy Committee. He first joined Eaton Vance’s equity group in 2000. Mr. Amell is a Vice President of EVM and a co-portfolio manager of the Fund effective October 2012. He joined EVM in 2009 as an equity options trader and is a member of the EVM equity trading team. Prior to joining EVM, Mr. Amell was a senior trader for Numeric Investors and Jacobs Levy Equity Management and had additional experience in trading at Fidelity Capital Markets.

The following table shows, as of the Fund’s most recent fiscal year end, the number of accounts each portfolio manager managed in each of the listed categories and the total assets (in millions of dollars) in the accounts managed within each category. The table also shows the number of accounts with respect to which the advisory fee is based on the performance of the account, if any, and the total assets (in millions of dollars) in those accounts.


     Number of
All

Accounts
     Total Assets  of
All

Accounts
    Number of
Accounts

Paying a
Performance Fee
     Total Assets
of Accounts
Paying

a Performance
Fee
 

Walter A. Row

          

Registered Investment Companies

     9       $ 9,264.5        0       $ 0   

Other Pooled Investment Vehicles

     0       $ 0        0       $ 0   

Other Accounts

     0       $ 0        0       $ 0   

Michael A. Allison

          

Registered Investment Companies

     7       $ 14,432.9        0       $ 0   

Other Pooled Investment Vehicles

     14       $ 6,554.3 (1)      0       $ 0   

Other Accounts

     0       $ 0        0       $ 0   

Kevin J. Amell

          

Registered Investment Companies

     1       $ 840.3        0       $ 0   

Other Pooled Investment Vehicles

     0       $ 0        0       $ 0   

Other Accounts

     0       $ 0        0       $ 0   

 

(1) 

Certain of these “Other Pooled Investment Vehicles” invest a substantial portion of their assets in a registered investment company or in a separate unregistered pooled investment vehicle managed by this portfolio manager.

The following table shows the dollar range of Fund shares beneficially owned by each portfolio manager as of the Fund’s most recent fiscal year end.

 

Portfolio Manager

  

Dollar Range of Equity Securities

Owned in the Fund

Walter A. Row

   $100,001-$500,000

Michael A. Allison

   $10,001-$50,000

Kevin J. Amell

   None

Potential for Conflicts of Interest. It is possible that conflicts of interest may arise in connection with a portfolio manager’s management of a Fund’s investments on the one hand and the investments of other accounts for which the portfolio manager is responsible on the other. For example, a portfolio manager may have conflicts of interest in allocating management time, resources and investment opportunities among the Fund and other accounts he or she advises. In addition, due to differences in the investment strategies or restrictions between a Fund and the other accounts, a portfolio manager may take action with respect to another account that differs from the action taken with respect to the Fund. In some cases, another account managed by a portfolio manager may compensate EVM or the sub-adviser based on the performance of the securities held by that account. The existence of such a performance based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities. Whenever conflicts of interest


arise, the portfolio manager will endeavor to exercise his or her discretion in a manner that he or she believes is equitable to all interested persons. EVM and the sub-adviser have adopted several policies and procedures designed to address these potential conflicts including a code of ethics and policies which govern EVM’s and the sub-adviser’s trading practices, including among other things the aggregation and allocation of trades among clients, brokerage allocation, cross trades and best execution.

Compensation Structure for EVM

Compensation of EVM’s portfolio managers and other investment professionals has three primary components: (1) a base salary, (2) an annual cash bonus, and (3) annual stock-based compensation consisting of options to purchase shares of EVC’s nonvoting common stock and restricted shares of EVC’s nonvoting common stock. EVM’s investment professionals also receive certain retirement, insurance and other benefits that are broadly available to EVM’s employees. Compensation of EVM’s investment professionals is reviewed primarily on an annual basis. Cash bonuses, stock-based compensation awards, and adjustments in base salary are typically paid or put into effect at or shortly after the October 31st fiscal year end of EVC.

Method to Determine Compensation. EVM compensates its portfolio managers based primarily on the scale and complexity of their portfolio responsibilities and the total return performance of managed funds and accounts versus the benchmark(s) stated in the prospectus, as well as an appropriate peer group (as described below). In addition to rankings within peer groups of funds on the basis of absolute performance, consideration may also be given to relative risk-adjusted performance. Risk-adjusted performance measures include, but are not limited to, the Sharpe Ratio. Performance is normally based on periods ending on the September 30th preceding fiscal year end. Fund performance is normally evaluated primarily versus peer groups of funds as determined by Lipper Inc. and/or Morningstar, Inc. When a fund’s peer group as determined by Lipper or Morningstar is deemed by EVM’s management not to provide a fair comparison, performance may instead be evaluated primarily against a custom peer group or market index. In evaluating the performance of a fund and its manager, primary emphasis is normally placed on three-year performance, with secondary consideration of performance over longer and shorter periods. For funds that are tax-managed or otherwise have an objective of after-tax returns, performance is measured net of taxes. For other funds, performance is evaluated on a pre-tax basis. For funds with an investment objective other than total return (such as current income), consideration will also be given to the fund’s success in achieving its objective. For managers responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis, based on averages or weighted averages among managed funds and accounts. Funds and accounts that have performance-based advisory fees are not accorded disproportionate weightings in measuring aggregate portfolio manager performance.

The compensation of portfolio managers with other job responsibilities (such as heading an investment group or providing analytical support to other portfolios) will include consideration of the scope of such responsibilities and the managers’ performance in meeting them.

EVM seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. EVM participates in investment-industry compensation surveys and utilizes survey data as a factor in determining salary, bonus and stock-based compensation levels for portfolio managers and other investment professionals. Salaries, bonuses and stock-based compensation are also influenced by the operating performance of EVM and its parent company. The overall annual cash bonus pool is based on a substantially fixed percentage of pre-bonus operating income. While the salaries of EVM’s portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year, based on changes in manager performance and other factors as described herein. For a high performing portfolio manager, cash bonuses and stock-based compensation may represent a substantial portion of total compensation.


Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers

REGISTRANT PURCHASES OF EQUITY SECURITIES

 

Period*

   (a)
Total Number of
Shares  Purchased
     (b)
Average Price
Paid per  Share
     (c)
Total Number of
Shares  Purchased
as Part of Publicly
Announced
Programs
     (d)
Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Programs*
 

August 2012

     26,700       $ 10.35         26,700         7,269,178   

September 2012

     515,700       $ 10.54         542,400         6,753,478   

October 2012

     1,298,700       $ 10.77         1,841,100         5,454,778   

November 2012

     432,800       $ 10.36         2,273,900         5,021,978   

December 2012

     422,200       $ 10.34         2,696,100         4,599,778   
  

 

 

    

 

 

       

Total

     2,696,100       $ 10.59         
  

 

 

    

 

 

       

 

* On August 6, 2012, 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 August 8, 2012.

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 Risk-Managed Diversified Equity Income Fund

 

By:  

/s/ Walter A. Row, III

  Walter A. Row, III
  President
Date:   February 11, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:

 

/s/ Barbara E. Campbell

  Barbara E. Campbell
  Treasurer
Date:   February 11, 2013
By:  

/s/ Walter A. Row, III

  Walter A. Row, III
  President
Date:   February 11, 2013