As filed with the Securities and Exchange Commission on XXXXX
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09761
The Potomac Insurance Trust
(Exact name of registrant as specified in charter)
33 Whitehall Street, 10th Floor
New York, NY 10004
(Address of principal executive offices) (Zip code)
New York, NY 10004
(Address of principal executive offices) (Zip code)
Daniel D. O’Neill
33 Whitehall Street, 10th Floor
New York, NY 10004
(Name and address of agent for service)
33 Whitehall Street, 10th Floor
New York, NY 10004
(Name and address of agent for service)
1-646-572-3390
Registrant’s telephone number, including area code
Registrant’s telephone number, including area code
Date of fiscal year end: 12/31/06
Date of reporting period: 6/30/06
Item 1. Report to Stockholders
Letter to Shareholders
August 28, 2006
Dear Shareholder,
This Semi-Annual Report covers the period from January 1, 2006 through June 30, 2006 (the “Semi-Annual Period”) and relates to three portfolios of the Direxion Insurance Trust (the “Trust”): the Evolution VP All-Cap Equity Fund, the Evolution VP Managed Bond Fund (“Managed Bond”) and the Dynamic VP HY Bond Fund. During the Semi-Annual Period, the Potomac Funds became Direxion Funds and the Evolution VP Managed Equity Fund became the Evolution VP All-Cap Equity Fund (“All-Cap Fund”). These changes did not reflect a change in the operations or investment objectives of the Trust or the All-Cap Fund; they were simply name changes.
The performance of the U.S. equities indexes were all good from January through the beginning of May, though small capitalization equities led the class, with the Russell 2000 gaining over 16% by May 8th. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100 had gained 8.92%, 6.77% and 4.4%, respectively by May 8th. The All-Cap Fund benefited from substantial exposure to small cap and emerging market equities, gaining 17% through May 8th when the Russell 2000 peaked. Unfortunately, emerging market equities declined quickly and substantially, and the U.S. equities markets followed. The All-Cap Fund struggled, losing 9% from May 8th through the end of the Semi-Annual Period while the Russell 2000 declined 7%, the S&P 500 lost 3.8% and the Nasdaq lost 8.10%. The All-Cap Fund’s strategy, which seeks to rotate into baskets of equities which are performing well at a given time, did not exit out of certain categories of equity securities quickly enough to avoid the downturn. For the Semi-Annual Period, the All-Cap Fund gained 6.19%.
The fixed income markets were less volatile than the equities markets but remained a puzzle. The Federal Reserve continued to raise short term interest rates and rates on longer-term instruments finally responded, with the yield on the 10 Year Note rising from 4.4% to 5.2% during the Semi-Annual Period. However, currently, yields on the 10 Year Note have fallen back to 4.8%, meaning the rates on overnight funds are higher than those on longer term instruments, historically a sign of a coming recession. For the Semi-Annual Period, the Managed Bond Fund declined 0.76% on a total return basis, and its return for the Semi-Annual Period was consistent with its overall lack of volatility during the Semi-Annual Period. The Managed Bond Fund was negatively impacted by rising rates and has rallied as rates have fallen. The Dynamic VP HY Bond Fund declined 1.4% as the high yield market struggled somewhat as the 10 Year Note finally responded to Fed tightening. The high yield market was also impacted by substantial issuance of debt due to leveraged buy-outs and weakening credit fundamentals as companies’ balance sheets deteriorated somewhat. Managing the Dynamic VP HY Fund has proven challenging and Rafferty Asset Management, LLC began managing the Fund directly effective July 1.
As always, we thank you for your investment in the Direxion Funds and we look forward to our continued mutual success.
Regards,
Daniel O’Neill
President
Direxion Insurance Trust
Past performance does not guarantee future results. To obtain current performance please call 1-800-851-0511. For more information on the Funds, including investment objectives, fees, risks and expenses, contact your Financial Advisor or call 1-800-851-0511.
Expense Example (Unaudited)
June 30, 2006
As a shareholder of a mutual fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service fees; and other fund expenses. The examples in this report are intended to help you understand your ongoing costs (in dollars) of investing in each mutual fund and to compare costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (January 1, 2006 – June 30, 2006).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. Although the Funds charge no sales load or transactions fees, you will be assessed fees for outgoing wire transfers, returned checks or stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Funds’ transfer agent. If you request a redemption be made by wire transfer, currently a $15.00 fee is charged by the Funds’ transfer agent. However, the example below does not include portfolio trading commissions and related expenses, or other extraordinary expenses as determined under generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as outgoing wire transfers, returned checks or stop payment orders. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
2
(Unaudited) | ||||||||||||
Evolution VP Managed Bond Fund | ||||||||||||
Expenses Paid | ||||||||||||
Beginning | Ending | During Period | ||||||||||
Account Value | Account Value | January 1, 2006 – | ||||||||||
January 1, 2006 | June 30, 2006 | June 30, 2006* | ||||||||||
Actual | $ | 1,000.00 | $ | 992.40 | $ | 9.88 | ||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,030.00 | 9.99 |
* | Expenses are equal to the Fund’s annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. |
(Unaudited) | ||||||||||||
Evolution VP All-Cap Equity Fund | ||||||||||||
Expenses Paid | ||||||||||||
Beginning | Ending | During Period | ||||||||||
Account Value | Account Value | January 1, 2006 – | ||||||||||
January 1, 2006 | June 30, 2006 | June 30, 2006* | ||||||||||
Actual | $ | 1,000.00 | $ | 1,061.90 | $ | 10.22 | ||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,014.88 | 9.99 |
* | Expenses are equal to the Fund’s annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. |
(Unaudited) | ||||||||||||
Dynamic VP HY Bond Fund | ||||||||||||
Expenses Paid | ||||||||||||
Beginning | Ending | During Period | ||||||||||
Account Value | Account Value | January 1, 2006 – | ||||||||||
January 1, 2006 | June 30, 2006 | June 30, 2006* | ||||||||||
Actual | $ | 1,000.00 | $ | 986.00 | $ | 8.62 | ||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,016.12 | 8.75 |
** | Expenses are equal to the Fund’s annualized expense ratio of 1.75%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. |
3
Evolution VP Managed Bond Fund
Evolution VP All-Cap Equity Fund
The percentages in these graphs are calculated based on net assets.
* Cash equivalents and other assets less liabilities
** These securities are investment companies that primarily invest in these types of securities.
4
Dynamic VP HY Bond Fund
The percentages in these graphs are calculated based on net assets.
* Cash equivalents and other assets less liabilities
** These securities are investment companies that primarily invest in these types of securities.
5
Evolution VP Managed Bond Fund
Schedule of Investments
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
INVESTMENT COMPANIES - 53.1% | ||||||||||
597 | Alliance World Dollar Government Fund II | $ | 7,170 | |||||||
384 | Blackrock Global FLG Inc Trust | 7,280 | ||||||||
452 | Evergreen Managed Income Fund | 7,318 | ||||||||
323 | Hancock John Preferred Income Fund | 7,264 | ||||||||
325 | Hancock John Preferred Income Fund II | 7,199 | ||||||||
1,892 | iShares GS $ InvesTop Corporate Bond Fund | 195,765 | ||||||||
9,944 | iShares Lehman Aggregate Bond Fund | 968,943 | ||||||||
9,789 | iShares Lehman Treasury Inflation Protected Securities Fund | 974,691 | ||||||||
14,082 | iShares Lehman 1-3 Year Treasury Bond Fund | 1,121,631 | ||||||||
11,449 | iShares Lehman 7-10 Year Treasury Bond Fund | 920,271 | ||||||||
6,692 | iShares Lehman 20+ Year Treasury Bond Fund | 564,671 | ||||||||
884 | MFS Charter Income Trust | 7,258 | ||||||||
808 | Morgan Stanley Emerging Markets Debt | 7,377 | ||||||||
846 | Morgan Stanley Government Income Trust | 7,233 | ||||||||
485 | Morgan Stanley Income SECS | 7,154 | ||||||||
485 | Neuberger Berman Income Opportunity Fund | 7,348 | ||||||||
591 | Nuveen Preferred and Convertible Income Fund 2 | 7,257 | ||||||||
438 | Salomon Brothers Emerging Markets Debt Fund, Inc. | 7,258 | ||||||||
553 | Salomon Brothers Emerging Markets Floating Rate Fund | 6,929 | ||||||||
572 | Salomon Brothers Global High Income Fund | 7,196 | ||||||||
459 | Salomon Brothers Inflation Management Fund | 7,275 | ||||||||
424 | Salomon Brothers Variable Rate Strategic Fund | 7,212 | ||||||||
443 | Van Kampen Bond Fund | 7,265 | ||||||||
648 | Western Asset/ Claymore US Treasury Inflation Protected Securities Fund | 7,219 | ||||||||
642 | Western Asset/ Claymore US Treasury Inflation Protected Securities Fund 2 | 7,210 | ||||||||
781 | 40/86 Strategic Income Fund | 7,060 | ||||||||
TOTAL INVESTMENT COMPANIES (Cost $4,890,306) | $ | 4,890,454 | ||||||||
Face | ||||||||||
Amount | ||||||||||
SHORT TERM INVESTMENTS - 42.6% | ||||||||||
U.S. GOVERNMENT AGENCY OBLIGATION - 32.6% | ||||||||||
$ | 3,000,000 | Federal Home Loan Bank Discount Note, 4.80%, 07/03/2006 (Cost $2,999,242) | $ | 2,999,242 | ||||||
Shares | ||||||||||
MONEY MARKET FUND - 10.0% | ||||||||||
918,489 | Federated Prime Obligations Fund - Class I (Cost $918,489) | $ | 918,489 | |||||||
TOTAL SHORT TERM INVESTMENTS (Cost $3,917,731) | $ | 3,917,731 | ||||||||
TOTAL INVESTMENTS - 95.7% (Cost $8,808,037) | $ | 8,808,185 | ||||||||
Other Assets in Excess of Liabilities - 4.3% | 392,160 | |||||||||
TOTAL NET ASSETS - 100.0% | $ | 9,200,345 | ||||||||
Percentages are calculated as a percent of net assets.
See notes to the financial statements.
6
Evolution VP All-Cap Equity Fund
Schedule of Investments
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% | ||||||||||
Aerospace & Defense - 0.1% | ||||||||||
361 | Ceradyne, Inc.* | $ | 17,866 | |||||||
Air Freight & Logistics - 0.1% | ||||||||||
206 | C.H. Robinson Worldwide, Inc. | 10,980 | ||||||||
Airlines - 0.4% | ||||||||||
865 | AirTran Holdings, Inc.* | 12,854 | ||||||||
1,341 | Gol-Linhas Aereas Inteligentes SA ADR | 47,605 | ||||||||
60,459 | ||||||||||
Auto Components - 1.1% | ||||||||||
13,631 | Standard Motor Products, Inc. | 113,683 | ||||||||
5,228 | Superior Industries International, Inc. | 95,620 | ||||||||
209,303 | ||||||||||
Automobiles - 1.9% | ||||||||||
8,097 | Ford Motor Co. | 56,112 | ||||||||
3,377 | General Motors Corp. | 100,601 | ||||||||
1,015 | Harley-Davidson, Inc. | 55,713 | ||||||||
3,523 | Tata Motors Ltd. ADR* | 60,772 | ||||||||
845 | Toyota Motor Corp. ADR | 88,379 | ||||||||
361,577 | ||||||||||
Beverages - 0.7% | ||||||||||
315 | Coca-Cola Femsa SA de CV ADR | 9,299 | ||||||||
293 | Companhia de Bebidas das Americas (AmBev) ADR | 12,086 | ||||||||
162 | Diageo PLC ADR | 10,943 | ||||||||
717 | Fomento Economico Mexicano SA de CV ADR | 60,027 | ||||||||
172 | Hansen Natural Corp.* | 32,744 | ||||||||
125,099 | ||||||||||
Biotechnology - 0.2% | ||||||||||
692 | PDL Biopharma, Inc.* | 12,740 | ||||||||
402 | Vertex Pharmaceuticals, Inc.* | 14,757 | ||||||||
27,497 | ||||||||||
Capital Markets - 0.3% | ||||||||||
538 | Deutsche Bank AG ADR | 60,525 | ||||||||
Chemicals - 2.8% | ||||||||||
170 | Air Products & Chemicals, Inc. | 10,866 | ||||||||
764 | Ashland, Inc. | 50,959 | ||||||||
1,131 | EI Du Pont de Nemours & Co. | 47,050 | ||||||||
16,253 | Landec Corp.* | 150,340 | ||||||||
2,119 | Lyondell Chemical Co. | 48,017 | ||||||||
715 | PPG Industries, Inc. | 47,190 | ||||||||
220 | Rohm & Haas Co. | 11,026 | ||||||||
776 | Sigma-Aldrich Corp. | 56,369 | ||||||||
2,412 | The Dow Chemical Co. | 94,140 | ||||||||
515,957 | ||||||||||
Commercial Banks - 4.5% | ||||||||||
292 | ABN AMRO Holding NV ADR | 7,989 | ||||||||
1,572 | Banco Bradesco SA ADR | 48,873 | ||||||||
964 | Bank of America Corp. | 46,368 | ||||||||
2,120 | Banco Itau Holding Financeira SA ADR | 61,819 | ||||||||
1,240 | BB&T Corp. | 51,572 | ||||||||
171 | Central Pacific Financial Corp. | 6,618 | ||||||||
101 | City National Corp. | 6,574 | ||||||||
207 | Comerica, Inc. | 10,762 | ||||||||
1,402 | Fifth Third Bancorp | 51,804 | ||||||||
411 | Glacier Bancorp, Inc. | 12,030 | ||||||||
1,457 | KeyCorp | 51,986 | ||||||||
99 | Kookmin Bank ADR* | 8,223 | ||||||||
93 | M&T Bank Corp. | 10,966 | ||||||||
240 | Marshall & Ilsley Corp. | 10,978 | ||||||||
185 | Mercantile Bankshares Corp.* | 6,599 | ||||||||
2,846 | Mitsubishi UFJ Financial Group, Inc. ADR | 39,702 | ||||||||
1,272 | National City Corp. | 46,034 | ||||||||
663 | PNC Financial Services Group | 46,523 | ||||||||
1,550 | Regions Financial Corp. | 51,336 | ||||||||
677 | SunTrust Banks, Inc. | 51,628 | ||||||||
414 | Synovus Financial Corp. | 11,087 | ||||||||
734 | Uniao de Bancos Brasileiros SA ADR | 48,731 | ||||||||
1,670 | US Bancorp | 51,569 | ||||||||
865 | Wachovia Corp. | 46,779 | ||||||||
768 | Wells Fargo & Co. | 51,517 | ||||||||
838,067 | ||||||||||
Commercial Services & Supplies - 2.1% | ||||||||||
5,944 | ICT Group, Inc.* | 145,806 | ||||||||
1,235 | Pitney Bowes, Inc. | 51,006 |
See notes to the financial statements.
7
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% (Continued) | ||||||||||
Commercial Services & Supplies - 2.1% (Continued) | ||||||||||
1,515 | RR Donnelley & Sons Co. | $ | 48,404 | |||||||
12,037 | TeleTech Holdings, Inc.* | 152,388 | ||||||||
397,604 | ||||||||||
Communications Equipment - 2.1% | ||||||||||
896 | Alcatel SA ADR* | 11,299 | ||||||||
7,564 | Audiovox Corp.* | 103,324 | ||||||||
385 | Comtech Telecommunications Corp.* | 11,269 | ||||||||
522 | Corning, Inc.* | 12,627 | ||||||||
567 | Motorola, Inc. | 11,425 | ||||||||
2,410 | Nokia OYJ ADR | 48,827 | ||||||||
512 | Plantronics, Inc. | 11,371 | ||||||||
1,341 | Powerwave Technologies, Inc.* | 12,230 | ||||||||
261 | QUALCOMM, Inc. | 10,458 | ||||||||
1,451 | Telefonaktiebolaget LM Ericsson ADR | 47,941 | ||||||||
922 | Tellabs, Inc.* | 12,272 | ||||||||
12,757 | UTstarcom, Inc.* | 99,377 | ||||||||
392,420 | ||||||||||
Computers & Peripherals - 0.5% | ||||||||||
1,486 | EMC Corp.* | 16,302 | ||||||||
573 | Komag, Inc.* | 26,461 | ||||||||
1,014 | Neoware Systems, Inc.* | 12,462 | ||||||||
492 | SanDisk Corp.* | 25,082 | ||||||||
547 | Synaptics, Inc.* | 11,706 | ||||||||
92,013 | ||||||||||
Construction Materials - 0.0% | ||||||||||
133 | Cemex S.A. de C.V. ADR* | 7,577 | ||||||||
Containers & Packaging - 0.3% | ||||||||||
205 | Aptargroup, Inc. | 10,170 | ||||||||
2,615 | Myers Industries, Inc. | 44,952 | ||||||||
55,122 | ||||||||||
Distributors - 0.3% | ||||||||||
1,125 | Genuine Parts Co. | 46,867 | ||||||||
Electric Utilities - 0.7% | ||||||||||
1,140 | Companhia Energetica de Minas Gerais ADR | 48,575 | ||||||||
149 | Consolidated Edison, Inc. | 6,622 | ||||||||
439 | Hawaiian Electric Industries | 12,253 | ||||||||
391 | Korea Electric Power Corp. ADR | 7,413 | ||||||||
309 | Puget Energy, Inc. | 6,637 | ||||||||
902 | WPS Resources Corp. | 44,739 | ||||||||
126,239 | ||||||||||
Electrical Equipment - 1.3% | ||||||||||
4,058 | ABB Ltd. ADR | 52,592 | ||||||||
143,188 | Emrise Corp.* | 147,484 | ||||||||
240 | Rockwell Automation, Inc. | 17,282 | ||||||||
1,074 | Vicor Corp. | 17,796 | ||||||||
235,154 | ||||||||||
Electronic Equipment & Instruments - 1.4% | ||||||||||
218 | Amphenol Corp. - Class A | 12,199 | ||||||||
19,493 | Bell Microproducts, Inc.* | 105,652 | ||||||||
895 | Brightpoint, Inc.* | 12,109 | ||||||||
491 | Flir Systems, Inc.* | 10,832 | ||||||||
357 | Plexus Corp.* | 12,213 | ||||||||
21,188 | Sanmina-SCI Corporation* | 97,465 | ||||||||
250,470 | ||||||||||
Energy Equipment & Services - 1.0% | ||||||||||
492 | Helix Energy Solutions Group, Inc.* | 19,857 | ||||||||
299 | Helmerich & Payne, Inc. | 18,018 | ||||||||
516 | Nabors Industries Ltd. ADR* | 17,436 | ||||||||
346 | NS Group, Inc.* | 19,058 | ||||||||
619 | Patterson-UTI Energy, Inc. | 17,524 | ||||||||
1,752 | Tenaris SA ADR | 70,938 | ||||||||
309 | Unit Corp.* | 17,579 | ||||||||
128 | Veritas DGC, Inc.* | 6,602 | ||||||||
187,012 | ||||||||||
Financial Services - 1.0% | ||||||||||
236 | AmeriCredit Corp.* | 6,589 | ||||||||
1,064 | Citigroup, Inc. | 51,328 | ||||||||
1,013 | ING Groep NV ADR | 39,831 | ||||||||
1,139 | JPMorgan Chase & Co. | 47,838 | ||||||||
1,522 | Leucadia National Corp. | 44,427 | ||||||||
190,013 | ||||||||||
See notes to the financial statements.
8
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% (Continued) | ||||||||||
Food & Staples Retailing - 0.2% | ||||||||||
2,036 | Nash Finch Co.* | $ | 43,346 | |||||||
Food Products - 3.4% | ||||||||||
13,830 | American Italian Pasta Co.* | 118,385 | ||||||||
2,344 | ConAgra Foods, Inc. | 51,826 | ||||||||
456 | Groupe Danone ADR | 12,161 | ||||||||
1,252 | H.J. Heinz Co. | 51,607 | ||||||||
53,504 | Inventure Group, Inc.* | 154,091 | ||||||||
991 | The J.M. Smucker Co. | 44,298 | ||||||||
25,877 | Monterey Gourmet Foods, Inc.* | 152,416 | ||||||||
2,070 | Perdigao SA Comercio E Industry ADR | 39,744 | ||||||||
624,528 | ||||||||||
Gas Utilities - 0.8% | ||||||||||
181 | Northwest Natural Gas Co. | 6,703 | ||||||||
3,607 | Southern Union Co. | 97,605 | ||||||||
1,539 | WGL Holdings, Inc. | 44,554 | ||||||||
148,862 | ||||||||||
Health Care Equipment & Supplies - 1.3% | ||||||||||
371 | Biosite, Inc.* | 16,940 | ||||||||
255 | Hologic, Inc.* | 12,587 | ||||||||
406 | Kensey Nash Corp.* | 11,977 | ||||||||
24,864 | Osteotech, Inc.* | 100,451 | ||||||||
29,535 | Theragenics Corp.* | 100,714 | ||||||||
242,669 | ||||||||||
Health Care Providers & Services - 0.7% | ||||||||||
333 | Coventry Health Care, Inc.* | 18,295 | ||||||||
34,199 | Hooper Holmes, Inc. | 104,307 | ||||||||
122,602 | ||||||||||
Hotels Restaurants & Leisure - 0.4% | ||||||||||
1,127 | Ctrip.com International Ltd. ADR | 57,533 | ||||||||
524 | McDonald’s Corp. | 17,607 | ||||||||
75,140 | ||||||||||
Household Durables - 3.6% | ||||||||||
7,443 | D.R. Horton, Inc. | 177,292 | ||||||||
565 | Hovnanian Enterprises, Inc.* | 16,995 | ||||||||
261 | Koninklijke Philips Electronics NV ADR | 8,128 | ||||||||
445 | Leggett & Platt, Inc. | 11,116 | ||||||||
3,360 | Lennar Corp. | 149,083 | ||||||||
13,924 | Libbey, Inc. | 102,342 | ||||||||
210 | MDC Holdings, Inc. | 10,905 | ||||||||
361 | Meritage Homes Corp.* | 17,057 | ||||||||
2,000 | Newell Rubbermaid, Inc. | 51,660 | ||||||||
126 | NVR, Inc.* | 61,898 | ||||||||
1,030 | Ryland Group, Inc. | 44,877 | ||||||||
656 | Toll Brothers, Inc.* | 16,774 | ||||||||
668,127 | ||||||||||
Household Products - 0.3% | ||||||||||
758 | Kimberly-Clark Corp. | 46,769 | ||||||||
Industrial Conglomerates - 0.2% | ||||||||||
457 | Siemens AG ADR | 39,677 | ||||||||
Information Retrieval Services - 0.5% | ||||||||||
3,402 | Rediff Com India Ltd ADR* | 50,349 | ||||||||
2,051 | The9 Ltd. ADR* | 47,563 | ||||||||
97,912 | ||||||||||
Insurance - 2.7% | ||||||||||
2,520 | Allianz AG ADR | 39,816 | ||||||||
216 | AMBAC Financial Group, Inc. | 17,518 | ||||||||
1,345 | Cincinnati Financial Corp. | 63,228 | ||||||||
190 | Genworth Financial, Inc. | 6,620 | ||||||||
771 | MBIA, Inc. | 45,142 | ||||||||
198 | Mercury General Corp. | 11,161 | ||||||||
2,115 | Old Republic International Corp. | 45,197 | ||||||||
5,433 | Platinum Underwriters Holdings Ltd. ADR | 152,015 | ||||||||
138 | RLI Corp.* | 6,649 | ||||||||
148 | The St. Paul Travelers Companies Inc. | 6,598 | ||||||||
5,726 | UnumProvident Corp. | 103,812 | ||||||||
167 | Zenith National Insurance Corp. | 6,625 | ||||||||
504,381 | ||||||||||
Internet Software & Services - 1.1% | ||||||||||
525 | Infospace, Inc.* | 11,902 | ||||||||
442 | j2 Global Communications, Inc.* | 13,799 | ||||||||
24,738 | Miva, Inc.* | 100,189 | ||||||||
2,602 | NetEase.com, Inc. ADR* | 58,103 |
See notes to the financial statements.
9
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% (Continued) | ||||||||||
Internet Software & Services - 1.1% (Continued) | ||||||||||
539 | Websense, Inc.* | $ | 11,071 | |||||||
384 | Yahoo!, Inc.* | 12,672 | ||||||||
207,736 | ||||||||||
Investment Advice - 0.1% | ||||||||||
668 | Amvescap PLC ADR | 12,351 | ||||||||
IT Services - 0.2% | ||||||||||
777 | eFunds Corp.* | 17,133 | ||||||||
348 | Satyam Computer Services Ltd. ADR | 11,533 | ||||||||
28,666 | ||||||||||
Leisure Equipment & Products - 1.1% | ||||||||||
1,361 | Brunswick Corp. | 45,253 | ||||||||
9,613 | Nautilus Group, Inc. | 151,020 | ||||||||
240 | Polaris Industries, Inc. | 10,392 | ||||||||
206,665 | ||||||||||
Machinery - 3.0% | ||||||||||
4,794 | Briggs & Stratton Corp. | 149,141 | ||||||||
231 | Caterpillar, Inc. | 17,205 | ||||||||
374 | Cummins, Inc. | 45,721 | ||||||||
228 | Eaton Corp. | 17,191 | ||||||||
228 | Illinois Tool Works, Inc. | 10,830 | ||||||||
155 | Ingersoll-Rand Co. | 6,631 | ||||||||
615 | JLG Industries, Inc. | 13,838 | ||||||||
631 | Joy Global, Inc. | 32,869 | ||||||||
84 | Reliance Steel & Aluminum Co. | 6,968 | ||||||||
5,129 | Tecumseh Products Co.* | 98,477 | ||||||||
1,331 | Watts Water Technologies, Inc. - Class A | 44,655 | ||||||||
29,143 | Wolverine Tube, Inc.* | 106,955 | ||||||||
550,481 | ||||||||||
Manufacturing - 0.1% | ||||||||||
121 | Nucor Corp. | 6,564 | ||||||||
85 | Parker Hannifin Corp. | 6,596 | ||||||||
195 | The Procter & Gamble Co. | 10,842 | ||||||||
24,002 | ||||||||||
Media - 0.4% | ||||||||||
184 | Focus Media Holding Ltd ADR* | 11,990 | ||||||||
425 | Harte-Hanks, Inc. | 10,897 | ||||||||
1,225 | Media General, Inc. - Class A | 51,315 | ||||||||
129 | WPP Group PLC ADR | 7,777 | ||||||||
81,979 | ||||||||||
Metals & Mining - 4.5% | ||||||||||
438 | Anglo American PLC ADR | 8,953 | ||||||||
1,144 | BHP Billiton Ltd. ADR | 49,272 | ||||||||
164 | Carpenter Technology Corp. | 18,942 | ||||||||
1,619 | Companhia Siderurgica Nacional SA ADR | 52,132 | ||||||||
2,057 | Companhia Vale do Rio Doce ADR | 49,450 | ||||||||
1,167 | Freeport-McMoRan Copper & Gold, Inc. - Class B | 64,663 | ||||||||
877 | Gerdau SA ADR | 13,069 | ||||||||
2,139 | Gold Fields Ltd. ADR | 48,983 | ||||||||
549 | Phelps Dodge Corp. | 45,106 | ||||||||
790 | POSCO ADR* | 52,851 | ||||||||
4,728 | Quanex Corp. | 203,635 | ||||||||
42 | Rio Tinto PLC ADR | 8,808 | ||||||||
318 | RTI International Metals, Inc.* | 17,757 | ||||||||
105 | Steel Dynamics, Inc. | 6,903 | ||||||||
2,313 | Steel Technologies, Inc. | 44,965 | ||||||||
2,162 | United States Steel Corp. | 151,599 | ||||||||
837,088 | ||||||||||
Multiline Retail - 0.8% | ||||||||||
4,455 | Dillard’s Inc. - Class A | 141,892 | ||||||||
773 | Dollar General Corp. | 10,806 | ||||||||
152,698 | ||||||||||
Multi-Utilities & Unregulated Power - 1.6% | ||||||||||
17,916 | Dynegy, Inc. - Class A* | 98,001 | ||||||||
181 | MDU Resources Group, Inc. | 6,626 | ||||||||
1,309 | Oneok, Inc. | 44,558 | ||||||||
173 | SCANA Corp. | 6,202 | ||||||||
975 | Sempra Energy | 44,343 | ||||||||
1,174 | Suez SA ADR | 49,015 | ||||||||
1,883 | Vectren Corp. | 51,312 | ||||||||
300,057 | ||||||||||
Oil & Gas - 3.2% | ||||||||||
791 | Chevron Corp. | 49,089 | ||||||||
649 | EOG Resources, Inc. | 45,002 | ||||||||
5,374 | Frontier Oil Corp. | 173,256 | ||||||||
958 | Noble Energy, Inc. | 44,892 |
See notes to the financial statements.
10
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% (Continued) | ||||||||||
Oil & Gas - 3.2% (Continued) | ||||||||||
437 | Occidental Petroleum Corp. | $ | 44,814 | |||||||
761 | Overseas Shipholding Group | 45,013 | ||||||||
645 | PetroChina Company Ltd. ADR | 69,641 | ||||||||
549 | Petroleo Brasileiro SA ADR | 49,031 | ||||||||
978 | Pogo Producing Co. | 45,086 | ||||||||
1,047 | Swift Energy Co.* | 44,948 | ||||||||
610,772 | ||||||||||
Paper & Forest Products - 1.2% | ||||||||||
2,168 | Aracruz Celulose SA ADR | 113,646 | ||||||||
16,299 | Pope & Talbot, Inc. | 101,543 | ||||||||
215,189 | ||||||||||
Pharmaceuticals - 2.0% | ||||||||||
421 | Allergan, Inc. | 45,157 | ||||||||
935 | Barr Pharmaceuticals, Inc.* | 44,590 | ||||||||
1,797 | Bristol-Myers Squibb Co. | 46,470 | ||||||||
534 | Elan Corp PLC ADR* | 8,918 | ||||||||
290 | Johnson & Johnson | 17,377 | ||||||||
1,323 | Merck & Co., Inc. | 48,197 | ||||||||
2,220 | Pfizer, Inc. | 52,103 | ||||||||
1,079 | Shire Pharmaceuticals PLC ADR | 47,724 | ||||||||
1,675 | Teva Pharmaceutical Industries Ltd. ADR | 52,913 | ||||||||
363,449 | ||||||||||
Real Estate Investment Trusts - 0.2% | ||||||||||
888 | AMB Property Corp. | 44,888 | ||||||||
Retail - Apparel - 0.2% | ||||||||||
1,823 | Foot Locker, Inc. | 44,645 | ||||||||
Road & Rail - 2.2% | ||||||||||
567 | Burlington Northern Santa Fe Corp. | 44,935 | ||||||||
6,667 | Celadon Group, Inc.* | 146,941 | ||||||||
267 | JB Hunt Transport Services, Inc. | 6,651 | ||||||||
5,423 | PAM Transportation Services* | 156,670 | ||||||||
2,192 | Werner Enterprises, Inc. | 44,432 | ||||||||
399,629 | ||||||||||
Semiconductor & Semiconductor Equipment - 1.6% | ||||||||||
499 | Advanced Micro Devices, Inc.* | 12,186 | ||||||||
650 | Altera Corp.* | 11,407 | ||||||||
409 | Broadcom Corp.* | 12,290 | ||||||||
279 | KLA-Tencor Corp. | 11,598 | ||||||||
258 | Lam Research Corp.* | 12,028 | ||||||||
731 | Linear Technology Corp. | 24,481 | ||||||||
370 | Maxim Integrated Products, Inc. | 11,881 | ||||||||
714 | MEMC Electronic Materials, Inc.* | 26,775 | ||||||||
1,661 | Micrel, Inc.* | 16,627 | ||||||||
700 | National Semiconductor Corp. | 16,695 | ||||||||
465 | Supertex, Inc.* | 18,572 | ||||||||
1 | Taiwan Semiconductor Manufacturing Co. Ltd. ADR* | 7 | ||||||||
1,004 | Texas Instruments, Inc. | 30,411 | ||||||||
6,247 | Vishay Intertechnology, Inc.* | 98,265 | ||||||||
303,223 | ||||||||||
Software - 1.0% | ||||||||||
320 | Autodesk, Inc.* | 11,027 | ||||||||
471 | Fair Isaac Corp. | 17,102 | ||||||||
754 | Intuit, Inc.* | 45,534 | ||||||||
464 | Kronos, Inc.* | 16,801 | ||||||||
809 | Quality Systems, Inc. | 29,787 | ||||||||
1,122 | SAP AG ADR | 58,928 | ||||||||
1,431 | Secure Computing Corp.* | 12,307 | ||||||||
191,486 | ||||||||||
Specialty Retail - 2.6% | ||||||||||
496 | Dress Barn, Inc.* | 12,574 | ||||||||
3,766 | Finish Line | 44,552 | ||||||||
3,374 | Guitar Center, Inc.* | 150,042 | ||||||||
32,878 | Hancock Fabrics Inc. | 109,812 | ||||||||
304 | The Home Depot, Inc.* | 10,880 | ||||||||
6,603 | Jo-Ann Stores, Inc.* | 96,734 | ||||||||
182 | Lowe’s COS. Inc. | 11,042 | ||||||||
140 | The Sherwin-Williams Co. | 6,647 | ||||||||
1,365 | Tiffany & Co. | 45,072 | ||||||||
487,355 | ||||||||||
Telecommunication Services - 1.0% | ||||||||||
1,852 | AT&T, Inc. | 51,652 | ||||||||
1,153 | Philippine Long Distance Telephone ADR | 39,802 | ||||||||
3,413 | Telecom Argentina S A ADR* | 39,591 |
See notes to the financial statements.
11
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
June 30, 2006 (Unaudited)
Shares | Value | |||||||||
COMMON STOCKS - 67.7% (Continued) | ||||||||||
Telecommunication Services - 1.0% (Continued) | ||||||||||
439 | Telefonos de Mexico SA de CV ADR | $ | 9,144 | |||||||
1,401 | Verizon Communications, Inc. | 46,920 | ||||||||
187,109 | ||||||||||
Textiles, Apparel & Luxury Goods - 0.0% | ||||||||||
81 | Nike, Inc. - Class B | 6,561 | ||||||||
Thrifts & Mortgage Finance - 0.7% | ||||||||||
353 | Fannie Mae | 16,979 | ||||||||
1,258 | First Niagara Financial Group, Inc.* | 17,637 | ||||||||
291 | Harbor Florida Bancshares, Inc. | 10,808 | ||||||||
731 | Radian Group, Inc. | 45,161 | ||||||||
1,025 | Washington Mutual, Inc. | 46,720 | ||||||||
137,305 | ||||||||||
Tobacco - 0.9% | ||||||||||
23,621 | Alliance One Intl, Inc. | 104,878 | ||||||||
640 | Altria Group, Inc. | 46,995 | ||||||||
57 | Reynolds American, Inc. | 6,572 | ||||||||
158,445 | ||||||||||
Water Utilities - 0.3% | ||||||||||
2,246 | Companhia de Saneamento Basico do Estado de Sao Paulo ADR | 52,893 | ||||||||
Wireless Telecommunication Services - 0.7% | ||||||||||
1,421 | America Movil SA de CV ADR, Series L | 47,263 | ||||||||
517 | SK Telecom Co. Ltd. ADR | 12,108 | ||||||||
2,589 | Tim Participacoes SA ADR | 71,327 | ||||||||
130,698 | ||||||||||
TOTAL COMMON STOCKS (Cost $12,061,210) | $ | 12,557,204 | ||||||||
INVESTMENT COMPANIES - 14.6% | ||||||||||
9,959 | iShares MSCI Emerging Markets Index Fund | $ | 935,150 | |||||||
12,519 | iShares S&P Europe 350 Index Fund | 1,143,235 | ||||||||
4,671 | iShares S&P Latin American 40 Index Fund | 638,619 | ||||||||
TOTAL INVESTMENT COMPANIES (Cost $2,614,541) | $ | 2,717,004 | ||||||||
Face | ||||||||||
Amount | ||||||||||
SHORT-TERM INVESTMENTS - 41.9% | ||||||||||
U.S. GOVERNMENT AGENCY OBLIGATION - 21.6% | ||||||||||
$ | 4,000,000 | Federal Home Loan Bank Discount Note, 4.80%, 07/03/2006 (Cost $3,998,989) | $ | 3,998,989 | ||||||
Shares | ||||||||||
MONEY MARKET FUND - 20.3% | ||||||||||
3,773,469 | Federated Prime Obligations Fund - Class I | $ | 3,773,469 | |||||||
TOTAL MONEY MARKET FUND (Cost $3,773,469) | $ | 3,773,469 | ||||||||
TOTAL SHORT TERM INVESTMENTS (Cost $7,772,458) | $ | 7,772,458 | ||||||||
TOTAL INVESTMENTS - 124.2% (Cost $22,448,210) | $ | 23,046,666 | ||||||||
Liabilities in Excess of Other Assets - (24.2)% | (4,494,828 | ) | ||||||||
TOTAL NET ASSETS - 100.0% | $ | 18,551,838 | ||||||||
Percentages are calculated as a percent of net assets.
ADR American Depository Receipt
* | Non-income producing security. |
See notes to the financial statements.
12
Dynamic VP HY Bond Fund
Schedule of Investments
June 30, 2006 (Unaudited)
Face | ||||||||||
Amount | Value | |||||||||
CORPORATE BOND - 86.4% | ||||||||||
Grantor Trust - 40.7% | ||||||||||
$ | 4,000,000 | Dow Jones CDX High Yield Note, 2006-T1, 8.625%, 06/29/2011 (Cost $3,962,500; Acquired 06/01/2006) (1) | $ | 3,932,520 | ||||||
4,500,000 | TRAINS High Yield Note, 2006-T1, 7.548%, 05/01/2016 (Cost $4,426,875; Acquired 06/30/2006) (1)(2) | 4,417,520 | ||||||||
TOTAL CORPORATE BOND (Cost $8,389,375) | $ | 8,350,040 | ||||||||
MONEY MARKET FUND - 48.2% | ||||||||||
4,656,782 | Federated Prime Obligations Fund - Class I (Cost $4,656,782) | $ | 4,656,782 | |||||||
TOTAL MONEY MARKET FUND (Cost $4,656,782) | $ | 4,656,782 | ||||||||
TOTAL INVESTMENTS - 134.6% (Cost $13,046,157) | $ | 13,006,822 | ||||||||
Liabilities in Excess of Other Assets - (34.6)% | (3,341,067 | ) | ||||||||
TOTAL NET ASSETS - 100.0% | $ | 9,665,755 | ||||||||
Percentages are calculated as a percent of net assets.
(1) | 144A securities are those that are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities are generally issued to qualified institutional buyers (“QIBs”), such as the Fund. Any resale of these securities must generally be effected through a sale that is exempt from registration (e.g. sale to another QIB), or the security must be registered for public sale. At June 30, 2006, the market value of 144A securities was $8,350,000 or 86.4% of net assets. |
(2) | Variable Rate Security |
See notes to the financial statements.
13
Statement of Assets and Liabilities (Unaudited)
June 30, 2006
Evolution VP Managed | Evolution VP All-Cap | Dynamic VP HY | |||||||||||
Bond Fund | Equity Fund | Bond Fund | |||||||||||
Assets: | |||||||||||||
Investments, at market value (Note 2) | $ | 8,808,185 | $ | 23,046,666 | $ | 13,006,822 | |||||||
Cash | 7,874 | — | — | ||||||||||
Receivable for Investments Sold | — | 277,872 | — | ||||||||||
Receivable for Fund Shares Sold | — | — | 1,153,936 | ||||||||||
Receivable from Investment Advisor | 3,362 | 1,832 | 2,534 | ||||||||||
Deposit at Broker | 402,265 | — | — | ||||||||||
Dividends and interest receivable | 6,900 | 57,671 | 33,065 | ||||||||||
Other assets | 1,384 | 1,919 | 3,970 | ||||||||||
Total Assets | 9,229,970 | 23,385,960 | 14,200,327 | ||||||||||
Liabilities: | |||||||||||||
Payable for Investments Purchased | — | 4,780,112 | 4,426,875 | ||||||||||
Payable for Fund Shares Redeemed | 351 | 705 | 123 | ||||||||||
Payable to Custodian | — | 1,970 | 23,915 | ||||||||||
Accrued expenses and other liabilities | 29,274 | 51,335 | 83,659 | ||||||||||
Total Liabilities | 29,625 | 4,834,122 | 4,534,572 | ||||||||||
Net Assets | $ | 9,200,345 | $ | 18,551,838 | $ | 9,665,755 | |||||||
Net Assets Consist Of: | |||||||||||||
Capital stock | $ | 9,355,981 | $ | 17,587,255 | $ | 10,318,092 | |||||||
Accumulated undistributed net investment income (loss) | 91,373 | 33,676 | 1,040,517 | ||||||||||
Accumulated undistributed net realized gain (loss) on investments | (247,157 | ) | 332,451 | (1,653,519 | ) | ||||||||
Net unrealized appreciation (depreciation) on investments | 148 | 598,456 | (39,335 | ) | |||||||||
Total Net Assets | $ | 9,200,345 | $ | 18,551,838 | $ | 9,665,755 | |||||||
Calculation of Net Asset Value Per Share: | |||||||||||||
Net assets | $ | 9,200,345 | $ | 18,551,838 | $ | 9,665,755 | |||||||
Shares outstanding (unlimited shares of beneficial interest authorized, no par value) | 472,746 | 755,685 | 488,984 | ||||||||||
Net Asset Value, Redemption Price and Offering Price Per Share | $ | 19.46 | $ | 24.55 | $ | 19.77 | |||||||
�� | |||||||||||||
Cost of Investments | $ | 8,808,037 | $ | 22,448,210 | $ | 13,046,157 | |||||||
See notes to the financial statements.
14
Statement of Operations (Unaudited)
For the Six Months Ended June 30, 2006
Evolution VP Managed | Evolution VP All-Cap | |||||||||
Bond Fund | Equity Fund | |||||||||
Investment income: | ||||||||||
Dividend income (net of foreign withholding tax of $0 and $8,552) | $ | 63,719 | $ | 114,689 | ||||||
Interest income | 62,899 | 52,110 | ||||||||
Total investment income | 126,618 | 166,799 | ||||||||
Expenses: | ||||||||||
Investment advisory fees | 32,974 | 68,718 | ||||||||
Distribution expenses | 8,243 | 17,179 | ||||||||
Administration fees | 5,464 | 7,614 | ||||||||
Shareholder servicing fees | 6,595 | 13,743 | ||||||||
Fund accounting fees | 5,210 | 7,604 | ||||||||
Custody fees | 1,753 | 4,603 | ||||||||
Professional fees | 10,581 | 11,513 | ||||||||
Reports to shareholders | 3,773 | 5,938 | ||||||||
Registration fees | 934 | 1,621 | ||||||||
Directors’ fees and expenses | 354 | 504 | ||||||||
Other | 761 | 4,435 | ||||||||
Total expenses before reimbursement | 76,642 | 143,472 | ||||||||
Less: Reimbursement of expenses by Advisor | (10,694 | ) | (6,036 | ) | ||||||
Total expenses | 65,948 | 137,436 | ||||||||
Net investment income (loss) | 60,670 | 29,363 | ||||||||
Realized and unrealized gain (loss) on investments: | ||||||||||
Net realized gain (loss) on: | ||||||||||
Investments | (150,616 | ) | 181,013 | |||||||
Short positions | — | 995 | ||||||||
Swaps | 80,968 | — | ||||||||
(69,648 | ) | 182,008 | ||||||||
Change in unrealized appreciation (depreciation) on: | ||||||||||
Investments | (20,112 | ) | 167,633 | |||||||
Net realized and unrealized gain (loss) on investments | (89,760 | ) | 349,641 | |||||||
Net increase (decrease) in net assets resulting from operations | $ | (29,090 | ) | $ | 379,004 | |||||
See notes to the financial statements.
15
Statement of Operations (Unaudited)
For the Six Months Ended June 30, 2006
Dynamic VP HY | ||||||
Bond Fund | ||||||
Investment income: | ||||||
Interest income | $ | 977,458 | ||||
Total investment income | 977,458 | |||||
Expenses: | ||||||
Investment advisory fees | 103,028 | |||||
Distribution expenses | 34,343 | |||||
Administration fees | 7,863 | |||||
Shareholder servicing fees | 48,080 | |||||
Fund accounting fees | 6,611 | |||||
Custody fees | 9,523 | |||||
Professional fees | 13,168 | |||||
Reports to shareholders | 8,627 | |||||
Registration fees | 2,132 | |||||
Directors’ fees and expenses | 635 | |||||
Other | 10,071 | |||||
Total expenses before reimbursement | 244,081 | |||||
Less: Reimbursement of expenses by Advisor | (3,681 | ) | ||||
Total expenses | 240,400 | |||||
Net investment income (loss) | 737,058 | |||||
Realized and unrealized gain (loss) on investments: | ||||||
Net realized gain (loss) on: | ||||||
Investments | (838,325 | ) | ||||
(838,325 | ) | |||||
Change in unrealized appreciation (depreciation) on: | ||||||
Investments | (282,705 | ) | ||||
Net realized and unrealized gain (loss) on investments | (1,121,030 | ) | ||||
Net increase (decrease) in net assets resulting from operations | $ | (383,972 | ) | |||
See notes to the financial statements.
16
Statement of Changes in Net Assets
June 30, 2006
Evolution VP Managed | Evolution VP All-Cap | ||||||||||||||||
Bond Fund | Equity Fund | ||||||||||||||||
Six Months Ended | Year Ended | ||||||||||||||||
June 30, 2006 | Year Ended | Six Months Ended | December 31, 2005 | ||||||||||||||
(Unaudited) | December 31, 2005 | June 30, 2006 | (Unaudited) | ||||||||||||||
Operations: | |||||||||||||||||
Net investment income (loss) | $ | 60,670 | $ | 75,851 | $ | 29,363 | $ | (4,934 | ) | ||||||||
Net realized gain (loss) on investments | (69,648 | ) | (177,943 | ) | 182,008 | 301 | |||||||||||
Capital gain distributions from regulated investment companies | — | 434 | — | — | |||||||||||||
Change in unrealized appreciation (depreciation) on investments | (20,112 | ) | 13,903 | 167,633 | 55,802 | ||||||||||||
Net increase (decrease) in net assets resulting from operations | (29,090 | ) | (87,755 | ) | 379,004 | 51,169 | |||||||||||
Distributions to shareholders: | |||||||||||||||||
Net investment income | — | (52,933 | ) | ||||||||||||||
Net realized gains | — | (6,352 | ) | ||||||||||||||
Total distributions | — | (59,285 | ) | ||||||||||||||
Capital share transactions: | |||||||||||||||||
Share sold | 5,487,887 | 3,759,605 | 11,205,769 | 1,233,433 | |||||||||||||
Proceeds from shares issued to holders in reinvestment of dividends | — | 59,285 | — | ||||||||||||||
Shares redeemed | (455,017 | ) | (228,836 | ) | (1,013,403 | ) | (290,679 | ) | |||||||||
Net increase (decrease) in net assets resulting from beneficial interest transactions | 5,032,870 | 3,590,054 | 10,192,366 | 942,754 | |||||||||||||
Total increase (decrease) in net assets | 5,003,780 | 3,443,014 | 10,571,370 | 993,923 | |||||||||||||
Net assets: | |||||||||||||||||
Beginning of period | 4,196,565 | 753,551 | 7,980,468 | 50,000 | |||||||||||||
End of period | $ | 9,200,345 | $ | 4,196,565 | $ | 18,551,838 | $ | 7,980,468 | |||||||||
Undistributed net investment income (loss), end of period | $ | 91,373 | $ | 30,703 | $ | 33,676 | $ | 4,313 | |||||||||
See notes to the financial statements.
17
Statement of Changes in Net Assets
June 30, 2006
Dynamic VP HY | |||||||||
Bond Fund | |||||||||
Six Months Ended | |||||||||
June 30, 2006 | February 1, 20051 | ||||||||
(Unaudited) | to December 31, 2005 | ||||||||
Operations: | |||||||||
Net investment income (loss) | $ | 737,058 | $ | 730,025 | |||||
Net realized gain (loss) on investments | (838,325 | ) | (815,194 | ) | |||||
Change in unrealized appreciation (depreciation) on investments | (282,705 | ) | 243,370 | ||||||
Net increase (decrease) in net assets resulting from operations | (383,972 | ) | 158,201 | ||||||
Distributions to shareholders: | |||||||||
Net investment income | — | (426,565 | ) | ||||||
Total distributions | — | (426,565 | ) | ||||||
Capital share transactions: | |||||||||
Shares sold | 74,380,758 | 111,694,991 | |||||||
Proceeds from shares issued to holders in reinvestment of dividends | — | 426,565 | |||||||
Share redeemed | (99,475,406 | ) | (76,708,817 | ) | |||||
Net increase (decrease) in net assets resulting from beneficial interest transactions | (25,094,648 | ) | 35,412,739 | ||||||
Total increase (decrease) in net assets | (25,478,620 | ) | 35,144,375 | ||||||
Net assets: | |||||||||
Beginning of period | 35,144,375 | — | |||||||
End of period | $ | 9,665,755 | $ | 35,144,375 | |||||
Undistributed net investment income (loss), end of period | $ | 1,040,517 | $ | 303,460 | |||||
1 Commencement of operations.
See notes to the financial statements.
18
Financial Highlights
Evolution VP Managed Bond Fund | ||||||||||||||
Six Months Ended | ||||||||||||||
June 30, 2006 | Year Ended | July 1, 20041 | ||||||||||||
(Unaudited) | December 31, 2005 | to December 31, 2004 | ||||||||||||
Per share data: | ||||||||||||||
Net asset value, beginning of period | $ | 19.61 | $ | 20.76 | $ | 20.00 | ||||||||
Income (loss) from investment operations: | ||||||||||||||
Net investment income (loss)4 | 0.18 | 0.67 | 8 | 0.32 | ||||||||||
Net realized and unrealized gain (loss) on investments6 | (0.33 | ) | (1.54 | ) | 0.44 | |||||||||
Total from investment operations | (0.15 | ) | (0.87 | ) | 0.76 | |||||||||
Less distributions: | ||||||||||||||
Dividends from net investment income | — | (0.25 | ) | — | ||||||||||
Distributions from realized gains | — | (0.03 | ) | — | ||||||||||
Total distributions | — | (0.28 | ) | — | ||||||||||
Net asset value, end of period | $ | 19.46 | $ | 19.61 | $ | 20.76 | ||||||||
Total return7 | (0.76)% | 2 | (4.19)% | 3.80% | 2 | |||||||||
Supplemental data and ratios: | ||||||||||||||
Net assets, end of period | $ | 9,666,567 | $ | 4,196,565 | $ | 753,551 | ||||||||
Ratio of net expenses to average net assets excluding short dividends: | ||||||||||||||
Before expense waiver/reimbursement | 2.32% | 3 | 4.69% | 23.17% | 3 | |||||||||
After expense waiver/reimbursement | 2.00% | 3 | 2.00% | 2.00% | 3 | |||||||||
Ratio of net expenses to average net assets including short dividends: | ||||||||||||||
Before expense waiver/reimbursement | 4.93% | |||||||||||||
After expense waiver/reimbursement | 2.24% | |||||||||||||
Ratio of net investment income (loss) to average net assets including short dividends: | ||||||||||||||
Before expense waiver/reimbursement | 1.52% | 3 | 0.68% | (17.98)% | 3 | |||||||||
After expense waiver/reimbursement | 1.84% | 3 | 3.37% | 9 | 3.19% | 3 | ||||||||
Portfolio turnover rate5 | 596% | 978% | 7% |
1 | Commencement of operations. |
2 | Not annualized. |
3 | Annualized. |
4 | Net investment income (loss) per share represents net investment income (loss) divided by the daily average shares of beneficial interest outstanding throughout each period. |
5 | Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. |
6 | The amounts shown may not correlate with aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. |
7 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes. |
8 | Net investment income (loss) before dividends on short positions for the year ended December 31, 2005 was $0.72 for the Evolution VP Managed Bond Fund. |
9 | The net investment income (loss) ratio included dividends on short positions. The ratio excluding dividends on short positions for the year ended December 31, 2005 was 3.60% for the Evolution VP Managed Bond Fund. |
See notes to the financial statements.
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Financial Highlights
Evolution VP All-Cap Equity Fund | ||||||||||||||
Six Months Ended | ||||||||||||||
June 30, 2006 | Year Ended | July 1, 20041 | ||||||||||||
(Unaudited) | December 31, 2005 | to December 31, 2004 | ||||||||||||
Per share data: | ||||||||||||||
Net asset value, beginning of period | $ | 23.12 | $ | 21.06 | $ | 20.00 | ||||||||
Income (loss) from investment operations: | ||||||||||||||
Net investment income (loss)4 | 0.05 | 0.03 | (0.15 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments6 | 1.38 | 2.03 | 1.21 | |||||||||||
Total from investment operations | 1.43 | 2.06 | 1.06 | |||||||||||
Less distributions: | ||||||||||||||
Dividends from net investment income | — | — | — | |||||||||||
Distributions from realized gains | — | — | — | |||||||||||
Total distributions | — | — | — | |||||||||||
Net asset value, end of period | $ | 24.55 | $ | 23.12 | $ | 21.06 | ||||||||
Total return7 | 6.19% | 2 | 9.78% | 5.30% | 2 | |||||||||
Supplemental data and ratios: | ||||||||||||||
Net assets, end of period | $ | 18,551,838 | $ | 7,980,468 | $ | 1,043,923 | ||||||||
Ratio of net expenses to average net assets: | ||||||||||||||
Before expense waiver/reimbursement | 2.09% | 3 | 3.84% | 20.13% | 3 | |||||||||
After expense waiver/reimbursement | 2.00% | 3 | 2.00% | 2.00% | 3 | |||||||||
Ratio of net investment income (loss) to average net assets: | ||||||||||||||
Before expense waiver/reimbursement | 0.34% | 3 | (1.72% | ) | (19.66% | )3 | ||||||||
After expense waiver/reimbursement | 0.43% | 3 | 0.12% | (1.53% | )3 | |||||||||
Portfolio turnover rate5 | 562% | 1001% | 2% |
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 | Net investment income (loss) per share represents net investment income (loss) divided by the daily average shares of beneficial interest outstanding throughout each period. |
5 | Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. |
6 | The amounts shown may not correlate with aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. |
7 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes. |
See notes to the financial statements.
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Financial Highlights
Dynamic VP HY Bond Fund | ||||||||||
Six Months Ended | ||||||||||
to June 30, 2006 | February 1, 20051 | |||||||||
(Unaudited) | to December 31, 2005 | |||||||||
Per share data: | ||||||||||
Net asset value, beginning of period | $ | 20.05 | $ | 20.00 | ||||||
Income (loss) from investment operations: | ||||||||||
Net investment income (loss)4 | 0.55 | 0.90 | ||||||||
Net realized and unrealized gain (loss) on investments6 | (0.83 | ) | (0.60 | ) | ||||||
Total from investment operations | (0.28 | ) | 0.30 | |||||||
Less distributions: | ||||||||||
Dividends from net investment income | — | (0.25 | ) | |||||||
Total distributions | — | (0.25 | ) | |||||||
Net asset value, end of period | $ | 19.77 | $ | 20.05 | ||||||
Total return7 | (1.40% | )2 | 1.50% | |||||||
Supplemental data and ratios: | ||||||||||
Net assets, end of period | $ | 9,665,755 | $ | 35,144,375 | ||||||
Ratio of net expenses to average net assets: | ||||||||||
Before expense waiver/reimbursement | 1.78% | 3 | 1.94% | |||||||
After expense waiver/reimbursement | 1.75% | 3 | 1.74% | |||||||
Ratio of net investment income (loss) to average net assets: | ||||||||||
Before expense waiver/reimbursement | 5.34% | 3 | 4.78% | |||||||
After expense waiver/reimbursement | 5.37% | 3 | 4.98% | |||||||
Portfolio turnover rate5 | 346% | 654% |
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 | Net investment income (loss) per share represents net investment income (loss) divided by the daily average shares of beneficial interest outstanding throughout each period. |
5 | Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. |
6 | The amounts shown may not correlate with aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. |
7 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes. |
See notes to the financial statements.
21
Direxion Insurance Trust
Notes to the Financial Statements
June 30, 2006 (Unaudited)
1. ORGANIZATION
Direxion Insurance Trust (the “Trust”) was organized as a Massachusetts business trust on December 28, 1999 and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company issuing its shares in series, each series representing a distinct portfolio with its own investment objective and policies. The series presently in operation are the Evolution VP Managed Bond Fund, the Evolution VP All-Cap Equity Fund, and the Dynamic VP HY Bond Fund (each a “Fund” and collectively, the “Funds”). Each Fund is a “non-diversified” series of the Trust pursuant to the 1940 Act. The Trust offers Class A shares to unaffiliated life insurance separate accounts (registered as unit investment trusts under the 1940 Act) to fund the benefits under variable annuity and variable life contracts. The Evolution VP Managed Bond Fund and Evolution VP All-Cap Equity Fund commenced operations on July 1, 2004. The Dynamic VP HY Bond Fund commenced operations on February 1, 2005.
The objective of the Evolution VP Managed Bond Fund is to seek the highest appreciation on an annual basis consistent with a high tolerance for risk by investing at least 80% of its assets (plus any borrowing for investment purposes) in fixed-income securities indirectly through securities that invest in or are a derivative of fixed-income securities, including exchange traded funds (ETFs) and other investment companies (fixed-income securities). The objective of the Evolution VP All-Cap Equity Fund is to seek the highest appreciation on an annual basis consistent with a high tolerance for risk by investing at least 80% of its assets (plus any borrowing for investment purposes) in equity securities either directly through individual stocks and American Depository Receipts (ADRs) or indirectly through securities that invest in or are a derivative of equity securities. The objective of the Dynamic VP HY Bond Fund is to seek the maximum total return (income plus capital appreciation) by investing primarily in debt instruments, including convertible securities, and derivatives of such instruments, with an emphasis on lower-quality debt instruments.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with U.S. generally accepted accounting principles.
a) Investment Valuation – Equity securities, OTC securities, closed-end investment companies, options, and futures and options on futures are valued at their last sales price, or if not available, the mean of the last bid and asked price. Price information on listed stocks is obtained from the exchange where the security is primarily traded. If no sale is reported at that time, the mean of the last bid and asked price is used. Securities traded principally on the NASDAQ Stock Market are valued at the NASDAQ Official Closing Price (“NOCP”) provided by NASDAQ each business day. Securities for which quotations are not readily available, the Funds’ pricing service does not provide valuation for such securities, the Funds’ pricing service provides a valuation that in the judgment of Rafferty Asset Managements, LLC (the “Adviser”) does not represent fair value, or the Funds or Adviser believes the market price is stale will be valued at fair value under the supervision of the Board of Trustees. Instruments with a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Other debt securities are valued by using the closing bid and asked prices provided by the Funds’ pricing service, or, if such prices are unavailable, by a pricing matrix method.
b) Repurchase Agreements – Each Fund may enter into repurchase agreements with institutions that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. In connection with transactions in repurchase agreements, it is the Trust’s policy that the Fund receive, as collateral, cash and/or securities (primarily U.S. government securities) whose market
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value, including accrued interest, at all times will be at least equal to 100% of the amount invested by the Fund in each repurchase agreement. If the seller defaults, and the value of the collateral declines, realization of the collateral by the Fund may be delayed or limited.
c) Short Positions – Each Fund may engage in short sale transactions. For financial statement purposes, an amount equal to the settlement amount is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the short position. Subsequent fluctuations in the market prices of short positions may require purchasing the securities at prices which may differ from the market value reflected on the Statement of Assets and Liabilities. The Fund is liable to the buyer for any dividends payable on securities while those securities are in a short position. As collateral for its short positions, the Fund is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities equal to the market value of the securities sold short. This collateral is required to be adjusted daily.
d) Concentration of Risk – Dynamic VP HY Bond Fund invests in the Dow Jones CDX High Yield Note (“CDX”) and TRAINS (Targeted Return Securities Trustsm) High Yield Notes (“TRAINS”), which represent trust of pooled investments. The TRAINS invest in a portfolio of high-yield debt securities, rated below investment grade and therefore have greater credit and liquidity risk than investment grade obligations. The high yield debt securities are generally unsecured and may be subordinated to other obligations of the issuer thereof. Upon a downgrade of an underlying securities’ rating to a specified level, the TRAINS may distribute the respective security on a pro-rata basis to the respective holders. The TRAINS may also invest in one or more interest rate swap or other swap transactions.
The CDX invests in a portfolio of credit default swap agreements and a repurchase agreement. Credit default swap agreements involve commitments to pay/receive a fixed interest rate in exchange for receipt/payment of the referenced obligation if a credit event affecting the referenced obligation occurs. The CDX is providing credit protection to the counterparties of the respective credit default swap agreements in exchange for a fixed interest rate payment, therefore there is credit risk with respect to a referenced entity, the Fund’s principal amount in the CDX will be reduced by its pro-rata interest in the respective credit default swap agreement. A credit event may include a failure to pay interest or principal, bankruptcy, or restructuring. Any recoverable amounts of the liquidation of the referenced obligation will be allocated pro rata to the holders of the CDX.
e) Security Transactions – Investment transactions are recorded on trade date. The Funds determine the gain or loss realized from investment transactions by comparing the identified cost, which is the same basis used for federal income tax purposes, with the net sales proceeds.
f) Federal Income Taxes – Each Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of income and capital gains to its shareholders sufficient to relieve it from all or substantially all federal income taxes.
Net investment income and realized gains and losses for federal income tax purposes may differ from that reported on the financial statements because of permanent book-to-tax differences. U.S. generally accepted accounting principles require that permanent differences between financial reporting and tax reporting be reclassified between various components of net assets. These differences are primarily due to net operating losses, post-October loss deferrals, net operating losses, and securities litigation, trade reclassification and non-deductible excise taxes.
g) Income and Expenses – Dividend income is recorded on the ex-dividend date. Interest income, including amortization of premium and discount, is recognized on an accrual basis. The Funds are charged for those expenses that are directly attributable to each Fund, such as advisory fees and registration costs. Expenses that are not directly attributable to a Fund are generally allocated among the Funds comprising the Trust in proportion to their respective average net assets.
h) Distributions to Shareholders – Each Fund generally pays dividends from substantially all of its net investment income and distributes net realized capital gains, if any, at least annual. Income and capital gain distributions are
23
determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. The Funds also may utilize earnings and profits distributed to shareholders on redemption of shares as part of the dividends paid deduction. Distributions to shareholders are recorded on the ex-dividend date.
During the periods ended June 30, 2006 and January 1, 2006, the tax character of distributions of the Funds were as follows:
Evolution VP Managed Bond Fund | Dynamic VP HY Bond Fund | |||||||||||||||
Period Ended | Year Ended | Period Ended | Period Ended | |||||||||||||
June 30, 2006 | December 31, 2005 | June 30, 2006 | December 31, 20051 | |||||||||||||
Distributions paid from: | ||||||||||||||||
Ordinary Income | $ | — | $ | 53,162 | $ | — | $ | 426,565 | ||||||||
Long-term capital gain | — | 6,123 | — | — | ||||||||||||
Total distributions paid | $ | — | $ | 59,285 | $ | — | $ | 426,565 | ||||||||
1 | Commenced operations on February 1, 2005. |
There were no distributions from the Evolution VP All-Cap Equity Fund for the periods ended June 30, 2006 and December 31, 2005.
As of December 31, 2005, the Evolution VP Managed Bond Fund and the Dynamic VP HY Bond Fund had capital loss carryforwards of $143,203 and $756,247, respectively, which expire in 2013. These amounts may be used to offset future capital gains.
The Evolution VP Managed Bond Fund had post October losses of $4,435
As of December 31, 2005, the components of distributable earnings on a tax basis were as follows:
Evolution VP Managed | Evolution VP All-Cap | Dynamic VP HY | ||||||||||
Bond Fund | Equity Fund | Bond Fund | ||||||||||
Cost basis of investments for federal income tax purposes | $ | 4,059,968 | $ | 7,630,524 | $ | 36,000,940 | ||||||
Unrealized Appreciation | 22,726 | 505,614 | 252,841 | |||||||||
Unrealized Depreciation | (28,898 | ) | (213,689 | ) | (68,418 | ) | ||||||
Net unrealized appreciation/depreciation | (6,172 | ) | 273,925 | 184,423 | ||||||||
Undistributed ordinary income/(loss) | 30,703 | 362,647 | 303,460 | |||||||||
Undistributed long-term gain/(loss) | — | 187 | — | |||||||||
Distributable earnings | 30,703 | 362,824 | 303,460 | |||||||||
Other Accumulated gain/(loss) | (151,077 | ) | (51,180 | ) | (756,247 | ) | ||||||
Total Accumulated gain/(loss) | $ | (125,546 | ) | $ | 585,579 | $ | (268,364 | ) | ||||
i) Use of Estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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3. SHARES OF BENEFICIAL INTERESTS TRANSACTIONS
The beneficial interest transactions for shares during the periods ended June 30, 2006 and December 31, 2005 for the Funds were as follows:
Evolution VP Managed Bond Fund | Evolution VP All-Cap Equity Fund | |||||||||||||||
Period Ended | Year Ended | Period Ended | Year Ended | |||||||||||||
June 30, 2006 | December 31, 2005 | June 30, 2006 | December 31, 2005 | |||||||||||||
Shares sold | 282,135 | 185,956 | 450,354 | 314,849 | ||||||||||||
Shares issued to holders in reinvestment of dividends | — | 3,022 | — | — | ||||||||||||
Shares redeemed | (23,345 | ) | (11,314 | ) | (39,835 | ) | (19,261 | ) | ||||||||
Total net increase from shares of beneficial interest transactions | 258,790 | 177,664 | 410,519 | 295,588 | ||||||||||||
Dynamic VP HY Bond Fund | ||||||||
Period Ended | Period Ended | |||||||
June 30, 2006 | December 31, 20051 | |||||||
Shares sold | 3,710,123 | 5,572,131 | ||||||
Shares issued to holders in reinvestment of dividends | — | 21,339 | ||||||
Shares redeemed | (4,973,714 | ) | (3,840,895 | ) | ||||
Total net increase from shares of beneficial interest transactions | (1,263,591 | ) | 1,752,575 | |||||
1 Commenced operations on February 1, 2005.
4. INVESTMENT TRANSACTIONS
During the period ended June 30, 2006, the aggregate purchases and sales of investments (excluding short-term investments) for each Funds were as follows:
Evolution VP Managed | Evolution VP All-Cap | Dynamic VP HY | ||||||||||
Bond Fund | Equity Fund | Bond Fund | ||||||||||
Purchases | $ | 23,009,495 | $ | 79,192,487 | $ | 83,815,853 | ||||||
Sales | 21,696,216 | 69,634,771 | 105,458,867 |
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with the Advisor. The Advisor receives a fee, computed daily and payable monthly, at the annual rates presented below as applied to each Fund’s average daily net assets. In addition, the Advisor has entered into sub-advisory agreements relating to the Evolution VP Managed Bond Fund and the Evolution VP All-Cap Equity Fund with Flexible Plan Investments, Ltd., and for Dynamic VP HY Bond Fund with Transamerica Investment Services, Inc., whereby the sub-advisors will direct investment activities of the Funds. The Advisor pays, out of the management fees it receives from the Funds, a fee for these sub-advised services. For the period ended June 30, 2006, the Advisor agreed to waive all operating expenses (excluding dividends on short positions), in excess of the annual cap on expenses presented below as applied to each Fund’s average daily net assets. The Advisor may recover from the Funds the expenses paid in excess of the annual cap on expenses for the
25
three previous years, as long as the recovery does not cause the Fund to exceed such annual cap on expenses. For the period ended June 30, 2006, the Advisor waived the following expenses:
Evolution VP Managed | Evolution VP All-Cap | Dynamic VP HY | ||||||||||
Bond Fund | Equity Fund | Bond Fund | ||||||||||
Annual Advisory rate | 1.00% | 1.00% | 0.75% | |||||||||
Annual cap on expenses | 2.00% | 2.00% | 1.75% | |||||||||
Expenses paid in excess of annual cap on expenses — 2006 | $ | 10,694 | $ | 6,036 | $ | 3,681 | ||||||
Advisor expense waiver recovery — 2006 | $ | — | $ | — | $ | — |
Remaining expenses subject to potential recovery expiring in:
Evolution VP Managed | Evolution VP All-Cap | Dynamic VP HY | ||||||||||
Bond Fund | Equity Fund | Bond Fund | ||||||||||
2007 | $ | 53,095 | $ | 58.373 | N/A | |||||||
2008 | 60,627 | 66,665 | $ | 28,879 | ||||||||
2009 | 10,694 | 6,036 | 3,681 |
Shares of the Evolution VP Managed Bond and the Evolution VP All-Cap Equity Funds are subject to an annual Rule 12b-1 fee of up to 0.25% of Fund’s average daily net assets. The shares of the Dynamic VP HY Bond Fund are subject to an annual Rule 12b-1 fee of up to 0.60% of Fund’s average daily net assets. The Rule 12b-1 fees are to pay the insurance company of the plan sponsor for its services for servicing shareholder accounts. Because the fees are paid out of each Fund’s net assets on an ongoing basis, the cost of an investment in a Fund will increase over time.
The Advisor paid directly all offering costs and organizational expenses associated with the registration and seeding of each Fund.
Rafferty Capital Markets, LLC (the “Distributor”) serves as principal underwriter of the Funds and acts as the Funds’ distributor in a continuous public offering of the Funds’ shares. The Distributor is an affiliate of the Advisor. There were no 12b-1 fees retained by the Distributor for the period ended June 30, 2006.
In the ordinary course of business, the Funds enter into contracts that contain a variety of indemnification provisions pursuant to which the Funds agree to indemnify third parties upon occurrence of specified events. Each Fund’s maximum exposure relating to these indemnification agreements is unknown. However, the Funds have not had prior claims or losses in connection with these provisions and believe the risk of loss is remote.
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Direxion Insurance Trust
Investment Advisory Agreement Approvals
Provided below is a summary of certain of the factors the Board considered at the May 12, 2006 meeting in approving the continuance of the Advisory Agreement between Rafferty Asset Management, LLC (“Rafferty”) and the Direxion Insurance Trust (the “Trust”) for the Dynamic VP HY Bond Fund (“Bond Fund”) and VP HY Bear Fund (“Bear Fund”) of the Trust (each a “Fund” and collectively, the “Funds”). The Board did not identify any particular information that was most relevant to its consideration to renew the Advisory Agreement and each Trustee may have afforded different weight to the various factors. The Board noted that the Bear Fund was not operational.
Nature, Extent and Quality of Services Provided. The Board reviewed the scope of the services to be provided under the Advisory Agreement and noted that Rafferty would be assuming the direct management of the Funds. The Board considered Rafferty’s representation that it has the financial resources, commitment and appropriate staffing to assume the direct management of the Funds, noting that Rafferty hired two new persons to assist in managing the Funds. The Board also considered Rafferty’s ability to adopt and implement compliance and control functions for the Funds and noted that information concerning portfolio management and a report from the chief compliance officer are provided on a periodic basis to the Board. The Board also considered Rafferty’s ability to increase assets of the complex and offer additional investment options to shareholders through the creation of new funds and Rafferty’s efforts to promote the Funds and increase assets. In this regard, the Board noted Rafferty’s positioning of the Funds in the marketplace compared to their competitors. The Board also considered Rafferty’s representation that it seeks attractive brokerage rates and best execution. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the nature, extent and quality of the services provided by Rafferty to the Funds under the Agreement were fair and reasonable.
Performance of the Fund and Fund Expenses. The Board considered the performance of the Bond Fund taking into account its expense ratios and transaction costs. The Board did not consider the performance of the Bear Fund as it has not commenced operations. The Board considered Rafferty’s representation that the Bond Fund has underperformed in comparison to a similar fund, but that Rafferty expects better performance when it assumes the direct management. In addition, the Board considered Rafferty’s representation that advisory fees are comparable to a fund with similar investment strategies and that Rafferty is committed to continue the expense limitation on the total operating expenses through the 2006 fiscal year. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the performance of the Bond Fund was satisfactory and the fees and expenses attributable to the Funds, as applicable, were reasonable.
Costs of Services Provided to the Funds and Profits Realized. The Board considered the overall fees paid to Rafferty, including any fee waivers and recoupment of fees previously waived. In addition, the Board considered (as noted above) Rafferty’s representation that advisory fees charged are comparable to those of a fund with similar investment strategies and that Rafferty is committed to continue the expense limitation on total operating expenses through the 2006 fiscal year. The Board also considered Rafferty’s representation that Rafferty does not assess profitability with respect to its services to individual funds, but that asset levels have been low and that it hopes to increase its revenues by directly managing the Funds. Based on these considerations, the Board determined that, in the exercise of its business judgment, the costs of services provided and profits realized by Rafferty under the Agreements were fair and reasonable.
Economies of Scale. The Board considered Rafferty’s representation that it believes that asset levels at this time are not sufficient to warrant a reduction in fee rates or the addition of breakpoints. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the reduction in fee rates or additions of breakpoints were not necessary at this time.
27
Other Benefits. The Board considered Rafferty’s representation that no material “fall-out” benefits will accrue to Rafferty because of its relationship with the Funds.
Conclusion. Based on, but not limited to, the above considerations and determinations, the Board determined that the Agreement was fair and reasonable in light of the services to be performed, fees, expenses and such other matters as the Board considered relevant in the exercise of its business judgment. On this basis, the Board unanimously voted in favor of the continuance of the Agreement.
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Direxion Insurance Trust
Advisory and Subadvisory Agreement Approvals
Provided below is a summary of certain of the factors the Board considered at the January 16, 2006 meeting for the approval of the Investment Advisory Agreement between Rafferty Asset Management and the Direxion Insurance Trust (the “Trust”) and the Investment Subadvisory Agreement between Rafferty and Flexible Plan, Ltd. (“FPI”) for the Evolution VP All-Cap Equity Fund (“All-Cap Equity Fund”) and Evolution VP Managed Bond Fund (“Managed Bond Fund”) of the Trust (each, a “Fund” and collectively, the “Funds”). The Board did not identify any particular information that was most relevant to its consideration to approve the Investment Advisory Agreement and Investment Subadvisory Agreement (each, an “Agreement”) and each Trustee may have afforded different weight to the various factors.
Nature, Extent and Quality of Services Provided. The Board reviewed the scope of the services to be provided under the Agreement and noted that there would no changes in the services provided by Rafferty and FPI to the Funds. The Board considered Rafferty’s representation that it has the financial resources, commitment and appropriate staffing to provide the same scope and quality of services that it provides to other funds in the Direxion complex. The Board also considered that the primary role of FPI to create an investment program for the Funds and make asset allocations, as well as that Rafferty’s primary role is to effect the trades of the Funds and oversee the management and operations of the Funds. The Board also considered Rafferty’s ability to adopt and implement compliance and control functions for the Funds and noted that information concerning portfolio management and a report from the chief compliance officer are provided on a periodic basis to the Board. The Board also considered Rafferty’s ability to increase assets of the Direxion complex and offer additional investment options to shareholders through the creation of new funds and Rafferty’s efforts to promote the Funds and increase assets. In addition, the Board considered Rafferty’s representation that it does not use soft dollar arrangements in connection with fund transactions and seeks attractive brokerage rates and best execution. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the nature, extent and quality of the services to be provided by Rafferty and FPI to the Funds under the Agreement were appropriate.
Performance of the Funds and Fund Expenses. The Board considered the investment performance of the Funds compared to their benchmark indices in 2004 and 2005. With respect to the Managed Bond Fund, the Board noted that the Fund underperformed in comparison to its benchmark index since its inception in April 2004. With respect to the All-Cap Equity Fund, the Board noted that although the Fund underperformed in comparison to its benchmark index in 2004, it outperformed this index in 2005. The Board also considered the current expenses of the Funds, including the advisory fees and subadvisory fees paid to Rafferty and FPI, respectively, and noted Rafferty’s representation that Rafferty’s fees are comparable to other subadvised funds in the Direxion complex. In addition, the Board noted that Rafferty has contractually agreed to limit each Fund’s expenses for its fiscal year. Concerning subadvisory fees, the Board noted that FPI represented that it will pass any benefits of lower Fund fees to clients currently enrolled in its wrap accounts for clients wishing to invest in the Funds. The Board also considered that the subadvisory fees to be paid to FPI concerning the Funds will be based on the prior month’s aggregate total net assets of the Funds and three other Evolution funds in the Direxion complex. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the expenses of the Funds were reasonable.
Costs of Services Provided to the Funds and Profits Realized. The Board considered the fees paid to Rafferty, including any fee waivers or expense reimbursements, and FPI. In addition, the Board considered (as noted above) the representations of Rafferty and FPI that FPI will pass any benefits of lower fund fees to clients currently enrolled in its wrap accounts for clients wishing to invest in the Funds. The Board also considered Rafferty’s representation that profits derived from managing the Funds have been minimal. Based on these considerations and other considerations, the Board determined that, in the exercise of its business judgment, the costs of services provided and profits realized by Rafferty under the Agreement were fair and reasonable.
29
Economies of Scale. The Board considered Rafferty’s representation that it believes that asset levels at this time are not sufficient to warrant a reduction in fee rates or the addition of breakpoints. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the Funds have not reached economies of scale requiring a reduction in fee rates or additions of breakpoints.
Other Benefits. The Board considered FPI’s representation that the Funds would permit FPI to offer additional investment options to its clients and that the Funds would benefit from their exposure to FPI’s existing client base, a wholesaler network and a vast network of financial advisers and broker-dealers with which it has relationships.
Conclusion. Based on, but not limited to, the above considerations and determinations, the Board determined that each Agreement was fair and reasonable in light of the services to be performed, fees, expenses and such other matters as the Board considered relevant in the exercise of its business judgment. On this basis, the Board unanimously approved each Agreement.
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Investment Advisor
Rafferty Asset Management, LLC | |
33 Whitehall Street, 10th Floor | |
New York, NY 10004 |
Administrator, Transfer Agent, Dividend
Paying Agent & Shareholding Servicing Agent
U.S. Bancorp Fund Services, LLC | |
P.O. Box 1993 | |
Milwaukee, WI 53201-1993 |
Custodian
U.S. Bank, N.A. | |
425 Walnut Street | |
Cincinnati, Ohio 45202 |
Independent Registered Public Accounting Firm
Ernst & Young LLP | |
233 S. Wacker Dr. | |
Chicago, IL 60606 |
Distributor
Rafferty Capital Markets, LLC | |
59 Hilton Avenue | |
Garden City, NY 11530 |
The Fund’s Proxy Voting Policies are available without charge by calling 1-800-851-0511, or by accessing the SEC’s website, at www.sec.gov.
The actual voting records relating to portfolio securities during the most recent twelve month period ended June 30 (starting with the year ending June 30, 2005) will be available without charge by calling 1-800-851-0511 or by accessing the SEC’s website at www.sec.gov.
Beginning with the Funds’ first and third quarters ending after July 9, 2004, the Funds will file complete schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Q will be available without charge, upon request, by calling 1-800-851-0511, or by accessing the SEC’s website, at www.sec.gov.
This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL
REPORT
June 30, 2006
33 Whitehall Street, 10th Floor
New York, NY 10004
(800) 851-0511
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and principal financial officer. The registrant has not made any amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report.
Undertake to provide a copy to any person without charge: The registrant undertakes to provide to any person without charge, upon request, a copy of its code of ethics by mail when they call the registrant at 1-800-851-0511.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past two fiscal years. “Audit services” refer to performing an audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. “Audit-related services” refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. “Tax services” refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant. All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant.
Item 5. Audit Committee of Listed Registrants.
Not applicable to open-end investment companies.
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Item 6. Schedule of Investments.
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchases.
Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of directors/trustees.
Item 11. Controls and Procedures.
(a) | The Registrant’s President/Chief Executive Officer and Treasurer/Chief Financial Officer have reviewed the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider. | |
(b) | There were no significant changes in the Registrant’s internal controls over financial reporting that occurred during the Registrant’s last fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12. Exhibits.
(a) | (1) Any code of ethics or amendment thereto, that is subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. 1) Incorporate by reference to previous Form N-CSR filing. |
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(2) | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies. | ||
(b) | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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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.
(Registrant) The Potomac Insurance Trust
By (Signature and Title) | /s/ D. O’Neill | |||||
Daniel D. O’Neill, President |
Date 9/3/06
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 (Signature and Title)* | /s/ D. O’Neill | |||||
Daniel D. O’Neill, President | ||||||
Date 9/3/06 | ||||||
By (Signature and Title)* | /s/ Timothy P. Hagan | |||||
Timothy P. Hagan, Chief Financial Officer | ||||||
Date 9/5/06 |
* | Print the name and title of each signing officer under his or her signature. |
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