Table of Contents
As filed with the Securities and Exchange Commission on March 5, 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09761
Direxion 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)
646-572-3390
Registrant’s telephone number, including area code
Registrant’s telephone number, including area code
Date of fiscal year end: December 31, 2007
Date of reporting period: December 31, 2007
Table of Contents
Item 1. Report to Stockholders
![(THE EVOLUTION MANAGED FUNDS LOGO)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317406.gif)
ANNUAL REPORT DECEMBER 31, 2007
Evolution VP Managed Bond Fund
Evolution VP All-Cap Equity Fund
33 Whitehall Street, 10th Floor
New York, New York 10004
(800) 851-0511
Table of Contents
Table of Contents
Letter to Shareholders | 2 | |||
Performance Summary | 3 | |||
Expense Example | 5 | |||
Allocation of Portfolio Holdings | 6 | |||
Schedule of Investments | 7 | |||
Financial Statements | 14 | |||
Financial Highlights | 17 | |||
Notes to the Financial Statements | 19 | |||
Report of Independent Registered Public Accounting Firm | 25 | |||
Additional Information | 26 | |||
Information on Board of Trustees and Officers | 29 |
Table of Contents
Dear Shareholders,
This Annual Report for the Evolution Funds covers the fiscal year January 1, 2007 to December, 31, 2007 (the “Annual Period”). This Annual Report covers the Evolution VP Managed Bond Fund (the “Managed Bond Fund”) and the Evolution VP All-Cap Equity Fund (“All-Cap Equity Fund”). Flexible Plan Investments, Ltd. (the “Sub-Advisor”), serves as the sub-advisor to the Evolution Funds.
During the Annual Period, the S&P 500 Index gained 5.49% and the Lehman Aggregate Bond Index gained 6.97% for the year. Domestic performance was driven by sound global economic growth, a relatively favorable interest rate environment and strong corporate earnings. The reporting period was not, however, without its challenges. On February 27th, a sell-off in China sparked a global decline that led to the largest one-day percentage decline in the S&P 500 Index since March 24th, 2003. After the sharp declines in February, equities began to rally again in April and May. A second major decline in the Chinese equity markets occurred at the end of May, although U.S. equities shrugged off the declines and continued climbing.
Rising energy and commodity prices, problems in the mortgage markets which led to a credit squeeze and concern about a bubble in emerging markets equities led to increased uncertainty about market direction and led to a spike in volatility in the late summer at which time the markets sold off sharply and threatened to decline further, leading the Federal Reserve to take many actions during the Annual Period in an effort to help stabilize equity markets. While the U.S. markets slowed toward the end of the year, emerging markets did particularly well, followed by stocks in Europe.
The Managed Bond Fund seeks the highest appreciation on an annual basis consistent with a high tolerance for risk. The Managed Bond Fund delivered a gain of 1.14% on a total return basis, during the Annual Period, compared to 6.97% for the Lehman Aggregate Bond Index.
The All-Cap Equity Fund seeks the highest appreciation on an annual basis consistent with a high tolerance for risk. The All-Cap Equity Fund delivered a gain of 3.11% on a total return basis, during the Annual Period, compared to 5.49% for the S&P 500 Index.
As always, we thank you for using the Direxion Funds and we look forward to our mutual success.
Sincerely,
![]() | ![]() | |
Daniel O’Neill | Bruce Greig, CFA | |
Direxion Funds | Flexible Plan Investments, Inc. |
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. To obtain performance data current to the most recent month-end, please call, toll-free, 1-800-851-0511 or visit www.direxionfunds.com.
The total annual fund operating expense ratio of the Evolution VP Managed Bond Fund and the Evolution VP All-Cap Equity Fund is 2.00% and 2.00%, respectively, net of any fee, waivers or expense reimbursements.
An investment in any of the Direxion Funds is subject to a number of risks that could affect the value of its shares. It is important that investors closely review and understand these risks before making an investment. Investors considering an investment may obtain a prospectus by calling 1-800-851-0511. Investors should read the prospectus carefully for more complete information, including charges, expenses, and additional risks, before investing or sending money.
Distributed by: Rafferty Capital Markets, LLC
Date of First Use: February 29, 2008
Table of Contents
July 1, 20041- December 31, 2007
![(BAR CHART)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317403.gif)
Average Annual | ||||||||
Total Return2 | ||||||||
Since | ||||||||
1 Year | Inception1 | |||||||
Evolution VP Managed Bond Fund | 1.14% | 0.80% | ||||||
Lehman Aggregate Bond Index | 6.97% | 5.04% | ||||||
Lipper High Yield Bond Fund Index | 2.13% | 6.83% |
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund’s inception, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions of the redemption of fund shares. The performance of the Lehman Aggregate Bond Index and the Lipper High Yield Bond Fund Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC, reimbursed fees for various expenses. Had these reimbursements not been in effect, performance would have been lower.
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. To obtain performance data current to the most recent month-end, please call, toll-free, 1-800-851-0511 or visit www.direxionfunds.com.
The total annual fund operating expense ratio of the Evolution VP Managed Bond Fund is 2.00%, net of any fee, waivers or expense reimbursements.
An investment in any of the Direxion Funds is subject to a number of risks that could affect the value of its shares. It is important that investors closely review and understand these risks before making an investment. Investors considering an investment may obtain a prospectus by calling 1-800-851-0511. Investors should read the prospectus carefully for more complete information, including charges, expenses, and additional risks, before investing or sending money.
Market Exposure | ||||
% of | ||||
Investment Type | Net Assets | |||
Investment Companies | 98.0 | % | ||
Futures Contracts | — | |||
Swap Contracts | — | |||
Total Exposure | 98.0 | % | ||
“Market Exposure” includes the value of total investments (including the contract value of any derivatives) and excludes any short-term investments and cash equivalents divided by Net Assets.
1 Commencement of operations was July 1, 2004.
2 As of December 31, 2007.
DIREXION EVOLUTION VP FUNDS 3
Table of Contents
July 1, 20041- December 31, 2007
![(BAR CHART)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317404.gif)
Average Annual | ||||||||
Total Return2 | ||||||||
Since | ||||||||
1 Year | Inception1 | |||||||
Evolution VP All-Cap Equity Fund | 3.11% | 8.79% | ||||||
S&P 500 Index | 5.49% | 9.82% |
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund’s inception, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions of the redemption of fund shares. The performance of the S&P 500 Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC, reimbursed fees for various expenses. Had these reimbursements not been in effect, performance would have been lower.
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. To obtain performance data current to the most recent month-end, please call, toll-free, 1-800-851-0511 or visit www.direxionfunds.com.
The total annual fund operating expense ratio of the Evolution VP All-Cap Equity Fund is 2.00%, net of any fee, waivers or expense reimbursements.
An investment in any of the Direxion Funds is subject to a number of risks that could affect the value of its shares. It is important that investors closely review and understand these risks before making an investment. Investors considering an investment may obtain a prospectus by calling 1-800-851-0511. Investors should read the prospectus carefully for more complete information, including charges, expenses, and additional risks, before investing or sending money.
Market Exposure | ||||
% of | ||||
Investment Type | Net Assets | |||
Common Stocks | 73.1 | % | ||
Investment Companies | 5.1 | % | ||
Futures Contracts | — | |||
Swap Contracts | — | |||
Total Exposure | 78.2 | % | ||
“Market Exposure” includes the value of total investments (including the contract value of any derivatives) and excludes any short-term investments and cash equivalents divided by Net Assets.
1 Commencement of operations was July 1, 2004.
2 As of December 31, 2007.
4 DIREXION EVOLUTION VP FUNDS
Table of Contents
December 31, 2007 (Unaudited)
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. This example is intended to help you understand your ongoing costs (in dollars) of investing in the 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 the entire period (July 1, 2007 — December 31, 2007).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges 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 the 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 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. The tables below do not reflect any fees and expenses imposed under variable annuity contracts and variable life insurance policies (“Contracts”) and certain qualified pension and retirement plans (“Plans”), which would increase overall fees and expenses. Please refer to your Contract or Plan Prospectus for a description of those fees and expenses.
Evolution VP Managed Bond Fund | |||||||||
Expenses Paid | |||||||||
Beginning | Ending | During Period | |||||||
Account Value | Account Value | July 1, 2007 - | |||||||
July 1, 2007 | December 31, 2007 | December 31, 2007* | |||||||
Actual | $ | 1,000.00 | $ | 1,015.90 | $ | 10.16 | |||
Hypothetical (5% return before expenses) | 1,000.00 | 1,015.12 | 10.16 |
* | Expenses are equal to the Fund’s annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. |
Evolution VP All-Cap Equity Fund | |||||||||
Expenses Paid | |||||||||
Beginning | Ending | During Period | |||||||
Account Value | Account Value | July 1, 2007 - | |||||||
July 1, 2007 | December 31, 2007 | December 31, 2007* | |||||||
Actual | $ | 1,000.00 | $ | 987.70 | $ | 10.02 | |||
Hypothetical (5% return before expenses) | 1,000.00 | 1,015.12 | 10.16 |
* | Expenses are equal to the Fund’s annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. |
DIREXION EVOLUTION VP FUNDS 5
Table of Contents
Evolution VP Managed Bond Fund
December 31, 2007
![GRAPH](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317401.gif)
Evolution VP All-Cap Equity Fund
Allocation of Portfolio Holdings (Unaudited)
December 31, 2007
![GRAPH](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317402.gif)
The percentages in these graphs are calculated based on net assets.
* | Cash and other assets less liabilities. | |
** | These are investment companies that primarily invest in this category of securities. |
6 DIREXION EVOLUTION VP FUNDS
Table of Contents
Evolution VP Managed Bond Fund
December 31, 2007
Shares | Value | |||||||||
INVESTMENT COMPANIES - 98.0% | ||||||||||
2,548 | Aberdeen Asia-Pacific Income Fund, Inc. | $ | 14,778 | |||||||
7,027 | AllianceBernstein Global High Income Fund | 88,611 | ||||||||
6,354 | BlackRock Corporate High Yield Fund VI | 74,787 | ||||||||
4,640 | BlackRock Floating Rate Income Strategies Fund | 74,147 | ||||||||
4,699 | BlackRock Preferred Income Strategies Fund | 74,855 | ||||||||
1,984 | Calamos Convertible and High Income Fund | 26,090 | ||||||||
1,733 | Calamos Convertible Opportunities and Income Fund | 25,198 | ||||||||
4,797 | Evergreen Managed Income Fund | 75,409 | ||||||||
7,036 | iShares Lehman 1-3 Year Treasury Bond Fund | 578,079 | ||||||||
7,332 | iShares Lehman 20+ Year Treasury Bond Fund | 682,169 | ||||||||
9,953 | iShares Lehman 7-10 Year Treasury Bond Fund | 863,920 | ||||||||
28,430 | iShares Lehman Aggregate Bond Fund | 2,875,979 | ||||||||
8,193 | iShares Lehman Treasury Inflation Protected Securities Fund | 866,819 | ||||||||
789 | iShares iBoxx High Yield Corporate Bond | 79,468 | ||||||||
2,453 | iShares Lehman MBS Bond | 249,470 | ||||||||
952 | iShares Lehman 1-3 year Credit Bond | 96,190 | ||||||||
876 | iShares Lehman Short Treasury Bond | 96,045 | ||||||||
7,665 | Ishares S&P National Municipal Bond | 778,380 | ||||||||
13,485 | MFS Charter Income Trust | 110,712 | ||||||||
16,627 | MFS Government Markets Income Trust | 112,232 | ||||||||
12,056 | MFS Intermediate Income Trust | 73,300 | ||||||||
2,075 | Nicholas-Applegate Convertible & Income Fund II | 25,502 | ||||||||
886 | Nuveen Multi-Currency Short-Term Government Income Fund | 15,000 | ||||||||
2,387 | Nuveen Preferred and Convertible Income Fund | 26,090 | ||||||||
11,806 | Putnam Premier Income Trust | 73,197 | ||||||||
2,875 | SPDR Lehman International Treasury Bond | 154,675 | ||||||||
6,800 | Templeton Emerging Markets Income Fund | 89,488 | ||||||||
1,765 | Templeton Global Income Fund | 14,897 | ||||||||
38,512 | Vanguard Total Bond Market | 2,965,424 | ||||||||
5,013 | Western Asset Emerging Markets Debt Fund | 89,181 | ||||||||
1,190 | Western Asset Emreging Markets Income Fund II | 14,875 | ||||||||
7,475 | Western Asset High Income Fund II | 75,498 | ||||||||
6,328 | Western Asset/Claymore Inflation - Linked Opportunities & Income Fund | 74,417 | ||||||||
TOTAL INVESTMENT COMPANIES (Cost $11,348,019) | $ | 11,534,882 | ||||||||
SHORT TERM INVESTMENTS - 2.2% | ||||||||||
MONEY MARKET FUNDS - 2.2% | ||||||||||
255,079 | Federated Prime Obligations Fund | $ | 255,079 | |||||||
TOTAL SHORT TERM INVESTMENTS (Cost $255,079) | $ | 255,079 | ||||||||
TOTAL INVESTMENTS (Cost $11,603,098) - 100.2% | $ | 11,789,961 | ||||||||
Liabilities in Excess of Other Assets - (0.2)% | (22,910 | ) | ||||||||
TOTAL NET ASSETS - 100.0% | $ | 11,767,051 |
Percentages are stated as a percent of net assets.
The accompanying notes are an integral part of these financial statements
7 DIREXION EVOLUTION VP FUNDS
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments
December 31, 2007
Shares | Value | |||||||||
COMMON STOCKS - 73.1% | ||||||||||
AEROSPACE & DEFENSE - 2.2% | ||||||||||
1,412 | BE Aerospace, Inc.(a) | $ | 74,695 | |||||||
1,225 | Ceradyne, Inc.(a) | 57,489 | ||||||||
276 | Esterline Technologies Corp.(a) | 14,283 | ||||||||
2,088 | Honeywell International, Inc. | 128,558 | ||||||||
124 | L-3 Communications Holdings, Inc. | 13,136 | ||||||||
1,371 | Precision Castparts Corp. | 190,158 | ||||||||
977 | Rockwell Collins, Inc. | 70,315 | ||||||||
2,146 | Spirit Aerosystems Holdings, Inc.(a) | 74,037 | ||||||||
622,671 | ||||||||||
AIR FREIGHT & LOGISTICS - 0.5% | ||||||||||
372 | FedEx Corp. | 33,171 | ||||||||
1,565 | Forward Air Corp. | 48,781 | ||||||||
506 | Ryanair Holdings Plc. ADR (Ireland)(a) | 19,957 | ||||||||
701 | United Parcel Service, Inc. | 49,575 | ||||||||
151,484 | ||||||||||
AIRLINES - 0.7% | ||||||||||
4,367 | Skywest, Inc. | 117,254 | ||||||||
2,100 | UAL Corp.(a) | 74,886 | ||||||||
192,140 | ||||||||||
AUTO COMPONENTS - 0.2% | ||||||||||
1,212 | Johnson Controls, Inc. | 43,680 | ||||||||
BEVERAGES - 0.4% | ||||||||||
417 | Coca-Cola Femsa S.A. de C.V. ADR (Mexico) | 20,550 | ||||||||
427 | Hansen Natural Corp.(a) | 18,912 | ||||||||
357 | Pepsi Bottling Group, Inc. | 14,087 | ||||||||
662 | PepsiCo, Inc. | 50,246 | ||||||||
103,795 | ||||||||||
BIOTECHNOLOGY - 1.5% | ||||||||||
1,945 | Amgen, Inc.(a) | 90,326 | ||||||||
1,205 | Biogen IDEC, Inc.(a) | 68,588 | ||||||||
1,576 | Celgene Corp.(a) | 72,827 | ||||||||
2,675 | Cephalon, Inc.(a) | 191,958 | ||||||||
1,085 | ViroPharma, Inc.(a) | 8,615 | ||||||||
432,314 | ||||||||||
BUILDING PRODUCTS - 0.4% | ||||||||||
6,644 | Apogee Enterprises, Inc. | 113,679 | ||||||||
CAPITAL MARKETS - 1.3% | ||||||||||
567 | Deutsche Bank AG (Germany)(b) | 73,376 | ||||||||
3,027 | Morgan Stanley | 160,764 | ||||||||
3,714 | SEI Investments Co. | 119,479 | ||||||||
353,619 | ||||||||||
CHEMICALS - 1.0% | ||||||||||
786 | E.I. du Pont de Nemours & Co. | 34,655 | ||||||||
684 | Monsanto Co. | 76,396 | ||||||||
495 | PPG Industries, Inc. | 34,764 | ||||||||
1,461 | Praxair, Inc. | 129,605 | ||||||||
275,420 | ||||||||||
COMMERCIAL BANKS - 1.3% | ||||||||||
2,250 | Banco Bradesco S.A. (Brazil)(b) | 72,000 | ||||||||
1,546 | Banco Itau Holding Financeira S.A. ADR (Brazil) | 39,979 | ||||||||
2,483 | Bancolombia S.A. ADR (Columbia) | 84,472 | ||||||||
1,201 | ICICI Bank Ltd. ADR (Singapore) | 73,861 | ||||||||
651 | Uniao de Bancos Brasileiros S.A. (Brazil)(b) | 90,906 | ||||||||
361,218 | ||||||||||
COMMERCIAL SERVICES & SUPPLIES - 1.5% | ||||||||||
615 | Apollo Group, Inc.(a) | 43,142 | ||||||||
1,991 | Bright Horizons Family Solutions, Inc.(a) | 68,769 | ||||||||
1,162 | The Brink’s Co. | 69,418 | ||||||||
289 | Deluxe Corp. | 9,505 | ||||||||
332 | G&K Services, Inc. | 12,457 | ||||||||
1,089 | ITT Educational Services, Inc.(a) | 92,859 | ||||||||
5,758 | Rollins, Inc. | 110,554 | ||||||||
302 | Watson Wyatt Worldwide, Inc. | 14,016 | ||||||||
420,720 | ||||||||||
COMMUNICATIONS EQUIPMENT - 3.8% | ||||||||||
8,236 | Arris Group, Inc.(a) | 82,195 | ||||||||
361 | Black Box Corp. | 13,057 | ||||||||
7,347 | Cisco Systems, Inc.(a) | 198,883 | ||||||||
223 | CommScope, Inc.(a) | 10,974 | ||||||||
2,618 | Comtech Telecommunications Corp.(a) | 141,398 | ||||||||
3,413 | Corning, Inc. | 81,878 | ||||||||
1,229 | Harris Corp. | 77,034 | ||||||||
1,299 | Juniper Networks, Inc.(a) | 43,127 | ||||||||
2,230 | Nokia Corp. ADR (Finland) | 85,610 | ||||||||
509 | Plantronics, Inc. | 13,234 | ||||||||
3,997 | QUALCOMM, Inc. | 157,282 | ||||||||
638 | Research In Motion Ltd. (Canada)(a)(b) | 72,349 | ||||||||
3,958 | Telefonaktiebolaget LM Ericsson ADR (Sweden) | 92,419 | ||||||||
1,069,440 | ||||||||||
COMPUTERS & PERIPHERALS - 1.6% | ||||||||||
1,196 | Apple Computer, Inc.(a) | 236,904 | ||||||||
471 | Avid Technology, Inc.(a) | 13,348 | ||||||||
2,371 | EMC Corp.(a) | 43,934 | ||||||||
669 | International Business Machines Corp. | 72,319 | ||||||||
2,551 | Western Digital Corp.(a) | 77,066 | ||||||||
443,571 | ||||||||||
The accompanying notes are an integral part of these financial statements
DIREXION EVOLUTION VP FUNDS 8
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
December 31, 2007
Shares | Value | |||||||||
CONSTRUCTION & ENGINEERING - 0.7% | ||||||||||
2,734 | EMCOR Group, Inc.(a) | $ | 64,604 | |||||||
467 | Foster Wheeler Ltd.(a) | 72,394 | ||||||||
732 | Jacobs Engineering Group, Inc.(a) | 69,987 | ||||||||
206,985 | ||||||||||
CONSUMER FINANCE - 0.2% | ||||||||||
2,132 | SLM Corp. | 42,938 | ||||||||
CONSUMER SERVICES - 0.3% | ||||||||||
1,765 | Pre-Paid Legal Services, Inc.(a) | 97,693 | ||||||||
CONTAINERS & PACKAGING - 0.0% | ||||||||||
363 | Rock-Tenn Co. | 9,224 | ||||||||
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.3% | ||||||||||
351 | CenturyTel, Inc. | 14,552 | ||||||||
738 | Compania Anonima Nacional Telefonos de Venezuela ADR (Venezuela) | 10,886 | ||||||||
2,512 | Neustar, Inc.(a) | 72,044 | ||||||||
97,482 | ||||||||||
ELECTRIC UTILITIES - 0.9% | ||||||||||
6,049 | Companhia Paranaense de Energia ADR (Brazil) | 91,279 | ||||||||
723 | Consolidated Edison, Inc. | 35,319 | ||||||||
2,255 | Huaneng Power International, Inc. ADR (China) | 93,131 | ||||||||
1,794 | Korea Electric Power Corp. ADR (South Korea)(a) | 37,405 | ||||||||
257,134 | ||||||||||
ELECTRICAL EQUIPMENT - 2.3% | ||||||||||
152 | Anixter International, Inc.(a) | 9,465 | ||||||||
1,342 | Avnet, Inc.(a) | 46,930 | ||||||||
820 | Cooper Industries Ltd. | 43,362 | ||||||||
272 | First Solar, Inc.(a) | 72,662 | ||||||||
1,621 | FLIR Systems, Inc.(a) | 50,737 | ||||||||
4,448 | LoJack Corp.(a) | 74,771 | ||||||||
2,802 | Molex, Inc. | 76,495 | ||||||||
1,072 | Suntech Power Holdings Company Ltd. ADR (China)(a) | 88,247 | ||||||||
2,652 | Woodward Governor Co. | 180,203 | ||||||||
642,872 | ||||||||||
ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.0% | ||||||||||
1,665 | Amphenol Corp. | 77,206 | ||||||||
1,351 | LG Philips LCD Company Ltd. ADR (South Korea)(a) | 35,099 | ||||||||
329 | MTS Systems Corp. | 14,038 | ||||||||
538 | Sunpower Corp.(a) | 70,150 | ||||||||
455 | Technitrol, Inc. | 13,004 | ||||||||
2,473 | Trimble Navigation Ltd.(a) | 74,784 | ||||||||
284,281 | ||||||||||
ENERGY EQUIPMENT & SERVICES - 4.8% | ||||||||||
2,676 | Cameron International Corp.(a) | 128,796 | ||||||||
3,874 | Dril-Quip, Inc.(a) | 215,627 | ||||||||
325 | ENSCO International, Inc. | 19,377 | ||||||||
640 | Grant Prideco, Inc.(a) | 35,526 | ||||||||
905 | Helmerich & Payne, Inc. | 36,263 | ||||||||
800 | ION Geophysical Corp.(a) | 12,624 | ||||||||
609 | Lufkin Industries, Inc. | 34,890 | ||||||||
1,259 | Nabors Industries Ltd. (Bermuda)(a)(b) | 34,484 | ||||||||
2,291 | National-Oilwell Varco, Inc.(a) | 168,297 | ||||||||
4,997 | Noble Corp. | 282,380 | ||||||||
989 | Patterson-UTI Energy, Inc. | 19,305 | ||||||||
2,262 | Pride International, Inc.(a) | 76,682 | ||||||||
2,062 | Tenaris S.A. ADR (Luxembourg) | 92,233 | ||||||||
809 | Transocean, Inc. | 115,808 | ||||||||
1,195 | Unit Corp.(a) | 55,269 | ||||||||
1,327,561 | ||||||||||
FINANCIAL SERVICES - 0.3% | ||||||||||
1,508 | Nasdaq Stock Market, Inc.(a) | 74,631 | ||||||||
FOOD & STAPLES RETAILING - 1.2% | ||||||||||
2,028 | BJ’s Wholesale Club, Inc.(a) | 68,607 | ||||||||
547 | The Kroger Co. | 14,611 | ||||||||
1,466 | Longs Drug Stores Corp. | 68,902 | ||||||||
2,624 | Performance Food Group Co.(a) | 70,507 | ||||||||
2,506 | Wal-Mart Stores, Inc. | 119,110 | ||||||||
341,737 | ||||||||||
FOOD PRODUCTS - 0.5% | ||||||||||
2,866 | Flowers Foods, Inc. | 67,093 | ||||||||
1,122 | Unilever N.V. ADR (Netherlands) | 40,908 | ||||||||
257 | Wimm-Bill-Dann Foods OJSC ADR (Russia) | 33,677 | ||||||||
141,678 | ||||||||||
GAS UTILITIES - 0.5% | ||||||||||
1,258 | Atmos Energy Corp. | 35,274 | ||||||||
998 | The Laclede Group, Inc. | 34,172 | ||||||||
701 | New Jersey Resources Corp. | 35,064 | ||||||||
949 | South Jersey Industries, Inc. | 34,249 | ||||||||
138,759 | ||||||||||
HEALTH CARE EQUIPMENT & SUPPLIES - 2.6% | ||||||||||
754 | C.R. Bard, Inc. | 71,479 | ||||||||
650 | Greatbatch, Inc.(a) | 12,993 | ||||||||
1,126 | Haemonetics Corp.(a) | 70,960 | ||||||||
2,098 | Hologic, Inc.(a) | 144,007 | ||||||||
2,287 | Immucor, Inc.(a) | 77,735 | ||||||||
810 | Mindray Medical International Ltd. ADR (China) | 34,806 | ||||||||
2,330 | Stryker Corp. | 174,098 | ||||||||
2,442 | Varian Medical Systems, Inc.(a) | 127,375 | ||||||||
713,453 | ||||||||||
The accompanying notes are an integral part of these financial statements
9 DIREXION EVOLUTION VP FUNDS
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
December 31, 2007
Shares | Value | |||||||||
HEALTH CARE PROVIDERS & SERVICES - 1.8% | ||||||||||
1,138 | CIGNA Corp. | $ | 61,145 | |||||||
394 | Community Health Systems, Inc.(a) | 14,523 | ||||||||
599 | Express Scripts, Inc.(a) | 43,727 | ||||||||
190 | Humana, Inc.(a) | 14,309 | ||||||||
694 | Laboratory Corp Of America Holdings(a) | 52,418 | ||||||||
1,925 | McKesson Corp. | 126,107 | ||||||||
2,492 | Patterson Companies, Inc.(a) | 84,603 | ||||||||
1,889 | Pharmaceutical Product Development, Inc. | 76,259 | ||||||||
395 | Wellpoint, Inc.(a) | 34,653 | ||||||||
507,744 | ||||||||||
HOTELS RESTAURANTS & LEISURE - 0.6% | ||||||||||
906 | Jack in the Box, Inc.(a) | 23,347 | ||||||||
858 | O’Charleys, Inc. | 12,853 | ||||||||
662 | Wynn Resorts Ltd. | 74,230 | ||||||||
1,340 | Yum! Brands, Inc. | 51,282 | ||||||||
161,712 | ||||||||||
HOUSEHOLD DURABLES - 1.0% | ||||||||||
788 | Homex Development Corp. ADR (Mexico)(a) | 38,967 | ||||||||
3,859 | Koninklijke Philips Electronics N.V. ADR (Netherlands) | 164,972 | ||||||||
1,344 | Sony Corp. ADR (Japan) | 72,979 | ||||||||
276,918 | ||||||||||
HOUSEHOLD PRODUCTS - 0.2% | ||||||||||
650 | Colgate-Palmolive Co. | 50,674 | ||||||||
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.5% | ||||||||||
1,322 | Constellation Energy Group, Inc. | 135,545 | ||||||||
INDUSTRIAL CONGLOMERATES - 0.4% | ||||||||||
858 | 3M Co. | 72,347 | ||||||||
618 | Textron, Inc. | 44,063 | ||||||||
116,410 | ||||||||||
INSURANCE - 1.2% | ||||||||||
628 | ACE Ltd. (Bermuda)(b) | 38,798 | ||||||||
1,894 | Aegon N.V. ADR (Netherlands) | 33,202 | ||||||||
4,120 | American Financial Group, Inc. | 118,986 | ||||||||
699 | China Life Insurance Company Ltd. ADR (Taiwan) | 53,473 | ||||||||
491 | Philadelphia Consolidated Holding Corp.(a) | 19,321 | ||||||||
1,587 | XL Capital Ltd. (Bermuda)(b) | 79,842 | ||||||||
343,622 | ||||||||||
INTERNET & CATALOG RETAIL - 0.7% | ||||||||||
1,265 | Amazon.com, Inc.(a) | 117,190 | ||||||||
2,275 | eBay, Inc.(a) | 75,507 | ||||||||
192,697 | ||||||||||
INTERNET SOFTWARE & SERVICES - 2.0% | ||||||||||
2,059 | Akamai Technologies, Inc.(a) | 71,241 | ||||||||
212 | Baidu.com, Inc. ADR (China)(a) | 82,763 | ||||||||
2,447 | Bankrate, Inc.(a) | 117,676 | ||||||||
143 | Google, Inc.(a) | 98,882 | ||||||||
3,712 | J2 Global Communications, Inc.(a) | 78,583 | ||||||||
6,841 | Miva, Inc.(a) | 13,066 | ||||||||
4,811 | Websense, Inc.(a) | 81,691 | ||||||||
543,902 | ||||||||||
IT SERVICES - 0.5% | ||||||||||
1,447 | Cognizant Technology Solutions Corp.(a) | 49,111 | ||||||||
276 | Computer Sciences Corp.(a) | 13,654 | ||||||||
960 | CSG Systems International, Inc.(a) | 14,131 | ||||||||
173 | DST Systems, Inc.(a) | 14,281 | ||||||||
267 | Fiserv, Inc.(a) | 14,816 | ||||||||
437 | Global Payments, Inc. | 20,329 | ||||||||
437 | Infosys Technologies Ltd. ADR (India) | 19,823 | ||||||||
146,145 | ||||||||||
LEISURE EQUIPMENT & PRODUCTS - 0.3% | ||||||||||
1,770 | FUJIFILM Holdings Corp. ADR (Japan) | 73,791 | ||||||||
354 | Hasbro, Inc. | 9,056 | ||||||||
82,847 | ||||||||||
LIFE SCIENCES TOOLS & SERVICES - 0.2% | ||||||||||
508 | Ventana Medical Systems(a) | 44,313 | ||||||||
MACHINERY - 4.9% | ||||||||||
4,940 | A.S.V., Inc.(a) | 68,419 | ||||||||
3,791 | Barnes Group, Inc. | 126,581 | ||||||||
516 | Cascade Corp. | 23,973 | ||||||||
2,156 | Caterpillar, Inc. | 156,439 | ||||||||
524 | CNH Global N.V. (Netherlands)(b) | 34,490 | ||||||||
73 | Cummins, Inc. | 9,298 | ||||||||
1,110 | Danaher Corp. | 97,391 | ||||||||
1,684 | Dover Corp. | 77,616 | ||||||||
1,162 | Eaton Corp. | 112,656 | ||||||||
3,395 | Graco, Inc. | 126,498 | ||||||||
944 | Ingersoll-Rand Company Ltd. (Bermuda)(b) | 43,868 | ||||||||
973 | Lincoln Electric Holdings, Inc. | 69,258 | ||||||||
3,199 | The Manitowoc Company, Inc. | 156,207 | ||||||||
1,208 | Paccar, Inc. | 65,812 | ||||||||
1,481 | Parker Hannifin Corp. | 111,534 | ||||||||
1,352 | Reliance Steel & Aluminum Co. | 73,278 | ||||||||
143 | Terex Corp.(a) | 9,377 | ||||||||
1,362,695 | ||||||||||
The accompanying notes are an integral part of these financial statements
DIREXION EVOLUTION VP FUNDS 10
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
December 31, 2007
Shares | Value | |||||||||
MEDIA - 0.9% | ||||||||||
2,947 | Discovery Holding Co.(a) | $ | 74,088 | |||||||
911 | Gannett Co., Inc. | 35,529 | ||||||||
3,760 | Grupo Televisa S.A. ADR (Mexico) | 89,375 | ||||||||
630 | Meredith Corp. | 34,637 | ||||||||
403 | Scholastic Corp.(a) | 14,061 | ||||||||
247,690 | ||||||||||
MEDICAL DEVICES - 0.2% | ||||||||||
133 | Intuitive Surgical, Inc.(a) | 43,159 | ||||||||
MEDICAL INSTRUMENTS - 0.1% | ||||||||||
521 | Zimmer Holdings, Inc.(a) | 34,464 | ||||||||
METALS & MINING - 2.6% | ||||||||||
2,039 | Aluminum Corp.of China Ltd. ADR (China) | 103,255 | ||||||||
1,751 | AngloGold Ashanti Ltd. ADR (South Africa) | 74,960 | ||||||||
484 | BHP Billiton Ltd. ADR (Australia) | 33,899 | ||||||||
242 | Brush Engineered Materials, Inc.(a) | 8,959 | ||||||||
93 | Cleveland-Cliffs, Inc. | 9,375 | ||||||||
225 | Companhia Siderurgica Nacional S.A. ADR (Brazil) | 20,153 | ||||||||
553 | Freeport-McMoRan Copper & Gold, Inc. | 56,649 | ||||||||
5,326 | Gold Fields Ltd. ADR (South Africa) | 75,629 | ||||||||
7,297 | Harmony Gold Mining Co. Ltd. ADR (South Africa)(a) | 75,232 | ||||||||
878 | Nucor Corp. | 51,995 | ||||||||
437 | POSCO ADR (South Korea)(a) | 65,729 | ||||||||
96 | Rio Tinto Plc. ADR (United Kingdom) | 40,311 | ||||||||
2,821 | Sterlite Industries India Ltd. ADR (India)(a) | 73,544 | ||||||||
200 | United States Steel Corp. | 24,182 | ||||||||
713,872 | ||||||||||
MULTILINE RETAIL - 0.5% | ||||||||||
2,769 | Kohl’s Corp.(a) | 126,820 | ||||||||
MULTI-UTILITIES - 0.1% | ||||||||||
681 | Integrys Energy Group, Inc. | 35,201 | ||||||||
MULTI-UTILITIES & UNREGULATED POWER - 0.2% | ||||||||||
879 | Energen Corp. | 56,458 | ||||||||
OIL & GAS - 0.7% | ||||||||||
1,461 | Range Resources Corp. | 75,037 | ||||||||
1,802 | Sunoco, Inc. | 130,537 | ||||||||
205,574 | ||||||||||
OIL, GAS & CONSUMABLE FUELS - 1.9% | ||||||||||
486 | Cabot Oil & Gas Corp. | 19,620 | ||||||||
1,236 | Chevron Corp. | 115,356 | ||||||||
409 | ConocoPhillips | 36,114 | ||||||||
791 | Exxon Mobil Corp. | 74,109 | ||||||||
1,216 | Marathon Oil Corp. | 74,006 | ||||||||
192 | Occidental Petroleum Corp. | 14,782 | ||||||||
518 | Overseas Shipholding Group, Inc. | 38,555 | ||||||||
174 | Petroleo Brasileiro S.A. ADR (Brazil) | 20,052 | ||||||||
502 | Valero Energy Corp. | 35,155 | ||||||||
1,996 | XTO Energy, Inc. | 102,514 | ||||||||
530,263 | ||||||||||
PAPER & FOREST PRODUCTS - 0.3% | ||||||||||
1,252 | Aracruz Celulose S.A. (Brazil)(b) | 93,086 | ||||||||
PERSONAL PRODUCTS - 1.1% | ||||||||||
3,532 | The Estee Lauder Companies, Inc. | 154,030 | ||||||||
850 | NBTY, Inc.(a) | 23,290 | ||||||||
3,424 | USANA Health Sciences, Inc.(a) | 126,962 | ||||||||
304,282 | ||||||||||
PHARMACEUTICALS - 1.3% | ||||||||||
3,364 | Bradley Pharmaceuticals, Inc.(a) | 66,271 | ||||||||
933 | Genzyme Corp.(a) | 69,452 | ||||||||
1,262 | King Pharmaceuticals, Inc.(a) | 12,923 | ||||||||
1,592 | Shire Pharmaceuticals Plc. ADR (United Kingdom) | 109,768 | ||||||||
2,272 | Teva Pharmaceutical Industries Ltd. ADR (Israel) | 105,603 | ||||||||
364,017 | ||||||||||
REAL ESTATE INVESTMENT TRUSTS - 0.1% | ||||||||||
207 | Boston Properties, Inc. | 19,005 | ||||||||
RETAIL - FOOD - 0.3% | ||||||||||
2,776 | Schering Plough Corp. | 73,953 | ||||||||
ROAD & RAIL - 1.0% | ||||||||||
172 | Burlington Northern Santa Fe Corp. | 14,316 | ||||||||
5,008 | Old Dominion Freight Line, Inc.(a) | 115,735 | ||||||||
1,120 | Union Pacific Corp. | 140,694 | ||||||||
270,745 | ||||||||||
The accompanying notes are an integral part of these financial statements
11 DIREXION EVOLUTION VP FUNDS
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
December 31, 2007
Shares | Value | |||||||||
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 4.7% | ||||||||||
723 | Advanced Energy Industries, Inc.(a) | $ | 9,457 | |||||||
6,537 | Altera Corp. | 126,295 | ||||||||
4,012 | ASML Holding N.V. ADR (Netherlands) | 125,535 | ||||||||
1,003 | Brooks Automation, Inc.(a) | 13,250 | ||||||||
829 | Cohu, Inc. | 12,684 | ||||||||
5,206 | Diodes, Inc.(a) | 156,544 | ||||||||
5,233 | Intevac, Inc.(a) | 76,088 | ||||||||
472 | JA Solar Holdings Co., Ltd. ADR (China)(a) | 32,950 | ||||||||
3,037 | Lam Research Corp.(a) | 131,289 | ||||||||
711 | LDK Solar Co., Ltd. ADR (China)(a) | 33,424 | ||||||||
2,543 | Linear Technology Corp. | 80,944 | ||||||||
2,247 | MEMC Electronic Materials, Inc.(a) | 198,837 | ||||||||
700 | MKS Instruments, Inc.(a) | 13,398 | ||||||||
3,931 | NVIDIA Corp.(a) | 133,733 | ||||||||
4,155 | Taiwan Semiconductor Manufacturing Co., Ltd. ADR (Taiwan) | 41,384 | ||||||||
3,383 | Varian Semiconductor, Inc.(a) | 125,171 | ||||||||
1,310,983 | ||||||||||
Software - 5.5% | ||||||||||
4,940 | Autodesk, Inc.(a) | 245,814 | ||||||||
2,750 | Blackbaud, Inc. | 77,110 | ||||||||
333 | Business Objects S.A. ADR (France)(a) | 20,280 | ||||||||
4,540 | Cadence Design Systems, Inc.(a) | 77,225 | ||||||||
888 | FactSet Research Systems, Inc. | 49,462 | ||||||||
7,041 | Informatica Corp.(a) | 126,879 | ||||||||
633 | JDA Software Group, Inc.(a) | 12,951 | ||||||||
1,059 | MICROS Systems, Inc.(a) | 74,299 | ||||||||
2,067 | Microsoft Corp. | 73,585 | ||||||||
10,814 | Oracle Corp.(a) | 244,180 | ||||||||
4,080 | Quality Systems, Inc. | 124,399 | ||||||||
3,582 | Red Hat, Inc.(a) | 74,649 | ||||||||
1,182 | Salesforce.com, Inc.(a) | 74,100 | ||||||||
2,445 | SAP AG ADR (Germany) | 124,817 | ||||||||
3,228 | SPSS, Inc.(a) | 115,918 | ||||||||
565 | Sybase, Inc.(a) | 14,741 | ||||||||
1,530,409 | ||||||||||
SPECIALTY RETAIL - 1.2% | ||||||||||
863 | Abercrombie & Fitch Co. | 69,014 | ||||||||
2,809 | American Eagle Outfitters, Inc. | 58,343 | ||||||||
197 | Autozone, Inc.(a) | 23,622 | ||||||||
3,721 | CarMax, Inc.(a) | 73,490 | ||||||||
909 | The Cato Corp. | 14,235 | ||||||||
336 | Jos. A. Bank Clothiers, Inc.(a) | 9,559 | ||||||||
339 | Men’s Wearhouse, Inc. | 9,146 | ||||||||
2,209 | O’Reilly Automotive, Inc.(a) | 71,638 | ||||||||
329,047 | ||||||||||
SURGICAL AND MEDICAL INSTRUMENTS AND APPARATUS - 0.1% | ||||||||||
759 | Symmetry Medical, Inc.(a) | 13,229 | ||||||||
TEXTILES, APPAREL & LUXURY GOODS - 2.0% | ||||||||||
6,843 | Coach, Inc.(a) | 209,259 | ||||||||
4,039 | Crocs, Inc.(a) | 148,676 | ||||||||
1,912 | Nike, Inc. | 122,827 | ||||||||
313 | Polo Ralph Lauren Corp. | 19,340 | ||||||||
3,565 | Skechers U.S.A., Inc.(a) | 69,553 | ||||||||
569,655 | ||||||||||
TRADING COMPANIES & DISTRIBUTORS - 0.4% | ||||||||||
2,262 | Applied Industrial Technologies, Inc. | 65,643 | ||||||||
490 | W.W. Grainger, Inc. | 42,885 | ||||||||
108,528 | ||||||||||
WATER UTILITIES - 0.1% | ||||||||||
708 | Companhia de Saneamento Basico ADR (Brazil) | 33,276 | ||||||||
WIRELESS TELECOMMUNICATION SERVICES - 1.5% | ||||||||||
328 | America Movil S.A.B. de C.V. ADR (Mexico) | 20,136 | ||||||||
1,759 | American Tower Corp.(a) | 74,933 | ||||||||
395 | China Mobile Hong Kong Ltd. ADR (Hong Kong) | 34,314 | ||||||||
1,547 | Leap Wireless International, Inc.(a) | 72,152 | ||||||||
1,283 | Mobile TeleSystems ADR (Russia) | 130,597 | ||||||||
453 | Vimpel-Communications ADR (Russia) | 18,845 | ||||||||
1,247 | SK Telecom Co., Ltd. ADR (South Korea) | 37,210 | ||||||||
914 | Vodafone Group Plc. ADR (United Kingdom) | 34,110 | ||||||||
422,297 | ||||||||||
TOTAL COMMON STOCKS (Cost $19,481,959) | $ | 20,361,416 | ||||||||
INVESTMENT COMPANIES - 5.1% | ||||||||||
4,734 | iShares MSCI Emerging Markets Index Fund | 711,283 | ||||||||
2,827 | iShares S&P Latin American 40 Index Fund | 703,273 | ||||||||
TOTAL INVESTMENT COMPANIES (Cost $1,426,568) | $ | 1,414,556 | ||||||||
Principal | ||||||||||
Amount | ||||||||||
SHORT TERM INVESTMENTS - 23.7% | ||||||||||
U.S. GOVERNMENT AGENCY OBLIGATIONS - 23.7% | ||||||||||
$ | 6,600,000 | Federal Home Loan Bank Discount Note, 1.02%, 1/02/2008 | 6,600,000 | |||||||
The accompanying notes are an integral part of these financial statements
DIREXION EVOLUTION VP FUNDS 12
Table of Contents
Evolution VP All-Cap Equity Fund
Schedule of Investments (continued)
December 31, 2007
Shares | Value | |||||||||
MONEY MARKET FUNDS - 0.0% | ||||||||||
$ | 5,102 | Federated Prime Obligations Fund | $ | 5,102 | ||||||
TOTAL SHORT TERM INVESTMENTS (Cost $6,605,102) | $ | 6,605,102 | ||||||||
TOTAL INVESTMENTS (Cost $27,513,629) - 101.9% | $ | 28,381,074 | ||||||||
Liabilities in Excess of Other Assets—(1.9)% | (516,460 | ) | ||||||||
TOTAL NET ASSETS - 100.0% | $ | 27,864,614 | ||||||||
Percentages are stated as a percent of net assets.
ADR American Depository Receipt
(a) | Non Income Producing |
(b) | Foreign Issued Security |
CONCENTRATION BY COUNTRY
Country | % of Net Assets | |||
United States of America | 88.5 | |||
China | 1.7 | |||
Brazil | 1.7 | |||
Netherlands | 1.4 | |||
South Africa | 0.8 | |||
Bermuda | 0.7 | |||
Germany | 0.7 | |||
Russia | 0.7 | |||
United Kingdom | 0.7 | |||
South Korea | 0.6 | |||
Mexico | 0.6 | |||
Japan | 0.5 | |||
Israel | 0.4 | |||
India | 0.3 | |||
Taiwan | 0.3 | |||
Luxembourg | 0.3 | |||
Sweden | 0.3 | |||
Finland | 0.3 | |||
Columbia | 0.3 | |||
Singapore | 0.3 | |||
Canada | 0.3 | |||
Australia | 0.1 | |||
Hong Kong | 0.1 | |||
France | 0.1 | |||
Ireland | 0.1 | |||
Venezuelaˆ | 0.0 | |||
101.9 | % |
ˆ Less than .05%.
The accompanying notes are an integral part of these financial statements
13 DIREXION EVOLUTION VP FUNDS
Table of Contents
Statements of Assets and Liabilities
December 31, 2007
Evolution VP Managed | Evolution VP All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
Assets: | ||||||||
Investments, at market value (Note 2) | $ | 11,789,961 | $ | 28,381,074 | ||||
Cash | 2,049 | 293 | ||||||
Receivable for investments sold | 179,049 | 174,776 | ||||||
Receivable for Fund shares sold | 137 | — | ||||||
Dividends and interest receivable | 35,578 | 49,213 | ||||||
Other assets | 644 | 1,189 | ||||||
Total Assets | 12,007,418 | 28,606,545 | ||||||
Liabilities: | ||||||||
Payable for investments purchased | 193,421 | 669,185 | ||||||
Payable for Fund shares redeemed | 1,091 | 3,153 | ||||||
Accrued distribution expense | 2,587 | 6,146 | ||||||
Accrued advisory expense | 10,430 | 5,752 | ||||||
Accrued expenses and other liabilities | 32,838 | 57,695 | ||||||
Total Liabilities | 240,367 | 741,931 | ||||||
Net Assets | $ | 11,767,051 | $ | 27,864,614 | ||||
Net Assets Consist Of: | ||||||||
Capital stock | $ | 11,868,700 | $ | 26,784,782 | ||||
Accumulated undistributed net investment income | 469,925 | — | ||||||
Accumulated undistributed net realized gain (loss) | (758,437 | ) | 212,387 | |||||
Net unrealized appreciation/(depreciation) on: | ||||||||
Investments | 186,863 | 867,445 | ||||||
Total Net Assets | $ | 11,767,051 | $ | 27,864,614 | ||||
Calculation of Net Asset Value Per Share: | ||||||||
Net assets | $ | 11,767,051 | $ | 27,864,614 | ||||
Shares outstanding | ||||||||
(unlimited shares of beneficial interest authorized, no par value) | 599,025 | 1,106,073 | ||||||
Net asset value, redemption price and offering price per share | $ | 19.64 | $ | 25.19 | ||||
Cost of Investments | $ | 11,603,098 | $ | 27,513,629 | ||||
The accompanying notes are an integral part of these financial statements
14 DIREXION EVOLUTION VP FUNDS
Table of Contents
Statements of Operations
For the Year Ended December 31, 2007
Evolution VP Managed | Evolution VP All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
Investment income: | ||||||||
Dividend income (net of foreign withholding tax of $0 and $4,333, respectively) | $ | 473,874 | $ | 272,965 | ||||
Interest income | 224,059 | 221,776 | ||||||
Total investment income | 697,933 | 494,741 | ||||||
Expenses: | ||||||||
Investment advisory fees | 124,180 | 286,840 | ||||||
Distribution expenses | 31,045 | 71,710 | ||||||
Administration fees | 6,288 | 12,087 | ||||||
Shareholder servicing fees | 33,999 | 73,616 | ||||||
Fund accounting fees | 10,286 | 33,337 | ||||||
Custody fees | 3,494 | 7,776 | ||||||
Professional fees | 23,845 | 40,412 | ||||||
Reports to shareholders | 10,320 | 9,315 | ||||||
Directors’ fees and expenses | 831 | 830 | ||||||
Other | 11,749 | 19,194 | ||||||
Total expenses before reimbursement | 256,037 | 555,117 | ||||||
Less: Reimbursement of expenses by Adviser | (8,065 | ) | — | |||||
Plus: Recoupment of previously reimbursed expenses | — | 18,563 | ||||||
Total expenses | 247,972 | 573,680 | ||||||
Net investment income (loss) | 449,961 | (78,939 | ) | |||||
Realized and unrealized gain (loss) on investments: | ||||||||
Net realized gain (loss) on: | ||||||||
Investments | (385,925 | ) | 3,221,192 | |||||
Futures | (778 | ) | (1,625,439 | ) | ||||
Swaps | (7,983 | ) | — | |||||
(394,686 | ) | 1,595,753 | ||||||
Capital gain distributions from regulated investment companies | 3,333 | — | ||||||
Change in unrealized appreciation (depreciation) on: Investments | 71,417 | (685,109 | ) | |||||
Net realized and unrealized gain (loss) on investments | (319,936 | ) | 910,644 | |||||
Net increase in net assets resulting from operations | $ | 130,025 | $ | 831,705 | ||||
The accompanying notes are an integral part of these financial statements
DIREXION EVOLUTION VP FUNDS 15
Table of Contents
Statements of Changes in Net Assets
Evolution VP Managed Bond Fund | Evolution VP All-Cap Equity Fund | |||||||||||||||
Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||
December 31, 2007 | December 31, 2006 | December 31, 2007 | December 31, 2006 | |||||||||||||
Operations: | ||||||||||||||||
Net investment income (loss) | $ | 449,961 | $ | 288,211 | $ | (78,939 | ) | $ | 80,263 | |||||||
Net realized gain (loss) on investments | (394,686 | ) | (110,474 | ) | 1,595,753 | 811,720 | ||||||||||
Capital gain distributions from regulated investment companies | 3,333 | — | — | — | ||||||||||||
Change in unrealized appreciation (depreciation) on investments | 71,417 | 95,186 | (685,109 | ) | 1,121,731 | |||||||||||
Net increase (decrease) in net assets resulting from operations | 130,025 | 272,923 | 831,705 | 2,013,714 | ||||||||||||
Distributions to shareholders: | ||||||||||||||||
Net investment income | (347,306 | ) | (30,745 | ) | (78,978 | ) | (4,381 | ) | ||||||||
Net realized gains | — | — | (1,319,400 | ) | (358,497 | ) | ||||||||||
Total distributions | (347,306 | ) | (30,745 | ) | (1,398,378 | ) | (362,878 | ) | ||||||||
Capital share transactions: | ||||||||||||||||
Proceeds from shares sold | 2,510,649 | 10,112,920 | 8,391,398 | 19,734,601 | ||||||||||||
Proceeds from shares issued to holders in reinvestment of distributions | 347,305 | 30,745 | 1,398,379 | 362,878 | ||||||||||||
Cost of shares redeemed | (4,113,820 | ) | (1,342,210 | ) | (8,562,377 | ) | (2,524,896 | ) | ||||||||
Net increase in net assets resulting from capital share transactions | (1,255,866 | ) | 8,801,455 | 1,227,400 | 17,572,583 | |||||||||||
Total increase (decrease) in net assets | (1,473,147 | ) | 9,043,633 | 660,727 | 19,223,419 | |||||||||||
Net assets: | ||||||||||||||||
Beginning of period | 13,240,198 | 4,196,565 | 27,203,887 | 7,980,468 | ||||||||||||
End of period | $ | 11,767,051 | $ | 13,240,198 | $ | 27,864,614 | $ | 27,203,887 | ||||||||
Accumulated undistributed net investment income (loss), end of period | $ | 469,925 | $ | 347,303 | $ | — | $ | 78,969 | ||||||||
The accompanying notes are an integral part of these financial statements
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Evolution VP Managed Bond Fund | ||||||||||||||||
Year Ended | Year Ended | Year Ended | July 1, 20041 to | |||||||||||||
December 31, 2007 | December 31, 2006 | December 31, 2005 | December 31, 2004 | |||||||||||||
Per share data: | ||||||||||||||||
Net asset value, beginning of year | $ | 20.00 | $ | 19.61 | $ | 20.76 | $ | 20.00 | ||||||||
Income (loss) from investment operations: | ||||||||||||||||
Net investment income (loss)4 | 0.73 | 0.63 | 0.67 | 6 | 0.32 | |||||||||||
Net realized and unrealized gain (loss) on investments | (0.51 | ) | (0.19 | ) | (1.54 | ) | 0.44 | |||||||||
Total from investment operations | 0.22 | 0.44 | (0.87 | ) | 0.76 | |||||||||||
Less distributions: | ||||||||||||||||
Dividends from net investment income | (0.58 | ) | (0.05 | ) | (0.25 | ) | — | |||||||||
Distributions from realized gains | — | — | (0.03 | ) | — | |||||||||||
Total distributions | (0.58 | ) | (0.05 | ) | (0.28 | ) | — | |||||||||
Net asset value, end of year | $ | 19.64 | $ | 20.00 | $ | 19.61 | $ | 20.76 | ||||||||
Total return8 | 1.14 | % | 2.23 | % | (4.19 | )% | 3.80 | %2 | ||||||||
Supplemental data and ratios: | ||||||||||||||||
Net assets, end of period | $ | 11,767,051 | $ | 13,240,198 | $ | 4,196,565 | $ | 753,551 | ||||||||
Ratio of net expenses to average net assets excluding short dividends: | ||||||||||||||||
Before expense reimbursement/recoupment | 2.06 | % | 2.55 | % | 4.69 | % | 23.17 | %3 | ||||||||
After expense reimbursement/recoupment | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | %3 | ||||||||
Ratio of net expenses to average net assets including short dividends: | ||||||||||||||||
Before expense reimbursement/recoupment | — | — | 4.93 | % | —3 | |||||||||||
After expense reimbursement/recoupment | — | — | 2.24 | % | —3 | |||||||||||
Ratio of net investment income (loss) to average net assets including short dividends: | ||||||||||||||||
Before expense reimbursement/recoupment | 3.56 | % | 2.64 | % | 0.68 | % | (17.98 | )%3 | ||||||||
After expense reimbursement/recoupment | 3.62 | % | 3.19 | % | 3.37 | %7 | 3.19 | %3 | ||||||||
Portfolio turnover rate5 | 958 | % | 954 | % | 978 | % | 7 | %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. Investments in options, swaps, futures contracts and repurchase agreements are deemed short-term securities. The Fund’s aggressive investment strategy may result in significant portfolio turnover to take advantage of anticipated changes in market conditions. | |
6 | 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. | |
7 | 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. | |
8 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes or any fees and expenses imposed under the Contracts and Plans, which would increase overall fees and expenses. Please refer to your Contract or Plan prospectus for a description of those fees and expenses. |
The accompanying notes are an integral part of these financial statements
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Financial Highlights
Evolution VP All-Cap Equity Fund | ||||||||||||||||
Year Ended | Year Ended | Year Ended | July 1, 20041 to | |||||||||||||
December 31, 2007 | December 31, 2006 | December 31, 2005 | December 31, 2004 | |||||||||||||
Per share data: | ||||||||||||||||
Net asset value, beginning of year | $ | 25.71 | $ | 23.12 | $ | 21.06 | $ | 20.00 | ||||||||
Income (loss) from investment operations: | ||||||||||||||||
Net investment income (loss)4 | (0.07 | ) | 0.11 | 0.03 | (0.15 | ) | ||||||||||
Net realized and unrealized gain (loss) on investments | 0.88 | 2.83 | 2.03 | 1.21 | ||||||||||||
Total from investment operations | 0.81 | 2.94 | 2.06 | 1.06 | ||||||||||||
Less distributions: | ||||||||||||||||
Dividends from net investment income | (0.08 | ) | (0.00 | )6 | — | — | ||||||||||
Distributions from realized gains | (1.25 | ) | (0.35 | ) | — | — | ||||||||||
Total distributions | (1.33 | ) | (0.35 | ) | — | — | ||||||||||
Net asset value, end of year | $ | 25.19 | $ | 25.71 | $ | 23.12 | $ | 21.06 | ||||||||
Total return7 | 3.11 | % | 12.70 | % | 9.78 | % | 5.30 | %2 | ||||||||
Supplemental data and ratios: | ||||||||||||||||
Net assets, end of period | $ | 27,864,614 | $ | 27,203,887 | $ | 7,980,468 | $ | 1,043,923 | ||||||||
Ratio of net expenses to average net assets: | ||||||||||||||||
Before expense reimbursement/recoupment | 1.94 | % | 2.09 | % | 3.84 | % | 20.13 | %3 | ||||||||
After expense reimbursement/recoupment | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | %3 | ||||||||
Ratio of net investment income (loss) to average net assets: | ||||||||||||||||
Before expense reimbursement/recoupment | (0.21 | )% | 0.35 | % | (1.72 | )% | (19.66 | )%3 | ||||||||
After expense reimbursement/recoupment | (0.27 | )% | 0.44 | % | 0.12 | % | (1.53 | )%3 | ||||||||
Portfolio turnover rate5 | 1,018 | % | 909 | % | 1,001 | % | 2 | %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. Investments in options, swaps, futures contracts and repurchase agreements are deemed short-term securities. The Fund’s aggressive investment strategy may result in significant portfolio turnover to take advantage of anticipated changes in market conditions. | |
6 | Amount less than $0.005 per share. | |
7 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes or any fees and expenses imposed under the Contracts and Plans, which would increase overall fees and expenses. Please refer to your Contract or Plan prospectus for a description of those fees and expenses. |
The accompanying notes are an integral part of these financial statements
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Evolution VP Managed Bond Fund
Evolution VP All-Cap Equity Fund
Evolution VP All-Cap Equity Fund
December 31, 2007
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 Trust currently has three series in operation of which two are included in this report, the Evolution VP Managed Bond Fund and the Evolution VP All-Cap Equity 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 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 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 closed-end investment companies (collectively, 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.
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, swap agreements, closed-end investment companies, options, futures, and options on futures are valued at their last sales price, or if not available, the average of the last bid and asked prices. Securities primarily traded on the NASDAQ National Market are valued using the NASDAQ Official Closing Price (“NOCP”). Short-term debt securities with a maturity of 60 days or less and money market securities are valued using the amortized cost method. Other debt securities are valued by using the closing bid and asked prices provided by the Funds’ pricing service or, if such services are unavailable, by a pricing matrix method. Securities for which reliable market quotations are not readily available, the Funds’ pricing service does not provide a valuation for such securities, the Funds’ pricing service provides valuation that in the judgment of Rafferty Asset Managements, LLC (the “Adviser”) does not represent fair value, or the Fund or Adviser believes the market price is stale will be fair valued as determined by the Adviser under the supervision of the Board of Trustees.
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 receives, as collateral, cash and/or securities (primarily U.S. government securities) whose market 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) Swap Contracts – Each Fund may enter into equity swap contacts. Standard swap contracts are between two parties that agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross amount to be exchanged is calculated with respect to a “notional amount” (i.e. the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index or industry sector). The Fund’s obligations are accrued daily (offset by any amounts owed to the funds.)
In a “long” swap agreement, the counterparty will generally agree to pay the Funds the amount, if any, by which the notional amount of swap contract would have increased in value if the Funds had been invested in the particular securities, plus dividends that would have been received on those
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securities. The Funds will agree to pay the counterparty a floating rate of interest on the notional amount of the swap contract plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such securities plus, in certain instances, commissions or trading spreads on the notional amounts. Thus, the return on the swap contract should be the gain or loss on the notional amount plus dividends on the securities less the interest paid by the Fund on the notional amount. Payments may be made at the conclusion of the contract or periodically during its term. Swap contracts do not include the delivery of securities or other underlying securities. The net amount of the excess, if any, of the Fund’s obligations over its entitlement with respect to each swap is accrued on a daily basis and an amount of cash or liquid assets, having an aggregate net asset value at least equal to such accrued excess is maintained in a segregated account by the Fund’s custodian. Until a swap contract is settled in cash, the gain or loss on the notional amount plus dividends on the securities less the interest paid by the Funds on the notional amount are recorded as “unrealized gains or losses on swaps and futures” and when cash is exchanged, the gain or loss is recorded as “realized gains or losses on swaps and futures.” Swap contracts are collateralized by the securities and cash of each particular Fund.
Each Fund may enter into swap contracts that provide the opposite return of the particular benchmark or security (“short” the index or security). The operations are similar to that of the swaps disclosed above except that the counterparty pays interest to the Fund on the notional amount outstanding and the dividends on the underlying securities reduce the value of the swap, plus, in certain instances, the Fund will agree to pay to the counterparty commissions or trading spreads on the notional amount. These amounts are netted with any unrealized appreciation or depreciation to determine the value of the swap.
Swap contracts involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount reflected in the Statements of Assets and Liabilities. The notional amounts reflect the extent of the total investment exposure that each Fund has under the swap contract. The primary risks associated with the use of swap agreements are imperfect correlation between movements in the notional amount and the price of the underlying securities and the inability of counterparties to perform. A Fund bears the risk of loss of the amount expected to be received under a swap contract in the event of default or bankruptcy of a swap contract counterparty.
d) 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.
e) Risks of Options, Futures Contracts, Options on Futures Contracts and Short Positions – The risks inherent in the use of options, futures contracts, options on futures contracts and short positions include 1) adverse changes in the value of such instruments; 2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the price of the underlying securities, index or futures contracts; 3) the possible absence of a liquid secondary market for any particular instrument at any time; 4) the possible need to defer closing out certain positions to avoid adverse tax consequences; and 5) the possible nonperformance by the counterparty under the terms of the contract. The Funds designate all cash, cash equivalents and liquid securities as collateral for written options, futures contracts and short positions.
f) Risks of Investing in Foreign Securities – Investments in foreign securities involve greater risks than investing in domestic securities. As a result, the Fund’s returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
g) 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.
h) 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
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and capital gains to its shareholders sufficient to relieve it from all or substantially all federal income and excise taxes.
i) 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 series, such as Advisory fees and registration costs. Expenses that are not directly attributable to a series are generally allocated among the Trust’s series in proportion to their respective net assets.
j) Distributions to Shareholders – Each Fund generally pays dividends from net investment income and distributes net realized capital gains, if any, at least annually. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Distributions to shareholders are recorded on the ex-dividend date. Each Fund may utilize earnings and profits distributed to shareholders on redemption of shares as part of the dividend paid deduction.
The tax character of distributions for the Funds during the years ended December 31, 2007 and December 31, 2006, were as follows:
Evolution VP | Evolution VP | |||||||||||||||
Managed Bond Fund | All-Cap Equity Fund | |||||||||||||||
Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Distributions paid from: | ||||||||||||||||
Ordinary Income | $ | 347,306 | $ | 30,745 | $ | 1,326,536 | $ | 362,670 | ||||||||
Long-term capital gain | — | — | 71,842 | 208 | ||||||||||||
Total distributions paid | $ | 347,306 | $ | 30,745 | $ | 1,398,378 | $ | 362,878 | ||||||||
As of December 31, 2007, the components of distributable earnings of the Funds on a tax basis were as follows:
Evolution VP | Evolution VP | |||||||
Managed | All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
Cost basis of investments for federal income tax purposes | $ | 11,734,554 | $ | 29,629,239 | ||||
Unrealized Appreciation | 208,723 | 1,216,506 | ||||||
Unrealized Depreciation | (153,316 | ) | (2,464,671 | ) | ||||
Net unrealized appreciation/(depreciation) | 55,407 | (1,248,165 | ) | |||||
Undistributed ordinary income/(loss) | 469,817 | 2,691,019 | ||||||
Undistributed long-term gain/(loss) | — | — | ||||||
Distributable earnings | 469,817 | 2,691,019 | ||||||
Other Accumulated gain/(loss) | (626,873 | ) | (363,022 | ) | ||||
Total Accumulated earnings | $ | (101,649 | ) | $ | 1,079,832 | |||
The difference between book cost of investments and tax cost of investments is attributable primarily to the tax deferral of losses on wash sales.
k) 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. | CAPITAL SHARE TRANSACTIONS |
Capital share transactions for the Funds during the years ended December 31, 2007 and December 31, 2006 were as follows:
Evolution VP | Evolution VP | |||||||||||||||
Managed Bond Fund | All-Cap Equity Fund | |||||||||||||||
Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Shares sold | 126,197 | 514,029 | 316,075 | 798,745 | ||||||||||||
Shares issued to holders in reinvestment of distributions | 17,875 | 1,537 | 55,098 | 14,022 | ||||||||||||
Shares redeemed | (207,080 | ) | (67,489 | ) | (323,161 | ) | (99,872 | ) | ||||||||
Total increase (decrease) from capital share transactions | (63,008 | ) | 448,077 | 48,012 | 712,895 | |||||||||||
4. | INVESTMENT TRANSACTIONS |
During the year ended December 31, 2007, the aggregate purchases and sales of investments (excluding short-term investments) for each Fund were as follows:
Evolution VP | Evolution VP | |||||||
Managed | All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
Purchases | $ | 81,879,306 | $ | 253,486,296 | ||||
Sales | 80,541,612 | 260,443,442 |
There were no purchases or sales of long-term U.S. Government securities during the period ended December 31, 2007.
In order to meet certain excise tax distribution requirements, the Funds are required to measure and distribute annually, net capital gains realized during a twelve-month period ending October 31st. In connection with this, the Funds are permitted for tax purposes to defer into their next fiscal year any net capital losses incurred between November 1st and the end of their fiscal year.
At October 31, 2007 the Evolution VP Managed Bond Fund deferred, on a tax basis, post-October losses of $(157,402).
As of December 31, 2007, the Evolution VP Managed Bond Fund had capital loss carryforwards on a tax basis of:
Capital Loss | ||||||
Carryover | Expires | |||||
$ | (143,203 | ) | 2013 | |||
(38,577 | ) | 2014 | ||||
(280,466 | ) | 2015 |
To the extent that the Fund realizes future net capital gains, those gains will be offset by any unused capital loss carryover.
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.
On the Statements of Assets and Liabilities, the following adjustments were made for permanent tax adjustments:
Accumulated | Undistributed Net | |||||||||||
Net Realized | Investment | |||||||||||
Gain/(Loss) | Income/(Loss) | Paid-in Capital | ||||||||||
Evolution VP Managed Bond Fund | $ | (19,967 | ) | $ | 19,967 | $ | — | |||||
Evolution VP All-Cap Equity Fund | $ | (668,856 | ) | $ | 78,948 | $ | 589,908 |
Differences are primarily due to income tax treatment of certain security investments and the reclass of distributions paid.
5. | INVESTMENT ADVISORY AND OTHER AGREEMENTS |
The Funds have entered into an investment advisory agreement with the Adviser. The Adviser 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 Adviser has entered into a sub-advisory agreement related to the Evolution VP Managed Bond Fund and the Evolution VP All-Cap Equity Fund with Flexible Plan Investments, Ltd., whereby the sub-
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adviser will direct investment activities of the Funds. The Adviser pays, out of the management fees it receives from the Funds, a fee for these sub-advisory services. For the year ended December 31, 2007, the Adviser has voluntarily agreed to pay 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. Because this is a voluntary waiver, the Adviser may change or end the waiver at any time. The Adviser may recover from the Funds the expenses paid in excess of the annual cap on expenses for the three previous years, as long as the recovery does not cause the Fund to exceed such annual cap on expenses. For the year ended December 31, 2007, the Adviser paid or recouped the following expenses:
Evolution VP | Evolution VP | |||||||
Managed | All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
Annual Advisory rate | 1.00 | % | 1.00 | % | ||||
Annual cap on expenses | 2.00 | % | 2.00 | % | ||||
Expenses paid in excess of annual cap on expenses - 2007 | $ | 8,065 | $ | — | ||||
Adviser expense waiver recovery - 2007 | $ | — | $ | 18,563 |
Remaining expenses subject to potential recovery expiring in:
Evolution VP | Evolution VP | |||||||
Managed | All-Cap | |||||||
Bond Fund | Equity Fund | |||||||
2008 | $ | 60,627 | $ | 66,665 | ||||
2009 | 49,690 | 16,813 | ||||||
2010 | 8,065 | — | ||||||
Total | $ | 118,382 | $ | 83,478 | ||||
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 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 Adviser 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. During the year ended December 31, 2007, the Evolution VP Managed Bond Fund and the Evolution All-Cap Equity Fund incurred expenses of $31,045 and $71,710, respectively under Rule 12b-1. The fee is paid to the Distributor for expenses incurred for distribution-related activities. The Distributor is an affiliate of the Adviser.
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. The 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.
6. | FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 48 |
In July 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required as of the date of the last Net Asset Value (“NAV”) calculation in the first required financial statement reporting period for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date.
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FIN 48 requires the Funds to analyze all open tax years. Open tax years are those years that are open for examination by the relevant income taxing authority. As of December 31, 2007, open Federal and state income tax years include the tax years ended December 31, 2004 through December 31, 2007. The Funds have no examinations in progress.
The Funds have reviewed all open tax years and concluded that the adoption of FIN 48 resulted in no effect to the Fund’s financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end December 31, 2007. The Funds are also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
7. | NEW ACCOUNTING PRONOUNCEMENT |
In September 2006, FASB issued its new Standard No. 157, Fair Value Measurements (“FAS 157”). FAS 157 is designed to unify guidance for the measurement of fair value of all types of assets, including financial instruments, and certain liabilities, throughout a number of accounting standards. FAS 157 also establishes a hierarchy for measuring fair value in generally accepted accounting principles and expands financial statement disclosures about fair value measurements that are relevant to mutual funds. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and earlier adoption is permitted. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
24 DIREXION EVOLUTION VP FUNDS
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Report of Independent Registered Public Accounting Firm
To the Shareholders and
Board of Trustees of Direxion Insurance Trust
We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Direxion Insurance Trust (comprising Evolution VP Managed Bond Fund and Evolution VP All-Cap Equity Fund) (the “Funds”), as of December 31, 2007, and the related statements 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 three years in the period then ended and for the period from July 1, 2004 (commencement of operations) to December 31, 2004. These financial statements and financial highlights are the responsibility of the Funds’ 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. We were not engaged to perform an audit of the Funds’ 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 Funds’ 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 and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Evolution VP Managed Bond Fund and Evolution VP All-Cap Equity Fund of Direxion Insurance Trust at December 31, 2007, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended and for the period from July 1, 2004 (commencement of operations) to December 31, 2004 in conformity with U.S. generally accepted accounting principles.
![-s- ERNST AND YOUNG LLP](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174ernstyo.gif)
Chicago, Illinois
February 21, 2008
February 21, 2008
DIREXION EVOLUTION VP FUNDS 25
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The Internal Revenue Code requires that shareholders be notified within 60 days of the Funds’ fiscal year-end of certain information regarding long-term capital gains, qualified dividend income and the dividends received deduction for corporate shareholders. This data is informational only. Every year in January, shareholders are sent a Form 1099-DIV, which provides the federal tax status of dividends and distributions received during the calendar year. Shareholders are advised to consult their own tax advisor with respect to the specific tax consequences in the Funds.
Each Fund hereby designates the following amounts as long-term capital gain distributions for purposes of the dividends paid deduction (including earnings and profits distributed to shareholders on redemption of Fund shares), during the fiscal year ended December 31, 2007.
Evolution VP Managed Bond Fund | $ | — | ||
Evolution VP All-Cap Equity Fund | $ | 71,842 |
Qualified Dividend Income/Dividends Received Deduction
For the fiscal year ended December 31, 2007, certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth ax Relief Act of 2003. The percentage of dividends declared from ordinary income designated as qualified income was as follows:
Evolution VP Managed Bond Fund | 0 | % | ||
Evolution VP All-Cap Equity Fund | 12.6 | % |
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the fiscal year ended December 31, 2007 was as follows:
Evolution VP Managed Bond Fund | 0 | % | ||
Evolution VP All-Cap Equity Fund | 12.6 | % |
26 DIREXION EVOLUTION VP FUNDS
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Investment Advisory and Subadvisory Agreement Approval
Provided below is a summary of certain of the factors the Board considered at its August 15, 2007 Board meeting in renewing: (i) the Advisory Agreement (“Advisory Agreement”) between Rafferty Asset Management, LLC (“Rafferty”) and the Direxion Insurance Trust (the “Trust”); and (ii) the Subadvisory Agreement (“Subadvisory Agreement”) between Rafferty and Flexible Plan Investments, Inc. (the “Subadviser” or “Flexible”), on behalf of Evolution VP Managed Bond Fund and Evolution VP All-Cap Equity Fund (each, a “Fund”).
The Board did not identify any particular information that was most relevant to its consideration to approve the continuance of the Advisory Agreement and the Subadvisory Agreement for each Fund (the “Agreements”) and each Trustee may have afforded different weight to the various factors. In determining whether to approve the continuance of the Agreements, the Board considered the best interests of each Fund separately. In addition, the Board noted that the Trustees have considered various reports and information provided throughout the year at their regular Board meetings and otherwise. While the Agreements for each Fund were considered at the same Board meeting, the Board considered each Fund’s investment advisory and investment subadvisory relationship separately.
In determining whether to approve the continuance of the Agreements for each Fund, the Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund; (3) the cost to Rafferty and Flexible of providing services and the profitability of the advisory business to Rafferty and Flexible, if such information was provided; (4) the extent to which economies of scale have been taken into account in setting fee schedules; (5) whether fee levels reflect these economies of scale, if any, for the benefit of Fund shareholders; (6) comparisons of services and fees with contracts entered into by Rafferty and Flexible with other clients (such as pension funds and other institutional investors), if any; and (7) other benefits derived or anticipated to be derived by Rafferty or Flexible from its relationships with the Fund.
Nature, Extent and Quality of Services Provided. The Board reviewed the nature, extent and quality of the services provided under the Advisory Agreements by Rafferty. The Board noted that Rafferty has provided services to the Funds since their inception. The Board also noted that Rafferty trades efficiently with low commission schedules, which helps improve performance results. The Board considered Rafferty’s representation that it has the financial resources and appropriate staffing to manage the Funds and meet its expense reimbursement obligations, if any. The Board also considered Rafferty’s ongoing efforts to improve its compliance and control functions for the Funds, and noted that information concerning portfolio management and a report from the chief compliance officer are provided to the Board at its regularly scheduled quarterly Board meetings. The Board considered that Rafferty oversees all aspects of the operation of the Funds, including oversight of the Funds’ service providers and Flexible.
Regarding the Subadvisory Agreement with Flexible, the Board noted that there would be no change in the services provided by Flexible.
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 Advisory Agreement and by Flexible under the Subadvisory Agreement were fair and reasonable.
Performance of the Funds. The Board evaluated the performance of each Fund compared to its benchmark index for monthly periods and the year-to-date period ended July 31, 2007.
With respect to the Evolution VP Managed Bond Fund, the Board noted that the Fund underperformed its benchmark index for the year-to-date period.
With respect to the Evolution VP All-Cap Equity Fund, the Board noted that the Fund underperformed its benchmark index for the year-to-date period.
Costs of Services Provided to the Funds and Profits Realized. The Board considered the overall fees paid to Rafferty on an annual basis since each Fund’s commencement of operations, including any fee waivers and recoupment of fees previously
DIREXION EVOLUTION VP FUNDS 27
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waived. The Board also considered that Rafferty contractually agreed to limit the total expenses for each Fund via fee waivers and/or expense limitations. The Board also considered the overall profitability of Rafferty’s investment business and its representation that it does not assess profitability with respect to its services to individual Funds. Based on these considerations, the Board determined that, in the exercise of its business judgment, the costs of the services provided and the profits realized under the Agreements were fair and reasonable.
In considering the fees paid by Rafferty to Flexible, the Board considered Rafferty’s representation that the fees are higher than industry averages. The Board also noted that Rafferty negotiated the lowest fee that Flexible charges for comparable client accounts. In addition, Rafferty also negotiated breakpoints in subadvisory fees with Flexible. With respect to each Fund, the Board noted Flexible’s representation that it did not earn any pre- or post-tax profits.
Based on these considerations, the Board determined that, in the exercise of its business judgment, the costs of the services provided and the profits realized 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 achieve economies of scale or warrant a reduction in fee rates or the addition of breakpoints. However, Rafferty noted that asset levels generally have increased due to sales and marketing efforts. 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.
Other Benefits. The Board considered Rafferty’s representation that its relationship with the Funds has permitted Rafferty to attract business to its non-mutual fund account. The Board also considered that Rafferty’s overall business with brokerage firms helps to lower commission rates and provide better execution for Fund portfolio transactions. In addition, the Board considered that Flexible has greater access to certain trust platforms due to its subadvisory services to the Evolution Funds. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the benefits were fair and reasonable.
Conclusion. Based on, but not limited to, the above considerations and determinations, the Board determined that the Agreements for each Fund were 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 Agreements.
28 DIREXION EVOLUTION VP FUNDS
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Direxion Funds
The business affairs of each Fund are managed by or under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Funds is set forth below. The SAI includes additional information about the Funds’ Trustee and Officers and is available without charge, upon request by calling 1-800-851-0511.
# of | Other | |||||||||||
Position(s) | Principal | Portfolios in | Trusteeships/ | |||||||||
Held | Term of Office and | Occupation(s) During | Direxion Complex | Directorships | ||||||||
Name, Address and Age | with Fund | Length of Time Served | Past Five Years | Overseen by Trustee(2) | Held by Trustee | |||||||
Interested Trustees | ||||||||||||
Lawrence C. Rafferty(1) Age: 65 | Chairman of the Board of Trustees | Lifetime of Trust until removal or resignation; Since 1997 | Chairman and Chief Executive Officer of Rafferty, 1997 — present; Chief Executive Officer of Rafferty Companies, LLC, 1996 — present; Chief Executive Officer of Rafferty Capital Markets, Inc., 1995 — present. | 114 | Board of Trustees, Fairfield University; Board of Directors, St. Vincent’s Services; Executive Committee, Metropolitan Golf Association | |||||||
# of | Other | |||||||||||
Position(s) | Principal | Portfolios in | Trusteeships/ | |||||||||
Held | Term of Office and | Occupation(s) During | Direxion Complex | Directorships | ||||||||
Name, Address and Age | with Fund | Length of Time Served | Past Five Years | Overseen by Trustee(2) | Held by Trustee | |||||||
Non-Interested Trustees | ||||||||||||
Daniel J. Byrne Age: 63 | Trustee | Lifetime of Trust until removal or resignation; Since 1997 | President and Chief Executive Officer of Byrne Securities Inc., 1992 — present; Trustee, The Opening Word Program, Wyandanch, New York. | 114 | None | |||||||
Gerald E. Shanley III Age: 64 | Trustee | Lifetime of Trust until removal or resignation; Since 1997 | Business Consultant, 1985 — present; Trustee of Trust Under Will of Charles S. Payson, 1987 — present; C.P.A. 1979 — present. | 114 | None | |||||||
John Weisser Age: 65 | Trustee | Lifetime of Trust until removal or resignation; Since 2007 | Retired, Since 1995; Salomon Brothers, Inc, 1971 — 1995, most recently as Managing Director. | 114 | MainStay VP Series Fund, Inc. | |||||||
DIREXION EVOLUTION VP FUNDS 29
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Direxion Funds
# of | Other | |||||||||||
Position(s) | Principal | Portfolios in | Trusteeships/ | |||||||||
Held | Term of Office and | Occupation(s) During | Direxion Complex | Directorships | ||||||||
Name, Address and Age | with Fund | Length of Time Served | Past Five Years | Overseen by Trustee(2) | Held by Trustee | |||||||
Officers | ||||||||||||
Daniel D. O’Neill Age: 39 | President; | One Year; Since 1999 | Managing Director of Rafferty, 1999 — present. | N/A | None | |||||||
Chief Operating Officer and Chief Investment Officer; | One Year; Since 2006 | |||||||||||
Chief Executive Officer | One Year; Since 2008 | |||||||||||
William Franca Age: 50 | Executive Vice President — Head of Distribution | One Year; Since 2006 | Senior Vice President — National Sales, Massachusetts Financial Services/SunLife Financial Distributors, 2002-2004; Executive Vice President, Distribution, SunLife, 2001-2002. | N/A | None | |||||||
Todd Warren Age: 40 | Chief Compliance Officer | One Year; Since 2007 | Chief Legal Officer, Alaric Compliance Services, LLC, 2006 — present; CCO and General Counsel, Oracle Evolution LLC 2004-2006. | N/A | None | |||||||
Todd Kellerman Age: 34 | Chief Financial Officer | Once Year; Since 2007 | Vice President of Corporate Development, Raven Holdings, Inc., 2003-2005; Business Consultant, 2002-2003; Senior Consultant — Business Consulting, Arthur Anderson, 1999-2000. | N/A | None | |||||||
Stephen P. Sprague Age: 58 | Treasurer and Controller | One Year; Since 1999 | Chief Financial Officer of Rafferty for the past 5 years. | N/A | None | |||||||
Eric W. Falkeis 615 East Michigan Street Milwaukee, WI 53202 Age: 34 | Secretary | One Year; Since 2004 | Vice President, U.S. Bancorp Fund Services LLC, 1997 — present. | N/A | None | |||||||
(1) | Mr. Rafferty is affiliated with Rafferty. Mr. Rafferty is the Chairman and Chief Executive Officer of Rafferty and owns a beneficial interest in Rafferty. | |
(2) | The Direxion Complex consists of the Direxion Funds which currently offers for sale to the public 40 portfolios of the 69 currently registered with the SEC and the Direxion Insurance Trust which currently offers for sale 3 portfolios of the 45 currently registered with the SEC. |
The address for all trustees and officers except Eric W. Falkeis is 33 Whitehall St., New York, NY 10004.
30 DIREXION EVOLUTION VP FUNDS
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![(THE EVOLUTION MANAGED FUNDS LOGO)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2317406.gif)
ANNUAL REPORT DECEMBER 31, 2007
Advisor
Rafferty Asset Management, LLC
33 Whitehall St. 10th Floor
New York, NY 10004
Sub-Advisor
Flexible Plan Investments, Ltd.
3883 Telegraph Road
Bloomfield Hills, MI 48302
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.
1555 RiverCenter Dr., Suite 302
Milwaukee, WI 53212
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 period ended June 30 (starting with the year ended June 30, 2005) is available without charge by calling 1-800-851-0511 or by accessing the SEC’s website at www.sec.gov.
The Fund files complete schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Q is 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.
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![(DIREXION FUNDS LOGO)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174direxion.gif)
Direxion Insurance Trust
ANNUAL REPORT DECEMBER 31, 2007
33 Whitehall Street, 10th Floor New York, New York 10004 (800) 851-0511
Dynamic VP HY Bond Fund
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Letter to Shareholders | 2 | |||
Performance Summary | 3 | |||
Expense Example | 4 | |||
Allocation of Portfolio Holdings | 5 | |||
Schedule of Investments | 6 | |||
Financial Statements | 8 | |||
Financial Highlights | 11 | |||
Notes to the Financial Statements | 12 | |||
Report of Independent Registered Public Accounting Firm | 18 | |||
Additional Information | 19 | |||
Information on Board of Trustees and Officers | 22 |
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Dear Shareholders,
This Annual Report for the Direxion Funds covers the fiscal year January 1, 2007 to December 31, 2007 (the “Annual Period”).
For the Annual Period, the Dynamic VP HY Bond Fund (the “Fund”), which seeks to maximize total return by investing primarily in “lower quality” High Yield debt instruments and their derivatives, returned -1.77% on a total return basis compared with a return of 2.13% for the Lipper High Yield Bond Fund Index. During the Annual Period, the Fund was generally exposed to the credit markets using a credit derivative index. Volatility in the financial markets and a developing credit crunch negatively affected the performance of the Fund both outright and on a relative basis versus its peers. Much of the relative underperformance was generally attributable to a lack of interest rate exposure and poor relative performance of the credit derivative index. Positive performance of the Fund was driven by a rally in the credit derivative index and exposure to auto company credits. Income in the Fund was generally achieved by investing cash in a combination of high quality overnight repurchase agreements and coupon payments from the credit derivative index.
As always, we thank you for using the Direxion Funds and we look forward to our mutual success.
Sincerely,
![]() | ![]() | |
Daniel O’Neill | Todd Kellerman | |
Chief Investment Officer | Chief Financial Officer |
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. To obtain performance data current to the most recent month-end, please call, toll-free, 1-800-851-0511 or visit www.direxionfunds.com.
The total annual fund operating expense ratio of the Dynamic VP HY Bond Fund is 1.63%, net of any fee, waivers or expense reimbursements.
An investment in any of the Direxion Funds is subject to a number of risks that could affect the value of its shares. It is important that investors closely review and understand these risks before making an investment. Investors considering an investment may obtain a prospectus by calling 1-800-851-0511. Investors should read the prospectus carefully for more complete information, including charges, expenses, and additional risks, before investing or sending money.
Distributed by: Rafferty Capital Markets, LLC
Date of First Use: February 29, 2008
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February 1, 20051- December 31, 2007
![(BAR CHART)](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2320302.gif)
Average Annual | ||||||||
Total Return2 | ||||||||
Since | ||||||||
1 Year | Inception1 | |||||||
Dynamic VP HY Bond Fund | (1.77% | ) | 1.99% | |||||
Lehman Aggregate Bond Index | 6.97% | 4.48% | ||||||
Lipper High Yield Bond Funds Index | 2.13% | 5.28% |
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund’s inception, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions of the redemption of fund shares. The performance of the Lehman Aggregate Bond Index and the Lipper High Yield Bond Fund Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC, waived and/or recouped fees for various expenses. Had these waivers and/or recoupments not been in effect, performance during the current period would have been lower.
The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. To obtain performance data current to the most recent month-end, please call, toll-free, 1-800-851-0511 or visit www.direxionfunds.com.
The total annual fund operating expense ratio of the Dynamic VP HY Bond Fund is 1.63%, net of any fee, waivers or expense reimbursements.
An investment in any of the Direxion Funds is subject to a number of risks that could affect the value of its shares. It is important that investors closely review and understand these risks before making an investment. Investors considering an investment may obtain a prospectus by calling 1-800-851-0511. Investors should read the prospectus carefully for more complete information, including charges, expenses, and additional risks, before investing or sending money.
Market Exposure | ||||
% of | ||||
Investment Type | Net Assets | |||
Common Stocks | 1.1 | % | ||
Corporate Bonds | 1.5 | % | ||
Futures Contracts | — | |||
Swap Contracts | 75.4 | % | ||
Total Exposure | 78.0 | % | ||
“Market Exposure” includes the value of total investments (including the contract value of any derivatives) and excludes any short-term investments and cash equivalents divided by Net Assets.
1 Commencement of operations was February 1, 2005.
2 As of December 31, 2007.
DIREXION DYNAMIC VP HY BOND FUND 3
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December 31, 2007 (Unaudited)
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. This example is intended to help you understand your ongoing costs (in dollars) of investing in the 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 the entire period (July 1, 2007 — December 31, 2007).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges 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 the 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 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. The tables below do not reflect any fees and expenses imposed under variable annuity contracts and variable life insurance policies (“Contracts”) and certain qualified pension and retirement plans (“Plans”), which would increase overall fees and expenses. Please refer to your Contract or Plan Prospectus for a description of those fees and expenses.
Dynamic VP HY Bond Fund | |||||||||
Expenses Paid | |||||||||
Beginning | Ending | During Period | |||||||
Account Value | Account Value | July 1, 2007 - | |||||||
July 1, 2007 | December 31, 2007 | December 31, 2007 | |||||||
Actual | $ | 1,000.00 | $ | 984.10 | $ | 8.15 | |||
Hypothetical (5% return before expenses) | 1,000.00 | 1,016.99 | 8.29 |
* | Expenses are equal to the Fund’s annualized expense ratio of 1.63%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. |
4 DIREXION DYNAMIC VP HY BOND FUND
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Dynamic VP HY Bond Fund
December 31, 2007
![GRAPH](https://capedge.com/proxy/N-CSR/0000950137-08-003302/c23174c2320301.gif)
The percentages in these graphs are calculated based on net assets
* | Cash and other assets less liabilities. | |
** | These are investment companies that primarily invest in this category of securities. |
DIREXION DYNAMIC VP HY BOND FUND 5
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Dynamic VP HY Bond Fund
December 31, 2007
Shares | Value | |||||||||
COMMON STOCKS - 1.1% | ||||||||||
AEROSPACE & DEFENSE - 1.0% | ||||||||||
35,000 | Bombardier, Inc. (Canada)(a)(c) | $ | 212,067 | |||||||
OIL & GAS - 0.1% | ||||||||||
400 | Teekay Shipping Corp. | 21,284 | ||||||||
TOTAL COMMON STOCKS (Cost $236,425) | $ | 233,351 | ||||||||
Principal Amount | ||||||||||
CORPORATE BONDS - 1.5% | ||||||||||
AUTO COMPONENTS - 1.1% | ||||||||||
$ | 250,000 | Goodyear Tire & Rubber Co. 8.663%, 12/01/2009(b)(d) | 253,125 | |||||||
FOOD PRODUCTS - 0.4% | ||||||||||
100,000 | Dole Food Co., Inc. | |||||||||
7.250%, 06/15/2010(b) | 91,500 | |||||||||
TOTAL CORPORATE BONDS (Cost $346,465) | $ | 344,625 | ||||||||
SHORT TERM INVESTMENTS - 83.2% | ||||||||||
Shares | ||||||||||
MONEY MARKET FUNDS - 83.2% | ||||||||||
3,687,303 | Dreyfus Government Cash Management | 3,687,303 | ||||||||
3,687,302 | Evergreen Institutional U.S. Government Money Market Fund | 3,687,302 | ||||||||
3,687,302 | Goldman Sachs Financial Square Government Fund | $ | 3,687,302 | |||||||
3,687,302 | SEI Daily Income Trust Government Fund | 3,687,302 | ||||||||
3,676,902 | Federated Prime Obligations Fund | 3,676,902 | ||||||||
TOTAL SHORT TERM INVESTMENTS (Cost $18,426,111) | $ | 18,426,111 | ||||||||
TOTAL INVESTMENTS (Cost $19,009,001) - 85.8% | $ | 19,004,087 | ||||||||
Assets in Excess of Other Liabilities - 14.2% | 3,154,470 | |||||||||
TOTAL NET ASSETS - 100.0% | $ | 22,158,557 |
Percentages are stated as a percent of net assets.
(a) | Non Income Producing |
(b) | Callable |
(c) | Foreign Issued Security |
(d) | The coupon rate on this variable rate security represents the rate on December 31, 2007. |
The accompanying notes are an integral part of these financial statements.
6 DIREXION DYNAMIC VP HY BOND FUND
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Dynamic VP HY Bond Fund
Credit Default Swap Contracts
December 31, 2007
Unrealized | ||||||||||||||||||||
Buy/Sell | Pay/Receive | Notional | Termination | Appreciation/ | ||||||||||||||||
Counterparty | Reference Entity | Protection | Fixed Rate | Amount | Date | (Depreciation) | ||||||||||||||
Bank of America | Dow Jones CDX NA HY Index | Sell | 3.75 | % | $ | 9,000,000 | 12/20/2012 | $ | 1,082 | |||||||||||
Goldman Sachs & Co. | Dow Jones CDX NA HY Index | Sell | 3.75 | % | 3,000,000 | 12/20/2012 | 2,027 | |||||||||||||
Morgan Stanley | Dow Jones CDX NA HY Index | Sell | 3.75 | % | 2,000,000 | 12/20/2012 | (96,148 | ) | ||||||||||||
Barclays | General Motors Corp. | Sell | 2.39 | % | 1,000,000 | 3/20/2010 | (65,600 | ) | ||||||||||||
Goldman Sachs & Co. | General Motors Corp. | Sell | 5.20 | % | 2,000,000 | 12/20/2012 | (133,341 | ) | ||||||||||||
$ | 17,000,000 | $ | (291,980 | ) | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
DIREXION DYNAMIC VP HY BOND FUND 7
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December 31, 2007
Dynamic VP HY | ||||
Bond Fund | ||||
Assets: | ||||
Investments, at market value (Note 2) | $ | 19,004,087 | ||
Receivable for Fund shares sold | 1,019,062 | |||
Deposit at broker for swaps | 2,940,000 | |||
Swap payments paid | 10,000 | |||
Unrealized appreciation on swaps | 3,109 | |||
Dividends and interest receivable | 90,048 | |||
Other assets | 539 | |||
Total Assets | 23,066,845 | |||
Liabilities: | ||||
Payable for Fund shares redeemed | 678 | |||
Payable to Custodian | 10,287 | |||
Swap payments received | 520,000 | |||
Unrealized depreciation on swaps | 295,089 | |||
Accrued distribution expense | 5,556 | |||
Accrued advisory expense | 14,304 | |||
Accrued expenses and other liabilities | 62,374 | |||
Total Liabilities | 908,288 | |||
Net Assets | $ | 22,158,557 | ||
Net Assets Consist of: | ||||
Capital stock | $ | 22,739,584 | ||
Accumulated undistributed net investment income | 1,064,614 | |||
Accumulated undistributed net realized gain (loss) | (1,348,747 | ) | ||
Net unrealized appreciation/(depreciation) on: | ||||
Investments | (4,914 | ) | ||
Swaps | (291,980 | ) | ||
Total Net Assets | $ | 22,158,557 | ||
Calculation of Net Asset Value Per Share: | ||||
Net assets | $ | 22,158,557 | ||
Shares outstanding | ||||
(unlimited shares of beneficial interest authorized, no par value) | 1,134,989 | |||
Net asset value, redemption price and offering price per share | $ | 19.52 | ||
Cost of Investments | $ | 19,009,001 | ||
The accompanying notes are an integral part of these financial statements.
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Statement of Operations
For the Year Ended December 31 , 2007
Dynamic VP HY | ||||
Bond Fund | ||||
Investment income: | ||||
Dividend income | $ | 4,381 | ||
Interest income | 1,755,199 | |||
Total investment income | 1,759,580 | |||
Expenses: | ||||
Investment advisory fees | 236,584 | |||
Distribution expenses | 78,861 | |||
Administration fees | 12,056 | |||
Shareholder servicing fees | 77,653 | |||
Fund accounting fees | 12,616 | |||
Custody fees | 12,383 | |||
Professional fees | 43,923 | |||
Reports to shareholders | 7,353 | |||
Directors’ fees and expenses | 636 | |||
Other | 30,923 | |||
Total expenses before waiver/recoupment | 512,988 | |||
Total expenses | 512,988 | |||
Net investment income | 1,246,592 | |||
Realized and unrealized gain (loss) on investments: | ||||
Net realized gain (loss) on: | ||||
Investments | 689,021 | |||
Futures | (366,029 | ) | ||
Swaps | 169,471 | |||
Securities sold short | 18,769 | |||
511,232 | ||||
Change in unrealized appreciation (depreciation) on: | ||||
Investments | (576,476 | ) | ||
Swaps | (1,161,280 | ) | ||
(1,737,756 | ) | |||
Net realized and unrealized gain on investments | (1,226,524 | ) | ||
Net increase in net assets resulting from operations | $ | 20,068 | ||
The accompanying notes are an integral part of these financial statements.
DIREXION DYNAMIC VP HY BOND FUND 9
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Statements of Changes in Net Assets
Dynamic VP HY Bond Fund | ||||||||
Year Ended | Year Ended | |||||||
December 31, 2007 | December 31, 2006 | |||||||
Operations: | ||||||||
Net investment income | $ | 1,246,592 | $ | 1,663,824 | ||||
Net realized gain (loss) on investments | 511,232 | (52,157 | ) | |||||
Change in unrealized appreciation (depreciation) on investments | (1,737,756 | ) | 1,197,492 | |||||
Net increase in net assets resulting from operations | 20,068 | 2,809,159 | ||||||
Distributions to shareholders: | ||||||||
Net investment income | (1,258,795 | ) | (1,883,085 | ) | ||||
Total distributions | (1,258,795 | ) | (1,883,085 | ) | ||||
Capital share transactions: | ||||||||
Proceeds from shares sold | 97,181,701 | 139,777,384 | ||||||
Proceeds from shares issued to holders in reinvestment of distributions | 1,258,795 | 1,883,085 | ||||||
Cost of shares redeemed | (119,748,425 | ) | (133,025,705 | ) | ||||
Net increase in net assets resulting from beneficial interest transactions | (21,307,929 | ) | 8,634,764 | |||||
Total increase (decrease) in net assets | (22,546,656 | ) | 9,560,838 | |||||
Net assets: | ||||||||
Beginning of period | 44,705,213 | 35,144,375 | ||||||
End of period | $ | 22,158,557 | $ | 44,705,213 | ||||
Accumulated undistributed net investment income, end of period | $ | 1,064,614 | $ | 389,504 | ||||
The accompanying notes are an integral part of these financial statements.
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Dynamic VP HY Bond Fund | ||||||||||||
Year Ended | Year Ended | February 1, 20051 to | ||||||||||
December 31, 2007 | December 31, 2006 | December 31, 2005 | ||||||||||
Per share data: | ||||||||||||
Net asset value, beginning of year/period | $ | 20.43 | $ | 20.05 | $ | 20.00 | ||||||
Income (loss) from investment operations: | ||||||||||||
Net investment income (loss)4 | 0.81 | 0.96 | 0.90 | |||||||||
Net realized and unrealized gain (loss) on investments | (1.16 | ) | 0.27 | (0.60 | ) | |||||||
Total from investment operations | (0.35 | ) | 1.23 | 0.30 | ||||||||
Less distributions: | ||||||||||||
Dividends from net investment income | (0.56 | ) | (0.85 | ) | (0.25 | ) | ||||||
Total distributions | (0.56 | ) | (0.85 | ) | (0.25 | ) | ||||||
Net asset value, end of year/period | $ | 19.52 | $ | 20.43 | $ | 20.05 | ||||||
Total return6 | (1.77 | )% | 6.21 | % | 1.50 | %2 | ||||||
Supplemental data and ratios: | ||||||||||||
Net assets, end of year/period | $ | 22,158,557 | $ | 44,705,213 | $ | 35,144,375 | ||||||
Ratio of net expenses to average net assets: | ||||||||||||
Before expense waiver/reimbursement | 1.63 | % | 1.68 | % | 1.94 | %3 | ||||||
After expense waiver/reimbursement | 1.63 | % | 1.67 | % | 1.74 | %3 | ||||||
Ratio of net investment income (loss) to average net assets: | ||||||||||||
Before expense waiver/reimbursement | 3.95 | % | 4.74 | % | 4.78 | %3 | ||||||
After expense waiver/reimbursement | 3.95 | % | 4.75 | % | 4.98 | %3 | ||||||
Portfolio turnover rate5 | 145 | % | 538 | % | 654 | %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. Investments in options, swaps, futures contracts and repurchase agreements are deemed short-term securities. The Fund’s aggressive investment strategy may result in significant portfolio turnover to take advantage of anticipated changes in market conditions. | |
6 | All returns reflect reinvested dividends, if any, but do not reflect the impact of taxes or any fees and expenses imposed under the Contracts and Plans, which would increase overall fees and expenses. Please refer to your Contract or Plan prospectus for a description of those fees and expenses. |
The accompanying notes are an integral part of these financial statements
DIREXION DYNAMIC VP HY BOND FUND 11
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Dynamic VP HY Bond Fund
December 31, 2007
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 Trust currently has three series in operation of which the Dynamic VP HY Bond Fund (the “Fund”) is included in this report. The Fund is a “non-diversified” series of the Trust pursuant to the 1940 Act. The Trust offers 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 Dynamic VP HY Bond Fund commenced operations on February 1, 2005.
The objective of the Dynamic VP HY Bond Fund is to maximize 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 Fund 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, swap agreements, closed-end investment companies, options, futures, and options on futures are valued at their last sales price, or if not available, the mean of the last bid and asked prices. Securities primarily traded on the NASDAQ National Market are valued using the NASDAQ Official Closing Price (“NOCP”). Short-term debt securities with a maturity of 60 days or less and money market securities are valued at the amortized cost. Other debt securities are valued by using the mean prices provided by the Fund’s pricing service or, if such services are unavailable, by a pricing matrix method. Securities for which reliable market quotations are not readily available, the Funds’ pricing service does not provide a valuation for such securities, the Fund’s pricing service provides valuation that in the judgment of Rafferty Asset Managements, LLC (the “Adviser”) does not represent fair value, or the Fund or Adviser believes the market price is stale will be fair valued as determined by the Adviser under the supervision of the Board of Trustees.
b) Repurchase Agreements – The 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 receives, as collateral, cash and/or securities (primarily U.S. government securities) whose market 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) Swap Contracts – The Fund may enter into equity swap contacts. Standard swap contracts are between two parties that agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross amount to be exchanged is calculated with respect to a “notional amount” (i.e. the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index or industry sector). The Fund’s obligations are accrued daily (offset by any amounts owed to the Fund).
In a “long” swap agreement, the counterparty will generally agree to pay the Fund the amount, if any, by which the notional amount of swap contract would have increased in value if the Fund had been invested in the particular securities, plus dividends that would have been received on those securities. The Fund will agree to pay the counterparty a floating rate of interest on the notional amount of the swap contract plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such securities plus, in certain instances, commissions or trading spreads on the notional amounts. Thus, the return on the swap contract should be the gain or loss on the notional amount plus dividends on the securities less the interest paid by the Fund on the notional amount. Payments may be made at the conclusion of the contract or periodically during its term. Swap contracts do not include the delivery of securities or other underlying securities. The net amount of the excess, if any, of the Fund’s obligations over its entitlement with respect to each swap is accrued on a daily basis and an amount of cash or liquid assets, having an aggregate net
12 DIREXION DYNAMIC VP HY BOND FUND
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asset value at least equal to such accrued excess is maintained in a segregated account by the Fund’s custodian. Until a swap contract is settled in cash, the gain or loss on the notional amount plus dividends on the securities less the interest paid by the Fund on the notional amount are recorded as “unrealized gains or losses on swaps and futures” and when cash is exchanged, the gain or loss is recorded as “realized gains or losses on swaps and futures.” Swap contracts are collateralized by the securities and cash of each particular Fund.
The Fund may enter into swap contracts that provide the opposite return of the particular benchmark or security (“short” the index or security). The operations are similar to that of the swaps disclosed above except that the counterparty pays interest to the Fund on the notional amount outstanding and the dividends on the underlying securities reduce the value of the swap, plus, in certain instances, the Fund will agree to pay to the counterparty commissions or trading spreads on the notional amount. These amounts are netted with any unrealized appreciation or depreciation to determine the value of the swap.
The Fund may enter into credit default swaps. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a referenced entity, typically corporate issues on its obligation. The stream of payments is recorded as an unrealized gain or loss until payments are received and adjusted to include up-front payments recorded as a component of unrealized gain or loss on swaps. When payments are received or when the swap is sold or expires, the stream of payments is recognized as a component of realized gains or losses. The Fund may use the swaps to attempt to gain exposure to debt securities without actually purchasing those securities or to hedge a position. The Fund may purchase credit protection on the referenced entity of the credit default swap (“Buy Contract”) or provide credit protection on the referenced entity of the credit default swap (“Sale Contract”). If a credit event occurs, the maximum payout amount for a sale contract is limited to the notional amount of the swap contract (“Maximum Payout Amount”). At December 31, 2007, the Dynamic VP HY Bond Fund has Sale Credit Default Swap Contracts outstanding with Maximum Payout Amounts aggregating $17,000,000 with four counterparties, with net unrealized depreciation of $291,980, and varying terms of 3 and 5 years, as reflected in the schedule of investments. Maximum Payout Amounts could be offset by the subsequent sale, if any, of assets obtained via the execution of a payout event.
Swap contracts involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount reflected in the Statement of Assets and Liabilities. The notional amounts reflect the extent of the total investment exposure that each Fund has under the swap contract. The primary risks associated with the use of swap agreements are imperfect correlation between movements in the notional amount and the price of the underlying securities and the inability of counterparties to perform. A Fund bears the risk of loss of the amount expected to be received under a swap contract in the event of default or bankruptcy of a swap contract counterparty.
d) Concentration of Risk – The Fund invests in the Dow Jones CDX High Yield Note (“CDX”), which represents a trust of pooled investments. 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 the referenced entities of these credit default swap agreements. If a credit event occurs 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) Short Positions – The 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.
f) Risks of Options, Futures Contracts, Options on Futures Contracts and Short Positions – The risks inherent in the use of options, futures contracts, options on futures contracts and short positions include 1) adverse changes in the value of such instruments; 2) imperfect correlation between the price of options and futures contracts and options thereon and
DIREXION DYNAMIC VP HY BOND FUND 13
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movements in the price of the underlying securities, index or futures contracts; 3) the possible absence of a liquid secondary market for any particular instrument at any time; 4) the possible need to defer closing out certain positions to avoid adverse tax consequences; and 5) the possible nonperformance by the counterparty under the terms of the contract. The Funds designate all cash, cash equivalents and liquid securities as collateral for written options, futures contracts and short positions.
g) Risks of Investing in Foreign Securities – Investments in foreign securities involve greater risks than investing in domestic securities. As a result, the Fund’s returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
h) Security Transactions – Investment transactions are recorded on trade date. The Fund determines 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.
i) Federal Income Taxes – The 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 and excise taxes.
j) 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 Fund is charged for those expenses that are directly attributable to each series, such as Advisory fees and registration costs. Expenses that are not directly attributable to a series are generally allocated among the Trust’s series in proportion to their respective net assets.
k) Distributions to Shareholders – The Fund generally pays dividends from net investment income and distributes net realized capital gains, if any, at least annually. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Distributions to shareholders are recorded on the ex-dividend date.
The tax character of distributions for the Dynamic VP HY Bond Fund during the years ended December 31, 2007 and December 31, 2006, were as follows:
Dynamic VP HY Bond Fund | ||||||||
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2007 | 2006 | |||||||
Distributions paid from: | �� | |||||||
Ordinary Income | $ | 1,258,795 | $ | 1,883,085 | ||||
Long-term capital gain | — | — | ||||||
Total distributions paid | $ | 1,258,795 | $ | 1,883,085 | ||||
As of December 31, 2007, the components of distributable earnings of the Fund on a tax basis were as follows:
Dynamic VP HY | ||||
Bond Fund | ||||
Cost basis of investments for federal income tax purposes | $ | 19,011,187 | ||
Unrealized Appreciation | 30,365 | |||
Unrealized Depreciation | (37,465 | ) | ||
Net unrealized appreciation/(depreciation) | (7,100 | ) | ||
Undistributed ordinary income/(loss) | 772,632 | |||
Undistributed long-term gain/(loss) | — | |||
Distributable earnings | 772,632 | |||
Other Accumulated gain/(loss) | (1,346,559 | ) | ||
Total Accumulated Earnings | $ | (581,027 | ) | |
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The difference between book cost of investments and tax cost of investments is attributable primarily to the tax deferral of losses on wash sales.
l) 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.
3. | CAPITAL SHARE TRANSACTIONS |
Capital share transactions for the Dynamic VP HY Bond Fund during the years ended December 31, 2007 and December 31, 2006 were as follows:
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2007 | 2006 | |||||||
Shares sold | 4,848,453 | 6,997,498 | ||||||
Shares issued to holders in reinvestment of distributions | 61,965 | 92,387 | ||||||
Shares redeemed | (5,963,395 | ) | (6,654,494 | ) | ||||
Total increase (decrease) from capital share transactions | (1,052,977 | ) | 435,391 | |||||
4. | INVESTMENT TRANSACTIONS |
During the year ended December 31, 2007, the aggregate purchases and sales of investments (excluding short-term investments) for the Dynamic VP HY Bond Fund were as follows:
Dynamic VP HY | ||||
Bond Fund | ||||
Purchases | $ | 6,731,646 | ||
Sales | 21,252,970 |
During the year ended December 31, 2007, the aggregate purchases and sales of long-term U.S. Government Securities for the Fund were as follows:
Dynamic VP HY | ||||
Bond Fund | ||||
Purchases | $ | 2,990,469 | ||
Sales | 3,032,812 |
In order to meet certain excise tax distribution requirements, the Fund is required to measure and distribute annually, net capital gains realized during a twelve-month period ending October 31st. In connection with this, the Fund is permitted for tax purposes to defer into their next fiscal year any net capital losses incurred between November 1st and the end of their fiscal year.
At October 31, 2007 the Fund deferred, on a tax basis, post-October losses of $(838,742).
As of December 31, 2007, the Dynamic VP HY Bond Fund had capital loss carryforwards on a tax basis of:
Capital Loss Carryover | Expires | |||||
$ | (203,531 | ) | 2013 | |||
(304,289 | ) | 2014 |
The Fund utilized capital loss of $552,716.
To the extent that the Fund realizes future net capital gains, those gains will be offset by any unused capital loss carryover.
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
DIREXION DYNAMIC VP HY BOND FUND 15
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require that permanent differences between financial reporting and tax reporting be reclassified between various components of net assets.
On the Statements of Assets and Liabilities, the following adjustments were made for permanent tax adjustments:
Accumulated | Undistributed Net | |||||||||||
Net Realized | Investment | |||||||||||
Gain/(Loss) | Income/(Loss) | Paid-in Capital | ||||||||||
Dynamic VP HY Bond Fund | $ | (687,323 | ) | $ | 687,313 | $ | 10 |
Differences are primarily due to differing book and tax treatments from certain derivative contracts.
5. | INVESTMENT ADVISORY AND OTHER AGREEMENTS |
The Fund has entered into an investment advisory agreement with the Adviser. The Adviser receives a fee, computed daily and payable monthly, at the annual rates presented below as applied to each Fund’s average daily net assets. For the year ended December 31, 2007, the Adviser has voluntarily agreed to pay all operating expenses (excluding dividends on short positions), in excess of the annual cap on expenses presented below as applied to the Fund’s average daily net assets. Because this is a voluntary waiver, the Adviser may change or end the waiver at any time. The Adviser may recover from the Fund the expenses paid in excess of the annual cap on expenses for the three previous years, as long as the recovery does not cause the Fund to exceed such annual cap on expenses. For the year ended December 31, 2007, the Adviser paid or recouped the following expenses:
Dynamic VP HY | ||||
Bond Fund | ||||
Annual Advisory rate | 0.75 | % | ||
Annual cap on expenses | 1.75 | % | ||
Expenses paid in excess of annual cap on expenses - 2007 | $ | — | ||
Adviser expense waiver recovery - 2007 | $ | — |
Remaining expenses subject to potential recovery expiring in:
Dynamic VP HY | ||||
Bond Fund | ||||
2008 | $ | — | ||
2009 | — | |||
2010 | — | |||
Total | $ | — | ||
The shares of the Dynamic VP HY Bond Fund are subject to an annual Rule 12b-1 fee of up to 0.25% 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 the Fund’s net assets on an ongoing basis, the cost of an investment in the Fund will increase over time.
The Adviser paid directly all offering costs and organizational expenses associated with the registration and seeding of the Fund.
Rafferty Capital Markets, LLC (the “Distributor”) serves as principal underwriter of the Fund and acts as the Fund’s distributor in a continuous public offering of the Fund’s shares. During the year ended December 31, 2007, the Dynamic VP HY Bond Fund incurred expenses of $78,861 under Rule 12b-1. The fee is paid to the Distributor for expenses incurred for distribution-related activities. The Distributor is an affiliate of the Adviser.
In the ordinary course of business, the Fund enters into contracts that contain a variety of indemnification provisions pursuant to which the Fund agrees to indemnify third parties upon occurrence of specified events. The Fund’s maximum exposure relating to these indemnification agreements is
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unknown. However, the Fund has not had prior claims or losses in connection with these provisions and believes the risk of loss is remote.
6. | FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 48 |
In July 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required as of the date of the last Net Asset Value (“NAV”) calculation in the first required financial statement reporting period for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date.
FIN 48 requires the Fund to analyze all open tax years. Open tax years are those years that are open for examination by the relevant income taxing authority. As of December 31, 2007, open Federal and state income tax years include the tax years ended December 31, 2004 through December 31, 2007. The Fund has no examination in progress.
The Fund has reviewed all open tax years and major jurisdictions and concluded that the adoption of FIN 48 resulted in no effect to the Fund’s financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end December 31, 2007. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
7. | NEW ACCOUNTING PRONOUNCEMENT |
In September 2006, FASB issued its new Standard No. 157, Fair Value Measurements (“FAS 157”). FAS 157 is designed to unify guidance for the measurement of fair value of all types of assets, including financial instruments, and certain liabilities, throughout a number of accounting standards. FAS 157 also establishes a hierarchy for measuring fair value in generally accepted accounting principles and expands financial statement disclosures about fair value measurements that are relevant to mutual funds. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and earlier adoption is permitted. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
DIREXION DYNAMIC VP HY BOND FUND 17
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To the Shareholders and
Board of Trustees of Direxion Insurance Trust
We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Direxion Insurance Trust (comprising the Dynamic VP HY Bond Fund) (the “Fund”), as of December 31, 2007, and the related statements 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 the two years in the period then ended and for the period from February 1, 2005 (commencement of operations) to December 31, 2005. These financial statements and financial highlights are the responsibility of the Funds’ 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. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audit 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 Funds’ 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 and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Dynamic VP HY Bond Fund of Direxion Insurance Trust at December 31, 2007, the related statements 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 two years in the period then ended and for the period from February 1, 2005 (commencement of operations) to December 31, 2005 in conformity with U.S. generally accepted accounting principles.
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Chicago, Illinois
February 21, 2008
February 21, 2008
18 DIREXION DYNAMIC VP HY BOND FUND
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Qualified Dividend Income/Dividends Received Deduction
For the fiscal year ended December 31, 2007, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth ax Relief Act of 2003. The percentage of dividends declared from ordinary income designated as qualified income was as follows:
Dynamic VP HY Bond Fund | 0 | % |
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the fiscal year ended December 31, 2007 was as follows:
Dynamic VP HY Bond Fund | 0 | % |
DIREXION DYNAMIC VP HY BOND FUND 19
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Investment Advisory Agreement Approval
Provided below is a summary of certain of the factors the Board considered at its August 15, 2007 Board meeting in renewing: the Advisory Agreement (“Advisory Agreement”) between Rafferty Asset Management, LLC (“Rafferty”) and the Direxion Insurance Trust (the “Trust”) on behalf of Dynamic VP HY Bond Fund (“Fund”).
The Board did not identify any particular information that was most relevant to its consideration to approve the continuance of the Advisory Agreement for the Fund and each Trustee may have afforded different weight to the various factors. In determining whether to approve the continuance of the Advisory Agreement, the Board considered the best interests of the Fund. In addition, the Board noted that the Trustees have considered various reports and information provided throughout the year at their regular Board meetings and otherwise.
In determining whether to approve the continuance of the Advisory Agreement for the Fund, the Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of the Fund; (3) the cost to Rafferty of providing services and the profitability of the advisory business to Rafferty; (4) the extent to which economies of scale have been taken into account in setting fee schedules; (5) whether fee levels reflect these economies of scale, if any, for the benefit of Fund shareholders; (6) comparisons of services and fees with contracts entered into by Rafferty with other clients (such as pension funds and other institutional investors), if any; and (7) other benefits derived or anticipated to be derived by Rafferty from its relationships with the Fund.
Nature, Extent and Quality of Services Provided. The Board reviewed the nature, extent and quality of the services provided under the Advisory Agreement by Rafferty. The Board noted that Rafferty has provided services to the Fund since its inception. The Board also noted that Rafferty trades efficiently with low commission schedules, which helps improve performance results. The Board considered Rafferty’s representation that it has the financial resources and appropriate staffing to manage the Fund and meet its expense reimbursement obligations. The Board also considered Rafferty’s ongoing efforts to improve its compliance and control functions for the Fund, and noted that information concerning portfolio management and a report from the chief compliance officer are provided to the Board at its regularly scheduled quarterly Board meetings. The Board considered that Rafferty oversees all aspects of the operation of the Fund, including oversight of the Fund’s service providers.
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 Fund under the Advisory Agreement were fair and reasonable.
Performance of the Fund. The Board evaluated the Fund’s performance based on management’s description of the performance of the HY Bond Fund and the Lipper Universe of high current yield funds.
Costs of Services Provided to the Fund and Profits Realized. The Board considered the overall fees paid to Rafferty on an annual basis since the Fund’s commencement of operations. The Board also considered the overall profitability of Rafferty’s investment business and its representation that it does not assess profitability with respect to its services to individual funds. Based on these considerations, the Board determined that, in the exercise of its business judgment, the costs of the services provided and the profits realized under the Advisory Agreement 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 achieve economies of scale or warrant a reduction in fee rates or the addition of breakpoints. However, Rafferty noted that asset levels generally have increased due to sales and marketing efforts. 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.
Other Benefits. The Board considered Rafferty’s representation that its relationship with the Fund has permitted Rafferty to attract business to its non-mutual fund account. The Board also considered that Rafferty’s overall business with brokerage firms helps to lower commission rates and provide better execution for Fund portfolio transactions. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the benefits were fair and reasonable.
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Conclusion. Based on, but not limited to, the above considerations and determinations, the Board determined that the Advisory Agreement for the Fund 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 Advisory Agreement.
DIREXION DYNAMIC VP HY BOND FUND 21
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Direxion Funds
The business affairs of each Fund are managed by or under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Funds is set forth below. The SAI includes additional information about the Funds’ Trustee and Officers and is available without charge, upon request by calling 1-800-851-0511.
# of | Other | |||||||||||
Principal | Portfolios in | Trusteeships/ | ||||||||||
Position(s) | Term of Office and | Occupation(s) During | Direxion Complex | Directorships | ||||||||
Name, Address and Age | Held with Fund | Length of Time Served | Past Five Years | Overseen by Trustee(2) | Held by Trustee | |||||||
Interested Trustees | ||||||||||||
Lawrence C. Rafferty(1) Age: 65 | Chairman of the Board of Trustees | Lifetime of Trust until removal or resignation; Since 1997 | Chairman and Chief Executive Officer of Rafferty, 1997 — present; Chief Executive Officer of Rafferty Companies, LLC, 1996-present; Chief Executive Officer of Rafferty Capital Markets, Inc., 1995 — present. | 114 | Board of Trustees, Fairfield University; Board of Directors, St. Vincent’s Services; Executive Committee, Metropolitan Golf Association | |||||||
# of | Other | |||||||||||
Principal | Portfolios in | Trusteeships/ | ||||||||||
Position(s) | Term of Office and | Occupation(s) During | Direxion Complex | Directorships | ||||||||
Name, Address and Age | Held with Fund | Length of Time Served | Past Five Years | Overseen by Trustee(2) | Held by Trustee | |||||||
Non-Interested Trustees | ||||||||||||
Daniel J. Byrne Age: 63 | Trustee | Lifetime of Trust until removal or resignation; Since 1997 | President and Chief Executive Officer of Byrne Securities Inc., 1992 — present; Trustee, The Opening Word Program, Wyandanch, New York. | 114 | None | |||||||
Gerald E. Shanley III Age: 64 | Trustee | Lifetime of Trust until removal or resignation; Since 1997 | Business Consultant, 1985 — present; Trustee of Trust Under Will of Charles S. Payson, 1987 — present; C.P.A. 1979 — present. | 114 | None | |||||||
John Weisser Age: 65 | Trustee | Lifetime of Trust until removal or resignation; Since 2007 | Retired, Since 1995; Salomon Brothers, Inc, 1971 — 1995, most recently as Managing Director. | 114 | MainStay VP Series Fund, Inc. | |||||||
22 DIREXION DYNAMIC VP HY BOND FUND
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Direxion Funds
Trustees and Officers
# of | ||||||||||||
Term of | Principal | Portfolios in | ||||||||||
Position(s) | Office and | Occupation(s) | Direxion Complex | Other Trusteeships/ | ||||||||
Held with | Length of | During Past Five | Overseen by | Directorships Held | ||||||||
Name, Address and Age | Fund | Time Served | Years | Trustee(2) | by Trustee | |||||||
Officers | ||||||||||||
Daniel D. O’Neill Age: 39 | President; | One Year; Since 1999 | Managing Director of Rafferty, 1999 — present. | N/A | None | |||||||
Chief Operating Officer and Chief Investment Officer; | One Year; Since 2006 | |||||||||||
Chief Executive Officer | One Year; Since 2008 | |||||||||||
William Franca Age: 50 | Executive Vice President — Head of Distribution | One Year; Since 2006 | Senior Vice President — National Sales, Massachusetts Financial Services/SunLife Financial Distributors, 2002-2004; Executive Vice President, Distribution, SunLife, 2001-2002. | N/A | None | |||||||
Todd Warren Age: 40 | Chief Compliance Officer | One Year; Since 2007 | Chief Legal Officer, Alaric Compliance Services, LLC, 2006 — present; CCO and General Counsel, Oracle Evolution LLC 2004-2006. | N/A | None | |||||||
Todd Kellerman Age: 34 | Chief Financial Officer | Once Year; Since 2007 | Vice President of Corporate Development, Raven Holdings, Inc., 2003-2005; Business Consultant, 2002-2003; Senior Consultant — Business Consulting, Arthur Anderson, 1999-2000. | N/A | None | |||||||
Stephen P. Sprague Age: 58 | Treasurer and Controller | One Year; Since 1999 | Chief Financial Officer of Rafferty for the past 5 years. | N/A | None | |||||||
Eric W. Falkeis 615 East Michigan Street Milwaukee, WI 53202 Age: 34 | Secretary | One Year; Since 2004 | Vice President, U.S. Bancorp Fund Services LLC, 1997 — present. | N/A | None | |||||||
(1) | Mr. Rafferty is affiliated with Rafferty. Mr. Rafferty is the Chairman and Chief Executive Officer of Rafferty and owns a beneficial interest in Rafferty. | |
(2) | The Direxion Complex consists of the Direxion Funds which currently offers for sale to the public 40 portfolios of the 69 currently registered with the SEC and the Direxion Insurance Trust which currently offers for sale 3 portfolios of the 45 currently registered with the SEC. |
The address for all trustees and officers except Eric W. Falkeis is 33 Whitehall St., New York, NY 10004.
DIREXION DYNAMIC VP HY BOND FUND 23
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Direxion Insurance Trust
ANNUAL REPORT DECEMBER 31, 2007
33 Whitehall Street, 10th Floor New York, New York 10004 (800) 851-0511
Investment Adviser
Rafferty Asset Management, LLC
33 Whitehall St. 10th Floor
New York, NY 10004
Administrator, Transfer Agent, Dividend
Paying Agent & Shareholding Servicing
Agent
Agent
U.S. Bancorp Fund Services, LLC
P.O. Box 1993
Milwaukee, WI 53201-1993
Custodian
U.S. Bank, N.A.
1555 RiverCenter Dr., Suite 302
Milwaukee, WI 53212
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 period ended June 30 (starting with the year ended June 30, 2005) is available without charge by calling 1-800-851-0511 or by accessing the SEC’s website at www.sec.gov.
The Fund files complete schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Q is available without change, 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.
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Item 2. Code of Ethics.
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.
(1) File: A copy of the registrant’s Code of Ethics is filed herewith.
Item 3. Audit Committee Financial Expert.
The registrant’s board of [trustees/directors] has determined that there is at least one audit committee financial expert serving on its audit committee. Gerald E. Shanley III is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
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. There were no “Other services” provided by the principal accountant. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
FYE 12/31/2007 | FYE 12/31/2006 | |||||||
Audit Fees | $ | 60,000 | $ | 49,800 | ||||
Audit-Related Fees | — | 6,000 | ||||||
Tax Fees | 12,600 | 10,500 | ||||||
All Other Fees | ||||||||
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. (If more than 50 percent of the accountant’s hours were spent to audit the registrant’s financial statements for the most recent fiscal year,
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state how many hours were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.)
The following table indicates the non-audit fees billed or expected to be billed by the registrant’s accountant for services to the registrant and to the registrant’s investment adviser (and any other controlling entity, etc.—not sub-adviser) for the last two years. The audit committee of the board of trustees/directors has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser is compatible with maintaining the principal accountant’s independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountant’s independence.
Non-Audit Related Fees | FYE 12/31/2007 | FYE 12/31/2006 | |||||||||
Registrant | — | — | |||||||||
Registrant’s Investment Adviser | — | — | |||||||||
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
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 Purchasers.
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.
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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 changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred 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) 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. Filed herewith. | |
(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) | Direxion Insurance Trust | |||||
By (Signature and Title)* | /s/ Daniel D. O’Neill | |||||
Daniel D. O’Neill, Chief Executive Officer | ||||||
Date February 28, 2008 |
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/ Daniel D. O’Neill | |||||
Daniel D. O’Neill, Chief Executive Officer | ||||||
Date February 28, 2008 | ||||||
By (Signature and Title)* | /s/ Todd Kellerman | |||||
Todd Kellerman, Chief Financial Officer | ||||||
Date February 27, 2008 |
* | Print the name and title of each signing officer under his or her signature. |