UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21624
Allianz Variable Insurance Products Fund of Funds Trust
(Exact name of registrant as specified in charter)
5701 Golden Hills Drive,
Minneapolis, MN 55416-1297
(Address of principal executive offices) (Zip code)
Citi Fund Services Ohio, Inc.,
4400 Easton Commons, Suite 200,
Columbus, OH 43219-8000
(Name and address of agent for service)
Registrant’s telephone number, including area code: 800-624-0197
Date of fiscal year end: December 31
Date of reporting period: December 31, 2018
Item 1. | Reports to Stockholders. |
AZL® Balanced Index Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 12
Other Federal Income Tax Information
Page 13
Page 14
Approval of Investment Advisory Agreement
Page 15
Information about the Board of Trustees and Officers
Page 17
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® Balanced Index Strategy Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® Balanced Index Strategy Fund.
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What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® Balanced Index Strategy Fund (the “Fund”) had a total return of-4.36%. That compared to a-4.38%, 0.01% and-1.81% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Balanced Composite Index1, respectively.
The Fund is a fund of funds that pursues broad diversification across four equitysub-portfolios and one fixed-incomesub-portfolio. The four equitysub-portfolios pursue passive strategies that aim to achieve, before fees, returns similar to the S&P 500 Index, the S&P 400 Index2, the S&P 600 Index3 and the MSCI EAFE Index4, which represents shares of large companies in developed foreign markets. The fixed-incomesub-portfolio is an enhanced bond index strategy that seeks to achieve a return that exceeds that of the Bloomberg Barclays Capital U.S. Aggregate Bond Index. Generally, the Fund allocates 40% to 60% of its assets to the underlying equity index funds and between 40% and 60% to the underlying bond index fund.*
U.S.large-cap stocks fell 4.38% during the12-month period. They started the year out with gains over the first three quarters thanks in part to strong economic data and positive earnings growth, and despite a volatile first quarter. However, volatility returned in the fourth quarter due to investor concerns over the Federal Reserve Board’s (the Fed) continued interest rate hikes, along with political and economic uncertainty, and contentious global trade negotiations.Mid- andsmall-cap stocks also performed poorly for the year: The S&P 400 generated a-11.08% return while the S&P 600 returned-8.48%. Growth stocks outperformed value stocks during the first three quarters, however, that trend reversed in the fourth quarter.
International developed markets, as measured by the MSCI EAFE Index (net), underperformed U.S. equities, posting a-13.79% return for the year. Though developed markets underperformed U.S. equities during the first three quarters, they outperformed U.S. equities during the volatile fourth quarter.
The U.S. bond market ended the year nearly flat, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining 0.01%. Despite the relative neutral return, there was a lot of activity in the fixed income market over the course of the year. The Fed hiked interest rates four times during the12-month period. Treasury yields rose during the first three quarters before the yield curve flattened in the fourth quarter. The intermediate part of the curve inverted as a result. Investment-grade corporate spreads widened sharply during the year, as investors became more risk averse, especially during the fourth quarter.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. The Fund’s strategic allocation to international equities weighed on relative results as U.S. equities outperformed international equities during the period. A strategic allocation to U.Smid- andsmall-cap equities also hurt performance as these underperformed U.S.large-cap equities during the year.*
Within the Fund’s fixed income holdings, an overweight allocation to corporate bonds hurt relative performance. The Fund modestly lagged its fixed income benchmark during the period as a result.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL®Balanced Index Strategy Fund Review(Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important consideration. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Index Strategy Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss.
The performance of the Fund is expected to be lower than that of the Indexes because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines. | ||||
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (7/10/09) | |||||||||||||
AZL® Balanced Index Strategy Fund | -4.36 | % | 4.42 | % | 3.85 | % | 7.28 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 14.05 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 3.34 | % | ||||||||
Balanced Composite Index | -1.81 | % | 5.80 | % | 5.63 | % | 8.86 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® Balanced Index Strategy Fund | 0.69 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.20% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.08%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Balanced Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (50%) S&P 500 and (50%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL Balanced Index Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL Balanced Index Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL Balanced Index Strategy Fund | $ | 1,000.00 | $ | 956.40 | $ | 0.39 | 0.08 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL Balanced Index Strategy Fund | $ | 1,000.00 | $ | 1,024.80 | $ | 0.41 | 0.08 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 52.2 | % | |||
Domestic Equity Funds | 35.5 | ||||
International Equity Funds | 12.4 | ||||
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Total Investment Securities | 100.1 | ||||
Net other assets (liabilities) | (0.1 | ) | |||
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Net Assets | 100.0 | % | |||
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3
AZL Balanced Index Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (100.1%): | ||||||||
Domestic Equity Funds (35.5%): | ||||||||
1,401,297 | AZL Mid Cap Index Fund, Class 2 | $ | 26,638,665 | |||||
6,601,212 | AZL S&P 500 Index Fund, Class 2 | 96,443,706 | ||||||
1,132,159 | AZL Small Cap Stock Index Fund, Class 2 | 13,778,376 | ||||||
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136,860,747 | ||||||||
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Fixed Income Funds (52.2%): | ||||||||
19,073,871 | AZL Enhanced Bond Index Fund | 201,992,298 | ||||||
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Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
International Equity Funds (12.4%): | ||||||||
3,350,640 | AZL International Index Fund, Class 2 | $ | 47,746,626 | |||||
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Total Affiliated Investment Companies (Cost $325,763,017) | 386,599,671 | |||||||
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Total Investment Securities | 386,599,671 | |||||||
Net other assets (liabilities) — (0.1)% | (411,077 | ) | ||||||
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Net Assets — 100.0% | $ | 386,188,594 | ||||||
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Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
4
AZL Balanced Index Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 325,763,017 | |||
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Investments in affiliates, at value | $ | 386,599,671 | |||
Interest and dividends receivable | 455 | ||||
Receivable for affiliated investments sold | 106,057 | ||||
Prepaid expenses | 4,805 | ||||
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Total Assets | 386,710,988 | ||||
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Liabilities: | |||||
Cash overdraft | 106,057 | ||||
Payable for capital shares redeemed | 381,195 | ||||
Manager fees payable | 16,651 | ||||
Administration fees payable | 4,420 | ||||
Custodian fees payable | 448 | ||||
Administrative and compliance services fees payable | 1,290 | ||||
Transfer agent fees payable | 427 | ||||
Trustee fees payable | 494 | ||||
Other accrued liabilities | 11,412 | ||||
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Total Liabilities | 522,394 | ||||
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Net Assets | $ | 386,188,594 | |||
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Net Assets Consist of: | |||||
Paid in capital | $ | 304,559,493 | |||
Total distributable earnings | 81,629,101 | ||||
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Net Assets | $ | 386,188,594 | |||
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Shares of beneficial interest (unlimited number of shares authorized, no par value) | 25,938,792 | ||||
Net Asset Value (offering and redemption price per share) | $ | 14.89 | |||
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 8,055,061 | |||
Dividends from non-affiliates | 716 | ||||
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Total Investment Income | 8,055,777 | ||||
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Expenses: | |||||
Manager fees | 212,386 | ||||
Administration fees | 54,026 | ||||
Custodian fees | 4,062 | ||||
Administrative and compliance services fees | 6,950 | ||||
Transfer agent fees | 5,459 | ||||
Trustee fees | 21,797 | ||||
Professional fees | 17,847 | ||||
Shareholder reports | 9,271 | ||||
Other expenses | 3,595 | ||||
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Total expenses | 335,393 | ||||
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Net Investment Income/(Loss) | 7,720,384 | ||||
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Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 6,782,754 | ||||
Net realized gains/(losses) on securities | 803 | ||||
Net realized gains distributions from affiliated underlying funds | 7,927,333 | ||||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (40,203,778 | ) | |||
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Net realized and Change in net unrealized gains/losses on investments | (25,492,888 | ) | |||
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Change in Net Assets Resulting From Operations | $ | (17,772,504 | ) | ||
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See accompanying notes to the financial statements.
5
AZL Balanced Index Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 7,720,384 | $ | 3,459,020 | ||||||
Net realized gains/(losses) on investments | 14,710,890 | 16,237,892 | ||||||||
Change in unrealized appreciation/depreciation on investments | (40,203,778 | ) | 28,523,288 | |||||||
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Change in net assets resulting from operations | (17,772,504 | ) | 48,220,200 | |||||||
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Distributions to Shareholders:(a) | ||||||||||
Distributions | (19,383,356 | ) | (30,564,447 | ) | ||||||
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Change in net assets resulting from distributions to shareholders | (19,383,356 | ) | (30,564,447 | ) | ||||||
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Capital Transactions: | ||||||||||
Proceeds from shares issued | 8,361,288 | 15,459,952 | ||||||||
Proceeds from dividends reinvested | 19,383,356 | 30,564,447 | ||||||||
Value of shares redeemed | (52,781,680 | ) | (53,598,790 | ) | ||||||
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Change in net assets resulting from capital transactions | (25,037,036 | ) | (7,574,391 | ) | ||||||
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Change in net assets | (62,192,896 | ) | 10,081,362 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 448,381,490 | 438,300,128 | ||||||||
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End of period | $ | 386,188,594 | $ | 448,381,490 | ||||||
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Share Transactions: | ||||||||||
Shares issued | 526,619 | 950,921 | ||||||||
Dividends reinvested | 1,252,155 | 1,932,013 | ||||||||
Shares redeemed | (3,282,281 | ) | (3,277,297 | ) | ||||||
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Change in shares | (1,503,507 | ) | (394,363 | ) | ||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL Balanced Index Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 16.34 | $ | 15.75 | $ | 15.44 | $ | 15.91 | $ | 15.40 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.31 | 0.15 | 0.30 | 0.34 | 0.16 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.99 | ) | 1.62 | 0.73 | (0.34 | ) | 0.78 | ||||||||||||||||||
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Total from Investment Activities | (0.68 | ) | 1.77 | 1.03 | — | (a) | 0.94 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.16 | ) | (0.38 | ) | (0.43 | ) | (0.17 | ) | (0.23 | ) | |||||||||||||||
Net Realized Gains | (0.61 | ) | (0.80 | ) | (0.29 | ) | (0.30 | ) | (0.20 | ) | |||||||||||||||
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Total Dividends | (0.77 | ) | (1.18 | ) | (0.72 | ) | (0.47 | ) | (0.43 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 14.89 | $ | 16.34 | $ | 15.75 | $ | 15.44 | $ | 15.91 | |||||||||||||||
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Total Return(b) | (4.36 | )% | 11.50 | % | 6.75 | % | 0.01 | % | 6.11 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 386,189 | $ | 448,381 | $ | 438,300 | $ | 432,536 | $ | 438,651 | |||||||||||||||
Net Investment Income/(Loss) | 1.82 | % | 0.78 | % | 1.83 | % | 2.14 | % | 1.02 | % | |||||||||||||||
Expenses Before Reductions*(c) | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | |||||||||||||||
Expenses Net of Reductions* | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | |||||||||||||||
Portfolio Turnover Rate | 5 | % | 6 | % | 12 | % | 11 | % | 9 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL Balanced Index Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
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AZL Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (9,832,388 | ) | ||
From net realized gains | (20,732,059 | ) | |||
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Change in net assets resulting from distributions to shareholders | $ | (30,564,447 | ) |
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL Balanced Index Strategy Fund | 0.05 | % | 0.20 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions | |||||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 224,376,218 | $ | 6,797,507 | $ | (23,008,797 | ) | $ | (891,929 | ) | $ | (5,280,701 | ) | $ | 201,992,298 | 19,073,871 | $ | 4,582,937 | $ | — | |||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 56,347,640 | 4,802,608 | (3,777,404 | ) | 714,687 | (10,340,905 | ) | 47,746,626 | 3,350,640 | 1,412,882 | 689,563 | ||||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 33,670,676 | 2,832,930 | (4,010,258 | ) | 746,477 | (6,601,160 | ) | 26,638,665 | 1,401,297 | 281,910 | 2,326,996 | ||||||||||||||||||||||||||||||||||
AZL S&P 500 Index Fund, Class 2 | 116,180,562 | 6,771,190 | (17,454,115 | ) | 5,278,029 | (14,331,960 | ) | 96,443,706 | 6,601,212 | 1,636,395 | 3,438,861 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 18,001,081 | 1,847,226 | (3,356,369 | ) | 935,490 | (3,649,052 | ) | 13,778,376 | 1,132,159 | 140,937 | 1,471,913 | ||||||||||||||||||||||||||||||||||
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$ | 448,576,177 | $ | 23,051,461 | $ | (51,606,943 | ) | $ | 6,782,754 | $ | (40,203,778 | ) | $ | 386,599,671 | 31,559,179 | $ | 8,055,061 | $ | 7,927,333 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
9
AZL Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $3,882 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Companies | $ | 386,599,671 | $ | — | $ | — | $ | 386,599,671 | ||||||||||||
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Total Investments | $ | 386,599,671 | $ | — | $ | — | $ | 386,599,671 | ||||||||||||
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5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL Balanced Index Strategy Fund | $ | 23,051,460 | $ | 51,606,943 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default. During the year ended December 31, 2018, the Fund did not directly invest in derivatives.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
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AZL Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $327,266,288. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 59,333,383 | ||
Unrealized (depreciation) | — | |||
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Net unrealized appreciation/(depreciation) | $ | 59,333,383 | ||
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL Balanced Index Strategy Fund | $ | 3,957,710 | $ | 15,425,646 | $ | 19,383,356 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL Balanced Index Strategy Fund | $ | 9,834,481 | $ | 20,729,966 | $ | 30,564,447 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL Balanced Index Strategy Fund | $ | 8,970,214 | $ | 13,325,504 | $ | — | $ | 59,333,383 | $ | 81,629,101 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 90% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL Balanced Index Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL Balanced Index Strategy Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 29.58% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $15,425,645.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Fund of Funds Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
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Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
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The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
16
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
17
Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
18
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® DFA Multi-Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 12
Other Federal Income Tax Information
Page 13
Page 14
Approval of Investment Advisory Agreement
Page 15
Information about the Board of Trustees and Officers
Page 17
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® DFA Multi-Strategy Fund Review(Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® DFA Multi-Strategy Fund.
| ||||
|
What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® DFA Multi-Strategy Fund (the “Fund”) returned-5.91%. That compared to a-4.38%, 0.01% and-2.26% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Moderate Composite Index1, respectively.
The Fund is a fund of funds that pursues broad diversification across three equitysub-portfolios and one fixed incomesub-portfolio. The four underlying portfolios are managed by Dimensional Fund Advisors. Generally, the Fund allocates 50% to 70% of its assets to the underlying equity funds and between 30% and 50% to the underlying fixed-income fund.*
U.S. equities sustained a brief period of volatility during the first quarter, but still managed to post healthy gains for the first three quarters of the year. Markets gained on strong economic data coupled with positive earnings growth. However, volatility increased significantly in the fourth quarter as investors became concerned with continued Federal Reserve Board (the Fed) rate hikes, political and economic uncertainty, and contentious trade negotiations. The S&P 500 Index returned-4.38% for the year, while the S&P 400 Index2 returned-11.08% and the S&P 600 Index3 returned-8.48%. Growth stocks sharply outperformed value stocks during the year, although this trend reversed during the fourth quarter.
International developed market equities, as measured by the MSCI EAFE Index4, returned-13.79% for the year, underperforming U.S. equities in general. However, international developed market equities generally outperformed their U.S. counterparts during the volatile fourth quarter.
The U.S. bond market ended the year flat, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining just 0.01%, although this return masks a good deal of activity in fixed income markets during the12-month period. Treasury yields rose during the first three quarters, then the yield curve flattened dramatically during the fourth quarter, leaving the intermediate part of the curve inverted. Investment-grade corporate spreads widened sharply during the year as investors became more risk averse, especially during the fourth quarter. The Fed hiked rates four times during the year.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. The Fund’s strategic allocation to international equities detracted, as international equities underperformed U.S. equities. The Fund further underperformed due to its
strategic allocation to U.S.mid-andsmall-cap equities, which underperformed U.S.large-cap equities during 2018, as well as its bias toward value stocks, which generally underperformed growth stocks.*
Within the Fund’s fixed income holdings, the Fund’s shorter duration contributed to returns relative to the Bloomberg Barclays U.S. Aggregate Bond Index, as longer-dated fixed income securities underperformed their shorter-dated counterparts. Compared to the Fund’s fixed income benchmark, the Fund benefited by holding currency-hedged exposure tonon-US bonds.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL® DFA Multi-Strategy Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of DFA Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by of the underlying fund in which the Fund invests.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
| ||||
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
|
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (7/10/09) | |||||||||||||
AZL® DFA Multi-Strategy Fund | -5.91 | % | 5.05 | % | 4.17 | % | 8.99 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 14.05 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 3.34 | % | ||||||||
Moderate Composite Index | -2.26 | % | 6.52 | % | 6.22 | % | 9.93 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® DFA Multi-Strategy Fund | 0.97 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.20% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.07%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Moderate Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (60%) S&P 500 and (40%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
Expense Examples
(Unaudited)
As a shareholder of the AZL DFA Multi-Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL DFA Multi-Strategy Fund | $ | 1,000.00 | $ | 932.40 | $ | 0.34 | 0.07 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL DFA Multi-Strategy Fund | $ | 1,000.00 | $ | 1,024.85 | $ | 0.36 | 0.07 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Domestic Equity Funds | 46.1 | % | |||
Fixed Income Funds | 42.5 | ||||
International Equity Funds | 11.4 | ||||
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Total Investment Securities | 100.0 | ||||
Net other assets (liabilities) | — | ^ | |||
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Net Assets | 100.0 | % | |||
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^ | Represents less than 0.05%. |
3
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (100.0%): | ||||||||
Domestic Equity Funds (46.1%): | ||||||||
31,573,684 | AZL DFA U.S. Core Equity Fund | $ | 357,414,103 | |||||
8,914,858 | AZL DFA U.S. Small Cap Fund | 90,842,403 | ||||||
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448,256,506 | ||||||||
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Fixed Income Funds (42.5%): | ||||||||
41,037,125 | AZL DFA Five-Year Global Fixed Income Fund | 412,833,477 | ||||||
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Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
International Equity Funds (11.4%): | ||||||||
12,069,597 | AZL DFA International Core Equity Fund | $ | 111,040,289 | |||||
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Total Affiliated Investment Companies (Cost $939,973,548) | 972,130,272 | |||||||
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Total Investment Securities | 972,130,272 | |||||||
Net other assets (liabilities) — 0.0%+ | 3,293 | |||||||
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Net Assets — 100.0% | $ | 972,133,565 | ||||||
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Percentages indicated are based on net assets as of December 31, 2018.
+ | Represents less than 0.05%. |
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
4
AZL DFA Multi-Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 939,973,548 | |||
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Investments in affiliates, at value | $ | 972,130,272 | |||
Receivable for capital shares issued | 73,303 | ||||
Receivable for affiliated investments sold | 137,730 | ||||
Prepaid expenses | 11,902 | ||||
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Total Assets | 972,353,207 | ||||
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Liabilities: | |||||
Cash overdraft | 137,730 | ||||
Manager fees payable | 42,127 | ||||
Administration fees payable | 4,535 | ||||
Custodian fees payable | 1,231 | ||||
Administrative and compliance services fees payable | 3,326 | ||||
Transfer agent fees payable | 477 | ||||
Trustee fees payable | 1,274 | ||||
Other accrued liabilities | 28,942 | ||||
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Total Liabilities | 219,642 | ||||
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Net Assets | $ | 972,133,565 | |||
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Net Assets Consist of: | |||||
Paid in capital | $ | 890,947,731 | |||
Total distributable earnings | 81,185,834 | ||||
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Net Assets | $ | 972,133,565 | |||
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Shares of beneficial interest (unlimited number of shares authorized, no par value) | 74,852,418 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.99 | |||
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 10,214,862 | |||
Dividends from non-affiliates | 124 | ||||
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Total Investment Income | 10,214,986 | ||||
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Expenses: | |||||
Manager fees | 562,041 | ||||
Administration fees | 58,995 | ||||
Custodian fees | 8,746 | ||||
Administrative and compliance services fees | 18,492 | ||||
Transfer agent fees | 6,010 | ||||
Trustee fees | 58,198 | ||||
Professional fees | 46,752 | ||||
Shareholder reports | 22,498 | ||||
Other expenses | 11,142 | ||||
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Total expenses | 792,874 | ||||
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Net Investment Income/(Loss) | 9,422,112 | ||||
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Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 21,991,574 | ||||
Net realized gains/(losses) on securities | 3,658 | ||||
Net realized gains distributions from affiliated underlying funds | 17,980,171 | ||||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (109,331,866 | ) | |||
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Net realized and Change in net unrealized gains/losses on investments | (69,356,463 | ) | |||
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Change in Net Assets Resulting From Operations | $ | (59,934,351 | ) | ||
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See accompanying notes to the financial statements.
5
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 9,422,112 | $ | 12,266,632 | ||||||
Net realized gains/(losses) on investments | 39,975,403 | 20,143,905 | ||||||||
Change in unrealized appreciation/depreciation on investments | (109,331,866 | ) | 110,992,500 | |||||||
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| |||||||
Change in net assets resulting from operations | (59,934,351 | ) | 143,403,037 | |||||||
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| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (28,987,454 | ) | (9,184,174 | ) | ||||||
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| |||||||
Change in net assets resulting from distributions to shareholders | (28,987,454 | ) | (9,184,174 | ) | ||||||
|
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Capital Transactions: | ||||||||||
Proceeds from shares issued | 3,711,811 | 11,253,458 | ||||||||
Proceeds from dividends reinvested | 28,987,454 | 9,184,174 | ||||||||
Value of shares redeemed | (175,840,406 | ) | (144,629,334 | ) | ||||||
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| |||||||
Change in net assets resulting from capital transactions | (143,141,141 | ) | (124,191,702 | ) | ||||||
|
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| |||||||
Change in net assets | (232,062,946 | ) | 10,027,161 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 1,204,196,511 | 1,194,169,350 | ||||||||
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| |||||||
End of period | $ | 972,133,565 | $ | 1,204,196,511 | ||||||
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| |||||||
Share Transactions: | ||||||||||
Shares issued | 263,773 | 845,577 | ||||||||
Dividends reinvested | 2,094,469 | 674,811 | ||||||||
Shares redeemed | (12,361,568 | ) | (10,743,935 | ) | ||||||
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Change in shares | (10,003,326 | ) | (9,223,547 | ) | ||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 14.19 | $ | 12.69 | $ | 18.08 | $ | 18.71 | $ | 17.86 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.15 | 0.15 | 0.10 | 0.01 | 0.20 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.97 | ) | 1.46 | 1.32 | (0.14 | ) | 0.96 | ||||||||||||||||||
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Total from Investment Activities | (0.82 | ) | 1.61 | 1.42 | (0.13 | ) | 1.16 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.17 | ) | (0.11 | ) | — | (0.24 | ) | (0.22 | ) | ||||||||||||||||
Net Realized Gains | (0.21 | ) | — | (6.81 | ) | (0.26 | ) | (0.09 | ) | ||||||||||||||||
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Total Dividends | (0.38 | ) | (0.11 | ) | (6.81 | ) | (0.50 | ) | (0.31 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 12.99 | $ | 14.19 | $ | 12.69 | $ | 18.08 | $ | 18.71 | |||||||||||||||
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Total Return(a) | (5.91 | )% | 12.69 | % | 9.32 | % | (0.67 | )% | 6.53 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 972,134 | $ | 1,204,197 | $ | 1,194,169 | $ | 1,257,794 | $ | 1,439,548 | |||||||||||||||
Net Investment Income/(Loss) | 0.84 | % | 1.02 | % | 0.75 | % | (0.07 | )% | 1.09 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.07 | % | 0.07 | % | 0.07 | % | 0.07 | % | 0.07 | % | |||||||||||||||
Expenses Net of Reductions* | 0.07 | % | 0.07 | % | 0.07 | % | 0.07 | % | 0.07 | % | |||||||||||||||
Portfolio Turnover Rate | 7 | % | 2 | % | 2 | % | 114 | %(c) | 7 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Effective April 27, 2015, the investment strategy of the Fund changed. Costs of purchases and proceeds from sales of portfolio securities associated with the changes in investment strategy contributed to higher portfolio turnover rate for the period ended December 31, 2015 as compared to prior year. |
See accompanying notes to the financial statements.
7
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL DFA Multi-Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for
8
AZL DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (9,184,174 | ) | ||
From net realized gains | — | ||||
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Change in net assets resulting from distributions to shareholders | $ | (9,184,174 | ) |
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL DFA Multi-Strategy Fund | 0.05 | % | 0.20 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL DFA Emerging Markets Core Equity Fund | $ | 63,140,016 | $ | 1,462,443 | $ | (54,106,102 | ) | $ | (2,416,328 | ) | $ | (8,080,029 | ) | $ | — | — | $ | 1,231,676 | $ | — | |||||||||||||||||||||||||
AZL DFA Five-Year Global Fixed Income Fund | 472,920,612 | 3,417,312 | (65,824,867 | ) | (266,478 | ) | 2,586,898 | 412,833,477 | 41,037,125 | 2,476,641 | — | ||||||||||||||||||||||||||||||||||
AZL DFA International Core Equity Fund | 87,201,630 | 49,986,259 | (7,495,909 | ) | 977,700 | (19,629,391 | ) | 111,040,289 | 12,069,597 | 1,429,515 | 409,915 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Core Equity Fund | 459,210,202 | 17,922,702 | (78,016,835 | ) | 19,403,934 | (61,105,900 | ) | 357,414,103 | 31,573,684 | 4,496,441 | 11,865,448 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Small Cap Fund | 122,556,147 | 6,285,394 | (19,188,440 | ) | 4,292,746 | (23,103,444 | ) | 90,842,403 | 8,914,858 | 580,589 | 5,704,808 | ||||||||||||||||||||||||||||||||||
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$ | 1,205,028,607 | $ | 79,074,110 | $ | (224,632,153 | ) | $ | 21,991,574 | $ | (109,331,866 | ) | $ | 972,130,272 | 93,595,264 | $ | 10,214,862 | $ | 17,980,171 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
9
AZL DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $10,346 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Companies | $ | 972,130,272 | $ | — | $ | — | $ | 972,130,272 | ||||||||||||
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Total Investments | $ | 972,130,272 | $ | — | $ | — | $ | 972,130,272 | ||||||||||||
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5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL DFA Multi-Strategy Fund | $ | 79,074,110 | $ | 224,632,153 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default. During the year ended December 31, 2018, the Fund did not directly invest in derivatives.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
10
AZL DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $940,318,035. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 40,066,167 | ||
Unrealized (depreciation) | (8,253,930 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | 31,812,237 | ||
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL DFA Multi-Strategy Fund | $ | 13,032,287 | $ | 15,955,167 | $ | 28,987,454 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL DFA Multi-Strategy Fund | $ | 9,184,174 | $ | — | $ | 9,184,174 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL DFA Multi-Strategy Fund | $ | 10,447,503 | $ | 38,926,094 | $ | — | $ | 31,812,237 | $ | 81,185,834 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 90% of the Fund. As of December 31, 2018, the Fund had a controlling interest (in excess of 50%) in the AZL DFA Five-Year Global Fixed Income Fund, AZL DFA U.S. Core Equity Fund, and AZL DFA U.S. Small Cap Fund, which are affiliated with the Investment Adviser.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL DFA Multi-Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL DFA Multi-Strategy Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
12
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 49.70% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $15,955,166.
13
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Fund of Funds Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
14
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
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The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP Balanced Index Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP Balanced Index Strategy Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP Balanced Index Strategy Fund.
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What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP Balanced Index Strategy Fund (the “Fund”) returned-4.44%. That compared to a-4.38%, 0.01% and a-1.81% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Balanced Composite Index1, respectively.
The Fund is a fund of funds that pursues broad diversification across four equitysub-portfolios and one fixed-incomesub-portfolio. The four equitysub-portfolios pursue passive strategies that aim to achieve, before fees, returns similar to the S&P 500 Index, the S&P 400 Index2, the S&P 600 Index3, and the MSCI EAFE Index4, which represents shares of large companies in developed foreign markets. The fixed-incomesub-portfolio is an enhanced bond index strategy that seeks to achieve a return that exceeds that of the Bloomberg Barclays Capital U.S. Aggregate Bond Index. Generally, the Fund allocates 40% to 60% of its assets to the underlying equity index funds and between 40% and 60% to the underlying bond index fund. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund and market volatility.*
U.S.large-cap stocks fell 4.38% during the12-month period. These stocks rose during the first three quarters due in part to strong economic data and positive earnings growth, and despite a volatile first quarter. However, volatility returned in the fourth quarter due to investor concerns over the Federal Reserve Board’s (the Fed) continued interest rate hikes, along with political and economic uncertainty, and contentious global trade negotiations.Mid- andsmall-cap stocks also performed poorly for the year: The S&P 400 Index generated a-11.08% return while the S&P 600 Index returned-8.48%. Growth stocks outperformed value stocks during the first three quarters, but that trend reversed in the fourth quarter.
International developed markets, as measured by the MSCI EAFE Index (Net), underperformed U.S. equities, posting a-13.79% return for the year. However, international developed markets outpaced U.S. equities during the volatile fourth quarter.
The U.S. bond market ended the year nearly flat, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining 0.01%. Despite the relative neutral return, there was a lot of activity in the fixed income market over the course of the year. The Fed hiked interest rates four times during the12-month period. Treasury yields rose during the first three quarters before the yield curve flattened in the fourth quarter. The intermediate part of the curve inverted as a result. Investment-grade corporate spreads widened sharply during the year, as investors became more risk averse, especially during the fourth quarter.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. The Fund’s strategic allocation to international equities weighed on relative results as U.S. equities outperformed international equities during the period. A strategic allocation to U.Smid- andsmall-cap equities also hurt performance as these underperformed U.S.large-cap equities during the year.*
Within the Fund’s fixed income holdings, an overweight allocation to corporate bonds hurt relative performance. The Fund modestly lagged its fixed income benchmark during the period as a result.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the very end of the year, and after stocks had already declined significantly, the MVP risk management process reduced equity exposure. During the short period remaining in the year, this reduced equity exposure detracted from relative performance as stocks rallied in the final days of the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL® MVP Balanced Index Strategy Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important consideration. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Index Strategy Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
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The performance of the Fund is expected to be lower than that of the Indexes because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus. | ||||
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | 5 Year | Since Inception (1/10/12) | |||||||||||||
AZL®MVP Balanced Index Strategy Fund | -4.44 | % | 4.31 | % | 3.74 | % | 5.65 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 12.30 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 2.12 | % | ||||||||
Balanced Composite Index | -1.81 | % | 5.80 | % | 5.63 | % | 7.28 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL®MVP Balanced Index Strategy Fund | 0.71 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.20% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses, the Fund’s gross expense ratio would be 0.71%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Balanced Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (50%) S&P 500 and (50%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP Balanced Index Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Balanced Index Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Balanced Index Strategy Fund | $ | 1,000.00 | $ | 956.30 | $ | 0.69 | 0.13 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Balanced Index Strategy Fund | $ | 1,000.00 | $ | 1,024.50 | $ | 0.71 | 0.13 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 50.6 | % | |||
Domestic Equity Funds | 32.5 | ||||
International Equity Funds | 12.0 | ||||
|
| ||||
Total Investment Securities | 95.1 | ||||
Net other assets (liabilities) | 4.9 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
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|
3
AZL MVP Balanced Index Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.1%): | ||||||||
Domestic Equity Funds (32.5%): | ||||||||
1,071,281 | AZL Mid Cap Index Fund, Class 2 | $ | 20,365,050 | |||||
4,602,320 | AZL S&P 500 Index Fund, Class 2 | 67,239,890 | ||||||
857,144 | AZL Small Cap Stock Index Fund, Class 2 | 10,431,439 | ||||||
|
| |||||||
98,036,379 | ||||||||
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| |||||||
Fixed Income Funds (50.6%): | ||||||||
14,431,988 | AZL Enhanced Bond Index Fund | 152,834,757 | ||||||
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|
Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
International Equity Funds (12.0%): | ||||||||
2,545,924 | AZL International Index Fund, Class 2 | $ | 36,279,424 | |||||
|
| |||||||
Total Affiliated Investment Companies (Cost $278,014,348) | 287,150,560 | |||||||
|
| |||||||
Total Investment Securities (Cost $278,014,348) —95.1%(a) | 287,150,560 | |||||||
Net other assets (liabilities) — 4.9% | 14,783,296 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 301,933,856 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $14,918,925 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized Appreciation/ (Depreciation) | ||||||||||||
S&P 500 Index E-Mini March Futures (U.S. Dollar) | 3/15/19 | 27 | $ | 3,382,020 | $ | (23,033 | ) | |||||||||
U.S. Treasury 10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 61 | 7,442,951 | 174,553 | ||||||||||||
|
| |||||||||||||||
$ | 151,520 | |||||||||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP Balanced Index Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 278,014,348 | |||
|
| ||||
Investments in affiliates, at value | 287,150,560 | ||||
Cash | 18,272 | ||||
Segregated cash for collateral | 14,918,925 | ||||
Interest and dividends receivable | 26,049 | ||||
Prepaid expenses | 3,729 | ||||
|
| ||||
Total Assets | | 302,117,535 | |||
|
| ||||
Liabilities: | |||||
Payable for affiliated investments purchased | 18,272 | ||||
Payable for capital shares redeemed | 123,005 | ||||
Payable for variation margin on futures contracts | | 314 | |||
Manager fees payable | 25,900 | ||||
Administration fees payable | 4,485 | ||||
Custodian fees payable | 354 | ||||
Administrative and compliance services fees payable | 1,023 | ||||
Transfer agent fees payable | 430 | ||||
Trustee fees payable | 392 | ||||
Other accrued liabilities | 9,504 | ||||
|
| ||||
Total Liabilities | | 183,679 | |||
|
| ||||
Net Assets | $ | 301,933,856 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 283,093,947 | |||
Total distributable earnings | 18,839,909 | ||||
|
| ||||
Net Assets | $ | 301,933,856 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 24,403,592 | ||||
Net Asset Value (offering and redemption price per share) | $ | 12.37 | |||
|
|
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 5,889,575 | |||
Interest | 274,865 | ||||
Dividends from non-affiliates | 912 | ||||
|
| ||||
Total Investment Income | 6,165,352 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 321,254 | ||||
Administration fees | 53,340 | ||||
Custodian fees | 3,411 | ||||
Administrative and compliance services fees | 5,258 | ||||
Transfer agent fees | 5,392 | ||||
Trustee fees | 16,415 | ||||
Professional fees | 13,663 | ||||
Shareholder reports | 8,112 | ||||
Other expenses | 2,627 | ||||
|
| ||||
Total expenses | 429,472 | ||||
|
| ||||
Net Investment Income/(Loss) | 5,735,880 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 1,552,800 | ||||
Net realized gains distributions from affiliated underlying funds | 5,837,763 | ||||
Net realized gains/(losses) on futures contracts | (808,905 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (26,405,491 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | 64,692 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (19,759,141 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (14,023,261 | ) | ||
|
|
See accompanying notes to the financial statements.
5
AZL MVP Balanced Index Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 5,735,880 | $ | 2,278,329 | ||||||
Net realized gains/(losses) on investments | 6,581,658 | 7,645,879 | ||||||||
Change in unrealized appreciation/depreciation on investments | (26,340,799 | ) | 24,224,785 | |||||||
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|
| |||||||
Change in net assets resulting from operations | (14,023,261 | ) | 34,148,993 | |||||||
|
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| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (10,275,883 | ) | (17,870,513 | ) | ||||||
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|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (10,275,883 | ) | (17,870,513 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 21,031,895 | 21,993,018 | ||||||||
Proceeds from dividends reinvested | 10,275,883 | 17,870,513 | ||||||||
Value of shares redeemed | (27,305,408 | ) | (46,656,347 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 4,002,370 | (6,792,816 | ) | |||||||
|
|
|
| |||||||
Change in net assets | (20,296,774 | ) | 9,485,664 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 322,230,630 | 312,744,966 | ||||||||
|
|
|
| |||||||
End of period | $ | 301,933,856 | $ | 322,230,630 | ||||||
|
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| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,574,251 | 1,662,006 | ||||||||
Dividends reinvested | 798,437 | 1,378,898 | ||||||||
Shares redeemed | (2,053,669 | ) | (3,503,941 | ) | ||||||
|
|
|
| |||||||
Change in shares | 319,019 | (463,037 | ) | |||||||
|
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|
|
(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Balanced Index Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 13.38 | $ | 12.74 | $ | 12.30 | $ | 12.56 | $ | 12.03 | |||||||||||||||
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|
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| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.24 | 0.11 | 0.17 | 0.22 | 0.08 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.82 | ) | 1.32 | 0.64 | (0.25 | ) | 0.65 | ||||||||||||||||||
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|
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| ||||||||||||||||
Total from Investment Activities | (0.58 | ) | 1.43 | 0.81 | (0.03 | ) | 0.73 | ||||||||||||||||||
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|
|
| ||||||||||||||||
Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.11 | ) | (0.26 | ) | (0.28 | ) | (0.10 | ) | (0.12 | ) | |||||||||||||||
Net Realized Gains | (0.32 | ) | (0.53 | ) | (0.09 | ) | (0.13 | ) | (0.08 | ) | |||||||||||||||
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| ||||||||||||||||
Total Dividends | (0.43 | ) | (0.79 | ) | (0.37 | ) | (0.23 | ) | (0.20 | ) | |||||||||||||||
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| ||||||||||||||||
Net Asset Value, End of Period | $ | 12.37 | $ | 13.38 | $ | 12.74 | $ | 12.30 | $ | 12.56 | |||||||||||||||
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| ||||||||||||||||
Total Return(a) | (4.44 | )% | 11.40 | % | 6.61 | % | (0.22 | )% | 6.09 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 301,934 | $ | 322,231 | $ | 312,745 | $ | 255,129 | $ | 208,618 | |||||||||||||||
Net Investment Income/(Loss) | 1.79 | % | 0.72 | % | 1.69 | % | 2.08 | % | 0.97 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.13 | % | 0.13 | % | 0.14 | % | 0.14 | % | 0.15 | % | |||||||||||||||
Expenses Net of Reductions* | 0.13 | % | 0.13 | % | 0.14 | % | 0.14 | % | 0.15 | % | |||||||||||||||
Portfolio Turnover Rate | 7 | % | 9 | % | 11 | % | 5 | % | 6 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Balanced Index Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The monthly average notional amount for these contracts was $15.6 million for the year ended December 31, 2018. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk |
| |||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 23,033 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 174,553 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk |
| |||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (808,905 | ) | $ | (153,052 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 217,744 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (5,886,420 | ) | ||
From net realized gains | (11,984,093 | ) | |||
|
| ||||
Change in net assets resulting from distributions to shareholders | $ | (17,870,513 | ) |
9
AZL MVP Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Balanced Index Strategy Fund | 0.10 | % | 0.20 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions | |||||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 153,072,168 | $ | 13,482,355 | $ | (9,436,074 | ) | $ | (534,660 | ) | $ | (3,749,032 | ) | $ | 152,834,757 | 14,431,988 | $ | 3,345,618 | $ | — | |||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 40,510,932 | 4,902,628 | (1,720,518 | ) | 136,455 | (7,550,073 | ) | 36,279,424 | 2,545,924 | 1,081,480 | 527,822 | ||||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 24,205,200 | 2,175,127 | (1,485,286 | ) | 149,885 | (4,679,876 | ) | 20,365,050 | 1,071,281 | 216,610 | 1,787,981 | ||||||||||||||||||||||||||||||||||
AZL S&P 500 Index Fund, Class 2 | 75,637,309 | 6,304,565 | (8,201,357 | ) | 1,551,769 | (8,052,396 | ) | 67,239,890 | 4,602,320 | 1,137,531 | 2,390,505 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 12,940,281 | 1,239,793 | (1,623,872 | ) | 249,351 | (2,374,114 | ) | 10,431,439 | 857,144 | 108,336 | 1,131,455 | ||||||||||||||||||||||||||||||||||
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$ | 306,365,890 | $ | 28,104,468 | $ | (22,467,107 | ) | $ | 1,552,800 | $ | (26,405,491 | ) | $ | 287,150,560 | 23,508,657 | $ | 5,889,575 | $ | 5,837,763 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $2,917 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
10
AZL MVP Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 287,150,560 | $ | — | $ | — | $ | 287,150,560 | ||||||||||||
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Total Investment Securities | 287,150,560 | — | — | 287,150,560 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | 151,520 | — | — | 151,520 | ||||||||||||||||
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Total Investments | $ | 287,302,080 | $ | — | $ | — | $ | 287,302,080 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Balanced Index Strategy Fund | $ | 28,104,468 | $ | 22,467,107 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $280,768,545. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 10,732,563 | ||
Unrealized (depreciation) | (4,350,548 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | 6,382,015 | ||
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AZL MVP Balanced Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Balanced Index Strategy Fund | $ | 3,233,566 | $ | 7,042,317 | $ | 10,275,883 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL MVP Balanced Index Strategy Fund | $ | 6,083,704 | $ | 11,786,809 | $ | 17,870,513 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MVP Balanced Index Strategy Fund | $ | 6,684,897 | $ | 5,804,805 | $ | — | $ | 6,382,015 | $ | 18,871,717 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 85% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Balanced Index Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Balanced Index Strategy Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 23.77% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $617,833.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $7,042,317.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP BlackRock Global Strategy Plus Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Consolidated Expense Examples and Portfolio Composition
Page 3
Consolidated Schedule of Portfolio Investments
Page 4
Consolidated Statement of Assets and Liabilities
Page 22
Consolidated Statement of Operations
Page 22
Consolidated Statements of Changes in Net Assets
Page 23
Consolidated Financial Highlights
Page 24
Notes to the Consolidated Financial Statements
Page 25
Report of Independent Registered Public Accounting Firm
Page 38
Other Federal Income Tax Information
Page 39
Page 40
Approval of Investment Advisory Agreement
Page 41
Information about the Board of Trustees and Officers
Page 43
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP BlackRock Global Strategy Plus Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP BlackRock Global Strategy Plus Fund. | ||
What factors affected the Fund’s performance for the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP BlackRock Global Strategy Plus Fund (the “Fund”) returned-5.77%. That compared to a-8.77%,-4.38%,-13.81%, 1.46%,-1.82% and a-3.71% total return for its benchmarks, the FTSE World Index1, the S&P 500 Index1, the FTSE World ex U.S. Index1, the ICE BofA Merrill Lynch5-Year U.S. Treasury Bond Index1, the FTSE(Non-USD) World Government Bond Index1, and the Balanced Reference Benchmark1, respectively.
The Fund is a fund of funds that invests primarily in a combination of three underlying mutual funds (the “Underlying Funds”), which are managed by the Manager. The Fund is designed to provide a diversified portfolio consisting of Underlying Funds in equity and fixed income asset classes, combined with the MVP (Managed Volatility Portfolio) risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund and market volatility.*
U.S. equity markets declined for the year, though they generally outperformed international equities for the12-month period. The S&P 500 Index returned-4.38%, while the FTSE World Ex U.S. Index returned-13.81% (in US dollar terms). Overall, equities suffered from investors’ concerns about slowing global growth, trade protectionism and geopolitical uncertainty, particularly in the U.K. and Italy. Positive corporate earnings reports and healthy macroeconomic data, including low unemployment, helped U.S. equities outperform their overseas counterparts.
Though markets had a strong start to the year, volatility quickly reared its head, first in equities and then in the investment-grade and emerging market bond sectors. In fixed-income markets, yields rose as the Federal Reserve Board pursued its schedule of four interest rate increases over the course of 2018. The European Central Bank left interest rates unchanged throughout the year and signaled the end of its quantitative easing program.
In the fourth quarter, yields initially reached a seven-year high before tightening financial conditions and a shift in tone from the Federal Open Market Committee caused yields to fall. Investors’ appetite for risk declined at the end of the period, leading to a strongsell-off in stocks.
The Fund underperformed its Balanced Reference Benchmark for the12-month period under review. Within the Fund’s active equity holdings, a higher-than-benchmark exposure to Japanese stocks dragged on relative performance, as did an underweight to U.S. equities. From a sector perspective, an above-benchmark allocation to European financials dragged on returns, as did stock selection within the technology, healthcare, consumer discretionary, materials and real estate sectors.*
The Fund’s exposure to passive strategies through the AZL MSCI Global Equity Index Fund and the AZL Enhanced Bond Index Fund was a detractor from relative returns compared to the Balanced Reference Benchmark.*
An underweight allocation to fixed income had a broadly negative impact on relative results. Within the active fixed income component, the Fund’s above-benchmark exposure to U.S. duration and an overweight exposure to select emerging market government bonds also detracted. Exposure to commodity-related securities and the Fund’s currency management, particularly exposure to the Indian rupee, dragged on relative results as well.*
Within the active equity component, an above-benchmark exposure to India added to results, as it was one of the few Asian emerging markets to post a positive return for the year. From a sector perspective, an overweight allocation to the healthcare and technology sectors, along with underweight allocations to the consumer staples, financials and industrials sectors benefited relative returns. Stock selection within the utilities and industrials sectors also contributed. From a cash management perspective, the Fund’s underweight exposure to the euro and overweight exposure to the U.S. dollar also added to relative results.*
The underlying Funds use derivatives, which may include options, futures, swaps and forward contracts, both to seek to enhance returns of the Fund and to hedge (or protect) against adverse movements in currency exchange rates, interest rates and movements in the securities markets.*
During the period, the Fund’s use of derivatives detracted from the Fund’s performance.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. As market volatility increased during February and March, the MVP risk management process reduced equity exposure. Overall, the MVP process had a moderately positive effect on performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
1
AZL® MVP BlackRock Global Strategy Plus Fund Review (Unaudited)
Fund Objective | ||||
The Fund’s investment objective is to seek high total investment return. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in a combination of Underlying Funds, which are managed by the manager, combined with the MVP risk management process. | ||||
Investment Concerns | ||||
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests. | ||||
Returns on growth stocks may not move in tandem with returns on other categories of stocks or the market as a whole. Growth stocks may be susceptible to rapid price savings or to adverse developments in certain sectors of the market. | ||||
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries. | ||||
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. | ||||
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility. | ||||
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities. | ||||
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates. | ||||
High-yield bonds have a higher risk of default or other adverse credit events, but have the potential to pay higher earnings over investment-grade bonds. The higher risk of default, or the inability of the creditor to repay its debt, is the primary reason for the higher interest rates on high-yield bonds. | ||||
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments. | ||||
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus. |
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | 5 Year | Since Inception (1/10/12) | |||||||||||||
AZL®MVP BlackRock Global Strategy Plus Fund | -5.77 | % | 2.79 | % | 1.77 | % | 4.16 | % | ||||||||
FTSE World Index | -8.77 | % | 7.14 | % | 4.91 | % | 8.91 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 12.30 | % | ||||||||
FTSE World ex U.S. Index | -13.81 | % | 4.57 | % | 1.08 | % | 5.29 | % | ||||||||
ICE BofA Merrill Lynch5-Year U.S. Treasury Bond Index | 1.46 | % | 0.91 | % | 1.42 | % | 1.00 | % | ||||||||
FTSE(Non-USD) World Government Bond Index | -1.82 | % | 3.32 | % | 0.28 | % | -0.13 | % | ||||||||
Balanced Reference Benchmark | -3.71 | % | 4.86 | % | 3.44 | % | 5.18 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL®MVP BlackRock Global Strategy Plus Fund | 1.02 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expenses, acquired fund fees and expenses and consolidated expenses) to 0.15% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.71%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the FTSE World Index, which is a market-capitalization weighted index representing the performance of the large- andmid-capitalization stocks from the FTSE Global Equity Index Series and covers90-95% of the investable market capitalization. The S&P 500 is representative of 500 selected common stocks, most of which, are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The FTSE World ex U.S. Index is part of a range of indexes designed to help U.S. investors benchmark their international investments. The index is comprised of (84%) large- and (16%)mid-cap stocks providing coverage of Developed and Emerging Markets (46 countries) excluding the U.S. The index is derived from the FTSE Global Equity Index Series, which covers 98% of the world’s investable market capitalization. The ICE BofA Merrill Lynch5-Year U.S. Treasury Bond Index is designed to track the total return of the current coupon5-Year U.S. Treasury bond. The FTSE(Non-USD) World Government Bond Index is a market capitalization-weighted index that tracks 10 government bond indexes, excluding the U.S. The Balanced Reference Benchmark is comprised of (30%) S&P 500; (20%) FTSE World ex U.S. Index; (30%) ICE BofA Merrill Lynch5-Year U.S. Treasury Bond; and (20%) FTSE(Non-USD) World Government Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP BlackRock Global Strategy Plus Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP BlackRock Global Strategy Plus Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period | |||||||||||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 1,000.00 | $ | 955.20 | $ | 3.35 | 0.68 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period | |||||||||||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 1,000.00 | $ | 1,021.78 | $ | 3.47 | 0.68 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Common Stocks | 29.3 | % | |||
Fixed Income Funds | 28.6 | ||||
International Equity Funds | 16.4 | ||||
U.S. Treasury Obligations | 14.1 | ||||
Foreign Bonds | 2.2 | ||||
Corporate Bonds | 1.8 | ||||
Short-Term Securities Held as Collateral for Securities on Loan | 1.5 | ||||
Yankee Dollars | 0.9 | ||||
Exchange Traded Funds | 0.6 | ||||
Money Markets | 0.3 | ||||
Convertible Preferred Stocks | 0.2 | ||||
Preferred Stocks | 0.3 | ||||
Purchased Options | 0.1 | ||||
Convertible Bonds | 0.1 | ||||
Bank Loans | 0.1 | ||||
Private Placements | 0.1 | ||||
Purchased Currency Options | — | ^ | |||
Purchased Swaptions | — | ^ | |||
|
| ||||
Total Investment Securities | 96.6 | ||||
Net other assets (liabilities) | 3.4 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
^ | Represents less than 0.05%. |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
United States | 80.0 | % | |||
Japan | 4.9 | ||||
United Kingdom | 1.6 | ||||
France | 1.4 | ||||
Germany | 1.1 | ||||
Canada | 0.8 | ||||
China | 0.7 | ||||
Netherlands | 0.6 | ||||
India | 0.6 | ||||
Switzerland | 0.6 | ||||
All other countries | 4.3 | ||||
|
| ||||
Total Investment Securities | 96.6 | ||||
Net other assets (liabilities) | 3.4 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks (29.3%): | ||||||||
Aerospace & Defense (0.6%): | ||||||||
384 | Boeing Co. (The)(a) | $ | 123,840 | |||||
426 | Dassault Aviation SA(a) | 589,803 | ||||||
77 | Northrop Grumman Corp.(a) | 18,857 | ||||||
4,798 | Raytheon Co.(a) | 735,773 | ||||||
12,478 | Safran SA(a) | 1,498,904 | ||||||
10,830 | United Technologies Corp.(a) | 1,153,179 | ||||||
|
| |||||||
4,120,356 | ||||||||
|
| |||||||
Air Freight & Logistics (0.0%)†: | ||||||||
1,268 | C.H. Robinson Worldwide, Inc.^(a) | 106,626 | ||||||
|
| |||||||
Airlines (0.7%): | ||||||||
533 | American Airlines Group, Inc.^(a) | 17,115 | ||||||
48,224 | Azul SA, ADR*(a) | 1,335,322 | ||||||
659 | Delta Air Lines, Inc.(a) | 32,884 | ||||||
57,000 | Japan Airlines Co., Ltd.(a) | 2,019,164 | ||||||
4,199 | Turk Hava Yollari Anonim Ortakligi*(a) | 12,788 | ||||||
15,206 | United Continental Holdings, Inc.*(a) | 1,273,198 | ||||||
|
| |||||||
4,690,471 | ||||||||
|
| |||||||
Auto Components (0.5%): | ||||||||
48,683 | Cheng Shin Rubber Industry Co., Ltd.(a) | 64,309 | ||||||
328 | Compagnie Generale des Establissements Michelin SCA, Class B(a) | 32,425 | ||||||
37,700 | Denso Corp.(a) | 1,673,357 | ||||||
2,500 | Exedy Corp.(a) | 61,070 | ||||||
21,400 | Koito Manufacturing Co., Ltd.(a) | 1,091,819 | ||||||
141 | Lear Corp.(a) | 17,323 | ||||||
2,300 | Stanley Electric Co., Ltd.(a) | 64,151 | ||||||
20,400 | Toyota Industries Corp.(a) | 938,846 | ||||||
|
| |||||||
3,943,300 | ||||||||
|
| |||||||
Automobiles (0.6%): | ||||||||
1,500 | BAIC Motor Corp., Ltd., Class H(a) | 793 | ||||||
6,000 | Dongfeng Motor Corp., Class H(a) | 5,407 | ||||||
74,300 | Fuji Heavy Industries, Ltd.(a) | 1,586,353 | ||||||
817 | General Motors Co.(a) | 27,329 | ||||||
10,800 | Guangzhou Automobile Group Co., Ltd.(a) | 10,673 | ||||||
2,973 | Hero MotoCorp, Ltd.(a) | 132,008 | ||||||
4,100 | Maruti Suzuki India, Ltd.(a) | 437,290 | ||||||
35,900 | Suzuki Motor Corp.(a) | 1,816,807 | ||||||
|
| |||||||
4,016,660 | ||||||||
|
| |||||||
Banks (1.5%): | ||||||||
27,240 | ABN AMRO Group NV(a) | 637,964 | ||||||
23,000 | Agricultural Bank of China, Ltd., Class A(a) | 10,022 | ||||||
9,649 | Banco Bilbao Vizcaya Argentaria SA(a) | 50,892 | ||||||
2,022 | Banco do Brasil SA(a) | 24,257 | ||||||
573 | Banco Santander Brasil SA(a) | 6,314 | ||||||
56,040 | Bank of America Corp.(a) | 1,380,826 | ||||||
7,000 | Bank of China, Ltd.(a) | 3,008 | ||||||
12,891 | Barclays plc(a) | 24,724 | ||||||
28,000 | China Citic Bank Co., Ltd.(a) | 16,959 | ||||||
11,000 | China Construction Bank(a) | 9,019 | ||||||
20,916 | Citigroup, Inc.(a) | 1,088,887 | ||||||
888 | Danske Bank A/S(a) | 17,598 | ||||||
1,416 | Fifth Third Bancorp(a) | 33,318 | ||||||
287 | Grupo Financiero Banorte SAB de C.V.(a) | 1,401 | ||||||
826 | Hana Financial Holdings Group, Inc.(a) | 26,807 | ||||||
161,303 | HSBC Holdings plc(a) | 1,323,510 |
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Banks, continued | ||||||||
72,000 | Industrial & Commercial Bank of China, Class H(a) | $ | 51,101 | |||||
1,329 | Industrial Bank of Korea (IBK)(a) | 16,735 | ||||||
13,344 | JPMorgan Chase & Co.(a) | 1,302,641 | ||||||
322 | KB Financial Group, Inc.(a) | 13,442 | ||||||
1,600 | Mitsubishi UFJ Financial Group, Inc.(a) | 7,891 | ||||||
72,800 | PT Bank Central Asia Tbk(a) | 131,651 | ||||||
1,341 | Shinhan Financial Group Co., Ltd.(a) | 47,591 | ||||||
1,639 | Societe Generale(a) | 52,029 | ||||||
91,540 | State Bank of India*(a) | 386,839 | ||||||
21,541 | SunTrust Banks, Inc.(a) | 1,086,528 | ||||||
60 | Taiwan Cooperative Financial Holding Co., Ltd.(a) | 34 | ||||||
3,328 | Turkiye Is Bankasi AS, Class C(a) | 2,857 | ||||||
811 | U.S. Bancorp(a) | 37,063 | ||||||
548 | Unicredit SpA(a) | 6,216 | ||||||
6,300 | United Overseas Bank, Ltd.(a) | 112,949 | ||||||
66,352 | Wells Fargo & Co.(a) | 3,057,500 | ||||||
1,133 | Woori Bank(a) | 15,841 | ||||||
|
| |||||||
10,984,414 | ||||||||
|
| |||||||
Beverages (0.3%): | ||||||||
13,018 | Anheuser-Busch InBev NV(a) | 861,443 | ||||||
546 | Carlsberg A/S, Class B(a) | 58,100 | ||||||
4,000 | China Resources Enterprises, Ltd.(a) | 13,861 | ||||||
103 | Constellation Brands, Inc., Class C(a) | 16,564 | ||||||
10,300 | Jiangsu Yanghe Brewery Joint-Stock Co., Ltd., Class A(a) | 141,948 | ||||||
5,900 | Kweichow Moutai Co., Ltd.(a) | 506,531 | ||||||
25,900 | Luzhou Laojiao Co., Ltd.(a) | 153,230 | ||||||
1,583 | PepsiCo, Inc.(a) | 174,890 | ||||||
2,000 | Tsingtao Brewery Co., Ltd., Class H(a) | 8,086 | ||||||
19,400 | Wuliangye Yibin Co., Ltd.(a) | 143,626 | ||||||
|
| |||||||
2,078,279 | ||||||||
|
| |||||||
Biotechnology (0.4%): | ||||||||
1,367 | AbbVie, Inc.(a) | 126,024 | ||||||
645 | Amgen, Inc.(a) | 125,562 | ||||||
2,955 | Biogen Idec, Inc.*(a) | 889,219 | ||||||
255 | Celgene Corp.*(a) | 16,343 | ||||||
27,177 | Gilead Sciences, Inc.(a) | 1,699,921 | ||||||
|
| |||||||
2,857,069 | ||||||||
|
| |||||||
Building Products (0.1%): | ||||||||
1,034 | Compagnie de Saint-Gobain SA(a) | 34,412 | ||||||
5,500 | Daikin Industries, Ltd.(a) | 578,850 | ||||||
1,887 | Fortune Brands Home & Security, Inc.^(a) | 71,687 | ||||||
6,303 | Masco Corp.(a) | 184,300 | ||||||
4,100 | Nichias Corp.(a) | 70,839 | ||||||
|
| |||||||
940,088 | ||||||||
|
| |||||||
Capital Markets (0.4%): | ||||||||
598 | Ameriprise Financial, Inc.(a) | 62,413 | ||||||
631 | Bank of New York Mellon Corp. (The)(a) | 29,701 | ||||||
36,300 | Charles Schwab Corp. (The)(a) | 1,507,539 | ||||||
480 | Goldman Sachs Group, Inc. (The)(a) | 80,184 | ||||||
37,741 | Morgan Stanley(a) | 1,496,431 | ||||||
229 | State Street Corp.(a) | 14,443 | ||||||
|
| |||||||
3,190,711 | ||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Chemicals (1.4%): | ||||||||
15,826 | Air Products & Chemicals, Inc.(a) | $ | 2,532,951 | |||||
40,800 | Asahi Kasei Corp.(a) | 416,344 | ||||||
14,500 | Daicel Chemical Industries, Ltd.(a) | 149,027 | ||||||
30,322 | DowDuPont, Inc.(a) | 1,621,621 | ||||||
1,971 | Evonik Industries AG(a) | 49,222 | ||||||
33,000 | Formosa Chemicals & Fibre Corp.(a) | 111,810 | ||||||
37,000 | Formosa Plastics Corp.(a) | 120,597 | ||||||
5,200 | Hitachi Chemical Co., Ltd.(a) | 77,673 | ||||||
893 | Huntsman Corp.(a) | 17,226 | ||||||
5,400 | Kuraray Co., Ltd.(a) | 75,769 | ||||||
582 | LG Chem, Ltd.(a) | 180,269 | ||||||
5 | Lotte Chemical Corp.(a) | 1,238 | ||||||
47,000 | Nan Ya Plastics Corp.(a) | 115,409 | ||||||
28,100 | Nitto Denko Corp.(a) | 1,403,172 | ||||||
713 | Nutrien, Ltd.(a) | 33,493 | ||||||
73,900 | PTT Global Chemical Public Co., Ltd.(a) | 161,485 | ||||||
17,300 | Shin-Etsu Chemical Co., Ltd.(a) | 1,332,989 | ||||||
54,000 | Sinopec Shanghai Petrochemical Co., Ltd., Class H(a) | 23,495 | ||||||
5,000 | Sumitomo Chemical Co., Ltd.(a) | 24,455 | ||||||
11,500 | Toagosei Co., Ltd.(a) | 127,779 | ||||||
86,300 | Toray Industries, Inc.(a) | 603,048 | ||||||
30,400 | Ube Industries, Ltd.(a) | 612,752 | ||||||
|
| |||||||
9,791,824 | ||||||||
|
| |||||||
Commercial Services & Supplies (0.0%)†: | ||||||||
6,229 | Country Garden Services Holdings Co., Ltd.*(a) | 9,804 | ||||||
191 | Waste Management, Inc.(a) | 16,997 | ||||||
|
| |||||||
26,801 | ||||||||
|
| |||||||
Communications Equipment (0.0%)†: | ||||||||
2,693 | Cisco Systems, Inc.(a) | 116,688 | ||||||
5,878 | Nokia OYJ(a) | 33,958 | ||||||
4,265 | Telefonaktiebolaget LM Ericsson, Class B(a) | 37,613 | ||||||
|
| |||||||
188,259 | ||||||||
|
| |||||||
Construction & Engineering (0.1%): | ||||||||
1,000 | China Communications Construction Co., Ltd.(a) | 939 | ||||||
3,077 | Eiffage SA(a) | 257,389 | ||||||
700 | Kajima Corp.(a) | 9,385 | ||||||
14,400 | Kinden Corp.(a) | 231,668 | ||||||
1,900 | Kyudenko Corp.(a) | 71,503 | ||||||
3,700 | Maeda Road Construction Co., Ltd.(a) | 76,243 | ||||||
3,400 | Nippo Corp.(a) | 65,044 | ||||||
4,300 | Okumura Corp.(a) | 124,584 | ||||||
100 | TAISEI Corp.(a) | 4,252 | ||||||
18,400 | Toda Corp.(a) | 113,854 | ||||||
|
| |||||||
954,861 | ||||||||
|
| |||||||
Construction Materials (0.0%)†: | ||||||||
3,500 | Anhui Conch Cement Co., Ltd., Class H(a) | 16,795 | ||||||
14,576 | Cemex SAB de C.V.*(a) | 7,048 | ||||||
8,000 | China National Buildings Material Co., Ltd.(a) | 5,420 | ||||||
32,000 | China Resources Cement Holdings, Ltd.(a) | 28,447 | ||||||
11,000 | Siam Cement PCL(a) | 147,168 | ||||||
|
| |||||||
204,878 | ||||||||
|
| |||||||
Consumer Finance (0.0%)†: | ||||||||
694 | Ally Financial, Inc.(a) | 15,726 | ||||||
301 | Capital One Financial Corp.(a) | 22,753 | ||||||
490 | Discover Financial Services(a) | 28,900 | ||||||
|
| |||||||
67,379 | ||||||||
|
|
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Containers & Packaging (0.0%)†: | ||||||||
331 | Packaging Corp. of America(a) | $ | 27,625 | |||||
|
| |||||||
Distributors (0.0%)†: | ||||||||
3,700 | Canon Marketing Japan, Inc.(a) | 65,430 | ||||||
|
| |||||||
Diversified Consumer Services (0.0%)†: | ||||||||
275 | New Oriental Education & Technology Group, Inc., ADR*(a) | 15,073 | ||||||
|
| |||||||
Diversified Financial Services (0.0%)†: | ||||||||
1,130 | Berkshire Hathaway, Inc., Class B*(a) | 230,723 | ||||||
126,000 | Fubon Financial Holdings Co., Ltd.(a) | 192,102 | ||||||
|
| |||||||
422,825 | ||||||||
|
| |||||||
Diversified Telecommunication Services (0.6%): | ||||||||
11,075 | AT&T, Inc.(a) | 316,081 | ||||||
48,548 | Cellnex Telecom SAU(a) | 1,239,996 | ||||||
244,000 | Chunghwa Telecom Co., Ltd.(a) | 896,151 | ||||||
81,000 | HKT Trust & HKT, Ltd.(a) | 116,631 | ||||||
2,700 | Nippon Telegraph & Telephone Corp.(a) | 109,948 | ||||||
62,300 | Singapore Telecommunications, Ltd.(a) | 133,667 | ||||||
576,422 | Telecom Italia SpA*(a) | 319,283 | ||||||
28,134 | Telecom Italia RNC(a) | 13,446 | ||||||
426 | Telstra Corp., Ltd.(a) | 855 | ||||||
24,657 | Verizon Communications, Inc.(a) | 1,386,216 | ||||||
|
| |||||||
4,532,274 | ||||||||
|
| |||||||
Electric Utilities (0.7%): | ||||||||
6,710 | CEZ(a) | 160,183 | ||||||
21,500 | CK Infrastructure Holdings, Ltd.(a) | 162,300 | ||||||
17,000 | CLP Holdings, Ltd.(a) | 191,648 | ||||||
161,458 | Enel SpA(a) | 931,336 | ||||||
910 | Exelon Corp.(a) | 41,041 | ||||||
6,500 | Hongkong Electric Holdings, Ltd.(a) | 45,130 | ||||||
17,110 | NextEra Energy, Inc.(a) | 2,974,060 | ||||||
739 | PG&E Corp.*(a) | 17,551 | ||||||
1,236 | Scottish & Southern Energy plc(a) | 16,991 | ||||||
374 | Xcel Energy, Inc.(a) | 18,427 | ||||||
|
| |||||||
4,558,667 | ||||||||
|
| |||||||
Electrical Equipment (0.2%): | ||||||||
768 | Eaton Corp. plc(a) | 52,731 | ||||||
4,900 | GS Yuasa Corp.(a) | 99,595 | ||||||
3,900 | Mabuchi Motor Co., Ltd.(a) | 119,227 | ||||||
124,600 | Mitsubishi Electric Corp.(a) | 1,366,165 | ||||||
382 | Rockwell Automation, Inc.^(a) | 57,483 | ||||||
|
| |||||||
1,695,201 | ||||||||
|
| |||||||
Electronic Equipment, Instruments & Components (0.2%): | ||||||||
2,108 | ALPS Electric Co., Ltd.(a) | 40,719 | ||||||
1,487 | Corning, Inc.(a) | 44,922 | ||||||
2,100 | Hitachi, Ltd.(a) | 55,829 | ||||||
62,320 | Hon Hai Precision Industry Co., Ltd.(a) | 143,847 | ||||||
7,100 | Japan Aviation Electronics Industry, Ltd.(a) | 81,469 | ||||||
300 | Keyence Corp.(a) | 151,215 | ||||||
9,300 | Murata Manufacturing Co., Ltd.(a) | 1,281,600 | ||||||
10 | Samsung Electro-Mechanics Co., Ltd., Series L(a) | 935 | ||||||
1,000 | Yageo Corp.(a) | 10,212 | ||||||
|
| |||||||
1,810,748 | ||||||||
|
| |||||||
Energy Equipment & Services (0.0%)†: | ||||||||
492 | Helmerich & Payne, Inc.(a) | 23,586 | ||||||
8,746 | Schlumberger, Ltd.(a) | 315,556 | ||||||
|
| |||||||
339,142 | ||||||||
|
|
See accompanying notes to the financial statements.
5
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Entertainment (0.1%): | ||||||||
282 | Ncsoft Corp.(a) | $ | 118,161 | |||||
300 | Nexon Co., Ltd.*(a) | 3,833 | ||||||
394 | Walt Disney Co. (The)(a) | 43,202 | ||||||
193,901 | Zynga, Inc.*(a) | 762,031 | ||||||
|
| |||||||
927,227 | ||||||||
|
| |||||||
Equity Real Estate Investment Trusts (0.2%): | ||||||||
585 | American Tower Corp.(a) | 92,541 | ||||||
9,597 | Equity Residential Property Trust(a) | 633,499 | ||||||
17,500 | Link REIT (The)(a) | 176,247 | ||||||
5,388 | Stockland Trust Group(a) | 13,364 | ||||||
3,292 | Unibail-Rodamco-Westfield(a) | 508,442 | ||||||
512 | Vornado Realty Trust(a) | 31,759 | ||||||
1,363 | Weyerhaeuser Co.(a) | 29,795 | ||||||
|
| |||||||
1,485,647 | ||||||||
|
| |||||||
Food & Staples Retailing (0.0%)†: | ||||||||
400 | Aeon Co., Ltd.(a) | 7,873 | ||||||
483 | Coles Group, Ltd.*(a) | 3,993 | ||||||
175 | Costco Wholesale Corp.(a) | 35,649 | ||||||
96 | E-Mart Co., Ltd.(a) | 15,659 | ||||||
6,789 | Jeronimo Martins SGPS SA(a) | 80,366 | ||||||
879 | Koninklijke Ahold Delhaize NV(a) | 22,172 | ||||||
1,128 | Kroger Co. (The)(a) | 31,020 | ||||||
1,900 | Seven & I Holdings Co., Ltd.(a) | 82,742 | ||||||
354 | Sysco Corp.(a) | 22,182 | ||||||
71 | Walgreens Boots Alliance, Inc.(a) | 4,851 | ||||||
1,009 | Wal-Mart Stores, Inc.(a) | 93,989 | ||||||
1,020 | Woolworths, Ltd.(a) | 21,131 | ||||||
|
| |||||||
421,627 | ||||||||
|
| |||||||
Food Products (1.1%): | ||||||||
77,300 | Ajinomoto Co., Inc.(a) | 1,371,533 | ||||||
42,956 | Angel Yeast Co., Ltd., Class A(a) | 157,735 | ||||||
583 | Conagra Brands, Inc.(a) | 12,453 | ||||||
39,747 | Danone SA(a) | 2,800,964 | ||||||
2,762 | Mondelez International, Inc., Class A(a) | 110,563 | ||||||
40,107 | Nestle SA, Registered Shares(a) | 3,262,060 | ||||||
6,000 | Tingyi (Caymen Is) Holding Corp.(a) | 7,948 | ||||||
79,000 | Uni-President Enterprises Corp.(a) | 178,799 | ||||||
176,000 | Want Want China Holdings, Ltd.(a) | 122,444 | ||||||
56,000 | WH Group, Ltd.(a) | 42,704 | ||||||
|
| |||||||
8,067,203 | ||||||||
|
| |||||||
Gas Utilities (0.2%): | ||||||||
3,500 | Beijing Enterprises Holdings, Ltd.(a) | 18,446 | ||||||
4,000 | China Resources Gas Group, Ltd.(a) | 15,745 | ||||||
52,200 | Tokyo Gas Co., Ltd.(a) | 1,320,296 | ||||||
|
| |||||||
1,354,487 | ||||||||
|
| |||||||
Health Care Equipment & Supplies (0.8%): | ||||||||
1,352 | Abbott Laboratories(a) | 97,790 | ||||||
1,417 | Baxter International, Inc.(a) | 93,267 | ||||||
160 | Edwards Lifesciences Corp.*(a) | 24,507 | ||||||
8,444 | Essilor International SA Compagnie Generale d’Optique(a) | 1,066,097 | ||||||
19,000 | HOYA Corp.(a) | 1,161,483 | ||||||
51 | Intuitive Surgical, Inc.*(a) | 24,425 | ||||||
85,806 | Koninklijke Philips Electronics NV(a) | 3,023,654 | ||||||
1,416 | Medtronic plc(a) | 128,800 |
Shares | �� | Fair Value | ||||||
Common Stocks, continued | ||||||||
Health Care Equipment & Supplies, continued | ||||||||
200 | Olympus Co., Ltd.(a) | $ | 6,116 | |||||
784 | Stryker Corp.(a) | 122,892 | ||||||
300 | Sysmex Corp.(a) | 14,476 | ||||||
|
| |||||||
5,763,507 | ||||||||
|
| |||||||
Health Care Providers & Services (1.9%): | ||||||||
4,100 | Alfresa Holdings Corp.(a) | 106,087 | ||||||
12,669 | Anthem, Inc.(a) | 3,327,259 | ||||||
157 | Cigna Corp.(a) | 29,817 | ||||||
40,410 | CVS Health Corp.(a) | 2,647,663 | ||||||
17,460 | DaVita, Inc.*(a) | 898,492 | ||||||
36,490 | Fresenius SE & Co. KGaA(a) | 1,763,600 | ||||||
57,784 | Hapvida Participacoes e Investimentos SA(a) | 465,218 | ||||||
7,966 | HCA Healthcare, Inc.(a) | 991,369 | ||||||
102 | Humana, Inc.(a) | 29,221 | ||||||
298 | McKesson Corp.(a) | 32,920 | ||||||
4,800 | Medipal Holdings Corp.(a) | 103,846 | ||||||
39,986 | NMC Health plc(a) | 1,397,561 | ||||||
102,541 | Notre Dame Intermedica Participacoes SA*(a) | 769,460 | ||||||
1,900 | Suzuken Co., Ltd.(a) | 97,529 | ||||||
7,586 | Tenet Healthcare Corp.*(a) | 130,024 | ||||||
1,682 | UnitedHealth Group, Inc.(a) | 419,020 | ||||||
|
| |||||||
13,209,086 | ||||||||
|
| |||||||
Health Care Technology (0.0%)†: | ||||||||
96,300 | Ping An Healthcare and Technology Co., Ltd.*(a) | 340,248 | ||||||
|
| |||||||
Hotels, Restaurants & Leisure (0.6%): | ||||||||
85 | Carnival Corp., Class A(a) | 4,191 | ||||||
2,000 | Galaxy Entertainment Group, Ltd.(a) | 12,555 | ||||||
47,100 | Genting Singapore, Ltd.(a) | 33,726 | ||||||
750 | Las Vegas Sands Corp.(a) | 39,038 | ||||||
309 | McDonald’s Corp.(a) | 54,869 | ||||||
29,146 | MGM Resorts International(a) | 707,082 | ||||||
268 | Royal Caribbean Cruises, Ltd.(a) | 26,208 | ||||||
400 | Sands China, Ltd.(a) | 1,732 | ||||||
18,062 | Sodexo SA(a) | 1,847,019 | ||||||
19,181 | Starbucks Corp.(a) | 1,235,256 | ||||||
662 | Wyndham Worldwide Corp.(a) | 23,726 | ||||||
3,169 | Yum China Holdings, Inc.(a) | 106,257 | ||||||
589 | Yum! Brands, Inc.(a) | 54,141 | ||||||
|
| |||||||
4,145,800 | ||||||||
|
| |||||||
Household Durables (0.0%)†: | ||||||||
2,841 | Berkeley Group Holdings plc (The)(a) | 125,994 | ||||||
1,674 | Coway Co., Ltd.(a) | 111,071 | ||||||
37 | LG Electronics, Inc.(a) | 2,081 | ||||||
2,500 | Panasonic Corp.(a) | 22,435 | ||||||
800 | Sony Corp.(a) | 38,531 | ||||||
|
| |||||||
300,112 | ||||||||
|
| |||||||
Household Products (0.5%): | ||||||||
36,948 | Colgate-Palmolive Co.(a) | 2,199,145 | ||||||
17,398 | Procter & Gamble Co. (The)(a) | 1,599,224 | ||||||
600 | Unicharm Corp.(a) | 19,387 | ||||||
|
| |||||||
3,817,756 | ||||||||
|
| |||||||
Independent Power and Renewable Electricity Producers (0.1%): | ||||||||
1,736 | AES Corp. (The)^(a) | 25,103 | ||||||
13,246 | NextEra Energy Partners LP^(a) | 570,240 |
See accompanying notes to the financial statements.
6
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Independent Power and Renewable Electricity Producers, continued | ||||||||
716 | NRG Energy, Inc.(a) | $ | 28,354 | |||||
7,687 | Vistra Energy Corp.*(a) | 175,955 | ||||||
|
| |||||||
799,652 | ||||||||
|
| |||||||
Industrial Conglomerates (0.0%)†: | ||||||||
20,000 | Citic, Ltd.(a) | 31,200 | ||||||
19,000 | Fosun International, Ltd.(a) | 27,798 | ||||||
3,523 | General Electric Co.(a) | 26,669 | ||||||
3,500 | Jardine Matheson Holdings, Ltd.(a) | 243,698 | ||||||
1,300 | Toshiba Corp.(a) | 36,908 | ||||||
|
| |||||||
366,273 | ||||||||
|
| |||||||
Insurance (0.6%): | ||||||||
125 | American International Group, Inc.(a) | 4,926 | ||||||
31,074 | AXA SA(a) | 669,417 | ||||||
105,000 | Cathay Financial Holding Co., Ltd.(a) | 159,808 | ||||||
6,959 | Chubb, Ltd.(a) | 898,964 | ||||||
2,142 | Hartford Financial Services Group, Inc. (The)(a) | 95,212 | ||||||
2,671 | Manulife Financial Corp.(a) | 37,903 | ||||||
29,613 | Marsh & McLennan Cos., Inc.(a) | 2,361,637 | ||||||
1,285 | MetLife, Inc.(a) | 52,762 | ||||||
60 | Muenchener Rueckversicherungs-Gesellschaft AG(a) | 13,092 | ||||||
11,887 | Old Mutual, Ltd.(a) | 18,498 | ||||||
500 | Ping An Insurance Group Co. of China, Ltd.(a) | 4,391 | ||||||
315 | Prudential Financial, Inc.(a) | 25,688 | ||||||
286 | Reinsurance Group of America, Inc.(a) | 40,106 | ||||||
310 | Swiss Re AG(a) | 28,495 | ||||||
1,208 | Travelers Cos., Inc. (The)(a) | 144,658 | ||||||
|
| |||||||
4,555,557 | ||||||||
|
| |||||||
Interactive Media & Services (1.5%): | ||||||||
61 | Alphabet, Inc., Class A*(a) | 63,743 | ||||||
5,282 | Alphabet, Inc., Class C*(a) | 5,470,092 | ||||||
106 | Baidu, Inc., ADR*(a) | 16,812 | ||||||
17,547 | Facebook, Inc., Class A*(a) | 2,300,236 | ||||||
146 | Momo, Inc., ADR*(a) | 3,468 | ||||||
571 | SINA Corp.*(a) | 30,628 | ||||||
51,200 | Tencent Holdings, Ltd.(a) | 2,029,647 | ||||||
|
| |||||||
9,914,626 | ||||||||
|
| |||||||
Internet & Direct Marketing Retail (0.6%): | ||||||||
5,905 | Alibaba Group Holding, Ltd., ADR*^(a) | 809,399 | ||||||
2,309 | Amazon.com, Inc.*(a) | 3,468,049 | ||||||
22 | Booking Holdings, Inc.*(a) | 37,893 | ||||||
1,336 | eBay, Inc.*(a) | 37,502 | ||||||
277 | Expedia, Inc.(a) | 31,204 | ||||||
14,468 | Meituan Dianping*(a) | 81,384 | ||||||
|
| |||||||
4,465,431 | ||||||||
|
| |||||||
IT Services (0.3%): | ||||||||
440 | Accenture plc, Class C(a) | 62,044 | ||||||
89 | Alliance Data Systems Corp.^(a) | 13,357 | ||||||
148 | Automatic Data Processing, Inc.(a) | 19,406 | ||||||
709 | Cognizant Technology Solutions Corp., Class A(a) | 45,007 | ||||||
421 | DXC Technology Co.(a) | 22,385 | ||||||
8,515 | FleetCor Technologies, Inc.*(a) | 1,581,406 | ||||||
200 | Fujitsu, Ltd.(a) | 12,540 | ||||||
697 | Global Payments, Inc.(a) | 71,882 | ||||||
910 | HCL Technologies, Ltd.(a) | 12,548 | ||||||
1,482 | Infosys, Ltd.(a) | 14,002 |
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
IT Services, continued | ||||||||
645 | International Business Machines Corp.(a) | $ | 73,317 | |||||
762 | MasterCard, Inc., Class A(a) | 143,751 | ||||||
609 | Paychex, Inc.(a) | 39,676 | ||||||
311 | PayPal Holdings, Inc.*(a) | 26,152 | ||||||
59 | Samsung SDS Co., Ltd.(a) | 10,758 | ||||||
601 | Tata Consultancy Services, Ltd.(a) | 16,308 | ||||||
321 | VeriSign, Inc.*(a) | 47,601 | ||||||
1,277 | Visa, Inc., Class A(a) | 168,487 | ||||||
|
| |||||||
2,380,627 | ||||||||
|
| |||||||
Life Sciences Tools & Services (0.0%)†: | ||||||||
328 | Agilent Technologies, Inc.(a) | 22,127 | ||||||
148 | Illumina, Inc.*(a) | 44,390 | ||||||
587 | Thermo Fisher Scientific, Inc.(a) | 131,364 | ||||||
|
| |||||||
197,881 | ||||||||
|
| |||||||
Machinery (0.4%): | ||||||||
467 | Caterpillar, Inc.(a) | 59,342 | ||||||
133 | Cummins, Inc.(a) | 17,774 | ||||||
11,255 | Doosan Bobcat, Inc.(a) | 316,921 | ||||||
12,254 | Dover Corp.(a) | 869,421 | ||||||
6,900 | Hino Motors, Ltd.(a) | 64,804 | ||||||
12,849 | Knorr-Bremse AG*(a) | 1,157,706 | ||||||
800 | Mitsubishi Heavy Industries, Ltd.(a) | 28,740 | ||||||
1,354 | Sandvik AB(a) | 19,384 | ||||||
|
| |||||||
2,534,092 | ||||||||
|
| |||||||
Media (1.6%): | ||||||||
10,664 | Charter Communications, Inc., Class A*^(a) | 3,038,920 | ||||||
121,174 | Comcast Corp., Class A(a)(d) | 4,125,975 | ||||||
7,600 | Eutelsat Communications SA^(a) | 150,276 | ||||||
15,329 | I-Cable Communications, Ltd.*(a) | 230 | ||||||
2,470 | Liberty Broadband Corp., Class A*^(a) | 177,371 | ||||||
10,617 | Liberty Broadband Corp., Class C*^(a) | 764,743 | ||||||
33,076 | Liberty Global plc, Class A*^(a) | 705,842 | ||||||
1,102 | Liberty Global plc, Class C*(a) | 22,745 | ||||||
8,858 | Liberty SiriusXM Group, Class A*(a) | 325,974 | ||||||
14,843 | Liberty SiriusXM Group, Class C*(a) | 548,894 | ||||||
9 | Naspers, Ltd.(a) | 1,792 | ||||||
8,800 | Nippon Television Holdings, Inc.(a) | 128,898 | ||||||
1,855 | Omnicom Group, Inc.^(a) | 135,860 | ||||||
592 | Publicis Groupe SA(a) | 33,876 | ||||||
79,479 | RAI Way SpA(a) | 394,410 | ||||||
6,400 | TV Asahi Holdings Corp.(a) | 114,155 | ||||||
50,922 | Zon Multimedia Servicos de Telecommunicacoes e Multimedia SGPS SA(a) | 308,163 | ||||||
|
| |||||||
10,978,124 | ||||||||
|
| |||||||
Metals & Mining (0.2%): | ||||||||
14,000 | Angang Steel Co., Ltd.(a) | 9,576 | ||||||
745 | Anglo American plc(a) | 16,467 | ||||||
419 | BHP Billiton, Ltd.^(a) | 10,107 | ||||||
2,100 | DOWA Mining Co.(a) | 62,686 | ||||||
445 | Eregli Demir ve Celik Fabrikalari T.A.S.(a) | 604 | ||||||
156 | Goldcorp, Inc.(a) | 1,528 | ||||||
400 | JFE Holdings, Inc.(a) | 6,365 | ||||||
1,262 | JSW Steel, Ltd.(a) | 5,545 | ||||||
54 | Kumba Iron Ore, Ltd.^(a) | 1,065 | ||||||
12,605 | Newcrest Mining, Ltd.(a) | 194,155 |
See accompanying notes to the financial statements.
7
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Metals & Mining, continued | ||||||||
30,407 | Newmont Mining Corp.(a) | $ | 1,053,603 | |||||
776 | POSCO(a) | 169,880 | ||||||
316 | Rio Tinto, Ltd.(a) | 17,474 | ||||||
91 | Southern Copper Corp.^(a) | 2,800 | ||||||
926 | Teck Cominco, Ltd., Class B(a) | 19,938 | ||||||
18,900 | Tokyo Steel Manufacturing Co., Ltd.(a) | 152,586 | ||||||
5,927 | Wheaton Precious Metals Corp.(a) | 115,717 | ||||||
2,700 | Yamato Kogyo Co., Ltd.(a) | 62,936 | ||||||
16,000 | Zijin Mining Group Co., Ltd.(a) | 6,048 | ||||||
|
| |||||||
1,909,080 | ||||||||
|
| |||||||
Multiline Retail (0.2%): | ||||||||
319 | Dollar General Corp.(a) | 34,478 | ||||||
17,551 | Dollar Tree, Inc.*(a) | 1,585,205 | ||||||
434 | Kohl’s Corp.^(a) | 28,792 | ||||||
378 | Target Corp.(a) | 24,982 | ||||||
|
| |||||||
1,673,457 | ||||||||
|
| |||||||
Multi-Utilities (0.1%): | ||||||||
3,288 | AGL Energy, Ltd.(a) | 47,566 | ||||||
707 | CenterPoint Energy, Inc.(a) | 19,959 | ||||||
2,153 | Engie Group(a) | 30,767 | ||||||
6,224 | National Grid plc(a) | 60,180 | ||||||
7,167 | Sempra Energy^(a) | 775,397 | ||||||
|
| |||||||
933,869 | ||||||||
|
| |||||||
Oil, Gas & Consumable Fuels (2.9%): | ||||||||
34,372 | Anadarko Petroleum Corp.(a) | 1,506,868 | ||||||
278 | Canadian Natural Resources, Ltd.(a) | 6,709 | ||||||
734 | Chevron Corp.(a) | 79,852 | ||||||
68,000 | China Petroleum & Chemical Corp., Class H(a) | 48,587 | ||||||
11,500 | China Shenhua Energy Co., Ltd.(a) | 25,050 | ||||||
31,000 | CNOOC, Ltd.(a) | 47,497 | ||||||
41,259 | Coal India, Ltd.(a) | 142,285 | ||||||
211 | ConocoPhillips Co.(a) | 13,156 | ||||||
53,535 | Enbridge, Inc.(a) | 1,663,310 | ||||||
64,488 | EnCana Corp.(a) | 372,741 | ||||||
2,027 | ENI SpA(a) | 31,917 | ||||||
49,584 | Exxon Mobil Corp.(a) | 3,381,134 | ||||||
941 | Fieldwood Energy LLC*(a)(b) | 35,758 | ||||||
3,485 | Fieldwood Energy LLC*(a)(b) | 132,430 | ||||||
26,000 | Formosa Petrochemical Corp.(a) | 91,483 | ||||||
7,090 | Hindustan Petroleum Corp., Ltd.(a) | 25,748 | ||||||
1,670 | Husky Energy, Inc.(a) | 17,263 | ||||||
716 | Imperial Oil, Ltd.(a) | 18,144 | ||||||
438 | Kinder Morgan, Inc.(a) | 6,736 | ||||||
19,348 | Marathon Petroleum Corp.(a) | 1,141,725 | ||||||
616 | Occidental Petroleum Corp.(a) | 37,810 | ||||||
41,802 | Oil & Natural Gas Corp., Ltd.(a) | 89,662 | ||||||
6,000 | PetroChina Co., Ltd., Class H(a) | 3,710 | ||||||
693 | Petroleo Brasileiro SA*(a) | 4,056 | ||||||
1,008 | Phillips 66(a) | 86,839 | ||||||
203 | Polski Koncern Naftowy Orlen SA(a) | 5,874 | ||||||
2,314 | Polskie Gornictwo Naftowe i Gazownictwo SA(a) | 4,279 | ||||||
120,012 | Reliance Industries, Ltd.(a) | 1,932,404 | ||||||
894 | Royal Dutch Shell plc, Class A(a) | 26,235 | ||||||
105,399 | Royal Dutch Shell plc, Class A(a) | 3,090,877 | ||||||
23,101 | Royal Dutch Shell plc, Class A, ADR(a) | 1,346,095 | ||||||
1,266 | Royal Dutch Shell plc, Class B(a) | 37,666 |
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Oil, Gas & Consumable Fuels, continued | ||||||||
12 | SK Energy Co., Ltd.(a) | $ | 1,925 | |||||
68,012 | Snam SpA(a) | 297,662 | ||||||
1,248 | S-Oil Corp.(a) | 108,901 | ||||||
411 | Statoil ASA(a) | 8,771 | ||||||
49,395 | Suncor Energy, Inc.(a) | 1,379,803 | ||||||
49,300 | Thai Oil Public Co., Ltd.(a) | 100,181 | ||||||
554 | Total SA, ADR(a) | 28,908 | ||||||
45,181 | TransCanada Corp.(a) | 1,613,607 | ||||||
931 | Valero Energy Corp.(a) | 69,797 | ||||||
132,104 | Williams Cos., Inc. (The)(a) | 2,912,894 | ||||||
10,000 | Yanzhou Coal Mining Co.(a) | 8,017 | ||||||
|
| |||||||
21,984,366 | ||||||||
|
| |||||||
Paper & Forest Products (0.0%)†: | ||||||||
3,000 | Nine Dragons Paper Holdings, Ltd.(a) | 2,752 | ||||||
386,370 | Quintis Pty, Ltd.*(a)(b)(c) | 206,782 | ||||||
554 | Suzano Papel e Celulose SA(a) | 5,444 | ||||||
|
| |||||||
214,978 | ||||||||
|
| |||||||
Personal Products (0.1%): | ||||||||
15,192 | Edgewell Personal Care Co.*^(a) | 567,421 | ||||||
168 | L’Oreal SA(a) | 38,559 | ||||||
500 | Shiseido Co., Ltd.(a) | 31,072 | ||||||
|
| |||||||
637,052 | ||||||||
|
| |||||||
Pharmaceuticals (1.4%): | ||||||||
250 | Allergan plc(a) | 33,415 | ||||||
1,071 | Aspen Pharmacare Holdings, Ltd.(a) | 10,073 | ||||||
76,700 | Astellas Pharma, Inc.(a) | 976,227 | ||||||
22,709 | Bayer AG, Registered Shares(a) | 1,574,454 | ||||||
1,302 | Bristol-Myers Squibb Co.(a) | 67,678 | ||||||
400 | Eisai Co., Ltd.(a) | 31,150 | ||||||
146 | Eli Lilly & Co.(a) | 16,895 | ||||||
3,143 | GlaxoSmithKline plc(a) | 59,644 | ||||||
1,455 | Gw Pharmaceuticals, ADR*(a) | 141,702 | ||||||
36,706 | Johnson & Johnson Co.(a) | 4,736,910 | ||||||
700 | Kyowa Hakko Kogyo Co., Ltd.(a) | 13,156 | ||||||
2,906 | Merck & Co., Inc.(a) | 222,047 | ||||||
200 | Mitsubishi Tanabe Pharma Corp.(a) | 2,874 | ||||||
5,510 | Novo Nordisk A/S, Class B(a) | 253,333 | ||||||
400 | Ono Pharmaceutical Co., Ltd.(a) | 8,096 | ||||||
200 | Otsuka Holdings Co., Ltd.(a) | 8,163 | ||||||
72,800 | Pfizer, Inc.(a) | 3,177,720 | ||||||
190 | Roche Holding AG(a) | 47,001 | ||||||
2,670 | Sanofi-Aventis SA(a) | 230,707 | ||||||
358 | Zoetis, Inc.(a) | 30,623 | ||||||
|
| |||||||
11,641,868 | ||||||||
|
| |||||||
Professional Services (0.0%)†: | ||||||||
454 | Experian plc(a) | 11,033 | ||||||
|
| |||||||
Real Estate Management & Development (0.7%): | ||||||||
12,000 | Agile Property Holdings, Ltd.(a) | 13,963 | ||||||
707,300 | CapitaLand, Ltd.(a) | 1,609,042 | ||||||
500 | CK Asset Holdings, Ltd.(a) | 3,636 | ||||||
8,000 | Country Garden Holdings Co., Ltd.(a) | 9,637 | ||||||
300 | Daiwa House Industry Co., Ltd.(a) | 9,529 | ||||||
96,000 | Hang Lung Properties, Ltd.(a) | 182,995 | ||||||
4,300 | Hongkong Land Holdings, Ltd.(a) | 27,107 | ||||||
6,900 | Mitsubishi Estate Co., Ltd.(a) | 108,145 |
See accompanying notes to the financial statements.
8
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Real Estate Management & Development, continued | ||||||||
900 | Mitsui Fudosan Co., Ltd.(a) | $ | 19,944 | |||||
52,000 | Sino Land Co., Ltd.(a) | 88,501 | ||||||
127,666 | Sun Hung Kai Properties, Ltd.(a) | 1,810,290 | ||||||
11,000 | Swire Pacific, Ltd., Class A(a) | 115,566 | ||||||
5,127 | The St. Joe Co.*^(a) | 67,523 | ||||||
2,005 | Vonovia SE(a) | 90,986 | ||||||
18,000 | Wharf Real Estate Investment Co., Ltd.(a) | 107,004 | ||||||
|
| |||||||
4,263,868 | ||||||||
|
| |||||||
Road & Rail (0.3%): | ||||||||
81 | Canadian Pacific Railway, Ltd., Class 1(a) | 14,375 | ||||||
78,900 | ComfortDelGro Corp., Ltd.(a) | 123,935 | ||||||
1,403 | CSX Corp.(a) | 87,168 | ||||||
22,400 | East Japan Railway Co.(a) | 1,991,264 | ||||||
266 | Norfolk Southern Corp.(a) | 39,778 | ||||||
5,000 | Seino Holdings Co., Ltd.(a) | 65,206 | ||||||
229 | Union Pacific Corp.(a) | 31,655 | ||||||
|
| |||||||
2,353,381 | ||||||||
|
| |||||||
Semiconductors & Semiconductor Equipment (0.3%): | ||||||||
40 | ASML Holding NV(a) | 6,240 | ||||||
3,114 | Intel Corp.(a) | 146,140 | ||||||
314 | KLA-Tencor Corp.(a) | 28,100 | ||||||
1,000 | MediaTek, Inc.(a) | 7,375 | ||||||
1,330 | Micron Technology, Inc.*(a) | 42,201 | ||||||
10,000 | Nanya Technology Corp.(a) | 17,666 | ||||||
500 | NXP Semiconductors NV(a) | 36,640 | ||||||
22,536 | QUALCOMM, Inc.(a) | 1,282,524 | ||||||
11,000 | ROHM Co., Ltd.(a) | 695,049 | ||||||
32,000 | Taiwan Semiconductor Manufacturing Co., Ltd.(a) | 232,304 | ||||||
|
| |||||||
2,494,239 | ||||||||
|
| |||||||
Software (1.7%): | ||||||||
390 | Adobe Systems, Inc.*(a) | 88,234 | ||||||
111 | Autodesk, Inc.*(a) | 14,276 | ||||||
62,818 | Cloudera, Inc.*^(a) | 694,767 | ||||||
63 | Dell Technologies, Inc., Class V*^(a)(c) | 5,562 | ||||||
17,481 | Domo, Inc.,*^(a) | 343,152 | ||||||
9,632 | Domo, Inc., Class B*(a)(b) | 189,076 | ||||||
63,800 | Dropbox, Inc., Class A*(a) | 1,303,434 | ||||||
513 | Intuit, Inc.(a) | 100,984 | ||||||
52,182 | Microsoft Corp.(a) | 5,300,126 | ||||||
300 | Oracle Corp. Japan | 18,984 | ||||||
9,311 | Oracle Corp.(a) | 420,392 | ||||||
202 | Red Hat, Inc.*(a) | 35,479 | ||||||
346 | SAP AG(a) | 34,460 | ||||||
131 | Symantec Corp.(a) | 2,475 | ||||||
68,532 | Uber Technologies, Inc.*(a)(b)(c) | 3,081,884 | ||||||
267 | VMware, Inc., Class A^(a) | 36,614 | ||||||
|
| |||||||
11,669,899 | ||||||||
|
| |||||||
Specialty Retail (0.1%): | ||||||||
531 | Home Depot, Inc. (The)(a) | 91,236 | ||||||
318,213 | Kingfisher plc(a) | 841,735 | ||||||
2,183 | Lowe’s Cos., Inc.(a) | 201,623 | ||||||
642 | Petrobras Distribuidora SA(a) | 4,258 | ||||||
417 | Ross Stores, Inc.(a) | 34,694 | ||||||
800 | Shimamura Co., Ltd.(a) | 61,498 | ||||||
|
| |||||||
1,235,044 | ||||||||
|
|
Shares | Fair Value | |||||||
Common Stocks, continued | ||||||||
Technology Hardware, Storage & Peripherals (0.9%): | ||||||||
33,731 | Apple, Inc.(a) | $ | 5,320,727 | |||||
2,490 | Hewlett Packard Enterprise Co.(a) | 32,893 | ||||||
1,175 | HP, Inc.(a) | 24,041 | ||||||
31,984 | Pure Storage, Inc., Class A*(a) | 514,303 | ||||||
1,534 | Samsung Electronics Co., Ltd.(a) | 53,082 | ||||||
25,857 | Western Digital Corp.(a) | 955,933 | ||||||
|
| |||||||
6,900,979 | ||||||||
|
| |||||||
Textiles, Apparel & Luxury Goods (0.0%)†: | ||||||||
33 | Adidas AG(a) | 6,895 | ||||||
145 | Kering(a) | 67,853 | ||||||
378 | Nike, Inc., Class B(a) | 28,025 | ||||||
239 | PVH Corp.(a) | 22,215 | ||||||
155 | VF Corp.(a) | 11,058 | ||||||
|
| |||||||
136,046 | ||||||||
|
| |||||||
Thrifts & Mortgage Finance (0.2%): | ||||||||
42,523 | Housing Development Finance Corp., Ltd.(a) | 1,199,360 | ||||||
|
| |||||||
Tobacco (0.6%): | ||||||||
40,326 | Altria Group, Inc.(a) | 1,991,702 | ||||||
11,728 | KT&G Corp.(a) | 1,067,028 | ||||||
19,344 | Philip Morris International, Inc.(a) | 1,291,405 | ||||||
|
| |||||||
4,350,135 | ||||||||
|
| |||||||
Trading Companies & Distributors (0.0%)†: | ||||||||
100 | Mitsui & Co., Ltd.(a) | 1,550 | ||||||
|
| |||||||
Transportation Infrastructure (0.0%)†: | ||||||||
168,000 | Beijing Capital International Airport Co., Ltd.(a) | 178,678 | ||||||
2,000 | Jiangsu Expressway Co., Ltd., Series H(a) | 2,778 | ||||||
3,600 | Kamigumi Co., Ltd.(a) | 73,468 | ||||||
30,100 | Malaysia Airports Holdings Berhad(a) | 61,129 | ||||||
12,000 | Zhejiang Expressway Co., Ltd.(a) | 10,439 | ||||||
|
| |||||||
326,492 | ||||||||
|
| |||||||
Wireless Telecommunication Services (0.7%): | ||||||||
32,800 | Advanced Information Service plc(a) | 174,438 | ||||||
22,026 | America Movil SAB de C.V., Series L(a) | 15,683 | ||||||
4,500 | China Mobile, Ltd.(a) | 43,370 | ||||||
148,000 | Far EasTone Telecommunications Co., Ltd.(a) | 367,195 | ||||||
88,100 | Intouch Holdings Public Co., Ltd.(a) | 129,371 | ||||||
5,600 | KDDI Corp.(a) | 133,467 | ||||||
808 | MTN Group, Ltd.(a) | 5,015 | ||||||
300 | NTT DoCoMo, Inc.(a) | 6,737 | ||||||
498 | Rogers Communications, Inc.(a) | 25,524 | ||||||
637 | SK Telecom Co., Ltd.(a) | 153,985 | ||||||
165 | Sprint Corp.*^(a) | 960 | ||||||
118,000 | Taiwan Mobile Co., Ltd.(a) | 408,544 | ||||||
1,258 | Tim Participacoes SA(a) | 3,847 | ||||||
1,325,226 | Vodafone Group plc(a) | 2,574,693 | ||||||
|
| |||||||
4,042,829 | ||||||||
|
| |||||||
Total Common Stocks (Cost $214,540,714) | 215,633,449 | |||||||
|
| |||||||
Preferred Stocks (0.3%): | ||||||||
Banks (0.1%): | ||||||||
13,017 | Citigroup Capital XIII, Series A, 8.89%, 10/30/40(a) | 344,039 | ||||||
20,628 | Itau Unibanco Holding SA, Series S, 0.47%, 10/29/18(a) | 188,965 | ||||||
75,000 | USB Capital IX, 3.50%, 10/29/49(US0003M+102bps), Callable 2/7/19 @ 100^(a) | 55,500 | ||||||
|
| |||||||
588,504 | ||||||||
|
|
See accompanying notes to the financial statements.
9
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Preferred Stocks, continued | ||||||||
Chemicals (0.0%)†: | ||||||||
364 | Braskem SA, Class A, 3.99%(a) | $ | 4,450 | |||||
|
| |||||||
Consumer Finance (0.0%)†: | ||||||||
14,377 | GMAC Capital Trust I, Series 2, 8.40%, 2/15/40(a) | 364,457 | ||||||
|
| |||||||
Health Care Providers & Services (0.0%)†: | ||||||||
143,925 | Grand Rounds, Inc., Series C*(a)(b)(c) | 352,616 | ||||||
|
| |||||||
Software (0.1%): | ||||||||
116,157 | Palantir Technologies, Inc., Series I*(a)(b)(c) | 628,410 | ||||||
|
| |||||||
Technology Hardware, Storage & Peripherals (0.0%)†: | ||||||||
874 | Samsung Electronics Co., Ltd., 4.60%, 10/31/18(a) | 24,933 | ||||||
|
| |||||||
Total Preferred Stocks (Cost $2,002,976) | 1,963,370 | |||||||
|
| |||||||
Convertible Preferred Stocks (0.2%): | ||||||||
Banks (0.0%)†: | ||||||||
116 | Wells Fargo & Co., Series L, Class A, 7.50%, 3/17/19(a) | 146,389 | ||||||
|
| |||||||
Equity Real Estate Investment Trusts (0.0%)†: | ||||||||
5,072 | Welltower, Inc., Series I, 6.50%, 4/15/19(a) | 320,297 | ||||||
|
| |||||||
Wireless Telecommunication Services (0.2%): | ||||||||
5,627 | Mandatory Exchange Trust, 5.75%, 3/1/19(a)(e) | 868,414 | ||||||
|
| |||||||
Total Convertible Preferred Stocks (Cost $914,060) | 1,335,100 | |||||||
|
| |||||||
Private Placements (0.1%): | ||||||||
Household Durables (0.0%)†: | ||||||||
23,389 | Jawbone, 0.00%*(a)(c) | — | ||||||
|
| |||||||
Internet Software & Services (0.1%): | ||||||||
5,547 | Lookout, Inc.*(a)(b)(c) | 111 | ||||||
63,925 | Lookout, Inc. Preferred Shares, Series F*(a)(b)(c) | 386,107 | ||||||
|
| |||||||
Total Private Placements (Cost $793,586) | 386,218 | |||||||
|
| |||||||
Convertible Bonds (0.1%): | ||||||||
Food Products (0.0%)†: | ||||||||
400,000 | REI Agro, Ltd., Registered Shares, 5.50%, 11/13/14(a)(c)(e)(f) | — | ||||||
|
| |||||||
Pharmaceuticals (0.1%): | ||||||||
600,000 | Bayer Capital Corp. BV, 5.63%, 11/22/19+(a)(e) | 525,628 | ||||||
|
| |||||||
Real Estate Management & Development (0.0%)†: | ||||||||
250,000 | CapitaLand, Ltd., 1.95%, 10/17/23+(a)(e) | 172,587 | ||||||
|
| |||||||
Total Convertible Bonds (Cost $1,216,451) | 698,215 | |||||||
|
| |||||||
Bank Loans (0.1%): | ||||||||
Hotels, Restaurants & Leisure (0.1%): | ||||||||
413,904 | Hilton Worldwide Finance LLC, 3.33%, 10/25/23(a) | 398,383 | ||||||
|
| |||||||
Oil, Gas & Consumable Fuels (0.0%)†: | ||||||||
111,961 | Fieldwood Energy LLC, 5.25%, 4/11/22(a) | 104,334 | ||||||
151,147 | Fieldwood Energy LLC, 7.25%, 4/11/23(a) | 131,347 | ||||||
|
| |||||||
235,681 | ||||||||
|
| |||||||
Total Bank Loans (Cost $667,521) | 634,064 | |||||||
|
| |||||||
Corporate Bonds (1.8%): | ||||||||
Aerospace & Defense (0.0%)†: | ||||||||
282,000 | Northrop Grumman Corp., 2.55%, 10/15/22, Callable 9/15/22 @ 100^(a) | 272,878 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Corporate Bonds, continued | ||||||||
Banks (0.4%): | ||||||||
$ | 124,000 | Bank of America Corp., Series G, 2.37% (US0003M+66 bps), 7/21/21, Callable 7/21/20 @ 100(a) | $ | 121,781 | ||||
282,000 | Bank of America Corp., 3.30%, 1/11/23, MTN(a) | 277,730 | ||||||
151,000 | Bank of America Corp., 4.00%, 1/22/25, MTN(a) | 147,096 | ||||||
272,000 | Citigroup, Inc., 2.45%, 1/10/20, Callable 12/10/19 @ 100(a) | 269,816 | ||||||
255,000 | Citigroup, Inc., Series Q, 5.95% (US0003M+410 bps), Callable 8/15/20 @ 100^(a) | 246,075 | ||||||
628,000 | Citigroup, Inc., Series O, 5.87% (US0003M+406 bps), Callable 3/27/20 @ 100(a) | 606,019 | ||||||
56,000 | Wells Fargo & Co., 3.07%, 1/24/23, Callable 1/24/22 @ 100(a) | 54,540 | ||||||
370,000 | Wells Fargo Bank NA, 3.55%, 8/14/23, Callable 7/14/23 @ 100(a) | 368,436 | ||||||
|
| |||||||
2,091,493 | ||||||||
|
| |||||||
Beverages (0.1%): | ||||||||
169,000 | Anheuser-Busch InBev Worldwide, Inc., 3.50%, 1/12/24, Callable 12/12/23 @ 100(a) | 165,307 | ||||||
279,000 | Anheuser-Busch InBev Worldwide, Inc., 4.00%, 4/13/28, Callable 1/13/28 @ 100^(a) | 266,872 | ||||||
|
| |||||||
432,179 | ||||||||
|
| |||||||
Biotechnology (0.0%)†: | ||||||||
282,000 | Gilead Sciences, Inc., 3.25%, 9/1/22, Callable 7/1/22 @ 100^(a) | 281,337 | ||||||
|
| |||||||
Capital Markets (0.1%): | ||||||||
282,000 | Goldman Sachs Group, Inc., 2.91% (US0003M+105 bps), 6/5/23, Callable 6/5/22 @ 100(a) | 270,717 | ||||||
298,000 | Goldman Sachs Group, Inc., Series M, 5.38% (US0003M+392 bps), Callable 5/10/20 @ 100(a) | 287,948 | ||||||
211,000 | Morgan Stanley, Series H, 5.45% (US0003M+361 bps), Callable 7/15/19 @ 100(a) | 205,223 | ||||||
|
| |||||||
763,888 | ||||||||
|
| |||||||
Chemicals (0.0%)†: | ||||||||
220,000 | Dowdupont, Inc., 3.77%, 11/15/20(a) | 222,109 | ||||||
54,000 | Sherwin-Williams, 2.25%, 5/15/20(a) | 53,173 | ||||||
|
| |||||||
275,282 | ||||||||
|
| |||||||
Consumer Finance (0.1%): | ||||||||
598,000 | American Express Co., 3.70%, 8/3/23, Callable 7/3/23 @ 100(a) | 599,729 | ||||||
186,000 | American Express Co., Series C, 4.90% (US0003M+329 bps), Callable 3/15/20 @ 100(a) | 178,095 | ||||||
86,000 | Capital One Finance Corp., 3.30%, 10/30/24, Callable 9/30/24 @ 100(a) | 81,334 | ||||||
203,000 | Capital One Financial Corp., 3.20%, 1/30/23, Callable 12/30/22 @ 100(a) | 197,544 | ||||||
|
| |||||||
1,056,702 | ||||||||
|
| |||||||
Diversified Financial Services (0.0%)†: | ||||||||
235,000 | BP Capital Markets America, Inc., 3.79%, 2/6/24, Callable 1/6/24 @ 100(a) | 237,536 | ||||||
|
|
See accompanying notes to the financial statements.
10
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Corporate Bonds, continued | ||||||||
Diversified Telecommunication Services (0.1%): | ||||||||
$ | 586,000 | AT&T, Inc., 3.60%, 2/17/23, Callable 12/17/22 @ 100(a) | $ | 582,369 | ||||
48,000 | Hughes Satellite Systems Corp., 7.63%, 6/15/21(a) | 49,800 | ||||||
293,000 | Verizon Communications, 3.13%, 3/16/22(a) | 291,047 | ||||||
|
| |||||||
923,216 | ||||||||
|
| |||||||
Equity Real Estate Investment Trusts (0.0%)†: | ||||||||
57,000 | AvalonBay Communities, Inc., 3.50%, 11/15/24, Callable 8/15/24 @ 100(a) | 56,659 | ||||||
113,000 | Simon Property Group, LP, 2.75%, 6/1/23, Callable 3/1/23 @ 100^(a) | 109,501 | ||||||
|
| |||||||
166,160 | ||||||||
|
| |||||||
Food & Staples Retailing (0.0%)†: | ||||||||
287,000 | Walgreen Co., 3.10%, 9/15/22(a) | 279,969 | ||||||
|
| |||||||
Health Care Equipment & Supplies (0.1%): | ||||||||
120,000 | Becton Dickinson & Co., 3.36%, 6/6/24, Callable 4/6/24 @ 100(a) | 115,257 | ||||||
271,000 | Becton, Dickinson & Co., 3.13%, 11/8/21(a) | 267,276 | ||||||
223,000 | Becton, Dickinson & Co., 2.89%, 6/6/22, Callable 5/6/22 @ 100(a) | 215,980 | ||||||
|
| |||||||
598,513 | ||||||||
|
| |||||||
Health Care Providers & Services (0.4%): | ||||||||
861,000 | CVS Health Corp., 3.70%, 3/9/23, Callable 2/9/23 @ 100(a) | 851,784 | ||||||
379,000 | Halfmoon Parent, Inc., 3.40%, 9/17/21^(a)(e) | 378,138 | ||||||
323,000 | Halfmoon Parent, Inc., 3.75%, 7/15/23, Callable 6/15/23 @ 100(a)(e) | 321,924 | ||||||
282,000 | UnitedHealth Group, Inc., 3.50%, 6/15/23^(a) | 284,431 | ||||||
170,000 | UnitedHealth Group, Inc., 3.50%, 2/15/24^(a) | 171,088 | ||||||
|
| |||||||
2,007,365 | ||||||||
|
| |||||||
Hotels, Restaurants & Leisure (0.0%)†: | ||||||||
282,000 | Starbucks Corp., 3.10%, 3/1/23, Callable 2/1/23 @ 100^(a) | 277,757 | ||||||
|
| |||||||
Insurance (0.0%)†: | ||||||||
161,000 | Prudential Financial, Inc., 5.87% (US0003M+418 bps), 9/15/42, Callable 9/15/22 @ 100^(a) | 162,610 | ||||||
107,000 | Prudential Financial, Inc., 5.63% (US0003M+392 bps), 6/15/43, Callable 6/15/23 @ 100(a) | 104,788 | ||||||
|
| |||||||
267,398 | ||||||||
|
| |||||||
Internet & Direct Marketing Retail (0.0%)†: | ||||||||
152,000 | eBay, Inc., 2.75%, 1/30/23, Callable 12/30/22 @ 100^(a) | 146,131 | ||||||
|
| |||||||
Media (0.3%): | ||||||||
225,000 | Comcast Corp., 3.45%, 10/1/21^(a) | 227,281 | ||||||
282,000 | Comcast Corp., 2.75%, 3/1/23, Callable 2/1/23 @ 100(a) | 274,463 | ||||||
555,000 | Comcast Corp., 3.70%, 4/15/24, Callable 3/15/24 @ 100^(a) | 558,388 | ||||||
200,000 | NBCUniversal Enterprise, Inc., 5.25%, Callable 3/19/21 @ 100(a)(e) | 202,500 | ||||||
|
| |||||||
1,262,632 | ||||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Corporate Bonds, continued | ||||||||
Multi-Utilities (0.0%)†: | ||||||||
$ | 76,000 | Sempra Energy, 2.88%, 10/1/22, Callable 7/1/22 @ 100(a) | $ | 73,297 | ||||
|
| |||||||
Oil, Gas & Consumable Fuels (0.1%): | ||||||||
151,000 | Enterprise Products Operating LLC, 3.35%, 3/15/23, Callable 12/15/22 @ 100(a) | 148,938 | ||||||
85,000 | Enterprise Products Operating LLC, 3.90%, 2/15/24, Callable 11/15/23 @ 100(a) | 85,720 | ||||||
142,000 | Williams Companies, Inc., 3.70%, 1/15/23, Callable 10/15/22 @ 100(a) | 138,522 | ||||||
|
| |||||||
373,180 | ||||||||
|
| |||||||
Personal Products (0.0%)†: | ||||||||
134,000 | Edgewell Personal Care Co., 4.70%, 5/19/21^(a) | 131,990 | ||||||
139,000 | Edgewell Personal Care Co., 4.70%, 5/24/22^(a) | 133,788 | ||||||
|
| |||||||
265,778 | ||||||||
|
| |||||||
Pharmaceuticals (0.0%)†: | ||||||||
133,000 | Forest Laboratories, Inc., 5.00%, 12/15/21, Callable 9/16/21 @ 100(a)(e) | 136,844 | ||||||
|
| |||||||
Semiconductors & Semiconductor Equipment (0.0%)†: | ||||||||
141,000 | Qualcomm, Inc., 2.60%, 1/30/23, Callable 12/30/22 @ 100(a) | 135,688 | ||||||
169,000 | Qualcomm, Inc., 2.90%, 5/20/24, Callable 3/20/24 @ 100(a) | 160,921 | ||||||
|
| |||||||
296,609 | ||||||||
|
| |||||||
Technology Hardware, Storage & Peripherals (0.1%): | ||||||||
491,000 | Apple, Inc., 3.35%, 2/9/27, Callable 11/9/26 @ 100(a) | 478,426 | ||||||
469,000 | Apple, Inc., 3.20%, 5/11/27, Callable 2/11/27 @ 100(a) | 452,622 | ||||||
|
| |||||||
931,048 | ||||||||
|
| |||||||
Tobacco (0.0%)†: | ||||||||
53,000 | Philip Morris International, Inc., 2.50%, 11/2/22, Callable 10/2/22 @ 100^(a) | 50,938 | ||||||
113,000 | Philip Morris International, Inc., 3.60%, 11/15/23^(a) | 113,260 | ||||||
|
| |||||||
164,198 | ||||||||
|
| |||||||
Total Corporate Bonds (Cost $13,759,382) | 13,581,390 | |||||||
|
| |||||||
Foreign Bonds (2.2%): | ||||||||
Banks (0.1%): | ||||||||
330,000 | Lloyds TSB Bank plc, Series E, 13.00%(GUKG5+1,340bps), Callable 1/22/29 @ 126+(a) | 675,134 | ||||||
|
| |||||||
Sovereign Bond (2.1%): | ||||||||
1,195,000 | Australian Government, 3.00%, 3/21/47+(a)(e) | 870,652 | ||||||
2,668,000 | Bundesrepublik Deutschland Bundesanleihe, 0.50%, 2/15/28+(a)(e) | 3,145,887 | ||||||
938,000 | Canadian Government, 0.75%, 3/1/21+(a) | 670,962 | ||||||
227,800,000 | Japan Treasury Discount Bill, 0.00%, 1/28/19+(a)(g) | 2,078,877 | ||||||
228,150,000 | Japan Treasury Discount Bill, 0.00%, 2/4/19+(a)(g) | 2,082,142 | ||||||
238,200,000 | Japan Treasury Discount Bill, 0.00%, 3/4/19+(a)(g) | 2,174,128 |
See accompanying notes to the financial statements.
11
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Foreign Bonds, continued | ||||||||
Sovereign Bond, continued | ||||||||
$ | 102,050,000 | Japan Treasury Discount Bill, 0.00%, 3/25/19+(a)(g) | $ | 931,529 | ||||
26,469,000 | Mexican Bonos Desarr, Series M, 6.50%, 6/10/21+(a)(h) | 1,285,837 | ||||||
25,300,000 | Mexican Bonos Desarr, 8.00%, 12/7/23+(a)(h) | 1,256,720 | ||||||
310,000 | Republic of Argentina, 3.38%, 1/15/23+(a) | 278,780 | ||||||
100,000 | Republic of Argentina, 5.25%, 1/15/28+(a) | 81,761 | ||||||
676,775 | Republic of Argentina, 7.82%, 12/31/33+(a) | 647,926 | ||||||
|
| |||||||
15,505,201 | ||||||||
|
| |||||||
Total Foreign Bonds (Cost $16,566,599) | 16,180,335 | |||||||
|
| |||||||
Yankee Dollars (0.9%): | ||||||||
Banks (0.4%): | ||||||||
282,000 | HSBC Holdings plc, 3.26% (US0003M+106 bps), 3/13/23, Callable 3/13/22 @ 100(a) | 275,981 | ||||||
614,000 | HSBC Holdings plc, 6.38% (USISDA05+371 bps), Callable 9/17/24 @ 100(a) | 571,020 | ||||||
410,000 | ING Groep NV, 4.10%, 10/2/23(a) | 409,751 | ||||||
200,000 | ING Groep NV, 6.00% (USSW5+445 bps), Callable 4/16/20 @ 100(a) | 194,280 | ||||||
861,000 | Sumitomo Mitsui Financial Group, Inc., 3.94%, 10/16/23(a) | 876,135 | ||||||
|
| |||||||
2,327,167 | ||||||||
|
| |||||||
Capital Markets (0.0%)†: | ||||||||
207,000 | UBS Group AG, 4.13%, 9/24/25(a)(e) | 206,235 | ||||||
|
| |||||||
Diversified Financial Services (0.0%)†: | ||||||||
80,000 | Intelsat Jackson Holdings SA, 8.00%, 2/15/24, Callable 2/15/19 @ 104(a)(e) | 82,400 | ||||||
|
| |||||||
Diversified Telecommunication Services (0.0%)†: | ||||||||
289,000 | Telecom Italia SpA, 5.30%, 5/30/24(a)(e) | 274,550 | ||||||
|
| |||||||
Food Products (0.0%)†: | ||||||||
208,000 | Danone SA, 2.59%, 11/2/23, Callable 9/2/23 @ 100(a)(e) | 197,744 | ||||||
|
| |||||||
Interactive Media & Services (0.0%)†: | ||||||||
220,000 | Baidu, Inc., 4.38%, 5/14/24, Callable 4/14/24 @ 100(a) | 221,810 | ||||||
|
| |||||||
Paper & Forest Products (0.1%): | ||||||||
40,720 | Quintis Pty, Ltd., 7.50%, 10/1/26, Callable 10/1/21 @ 105.63(a)(c)(e) | 40,720 | ||||||
753,320 | Quintis Pty, Ltd., 12.00%, 10/1/28, Callable 2/7/19 @ 90(a)(c)(e) | 753,320 | ||||||
|
| |||||||
794,040 | ||||||||
|
| |||||||
Pharmaceuticals (0.0%)†: | ||||||||
265,000 | Actavis Funding SCS, 3.45%, 3/15/22, Callable 1/15/22 @ 100(a) | 260,771 | ||||||
205,000 | Takeda Pharmaceutical Co., Ltd., 3.80%, 11/26/20(a)(e) | 206,237 | ||||||
|
| |||||||
467,008 | ||||||||
|
| |||||||
Road & Rail (0.0%)†: | ||||||||
517,099 | Inversiones Alsacia SA, 8.00%, 12/31/18(a)(b)(f) | 5,171 | ||||||
|
|
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Yankee Dollars, continued | ||||||||
Sovereign Bond (0.4%): | ||||||||
$ | 1,176,000 | Republic of Argentina, 6.88%, 1/26/27(a) | $ | 896,700 | ||||
1,698,000 | Republic of Argentina, 5.88%, 1/11/28(a) | 1,220,438 | ||||||
|
| |||||||
2,117,138 | ||||||||
|
| |||||||
Total Yankee Dollars (Cost $7,579,396) | 6,693,263 | |||||||
|
| |||||||
U.S. Treasury Obligations (14.1%): | ||||||||
U.S. Treasury Bills (2.7%) | ||||||||
14,000,000 | 1.97%, 1/15/19(a)(g) | 13,988,505 | ||||||
6,000,000 | 2.15%, 1/31/19(a)(g) | 5,988,932 | ||||||
|
| |||||||
19,977,437 | ||||||||
|
| |||||||
U.S. Treasury Inflation Index Bonds (0.4%) | ||||||||
3,019,782 | 0.63%, 4/15/23(a) | 2,969,785 | ||||||
|
| |||||||
U.S. Treasury Notes (11.0%) | ||||||||
1,500,000 | 1.50%, 11/30/19(i) | 1,484,531 | ||||||
9,030,200 | 2.75%, 8/31/23(a) | 9,131,437 | ||||||
23,424,700 | 2.88%, 9/30/23(a) | 23,805,351 | ||||||
25,120,700 | 2.88%, 10/31/23(a)(d) | 25,538,724 | ||||||
11,848,300 | 3.13%, 10/31/25(a)(d) | 12,155,152 | ||||||
8,228,000 | 2.88%, 11/30/25(a) | 8,375,525 | ||||||
|
| |||||||
80,490,720 | ||||||||
|
| |||||||
Total U.S. Treasury Obligations (Cost $101,692,242) | 103,437,942 | |||||||
|
| |||||||
Purchased Options (0.1%): | ||||||||
Total Purchased Options (Cost $1,729,594) | 737,645 | |||||||
|
| |||||||
Purchased Currency Options (0.0%)†: | ||||||||
Total Purchased Currency Options (Cost $190,251) | 142,517 | |||||||
|
| |||||||
Purchased Swaptions (0.0%)†: | ||||||||
Total Purchased Swaptions (Cost $44,844) | 5,160 | |||||||
|
| |||||||
Exchange Traded Funds (0.6%): | ||||||||
21,280 | VanEck Vectors Gold ETF(a) | 448,795 | ||||||
191,469 | iShares Gold Trust(a)(i) | 2,353,154 | ||||||
16,029 | SPDR Gold Trust(a)(d)(i) | 1,943,516 | ||||||
|
| |||||||
Total Exchange Traded Funds (Cost $4,830,060) | 4,745,465 | |||||||
|
| |||||||
Affiliated Investment Companies (45.0%): | ||||||||
Fixed Income Funds (28.6%): | ||||||||
19,830,630 | AZL Enhanced Bond Index Fund | 210,006,372 | ||||||
|
| |||||||
International Equity Funds (16.4%): | ||||||||
12,060,312 | AZL MSCI Global Equity Index Fund | 120,964,934 | ||||||
|
| |||||||
Total Affiliated Investment Companies (Cost $324,068,396) | 330,971,306 | |||||||
|
| |||||||
Unaffiliated Investment Company (0.3%): | ||||||||
2,230,455 | Dreyfus Treasury Securities Cash Management Fund, Institutional Shares, 2.20%(g) | 2,230,455 | ||||||
|
| |||||||
Total Unaffiliated Investment Company (Cost $2,230,455) | 2,230,455 | |||||||
|
|
See accompanying notes to the financial statements.
12
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Contracts, Shares, Notional Amount or Principal Amount | Fair Value | |||||||
Short-Term Securities Held as Collateral for Securities on Loan (1.5%) | ||||||||
Miscellaneous Investments (1.5%) | ||||||||
$ | 11,159,870 | Short-Term Investments(j) | $ | 11,159,870 | ||||
|
| |||||||
| Total Short-Term Securities Held as Collateral for Securities on | 11,159,870 | ||||||
|
| |||||||
Total Investment Securities (Cost $703,986,397) — 96.6%(k) | 710,535,764 | |||||||
Net other assets (liabilities) — 3.4% | 24,953,406 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 735,489,170 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
ADR—American Depositary Receipt
GUKG5—UK Govt Bonds 5 Year Note Generic Bid Yield
LIBOR—London Interbank Offered Rate
MTN—Medium Term Note
SPDR—Standard & Poor’s Depository Receipts
US0003M—3 Month US Dollar LIBOR
USISDA05—5 Year ICE Swap Rate
USSW5—USD 5 Year Swap Rate
† | Represents less than 0.05%. |
* | Non-income producing security. |
^ | This security or a partial position of this security was on loan as of December 31, 2018. The total value of securities on loan as of December 31, 2018, was $10,901,916. |
+ | The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars. |
(a) | These securities are held by the AZL BlackRock Global Allocation Fund (the “VIP Subsidiary”). |
(b) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. Thesub-adviser has deemed these securities to be illiquid based on procedures approved by the Board of Trustees. As of December 31, 2018, these securities represent 0.68% of the net assets of the fund. |
(c) | Security was valued using unobservable inputs in good faith pursuant to procedures approved by the Board of Trustees as of December 31, 2018. The total of all such securities represent 0.74% of the net assets of the fund. |
(d) | All or a portion of this security has been pledged as collateral for open derivative positions. |
(e) | Rule 144A, Section 4(2) or other security which is restricted to resale to institutional investors. Thesub-adviser has deemed these securities to be liquid based on procedures approved by the Board of Trustees. |
(f) | Defaulted bond. |
(g) | The rate represents the effective yield at December 31, 2018. |
(h) | Principal amount is stated in 100 Mexican Peso Units. |
(i) | All or a portion of these securities are held by the AZL Cayman Global Allocation Fund I, Ltd. (the “Subsidiary”). |
(j) | Represents various short-term investments purchased with cash collateral held from securities lending. The value of the collateral could include collateral held for securities that were sold on or before December 31, 2018. Refer to Note 2 in the Notes to the Consolidated Financial Statements for details. |
(k) | See Federal Tax Information listed in the Notes to the Financial Statements. |
The following represents the concentrations by country of risk (based on the domicile of the security issuer) relative to the total fair value of investments as of December 31, 2018:
(Unaudited)
Country | Percentage | |||
Argentina | 0.5 | % | ||
Australia | 0.3 | % | ||
Belgium | 0.1 | % | ||
Bermuda | — | %^ | ||
Brazil | 0.4 | % | ||
Canada | 0.9 | % | ||
Cayman Islands | — | %^ | ||
Chile | — | %^ | ||
China | 0.7 | % | ||
Czech Republic | — | %^ |
Country | Percentage | |||
Denmark | — | %^ | ||
European Community | — | %^ | ||
Finland | — | %^ | ||
France | 1.4 | % | ||
Germany | 1.2 | % | ||
Hong Kong | 0.5 | % | ||
India | 0.6 | % | ||
Indonesia | — | %^ | ||
Ireland (Republic of) | — | %^ | ||
Italy | 0.3 | % |
See accompanying notes to the financial statements.
13
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Country | Percentage | |||
Japan | 5.1 | % | ||
Jersey | — | %^ | ||
Liberia | — | %^ | ||
Luxembourg | — | %^ | ||
Malaysia | — | %^ | ||
Mexico | 0.4 | % | ||
Netherlands | 0.7 | % | ||
Norway | — | %^ | ||
Panama | — | %^ | ||
Poland | — | %^ | ||
Portugal | 0.1 | % | ||
Republic of Korea (South) | 0.3 | % |
Country | Percentage | |||
Singapore | 0.3 | % | ||
South Africa | — | %^ | ||
Spain | 0.2 | % | ||
Sweden | — | %^ | ||
Switzerland | 0.6 | % | ||
Taiwan, Province Of China | 0.4 | % | ||
Thailand | 0.1 | % | ||
Turkey | — | %^ | ||
United Arab Emirates | 0.2 | % | ||
United Kingdom | 1.6 | % | ||
United States | 83.1 | % | ||
|
| |||
100.0 | % | |||
|
|
^ | Represents less than 0.05%. |
Securities Sold Short (0.0%)†:
At December 31, 2018, the Fund’s securities sold short were as follows:
Security Description | Shares | Proceeds Received | Fair Value | |||||||||
Common Stocks | ||||||||||||
Beverages | ||||||||||||
Pernod Ricard SA | (1,192 | ) | $(199,683 | ) | $ | (195,697 | ) | |||||
Chemicals | ||||||||||||
LyondellBasell Industries NV | (1,549 | ) | (180,179 | ) | (128,815 | ) | ||||||
Electronic Equipment, Instruments & Components | ||||||||||||
Yaskawa Electric Corp. | (9,800 | ) | (312,588 | ) | (237,358 | ) | ||||||
Semiconductors & Semiconductor Equipment | ||||||||||||
SUMCO Corp. | (20,000 | ) | (309,987 | ) | (225,547 | ) | ||||||
|
|
|
| |||||||||
$ | (1,002,437 | ) | $ | (787,417 | ) | |||||||
|
|
|
|
Futures Contracts
Cash of $37,169,319 has been segregated to cover margin requirements for the following open exchange traded futures contracts as of December 31, 2018:
Short Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized Appreciation/ (Depreciation) | ||||||||||||
CAC40 Index January Futures (Euro)(a) | 1/18/19 | 1 | $ | (54,169 | ) | $ | (195 | ) | ||||||||
Canada10-Year Bond March Futures (Canadian Dollar)(a) | 3/20/19 | 31 | (3,106,132 | ) | (37,811 | ) | ||||||||||
DJ EURO STOXX 50 March Futures (Euro)(a) | 3/15/19 | 211 | (7,188,759 | ) | 207,581 | |||||||||||
NASDAQ 100E-Mini March Futures (U.S. Dollar)(a) | 3/15/19 | 21 | (2,659,965 | ) | 62,537 | |||||||||||
Nikkei 225 Index March Futures (Japanese Yen)(a) | 3/7/19 | 3 | (271,215 | ) | 18,071 | |||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar)(a) | 3/15/19 | 4 | (501,040 | ) | (1,166 | ) | ||||||||||
|
| |||||||||||||||
$ | 249,017 | |||||||||||||||
|
|
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized Appreciation/ (Depreciation) | ||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/18/19 | 145 | 18,162,700 | $ | (1,024,427 | ) | ||||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 149 | 18,180,324 | 422,682 | ||||||||||||
|
| |||||||||||||||
(601,745 | ) | |||||||||||||||
|
| |||||||||||||||
Total Net Futures Contracts | $ | (352,728 | ) | |||||||||||||
|
|
See accompanying notes to the financial statements.
14
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Contracts for Differences
At December 31, 2018, the Fund’s openover-the-counter equity contracts for differences were as follows:
Reference Entity | Counterparty | Long/ Short | Currency | Financing Rate | Expiration Date | Trade Notional | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||
AAC Technologies Holdings, Inc. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 3,000 | $ | (27,302) | $ | 9,890 | |||||||||||||||||||
Advantech Co., Ltd. | Citigroup | Short | TWD | (1.75) | % | 12/30/39 | 3,000 | (20,480) | (71) | |||||||||||||||||||||
Alibaba Health Information Technology, Ltd. | Citigroup | Short | HKD | (1.25) | % | 12/30/39 | 24,000 | (22,467) | 3,002 | |||||||||||||||||||||
Alibaba Health Information Technology, Ltd. | JPMorgan Chase | Short | HKD | 1.26 | % | 12/30/39 | 4,000 | (3,399) | 155 | |||||||||||||||||||||
AmerisourceBergen Corp. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 76 | (6,669) | 1,015 | |||||||||||||||||||||
Analog Devices, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 115 | (10,320) | 450 | |||||||||||||||||||||
AP Moeller Maersk A/S | Citigroup | Short | DKK | (0.25) | % | 12/30/39 | 1 | (1,415) | 158 | |||||||||||||||||||||
Aptiv plc | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 70 | (5,099) | 789 | |||||||||||||||||||||
ASE Technology Holding Co., Ltd. | JPMorgan Chase | Short | TWD | 2.11 | % | 12/30/39 | 2,000 | (4,787) | 984 | |||||||||||||||||||||
Atacadao Carrefour SA | JPMorgan Chase | Short | BRL | 1.51 | % | 12/30/39 | 543 | (2,159) | (383) | |||||||||||||||||||||
Autohome, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 356 | (27,473) | (376) | |||||||||||||||||||||
Baker Hughes | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 179 | (3,823) | (25) | |||||||||||||||||||||
Barrick Gold Corp. | JPMorgan Chase | Short | CAD | 2.15 | % | 12/30/39 | 197 | (2,064) | (621) | |||||||||||||||||||||
BASF SE | JPMorgan Chase | Short | EUR | 2.24 | % | 12/30/39 | 100 | (6,859) | (59) | |||||||||||||||||||||
Beijing Enterprises Water Group, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 4,000 | (2,122) | 84 | |||||||||||||||||||||
Bollore NV | JPMorgan Chase | Short | EUR | 2.24 | % | 12/30/39 | 3 | (15) | 3 | |||||||||||||||||||||
Bollore SA | JPMorgan Chase | Short | EUR | 2.24 | % | 12/30/39 | 1,103 | (4,695) | 270 | |||||||||||||||||||||
Bollore SA | Citigroup | Short | EUR | (0.93) | % | 12/30/39 | 2,566 | (10,811) | 511 | |||||||||||||||||||||
Brilliance China Automotive Holdings, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 30,000 | (34,373) | 12,042 | |||||||||||||||||||||
British American Tobacco plc | Citigroup | Short | GBP | (0.25) | % | 12/30/39 | 339 | (16,775) | 6,046 | |||||||||||||||||||||
BT Group plc | JPMorgan Chase | Short | GBP | 2.27 | % | 12/30/39 | 4,136 | (13,379) | 825 | |||||||||||||||||||||
BYD Electronic International Co., Ltd. | Citigroup | Short | HKD | (1.25) | % | 12/30/39 | 2,000 | (2,833) | 320 | |||||||||||||||||||||
Cenovus Energy, Inc. | JPMorgan Chase | Short | CAD | 2.15 | % | 12/30/39 | 6,497 | (57,230) | 11,822 | |||||||||||||||||||||
China Everbright International, Ltd. | Citigroup | Short | HKD | (0.31) | % | 12/30/39 | 11,000 | (9,330) | (533) | |||||||||||||||||||||
China Everbright International, Ltd. | JPMorgan Chase | Short | HKD | 2.11 | % | 12/30/39 | 9,000 | (7,383) | (687) | |||||||||||||||||||||
China Gas Holdings, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 800 | (2,608) | (243) | |||||||||||||||||||||
China International Capital Corp., Ltd. | Citigroup | Short | HKD | (2.19) | % | 12/30/39 | 10,800 | (19,010) | (1,265) | |||||||||||||||||||||
China Southern Airlines, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 2,000 | (1,310) | 72 | |||||||||||||||||||||
China State Construction International Holdings, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 8,000 | (7,198) | 843 | |||||||||||||||||||||
Clorox | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 301 | (48,433) | 2,037 | |||||||||||||||||||||
Concho Resources, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 58 | (8,089) | 2,127 | |||||||||||||||||||||
Concho Resources, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 137 | (18,774) | 4,692 | |||||||||||||||||||||
Ctrip.com International | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 321 | (11,178) | 2,492 | |||||||||||||||||||||
Daiichi Sankyo, Ltd. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 200 | (7,929) | 1,490 | |||||||||||||||||||||
Daimler AG | JPMorgan Chase | Short | EUR | 2.24 | % | 12/30/39 | 776 | (48,005) | 7,190 | |||||||||||||||||||||
Daimler AG | Citigroup | Short | EUR | (0.25) | % | 12/30/39 | 137 | (8,855) | 1,651 | |||||||||||||||||||||
Delta Electronics, Inc. | JPMorgan Chase | Short | TWD | 2.11 | % | 12/30/39 | 4,000 | (16,035) | (817) | |||||||||||||||||||||
Diamondback Energy, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 157 | (16,852) | 2,298 | |||||||||||||||||||||
Digital Realty Trust REIT, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 178 | (21,987) | 3,021 | |||||||||||||||||||||
Digital Realty Trust REIT, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 119 | (14,380) | 1,701 | |||||||||||||||||||||
Edison International | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 132 | (9,111) | 1,617 | |||||||||||||||||||||
Electronic Arts, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 30 | (2,609) | 241 | |||||||||||||||||||||
Evergrande Group | Citigroup | Short | HKD | (1.67) | % | 12/30/39 | 9,000 | (23,239) | (3,717) | |||||||||||||||||||||
Familymart UNY Holdings, Ltd. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 200 | (28,392) | 3,016 | |||||||||||||||||||||
Fortive Corp. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 435 | (32,105) | 2,673 | |||||||||||||||||||||
Freeport McMoRan, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 12 | (176) | 53 | |||||||||||||||||||||
Freeport McMoRan, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 153 | (2,009) | 431 | |||||||||||||||||||||
Geely Automobile Holdings, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 4,000 | (7,298) | 249 | |||||||||||||||||||||
General Mills, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 151 | (7,169) | 1,289 | |||||||||||||||||||||
Great Wall Motor, Ltd. | Citigroup | Short | HKD | (2.00) | % | 12/30/39 | 20,500 | (12,317) | 563 | |||||||||||||||||||||
Hennes & Mauritz AB | Citigroup | Short | SEK | (1.27) | % | 12/30/39 | 591 | (8,870) | 405 | |||||||||||||||||||||
Hershey Co. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 48 | (4,995) | (150) |
See accompanying notes to the financial statements.
15
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Reference Entity | Counterparty | Long/ Short | Currency | Financing Rate | Expiration Date | Trade Notional | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||
Hess Corp. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 83 | $ | (5,429) | $ | 2,067 | |||||||||||||||||||
Hormel Foods Corp. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 435 | (17,213) | (1,352) | |||||||||||||||||||||
Huazhu Group, Ltd. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 335 | (11,913) | 2,322 | |||||||||||||||||||||
Huazhu Group, Ltd. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 1,140 | (34,820) | 2,182 | |||||||||||||||||||||
Hyundai Glovis, Ltd. | JPMorgan Chase | Short | KRW | 2.16 | % | 12/30/39 | 74 | (8,375) | (191) | |||||||||||||||||||||
Hyundai Heavy Industries, Ltd. | Citigroup | Short | KRW | (0.56) | % | 12/30/39 | 58 | (6,710) | 19 | |||||||||||||||||||||
Incyte Corp. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 301 | (20,443) | 1,302 | |||||||||||||||||||||
Incyte Corp. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 328 | (23,214) | 2,357 | |||||||||||||||||||||
Industrias Penoles SAB de C.V. | Citigroup | Short | MXN | (0.50) | % | 12/30/39 | 328 | (5,491) | 1,437 | |||||||||||||||||||||
Komatsu, Ltd. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 400 | (11,247) | 2,559 | |||||||||||||||||||||
Kone OYJ | JPMorgan Chase | Short | EUR | 2.27 | % | 12/30/39 | 172 | (8,739) | 538 | |||||||||||||||||||||
LG Display, Ltd. | Citigroup | Short | KRW | (0.54) | % | 12/30/39 | 556 | (10,141) | 1,127 | |||||||||||||||||||||
LG Display, Ltd. | JPMorgan Chase | Short | KRW | 2.16 | % | 12/30/39 | 285 | (5,145) | 523 | |||||||||||||||||||||
Linde plc | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 39 | (6,316) | 231 | |||||||||||||||||||||
Line Corp. | Citigroup | Short | JPY | (1.38) | % | 12/30/39 | 400 | (14,057) | 286 | |||||||||||||||||||||
Line Corp. | JPMorgan Chase | Short | JPY | 1.40 | % | 12/30/39 | 100 | (4,420) | 950 | |||||||||||||||||||||
Lojas Americanas | JPMorgan Chase | Short | BRL | 1.95 | % | 12/30/39 | 1,510 | (6,915) | (775) | |||||||||||||||||||||
Lotte Corp. | Citigroup | Short | KRW | (1.82) | % | 12/30/39 | 189 | (8,879) | (54) | |||||||||||||||||||||
Lotte Corp. | JPMorgan Chase | Short | KRW | 1.03 | % | 12/30/39 | 36 | (1,575) | (127) | |||||||||||||||||||||
Lotte Shopping, Ltd. | JPMorgan Chase | Short | KRW | 1.87 | % | 12/30/39 | 28 | (5,097) | (199) | |||||||||||||||||||||
Makita Corp. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 500 | (22,674) | 4,752 | |||||||||||||||||||||
National Oilwell Varco, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 66 | (2,481) | 785 | |||||||||||||||||||||
Naver Corp. | JPMorgan Chase | Short | KRW | 2.16 | % | 12/30/39 | 57 | (7,457) | 1,202 | |||||||||||||||||||||
NetEase, Inc., | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 13 | (2,878) | (181) | |||||||||||||||||||||
NetEase, Inc., | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 97 | (20,393) | (2,438) | |||||||||||||||||||||
Netmarble Games Corp. | Citigroup | Short | KRW | (2.45) | % | 12/30/39 | 353 | (34,609) | (633) | |||||||||||||||||||||
Netmarble Games Corp. | JPMorgan Chase | Short | KRW | 1.24 | % | 12/30/39 | 179 | (19,175) | 1,283 | |||||||||||||||||||||
Nippon Paint Holdings Co., Ltd. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 700 | (26,225) | 2,181 | |||||||||||||||||||||
Nippon Paint Holdings Co., Ltd. | Citigroup | Short | JPY | (0.40) | % | 12/30/39 | 500 | (19,052) | 1,863 | |||||||||||||||||||||
NVIDIA Corp. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 64 | (9,666) | 1,122 | |||||||||||||||||||||
Orsted A/S | Citigroup | Short | DKK | (0.25) | % | 12/30/39 | 277 | (17,308) | (1,219) | |||||||||||||||||||||
Pegatron Corp. | Citigroup | Short | TWD | (0.50) | % | 12/30/39 | 2,000 | (4,198) | 849 | |||||||||||||||||||||
PPG Industries, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 125 | (13,277) | 498 | |||||||||||||||||||||
Reckitt Benckiser Group plc | Citigroup | Short | GBP | (0.25) | % | 12/30/39 | 139 | (11,534) | 873 | |||||||||||||||||||||
Reckitt Benckiser Group plc | JPMorgan Chase | Short | GBP | 2.27 | % | 12/30/39 | 39 | (3,371) | 381 | |||||||||||||||||||||
Regeneron Pharmaceuticals, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 68 | (26,769) | 1,371 | |||||||||||||||||||||
Remgro, Ltd. | JPMorgan Chase | Short | ZAR | 2.02 | % | 12/30/39 | 50 | (652) | (27) | |||||||||||||||||||||
Renesas Electronics Corp. | JPMorgan Chase | Short | JPY | 2.15 | % | 12/30/39 | 400 | (3,039) | 1,188 | |||||||||||||||||||||
Salesforce.com, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 43 | (5,822) | (68) | |||||||||||||||||||||
Samsung SDI Co., Ltd | JPMorgan Chase | Short | KRW | 2.16 | % | 12/30/39 | 73 | (16,348) | 1,972 | |||||||||||||||||||||
Saputo, Inc. | JPMorgan Chase | Short | CAD | 2.15 | % | 12/30/39 | 966 | (28,066) | 306 | |||||||||||||||||||||
Sharp Corp. | Citigroup | Short | JPY | (2.00) | % | 12/30/39 | 800 | (10,177) | 2,084 | |||||||||||||||||||||
Shenzhou International Group, Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 1,000 | (11,361) | 25 | |||||||||||||||||||||
Sherwin-Williams Co. (The) | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 100 | (43,320) | 3,974 | |||||||||||||||||||||
Sherwin-Williams Co. (The) | Citigroup | Short | USD | 2.23 | % | 12/30/39 | 35 | (16,048) | 2,277 | |||||||||||||||||||||
Square, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 879 | (56,440) | 7,137 | |||||||||||||||||||||
Sunny Optical Technology Group Co., Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 5,500 | (63,284) | 14,404 | |||||||||||||||||||||
T. Rowe Price Group, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 6 | (698) | 145 | |||||||||||||||||||||
T. Rowe Price Group, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 113 | (12,013) | 1,581 | |||||||||||||||||||||
TAL Education Group | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 193 | (5,161) | 11 | |||||||||||||||||||||
TAL Education Group | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 414 | (12,703) | 1,657 | |||||||||||||||||||||
Tesla, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 104 | (30,074) | (4,537) | |||||||||||||||||||||
Thyssenkrupp AG | JPMorgan Chase | Short | EUR | 1.77 | % | 12/30/39 | 1,731 | (38,069) | 8,288 | |||||||||||||||||||||
Thyssenkrupp AG | Citigroup | Short | EUR | (0.25) | % | 12/30/39 | 419 | (8,805) | 1,603 | |||||||||||||||||||||
Transurban Group | JPMorgan Chase | Short | AUD | 2.22 | % | 12/30/39 | 1,713 | (13,901) | (160) | |||||||||||||||||||||
Ultrapar Participoes SA | JPMorgan Chase | Short | BRL | 2.01 | % | 12/30/39 | 388 | (4,290) | (1,050) | |||||||||||||||||||||
Vipshop Holdings, Ltd. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 2,862 | (20,143) | 4,516 |
See accompanying notes to the financial statements.
16
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Reference Entity | Counterparty | Long/ Short | Currency | Financing Rate | Expiration Date | Trade Notional | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||
Vipshop Holdings, Ltd. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 6,747 | $ | (42,165) | $ | 5,326 | |||||||||||||||||||
Volkswagen AG | Citigroup | Short | EUR | (0.25) | % | 12/30/39 | 14 | (2,385) | 156 | |||||||||||||||||||||
Volkswagen AG | JPMorgan Chase | Short | EUR | 2.24 | % | 12/30/39 | 101 | (16,641) | 552 | |||||||||||||||||||||
Volkswagen AG | Citigroup | Short | EUR | (0.25) | % | 12/30/39 | 60 | (9,960) | 398 | |||||||||||||||||||||
Workday, Inc. | JPMorgan Chase | Short | USD | 2.23 | % | 12/30/39 | 137 | (21,820) | (57) | |||||||||||||||||||||
Worldpay, Inc. | Citigroup | Short | USD | (0.18) | % | 12/30/39 | 195 | (15,953) | 1,049 | |||||||||||||||||||||
Wuxi Biologics Cayman, Inc. | JPMorgan Chase | Short | HKD | 1.51 | % | 12/30/39 | 500 | (4,485) | 1,282 | |||||||||||||||||||||
Wuxi Biologics Cayman, Inc. | Citigroup | Short | HKD | (0.30) | % | 12/30/39 | 5,500 | (48,768) | 13,537 | |||||||||||||||||||||
Zhuzhou CSR Times Electric Co., Ltd. | JPMorgan Chase | Short | HKD | 2.21 | % | 12/30/39 | 1,500 | (8,073) | (243) | |||||||||||||||||||||
ZTE Corp. | Citigroup | Short | HKD | (1.90) | % | 12/30/39 | 1,000 | (1,619) | (271) | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
$ | (1,721,684) | $ | 174,516 | |||||||||||||||||||||||||||
|
|
|
|
Option Contracts(a)
At December 31, 2018, the Fund’sover-the-counter options purchased were as follows:
Description | Counterparty | Put/ Call | Strike Price | Expiration Date | Contracts | Notional Amount(b) | Fair Value | |||||||||||||||||||||
Alphabet, Inc. | JPMorgan Chase | Call | 1225.00 | USD | 1/21/20 | 669 | $ | 819,525 | $ | 38,124 | ||||||||||||||||||
Anadarko Petroleum Corp. | Credit Suisse First Boston | Call | 67.50 | USD | 1/21/20 | 7,067 | 477,023 | 11,108 | ||||||||||||||||||||
BP plc | UBS Warburg | Call | 52.00 | USD | 6/24/19 | 34,666 | 1,802,632 | 1,443 | ||||||||||||||||||||
BP plc | Nomura | Call | 43.50 | USD | 1/21/20 | 32,800 | 1,426,800 | 40,789 | ||||||||||||||||||||
Chevron Corp. | UBS Warburg | Call | 125.00 | USD | 1/22/19 | 10,746 | 1,343,250 | 197 | ||||||||||||||||||||
ConocoPhillips Co. | UBS Warburg | Call | 75.00 | USD | 6/24/19 | 18,108 | 1,358,100 | 21,897 | ||||||||||||||||||||
CVS Health Corp. | JPMorgan Chase | Call | 78.50 | USD | 1/21/20 | 4,950 | 388,575 | 14,970 | ||||||||||||||||||||
EURO STOXX 50 Index | UBS Warburg | Call | 134.92 | EUR | 6/21/21 | 6,489 | 875,496 | 6,691 | ||||||||||||||||||||
EURO STOXX Bank Index | Barclays Bank | Call | 136.97 | EUR | 3/22/21 | 6,300 | 862,911 | 6,359 | ||||||||||||||||||||
Exxon Mobil Corp. | UBS Warburg | Call | 95.00 | USD | 1/22/19 | 7,306 | 694,070 | — | ||||||||||||||||||||
Facebook, Inc. | UBS Warburg | Call | 165.00 | USD | 9/23/19 | 11,500 | 1,897,500 | 61,105 | ||||||||||||||||||||
Halliburton Co. | Citigroup | Call | 50.00 | USD | 1/21/20 | 13,346 | 667,300 | 2,264 | ||||||||||||||||||||
J.P. Morgan Chase & Co. | Citigroup | Call | 114.50 | USD | 1/21/20 | 4,968 | 568,836 | 15,689 | ||||||||||||||||||||
Johnson & Johnson | Bank of America | Call | 155.00 | USD | 1/21/20 | 5,018 | 777,790 | 13,268 | ||||||||||||||||||||
KOSPI 200 Index | Goldman Sachs | Call | 302.50 | USD | 3/15/19 | 5,549 | 1,678,573 | 878 | ||||||||||||||||||||
Occidental Petroleum Corp. | UBS Warburg | Call | 92.50 | USD | 6/24/19 | 16,147 | 1,493,598 | 969 | ||||||||||||||||||||
Royal Dutch Shell plc | UBS Warburg | Call | 77.00 | USD | 6/24/19 | 19,788 | 1,523,676 | 2,358 | ||||||||||||||||||||
Russell 2000 Index | Bank of America | Call | 1700.00 | USD | 3/18/19 | 1,085 | 1,844,500 | 389 | ||||||||||||||||||||
Schlumberger, Ltd. | UBS Warburg | Call | 90.00 | USD | 1/22/19 | 10,576 | 951,840 | — | ||||||||||||||||||||
Schlumberger, Ltd. | UBS Warburg | Call | 70.00 | USD | 1/20/20 | 11,244 | 787,080 | 1,191 | ||||||||||||||||||||
SPDR Gold Shares(c) | JPMorgan Chase | Call | 120.00 | USD | 2/19/19 | 5,955 | 714,600 | 17,206 | ||||||||||||||||||||
SPDR Gold Shares(c) | Societe Generale | Call | 121.00 | USD | 3/18/19 | 10,516 | 1,272,436 | 32,463 | ||||||||||||||||||||
SPDR Gold Shares(c) | Societe Generale | Call | 123.00 | USD | 4/22/19 | 11,146 | 1,370,958 | 33,911 | ||||||||||||||||||||
SPDR Gold Shares(c) | Morgan Stanley | Call | 120.00 | USD | 5/20/19 | 6,045 | 725,400 | 30,744 | ||||||||||||||||||||
SPDR Gold Shares(c) | Societe Generale | Call | 124.00 | USD | 6/24/19 | 10,516 | 1,303,984 | 41,400 | ||||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Call | 4756.33 | JPY | 3/16/20 | 14,063 | 66,888,269 | 4,902 | ||||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Call | 4816.24 | JPY | 9/14/20 | 11,381 | 54,813,627 | 4,800 | ||||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Call | 4894.87 | JPY | 12/14/20 | 11,358 | 55,595,933 | 4,344 | ||||||||||||||||||||
Suncor Energy Inc. | UBS Warburg | Call | 45.00 | USD | 6/24/19 | 23,428 | 1,054,260 | 499 | ||||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 1785.00 | JPY | 3/11/19 | 78,515 | 140,149,275 | 736 | ||||||||||||||||||||
Tokyo Stock Exchange Price Index | Bank of America | Call | 191.28 | JPY | 12/16/19 | 269,219 | 51,496,210 | 2,607 | ||||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 191.28 | JPY | 12/16/19 | 509,036 | 97,368,406 | 4,928 | ||||||||||||||||||||
Tokyo Stock Exchange Price Index | BNP Paribas | Call | 194.04 | JPY | 3/16/20 | 363,317 | 70,498,031 | 5,212 | ||||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 192.04 | JPY | 4/13/20 | 323,621 | 62,148,177 | 4,910 | ||||||||||||||||||||
Total SA | UBS Warburg | Call | 70.00 | USD | 9/23/19 | 24,693 | 1,728,510 | 4,174 | ||||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2350.00 | USD | 1/21/19 | 149 | 350,150 | 2,583 | ||||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2700.00 | USD | 1/21/19 | 1,413 | 3,815,100 | 292,358 |
See accompanying notes to the financial statements.
17
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Description | Counterparty | Put/ Call | Strike Price | Expiration Date | Contracts | Notional Amount(b) | Fair Value | |||||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2400.00 | USD | 1/22/19 | 180 | $ | 432,000 | $ | 4,685 | ||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2400.00 | USD | 2/01/19 | 150 | 360,000 | 5,494 | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total (Cost $1,729,594) | $ | 737,645 | ||||||||||||||||||||||||||
|
|
At December 31, 2018, the Fund’sover-the-counter options written were as follows:
Description | Counterparty | Put/ Call | Strike Price | Expiration Date | Contracts | Notional Amount(b) | Fair Value | |||||||||||||||||||||
Alphabet, Inc. | JPMorgan Chase | Call | 1350.00 | USD | 1/21/20 | 669 | $ | 903,150 | $ | (20,188 | ) | |||||||||||||||||
Anadarko Petroleum Corp. | Credit Suisse First Boston | Call | 76.00 | USD | 1/21/20 | 7,067 | 537,092 | (6,306 | ) | |||||||||||||||||||
Apple, Inc. | Barclays Bank | Call | 160.00 | USD | 1/21/19 | 2,690 | 430,400 | (11,373 | ) | |||||||||||||||||||
Comcast Corp. | Citigroup | Call | 37.50 | USD | 1/21/20 | 12,216 | 458,100 | (29,135 | ) | |||||||||||||||||||
ConocoPhillips Co. | UBS Warburg | Call | 85.00 | USD | 6/24/19 | 18,108 | 1,539,180 | (4,729 | ) | |||||||||||||||||||
CVS Health Corp. | JPMorgan Chase | Call | 87.50 | USD | 1/21/20 | 4,950 | 433,125 | (7,517 | ) | |||||||||||||||||||
Facebook, Inc. | UBS Warburg | Call | 220.00 | USD | 1/21/20 | 26,331 | 5,792,820 | (37,733 | ) | |||||||||||||||||||
J.P. Morgan Chase & Co. | Citigroup | Call | 125.50 | USD | 1/21/20 | 4,968 | 623,484 | (7,117 | ) | |||||||||||||||||||
Johnson & Johnson | Bank of America | Call | 170.00 | USD | 1/21/20 | 5,018 | 853,060 | (5,166 | ) | |||||||||||||||||||
KOSPI 200 Index | Goldman Sachs | Call | 327.50 | USD | 3/15/19 | 5,549 | 1,817,298 | (115 | ) | |||||||||||||||||||
Microsoft Corp. | Barclays Bank | Call | 90.00 | USD | 1/21/19 | 4,767 | 429,030 | (58,428 | ) | |||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Call | 5679.90 | JPY | 3/16/20 | 14,063 | 79,876,434 | (857 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 1950.00 | JPY | 3/11/19 | 78,515 | 153,104,250 | (91 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Bank of America | Call | 221.29 | JPY | 12/16/19 | 269,219 | 59,575,473 | (470 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 221.29 | JPY | 12/16/19 | 509,036 | 112,644,576 | (889 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | BNP Paribas | Call | 237.47 | JPY | 3/16/20 | 363,317 | 86,276,888 | (719 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Call | 233.87 | JPY | 4/13/20 | 323,621 | 75,685,243 | (779 | ) | |||||||||||||||||||
Total SA | UBS Warburg | Call | 75.00 | USD | 9/23/19 | 24,693 | 1,851,975 | (1,656 | ) | |||||||||||||||||||
United Continental Holdings, Inc. | Deutsche Bank | Call | 75.00 | USD | 1/21/19 | 3,469 | 260,175 | (32,322 | ) | |||||||||||||||||||
Alphabet, Inc. | JPMorgan Chase | Put | 860.00 | USD | 1/21/20 | 669 | 575,340 | (30,492 | ) | |||||||||||||||||||
Anadarko Petroleum Corp. | Credit Suisse First Boston | Put | 46.00 | USD | 1/21/20 | 7,067 | 325,082 | (57,870 | ) | |||||||||||||||||||
BP plc | Nomura | Put | 28.00 | USD | 1/21/20 | 32,800 | 918,400 | (34,732 | ) | |||||||||||||||||||
CVS Health Corp. | JPMorgan Chase | Put | 56.00 | USD | 1/21/20 | 4,950 | 277,200 | (19,493 | ) | |||||||||||||||||||
EURO STOXX 50 Index | UBS Warburg | Put | 106.38 | EUR | 6/21/21 | 4,268 | 454,030 | (170,340 | ) | |||||||||||||||||||
EURO STOXX Bank Index | Barclays Bank | Put | 110.23 | EUR | 3/22/21 | 4,201 | 463,076 | (169,645 | ) | |||||||||||||||||||
Facebook, Inc. | UBS Warburg | Put | 155.00 | USD | 1/21/20 | 26,331 | 4,081,305 | (814,059 | ) | |||||||||||||||||||
Halliburton Co. | Citigroup | Put | 35.00 | USD | 1/21/20 | 13,346 | 467,110 | (127,496 | ) | |||||||||||||||||||
J.P. Morgan Chase & Co. | Citigroup | Put | 87.25 | USD | 1/21/20 | 4,968 | 433,458 | (30,372 | ) | |||||||||||||||||||
Johnson & Johnson | Bank of America | Put | 109.00 | USD | 1/21/20 | 5,018 | 546,962 | (23,889 | ) | |||||||||||||||||||
KOSPI 200 Index | Goldman Sachs | Put | 270.00 | USD | 3/15/19 | 5,549 | 1,498,230 | (67,901 | ) | |||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2200.00 | �� | USD | 1/21/19 | 149 | 327,800 | (778 | ) | ||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2250.00 | USD | 1/22/19 | 180 | 405,000 | (1,391 | ) | |||||||||||||||||||
S&P 500 Index | Barclays Bank | Put | 2250.00 | USD | 2/01/19 | 150 | 337,500 | (2,010 | ) | |||||||||||||||||||
S&P 500 Index | Bank of America | Put | 2600.00 | USD | 3/18/19 | 599 | 1,557,400 | (92,311 | ) | |||||||||||||||||||
Schlumberger, Ltd. | UBS Warburg | Put | 52.50 | USD | 1/20/20 | 11,244 | 590,310 | (198,712 | ) | |||||||||||||||||||
SPDR Gold Shares(c) | Morgan Stanley | Put | 113.00 | USD | 5/20/19 | 3,023 | 341,599 | (2,122 | ) | |||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Put | 3832.77 | JPY | 3/16/20 | 14,063 | 53,900,245 | (70,552 | ) | |||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Put | 3820.96 | JPY | 9/14/20 | 7,587 | 28,989,624 | (43,876 | ) | |||||||||||||||||||
Sumitomo Mitsui Financial Group, Inc. | Morgan Stanley | Put | 3786.60 | JPY | 12/14/20 | 7,573 | 28,675,922 | (46,724 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Put | 1600.00 | JPY | 3/11/19 | 78,515 | 125,624,000 | (88,720 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Bank of America | Put | 156.59 | JPY | 12/16/19 | 269,219 | 42,157,003 | (52,243 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Put | 156.59 | JPY | 12/16/19 | 509,036 | 79,709,947 | (98,772 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | BNP Paribas | Put | 155.80 | JPY | 3/16/20 | 363,317 | 56,604,789 | (73,472 | ) | |||||||||||||||||||
Tokyo Stock Exchange Price Index | Morgan Stanley | Put | 157.82 | JPY | 4/13/20 | 323,621 | 51,073,866 | (75,253 | ) | |||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total (Premiums $1,673,647) | $ | (2,618,815 | ) | |||||||||||||||||||||||||
|
|
See accompanying notes to the financial statements.
18
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
At December 31, 2018, the Fund’s exchange traded options written were as follows:
Description | Put/ Call | Strike Price | Expiration Date | Contracts | Notional Amount(b) | Fair Value | ||||||||||||||||||||||
Amazon.com, Inc. | Call | 1780.00 | USD | 2/19/19 | 3 | $ | 5,340 | $ | (5,190 | ) | ||||||||||||||||||
Amazon.com, Inc. | Call | 1790.00 | USD | 2/19/19 | 3 | 5,370 | (4,605 | ) | ||||||||||||||||||||
Amazon.com, Inc. | Call | 1800.00 | USD | 2/19/19 | 3 | 5,400 | (4,155 | ) | ||||||||||||||||||||
McDonald’s Corp. | Call | 185.00 | USD | 1/22/19 | 2 | 370 | (176 | ) | ||||||||||||||||||||
Verisign, Inc | Call | 170.00 | USD | 1/22/19 | 1 | 170 | (39 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total (Premiums $68,886) |
| $ | (14,165 | ) | ||||||||||||||||||||||||
|
|
At December 31, 2018, the Fund’sover-the-counter currency options purchased were as follows:
Description | Counterparty | Put/ Call | Strike Price | Expiration Date | Notional Amount | Fair Value | ||||||||||||||||||||
British Pound Call Currency Option (GBP/USD) | UBS Warburg | Call | 1.32 | GBP | 5/16/19 | 58,850 | $ | 142,517 | ||||||||||||||||||
|
| |||||||||||||||||||||||||
Total (Cost $190,251) | $ | 142,517 | ||||||||||||||||||||||||
|
|
At December 31, 2018, the Fund’s openover-the-counter interest rate swaptions purchased were as follows:
Paid by the Fund | Received by the Fund | |||||||||||||||||||||||||||||||
Rate | Frequency | Rate | Frequency | Expiration Date | Counterparty | Notional Amount | Value | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||||
3.00% | Semi-annually | 3-Month U.S. Dollar LIBOR | Quarterly | 3/4/19 | Nomura | 1,189 | USD | $ | 5,160 | $ | (39,684 | ) | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total (Cost $44,844) | $ | 5,160 | $ | (39,684 | ) | |||||||||||||||||||||||||||
|
|
|
|
At December 31, 2018, the Fund’s openover-the-counter interest rate swaptions written were as follows:(a)
Paid by the Fund | Received by the Fund | |||||||||||||||||||||||||||||||||
Rate | Frequency | Rate | Frequency | Expiration Date | Counterparty | Notional Amount | Value | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||||||
2.70% | Semi-annually | 3-Month U.S. Dollar LIBOR | Quarterly | 3/4/19 | Nomura | (1,189 | ) | USD | $ | (104,357 | ) | $ | (86,216 | ) | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total (Premiums $18,141) | $ | (104,357 | ) | $ | (86,216 | ) | ||||||||||||||||||||||||||||
|
|
|
|
Forward Currency Contracts
At December 31, 2018, the Fund’s open forward currency contracts were as follows:
Currency Purchased | Currency Sold | Counterparty | Settlement Date | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Japanese Yen | 102,084,390 | U.S. Dollar | 922,057 | JPMorgan Chase | 1/7/19 | $ | 10,000 | |||||||||||||
Japanese Yen | 1,642,430 | U.S. Dollar | 14,877 | UBS Warburg | 1/7/19 | 119 | ||||||||||||||
Japanese Yen | 211,538,820 | U.S. Dollar | 1,905,000 | JPMorgan Chase | 1/25/19 | 29,311 | ||||||||||||||
U.S. Dollar | 628,128 | Australian Dollar | 888,000 | JPMorgan Chase | 1/25/19 | 2,464 | ||||||||||||||
Japanese Yen | 210,764,000 | U.S. Dollar | 1,887,078 | Citigroup | 1/31/19 | 41,094 | ||||||||||||||
Japanese Yen | 161,863,500 | U.S. Dollar | 1,439,638 | JPMorgan Chase | 2/14/19 | 42,690 | ||||||||||||||
Japanese Yen | 161,863,500 | U.S. Dollar | 1,439,638 | JPMorgan Chase | 2/14/19 | 42,690 | ||||||||||||||
European Euro | 838,000 | U.S. Dollar | 957,431 | Goldman Sachs | 2/15/19 | 6,296 | ||||||||||||||
European Euro | 834,000 | U.S. Dollar | 948,998 | Morgan Stanley | 2/28/19 | 11,093 | ||||||||||||||
Japanese Yen | 129,776,401 | U.S. Dollar | 1,149,000 | Morgan Stanley | 3/7/19 | 41,474 | ||||||||||||||
European Euro | 825,000 | U.S. Dollar | 938,374 | Morgan Stanley | 3/14/19 | 12,508 | ||||||||||||||
Swedish Krona | 17,198,882 | European Euro | 1,664,000 | Goldman Sachs | 3/21/19 | 35,519 | ||||||||||||||
|
| |||||||||||||||||||
$ | 275,258 | |||||||||||||||||||
|
|
See accompanying notes to the financial statements.
19
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Currency Purchased | Currency Sold | Counterparty | Settlement Date | Net Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
U.S. Dollar | 1,636 | Japanese Yen | 180,000 | JPMorgan Chase | 1/4/19 | $ | (7 | ) | ||||||||||||
British Pound | 1,296,000 | U.S. Dollar | 1,691,897 | JPMorgan Chase | 1/11/19 | (39,341 | ) | |||||||||||||
European Euro | 827,000 | U.S. Dollar | 950,365 | Morgan Stanley | 1/25/19 | (882 | ) | |||||||||||||
U.S. Dollar | 2,055,204 | Japanese Yen | 227,800,000 | Morgan Stanley | 1/28/19 | (28,321 | ) | |||||||||||||
Norwegian Krone | 6,254,000 | U.S. Dollar | 754,556 | JPMorgan Chase | 2/1/19 | (29,574 | ) | |||||||||||||
U.S. Dollar | 2,039,625 | Japanese Yen | 228,149,999 | Goldman Sachs | 2/4/19 | (48,215 | ) | |||||||||||||
British Pound | 1,486,000 | U.S. Dollar | 1,945,241 | JPMorgan Chase | 2/15/19 | (47,204 | ) | |||||||||||||
U.S. Dollar | 963,545 | European Euro | 838,000 | Morgan Stanley | 2/15/19 | (181 | ) | |||||||||||||
British Pound | 775,000 | U.S. Dollar | 1,014,568 | JPMorgan Chase | 2/21/19 | (24,408 | ) | |||||||||||||
U.S. Dollar | 957,157 | European Euro | 834,000 | Deutsche Bank | 2/28/19 | (2,935 | ) | |||||||||||||
U.S. Dollar | 1,057,330 | Brazilian Real | 4,122,000 | Deutsche Bank | 3/1/19 | (1,711 | ) | |||||||||||||
U.S. Dollar | 2,137,446 | Japanese Yen | 238,199,999 | Goldman Sachs | 3/4/19 | (46,994 | ) | |||||||||||||
South African Rand | 16,446,000 | U.S. Dollar | 1,147,816 | Citigroup | 3/14/19 | (11,855 | ) | |||||||||||||
U.S. Dollar | 946,012 | European Euro | 825,000 | Morgan Stanley | 3/14/19 | (4,870 | ) | |||||||||||||
U.S. Dollar | 927,341 | Japanese Yen | 102,050,000 | JPMorgan Chase | 3/25/19 | (10,420 | ) | |||||||||||||
|
| |||||||||||||||||||
$ | (296,918 | ) | ||||||||||||||||||
|
| |||||||||||||||||||
Total Net Forward Currency Contracts |
| $ | (21,660 | ) | ||||||||||||||||
|
|
Swap Agreements
At December 31, 2018, the Fund’s open centrally cleared credit default swap agreements (sell protection) were as follows:
Description | Payment Frequency | Implied Credit Spread at December 31, 2018(d) | Expiration Date | Notional Amount(e) | Fixed Rate | Value | Premiums Paid/ (Received) | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||||
CDX North America High Yield Index Swap Agreement with Series 30 | Quarterly | 4.14 | % | 6/20/23 | $ | 531,318 | 5.00 | % | $ | 16,319 | $ | 34,127 | $ | (17,808 | ) | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
$ | 16,319 | $ | 34,127 | $ | (17,808 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
Cash of $768,430 has been segregated to cover margin requirements for the following open centrally cleared interest rate swap agreements as of December 31, 2018:
Paid by the Fund | Received by the Fund | |||||||||||||||||||||||||||||||||
Rate | Frequency | Rate | Frequency | Expiration Date | Notional Amount | Upfront Premiums Paid/ (Received) | Value | Unrealized Appreciation/ (Depreciation) | ||||||||||||||||||||||||||
3-Month LIBOR | Quarterly | 2.97% | Semi-annually | 7/18/25 | 12,447,470 | USD | $ | 177 | $ | 207,705 | $ | 207,528 | ||||||||||||||||||||||
0.84% | Annually | 6-Month EURIBOR | Semi-annually | 2/15/28 | 1,463,000 | EUR | 31 | (18,345 | ) | (18,376 | ) | |||||||||||||||||||||||
0.84% | Annually | 6-Month EURIBOR | Semi-annually | 2/15/28 | 1,474,000 | EUR | 32 | (18,453 | ) | (18,485 | ) | |||||||||||||||||||||||
0.99% | Annually | 6-Month EURIBOR | Semi-annually | 10/29/28 | 7,981,613 | EUR | — | (170,415 | ) | (170,415 | ) | |||||||||||||||||||||||
3-Month LIBOR | Quarterly | 3.20% | Semi-annually | 10/29/28 | 10,098,436 | USD | — | 435,859 | 435,859 | |||||||||||||||||||||||||
2.99% | Semi-annually | 3-Month LIBOR | Quarterly | 7/18/50 | 2,797,184 | USD | 89 | (62,848 | ) | (62,937 | ) | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
$ | 373,503 | $ | 373,174 | |||||||||||||||||||||||||||||||
|
|
|
|
At December 31, 2018, cash of $90,000 was received as collateral for the following over-the-counter total return swap agreements:
Pay/ Receive | Financing Rate | Description | Expiration Date | Counterparty | Notional | Value and Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Pay | 0.00 | % | EURO STOXX Bank Index April Futures | 4/30/19 | BNP Paribas SA | (574,875 | ) | EUR | $ | 61,806 | ||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/21 | BNP Paribas SA | 15,520,000 | JPY | 16,425 | ||||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/21 | BNP Paribas SA | 7,655,000 | JPY | 9,171 |
See accompanying notes to the financial statements.
20
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Schedule of Portfolio Investments
December 31, 2018
Pay/ Receive | Financing Rate | Description | Expiration Date | Counterparty | Notional | Value and Unrealized Appreciation/ (Depreciation) | ||||||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/21 | BNP Paribas SA | 4,215,000 | JPY | $ | 1,049 | |||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/22 | BNP Paribas SA | 15,720,000 | JPY | 15,002 | ||||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/22 | BNP Paribas SA | 7,950,000 | JPY | 6,679 | ||||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/22 | BNP Paribas SA | 7,970,000 | JPY | 6,497 | ||||||||||||||
Pay | 0.00 | % | NIKKEI 225 Dividend IndexE-Mini March Futures | 3/31/22 | BNP Paribas SA | 4,260,000 | JPY | 739 | ||||||||||||||
Pay | 0.00 | % | S&P 500 Index Dividends December Futures | 12/18/20 | Goldman Sachs | 107,944 | USD | 19,181 | ||||||||||||||
Pay | 0.00 | % | S&P 500 Index Dividends December Futures | 12/17/21 | BNP Paribas SA | 133,513 | USD | 22,963 | ||||||||||||||
|
| |||||||||||||||||||||
$ | 159,512 | |||||||||||||||||||||
|
|
† | Represents less than 0.05%. |
(a) | These securities are held by the AZL BlackRock Global Allocation Fund (the “VIP Subsidiary”). |
(b) | Notional amount is expressed as the number of contracts multiplied by the strike price of the underlying asset. |
(c) | All or a portion of these securities are held by the AZL Cayman Global Allocation Fund I, Ltd. (the “Subsidiary”). |
(d) | Implied credit spread, represented in absolute terms, utilized in determining the market value of the credit default swap agreements as of period end will serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a referenced entity reflects the cost of buying/selling protection and may include upfront or daily payments required to be made to enter into the agreement. Generally, wider credit spreads represent a perceived deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the swap agreement. |
(e) | The notional amount represents the maximum potential amount the Fund could be required to make as a seller of credit protection if a credit event occurs, as defined under the terms of the swap agreement. |
Balances Reported in the Consolidated Statement of Assets and Liabilities for Options Written, Forward Currency Contracts and Swap Agreements
Premiums Paid | Premiums Received | Unrealized Appreciation | Unrealized Depreciation | Value | ||||||||||||||
Written options and swaptions | $ | — | $1,760,674 | $ | 54,721 | $ | (1,031,383 | ) | $ | (2,737,337) | ||||||||
Forward currency contracts | — | — | 275,258 | (296,918 | ) | (21,660 | ) | |||||||||||
Centrally cleared swap agreements(a) | 34,456 | — | 643,387 | (288,021 | ) | 389,822 | ||||||||||||
Over-the-counter swap agreements | — | — | 159,512 | — | — |
(a) | Includes cumulative unrealized appreciation (depreciation) on these swap agreements as reported in the Consolidated Schedule of Portfolio Investments. Only current day’s variation margin for centrally cleared swap agreements is reported within the Consolidated Statement of Assets and Liabilities and is net of any previously paid (received) swap premium amounts. |
See accompanying notes to the financial statements.
21
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments innon-affiliates, at cost | $ | 379,918,001 | |||
Investments in affiliates, at cost | 324,068,396 | ||||
|
| ||||
Investments innon-affiliates, at value* | $ | 379,564,458 | |||
Investments in affiliates, at value | 330,971,306 | ||||
Segregated cash for collateral for futures contracts | 37,169,319 | ||||
Segregated cash for collateral on swap agreeements | 768,430 | ||||
Deposits with brokers for securities sold short | 1,163,005 | ||||
Interest and dividends receivable | 1,247,087 | ||||
Foreign currency, at value (cost $63,713) | 63,930 | ||||
Unrealized appreciation on forward currency contracts | 275,258 | ||||
Unrealized appreciation on swap agreements | 159,512 | ||||
Receivable for investments sold | 1,051,100 | ||||
Receivable for capital shares issued | 281 | ||||
Receivable for variation margin on centrally cleared swap agreements | 75,118 | ||||
Receivable for variation margin on futures contracts | 101,361 | ||||
Receivable for variation margin on contracts for differences | 7,125 | ||||
Reclaims receivable | 328,426 | ||||
Prepaid expenses | 7,763 | ||||
|
| ||||
Total Assets | 752,953,479 | ||||
|
| ||||
Liabilities: | |||||
Cash overdraft | 69,666 | ||||
Cash received as collateral for swap agreements | 90,000 | ||||
Written options and swaptions (Proceeds received $1,760,675) | 2,737,337 | ||||
Unrealized depreciation on forward currency contracts | 296,918 | ||||
Payable for investments purchased | 1,423,199 | ||||
Payable for collateral received on loaned securities | 11,159,870 | ||||
Payable for capital shares redeemed | 55,060 | ||||
Securities sold short (Proceeds received $1,002,437) | 787,417 | ||||
Payable for variation margin on futures contracts | 154,783 | ||||
Payable for variation margin on contracts for differences | 8,445 | ||||
Payable for variation margin on centrally cleared swap agreements | 32,216 | ||||
Interest payable on securities sold short | 4,285 | ||||
Accrued foreign taxes | 37,925 | ||||
Manager fees payable | 300,299 | ||||
Administration fees payable | 6,520 | ||||
Distribution fees payable | 79,057 | ||||
Custodian fees payable | 8,175 | ||||
Administrative and compliance services fees payable | 7,737 | ||||
Transfer agent fees payable | 712 | ||||
Trustee fees payable | 1,261 | ||||
Other accrued liabilities | 203,427 | ||||
|
| ||||
Total Liabilities | 17,464,309 | ||||
|
| ||||
Net Assets | $ | 735,489,170 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 671,078,999 | |||
Total distributable earnings | 64,410,171 | ||||
|
| ||||
Net Assets | $ | 735,489,170 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 63,288,343 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.62 | |||
|
|
* | Includes securities on loan of $10,901,916. |
Consolidated Statement of Operations
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 7,177,333 | |||
Dividends from non-affiliates | 5,464,534 | ||||
Interest | 4,596,761 | ||||
Income from securities lending | 53,199 | ||||
Foreign withholding tax | (295,336 | ) | |||
|
| ||||
Total Investment Income | 16,996,491 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 3,809,991 | ||||
Administration fees | 214,963 | ||||
Distribution fees | 1,003,021 | ||||
Custodian fees | 205,663 | ||||
Administrative and compliance services fees | 20,376 | ||||
Transfer agent fees | 11,795 | ||||
Trustee fees | 63,664 | ||||
Professional fees | 55,063 | ||||
Shareholder reports | 29,126 | ||||
Dividends on securities sold short | 22,298 | ||||
Other expenses | 95,041 | ||||
|
| ||||
Net expenses | 5,531,001 | ||||
|
| ||||
Net Investment Income/(Loss) | 11,465,490 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments: | |||||
Net realized gains/(losses) on securities and foreign currencies | 12,300,949 | ||||
Net realized gains/(losses) on affiliated securities | 2,458,499 | ||||
Net realized gains/(losses) on futures contracts | (568,634 | ) | |||
Net realized gains/(losses) on contracts for differences | 25,530 | ||||
Net realized gains/(losses) on written options contracts | 447,873 | ||||
Net realized gains (losses) on securities held short | 165,619 | ||||
Net realized gains/(losses) on swap agreements | (12,099 | ) | |||
Net realized gains/(losses) on forward currency contracts | (700,813 | ) | |||
Change in net unrealized appreciation/depreciation on securities | (45,748,189 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated securities | (22,690,543 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (554,549 | ) | |||
Change in net unrealized appreciation/depreciation contracts for differences | 174,516 | ||||
Change in net unrealized appreciation/depreciation on written option contracts | (1,438,114 | ) | |||
Change in net unrealized appreciation/depreciation on securities held short | 215,020 | ||||
Change in net unrealized appreciation/depreciation on swap agreements | (562,836 | ) | |||
Change in net unrealized appreciation/depreciation on forward currency contracts | (276,672 | ) | |||
Change in accrued foreign tax liability | 7,909 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (56,756,534 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (45,291,044 | ) | ||
|
|
See accompanying notes to the financial statements.
22
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Statements of Changes in Net Assets
For the Year Ended | For the Year Ended | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 11,465,490 | $ | 7,996,110 | ||||||
Net realized gains/(losses) on investments | 14,116,924 | 25,099,254 | ||||||||
Change in unrealized appreciation/depreciation on investments | (70,873,458 | ) | 57,180,746 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (45,291,044 | ) | 90,276,110 | |||||||
|
|
|
| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (15,884,365 | ) | (3,178,036 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (15,884,365 | ) | (3,178,036 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 7,902,972 | 8,651,752 | ||||||||
Proceeds from dividends reinvested | 15,884,365 | 3,178,036 | ||||||||
Value of shares redeemed | (61,287,105 | ) | (79,282,868 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (37,499,768 | ) | (67,453,080 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (98,675,177 | ) | 19,644,994 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 834,164,347 | 814,519,353 | ||||||||
|
|
|
| |||||||
End of period | $ | 735,489,170 | $ | 834,164,347 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 631,927 | 710,754 | ||||||||
Dividends reinvested | 1,320,396 | 258,587 | ||||||||
Shares redeemed | (4,935,276 | ) | (6,584,146 | ) | ||||||
|
|
|
| |||||||
Change in shares | (2,982,953 | ) | (5,614,805 | ) | ||||||
|
|
|
|
(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in Notes to the Consolidated Financial Statements. |
See accompanying notes to the financial statements.
23
AZL MVP BlackRock Global Strategy Plus Fund
Consolidated Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.59 | $ | 11.33 | $ | 11.69 | $ | 12.22 | $ | 12.02 | |||||||||||||||
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|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.18 | 0.11 | 0.10 | 0.07 | 0.10 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.90 | ) | 1.20 | 0.27 | (0.26 | ) | 0.16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.72 | ) | 1.31 | 0.37 | (0.19 | ) | 0.26 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.18 | ) | (0.05 | ) | (0.31 | ) | (0.14 | ) | — | (a) | |||||||||||||||
Net Realized Gains | (0.07 | ) | — | (0.42 | ) | (0.20 | ) | (0.06 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.25 | ) | (0.05 | ) | (0.73 | ) | (0.34 | ) | (0.06 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 11.62 | $ | 12.59 | $ | 11.33 | $ | 11.69 | $ | 12.22 | |||||||||||||||
|
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|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(b) | (5.77 | )% | 11.54 | % | 3.34 | % | (1.57 | )% | 2.18 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 735,489 | $ | 834,164 | $ | 814,519 | $ | 830,363 | $ | 818,435 | |||||||||||||||
Net Investment Income/(Loss) | 1.43 | % | 0.97 | % | 0.85 | % | 0.67 | % | 0.96 | % | |||||||||||||||
Expenses Before Reductions*(c) | 0.69 | % | 0.71 | % | 1.11 | % | 1.18 | % | 1.18 | % | |||||||||||||||
Expenses Net of Reductions* | 0.69 | % | 0.71 | % | 1.11 | % | 1.18 | % | 1.18 | % | |||||||||||||||
Expenses Net of Reductions, Excluding Expenses Paid Indirectly* | 0.69 | % | 0.71 | % | 1.11 | % | 1.18 | % | 1.18 | %(d) | |||||||||||||||
Portfolio Turnover Rate | 39 | % | 40 | % | 91 | % | 64 | % | 61 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | Represents less than $0.005. |
(b) | The return includes reinvested dividends and fund level expenses, but excludes insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(d) | Expenses net of reductions excludes expenses paid indirectly, pursuant to a “commission recapture” program, under which brokers remitted a portion of the brokerage commission which were used to pay certain Fund expenses. The Fund ceased participation in the program in June 2014. |
See accompanying notes to the financial statements.
24
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP BlackRock Global Strategy Plus Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on theex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available. Income received by the Fund from sources within foreign countries may be subject to withholding or similar taxes imposed by such countries. The Fund accrues such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
Consolidation of Subsidiaries
During the year ended December 31, 2018, the Fund primarily invested in shares of another mutual fund managed by the Manager, the AZL BlackRock Global Allocation Fund (the “VIP Subsidiary”), a wholly-owned and controlled subsidiary of the Fund. As of December 31, 2018, the Fund’s aggregate investment in the VIP Subsidiary was $368,098,344, representing 50.1% of the Fund’s net assets.
The VIP Subsidiary’s primary vehicle for gaining exposure to the commodities markets is through investment in the AZL Cayman Global Allocation Fund I, Ltd. (the “Cayman Subsidiary”), a wholly-owned and controlled subsidiary of the VIP Subsidiary formed in the Cayman Islands, which invests primarily in commodity-related instruments. The Subsidiaries’ financial statements, including its investments, and its operating results have been consolidated with those of the Fund which includes the consolidation of the Cayman Subsidiary. All intercompany transactions have been eliminated.
Real Estate Investment Trusts
The Fund may own shares of real estate investment trusts (“REITs”) which report information on the source of their distributions annually. Certain distributions received from REITs during the year, which are known to be a return of capital, are recorded as a reduction to the cost of the individual REIT. A REIT may focus on particular types of projects, such as apartment complexes or shopping centers, or on particular geographic regions, or both. An investment in a REIT may be subject to certain risks similar to those associated with direct ownership of real estate, including: declines in the value of real estate; risks related to general and local economic conditions, overbuilding and competition; increases in property taxes and operating expenses; and variations in rental income.
Foreign Currency Translation and Withholding Taxes
The accounting records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the current rate of exchange to determine the fair value of investments, assets and liabilities. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included in the net realized and unrealized gain or loss on investments and foreign currencies on statement of operations. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
25
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
Floating Rate Loans
The Fund may invest in floating rate loans, which usually take the form of loan participations and assignments. These loans are made by banks and other large financial institutions to various companies and are typically senior in the borrowing companies’ capital structure. Coupon rates are variable and are tied to a benchmark lending rate. Loans involve a risk of loss in case of default or insolvency of the financial intermediaries who are parties to the transactions. A Fund records an investment when the borrower withdraws money and records the interest as earned.
Short Sales
The Fund may engage in short sales against the box (i.e., where the Fund owns or has an unconditional right to acquire at no additional cost a security substantially similar to the security sold short) for hedging purposes to limit exposure to a possible market decline in the value of its portfolio securities. In a short sale, the Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security. The Fund may also incur an interest expense if a security that has been sold short has an interest payment. When the Fund engages in a short sale, the Fund records a liability for securities sold short and records an asset equal to the proceeds received. The amount of the liability is subsequently marked to market to reflect the market value of the securities sold short. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Fund of Funds Trust.
Bank Loans
The Fund may invest in bank loans, which generally have interest rates which are reset periodically by reference to a base lending rate plus a premium. These base rates are primarily the London-Interbank Offered Rate and, secondarily, the prime rate offered by one or more major U.S. banks and the certificate of deposit rate or other base lending rates used by commercial lenders. Bank loans often require prepayments from excess cash flows or allow the borrower to repay at its election. The rate at which the borrower repays cannot be predicted with accuracy. Therefore, the anticipated or actual maturity may be considerably earlier than the stated maturity shown in the Consolidated Schedule of Portfolio of Investments. All or a portion of any bank loans may be unfunded. The portfolio is obligated to fund any commitments at the borrower’s discretion. Therefore, the portfolio must have funds sufficient to cover its contractual obligation.
Securities Lending
To generate additional income, the Fund may lend up to 331/3% of its assets pursuant to agreements requiring that the loan be continuously secured by any combination of cash, U.S. government or U.S. government agency securities, equal initially to at least 102% of the fair value plus accrued interest on the securities loaned (105% for foreign securities). The borrower of securities is at all times required to post collateral to the Fund in an amount equal to 100% of the fair value of the securities loaned based on the previous day’s fair value of the securities loaned,marked-to-market daily. Any collateral shortfalls are adjusted the next business day. The Fund bears all of the gains and losses on such investments. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn income on the investment of cash collateral received. In extremely low interest rate environments, the broker rebate fee may exceed the interest earned or the cash collateral which would result in a loss to the Fund. The investment of cash collateral deposited by the borrower is subject to inherent market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present in the market, and as such, the value of these investments may not be sufficient, when liquidated, to repay the borrower when the loaned security is returned. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans will be made only to borrowers, such as broker-dealers, banks or institutional borrowers of securities, deemed by the Manager to be of good standing and credit worthy and when in its judgment, the consideration which can be earned currently from such securities loans justifies the attendant risks. Loans are subject to termination by the Trust or the borrower at any time, and are, therefore, not considered to be illiquid investments. Securities on loan at December 31, 2018 are presented on the Fund’s Consolidated Schedule of Portfolio Investments.
Cash collateral received in connection with securities lending is invested in short-term investments that have a remaining maturity of 397 days or less, similar to investments held in compliance with Rule 2a-7 under the 1940 Act. Included in short-term investments may be investments in overnight repurchase agreements that are collateralized at 102% with securities issued by the U.S. Treasury; U.S. government or any agency, instrumentality or authority of the U.S. government, or other approved issuers. The securities purchased with cash collateral received are reflected in the Fund’s Consolidated Schedule of Portfolio Investments under Short-Term Securities Held as Collateral for Securities on Loan. Short-term securities held as collateral for securities on loan are valued at amortized cost which approximates fair value. Under the amortized cost method, discounts or premiums are amortized on a constant basis to the maturity of the security. These are typically categorized as Level 2 in the fair value hierarchy, as defined in Note 4. Income earned on these investments is included in “Income from securities lending” on the Consolidated Statement of Operations.
26
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
The Fund pays the Securities Lending Agent 9% of the gross revenues received from securities lending activities and keeps 91%. The Fund paid securities lending fees of $5,389 during the year ended December 31, 2018. These fees have been netted against “Income from securities lending” on the Consolidated Statement of Operations. The Fund had securities lending transactions of $11,130,249 accounted for as secured borrowings with cash collateral of overnight and continuous maturities as of December 31, 2018. At December 31, 2018, there were no master netting provisions in the securities lending agreement.
TBA Purchase and Sale Commitments
The Fund may enter intoto-be-announced (TBA) purchase or sale commitments, pursuant to which it agrees to purchase or sell, respectively, mortgage-backed securities for a fixed unit price, with payment and delivery at a scheduled future date beyond the customary settlement period for such securities. With TBA transactions, the particular securities to be delivered are not identified at the trade date; however, delivered securities must meet specified terms, including issuer, rate, and mortgage term, and be within industry-accepted “good delivery” standards. The Fund may enter into TBA purchase transactions with the intention of taking possession of the underlying securities, may elect to extend the settlement by “rolling” the transaction, and/or may use TBAs to gain interim exposure to underlying securities. Until settlement, the Fund maintains liquid assets sufficient to settle its TBA commitments.
To mitigate counterparty risk, the Fund has entered into agreements with TBA counterparties that provide for collateral and the right to offset amounts due to or from those counterparties under specified conditions. Subject to minimum transfer amounts, collateral requirements are determined and transfers made based on the net aggregate unrealized gain or loss on all TBA commitments with a particular counterparty. At any time, the Fund’s risk of loss from a particular counterparty related to its TBA commitments is the aggregate unrealized gain on appreciated TBAs in excess of unrealized loss on depreciated TBAs and collateral held, if any, by such counterparty. As of December 31, 2018, no collateral had been posted by the Fund to counterparties for TBAs.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Consolidated Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type.
Forward Currency Contracts
During the year ended December 31, 2018, the Fund entered into forward currency contracts as an economic hedge against either specific transactions or portfolio instruments or to obtain exposure to foreign currencies. In addition to the foreign currency risk related to the use of these contracts, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In the event of default by the counterparty to the transaction, the Fund’s maximum amount of loss, as either the buyer or the seller, is the unrealized appreciation of the contract. The forward currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized gains or losses until the contract settlement date. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $22.1 million and the monthly average notional amount for short contracts was $11.1 million. Realized gains and losses are reported as “Net realized gains/(losses) on forward currency contracts” on the Consolidated Statement of Operations.
Futures Contracts
During the year ended December 31, 2018, the Fund used futures contracts to gain exposure to, or economically hedge against changes in the value of equity securities. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Consolidated Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $40.7 million and the monthly average notional for short contracts was $10.1 million. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Consolidated Statement of Operations.
Contracts for Difference
The Fund may invest in Contracts for Difference (“CFD”). A CFD is a privately negotiated contract between two parties, buyer and seller, stipulating that the seller will pay to or receive from the buyer the difference between the nominal value of the underlying instrument at the opening of the contract and that instrument’s value at the end of the contract. The underlying instrument may be a single security, stock basket or index. A CFD can be set up to take either a short or long position on the underlying instrument. The buyer and seller are both required to post margin, which is adjusted daily. The buyer will also pay to the seller a financing rate on the notional amount of the capital employed by the seller less the margin deposit. A CFD is usually terminated at the buyer’s initiative. The seller of the CFD will simply match the exposure of the underlying instrument in the open market and the parties will exchange whatever payment is due.
27
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
As is the case with owning any financial instrument, there is the risk of loss associated with buying a CFD. For example, if the Fund buys a long CFD and the underlying security is worth less at the end of the contract, the Fund would be required to make a payment to the seller and would suffer a loss. Also, there may be liquidity risk if the underlying instrument is illiquid because the liquidity of a CFD is based on the liquidity of the underlying instrument. CFDs also carry counterparty risk, i.e., the risk that the counterparty to the CFD transaction may be unable or unwilling to make payments or to otherwise honor its financial obligations under the terms of the contract. If the counterparty were to do so, the value of the contract, and of the Fund’s shares, may be reduced. The Fund will not enter into a CFD transaction that is inconsistent with its investment objective, policies and strategies. For the year ended December 31, 2018, the monthly average notional amount on contracts for differences was $0.2 million. Realized gains and losses are reported as “Net realized gains/(losses) on contracts for differences” on the Consolidated Statement of Operations.
Options Contracts
The Fund may purchase or write put and call options on a security or an index of securities. During the year ended December 31, 2018, the Fund purchased and wrote call and put options to increase or decrease its exposure to underlying instruments (including equity risk, interest rate risk and/or foreign currency exchange rate risk) and/or, in the case of options written, to generate gains from options premiums.
Purchased Options Contracts — The Fund pays a premium which is included in “Investments, at value” on the Consolidated Statement of Assets and Liabilities and marked to market to reflect the current value of the option. Premiums paid for purchasing options that expire are treated as realized losses. When a put option is exercised or closed, premiums paid for purchasing options are offset against proceeds to determine the realized gain/loss on the transaction. The Fund bears the risk of loss of the premium and change in value should the counterparty not perform under the contract.
Written Options Contracts — The Fund receives a premium which is recorded as a liability and is subsequently adjusted to the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are either exercised or closed are offset against the proceeds received or the amount paid on the transaction to determine realized gains or losses. The risk associated with writing an option is that the Fund bears the market risk of an unfavorable change in the price of an underlying asset and is required to buy or sell an underlying asset under the contractual terms of the option at a price different from the current value.
A swaption is an option to enter into a pre-defined swap agreement by some specified date in the future. The writer of the swaption becomes the counterparty to the swap if the buyer exercises their option. The interest rate swaption agreement will specify whether the buyer of the swaption will be a fixed rate receiver or a fixed rate buyer. The Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in interest rates.
For the year ended December 31, 2018, the monthly average notional amount for written options contracts was $39.2 million. Realized gains and losses are reported as “Net realized gains/(losses) on written options contracts” on the Consolidated Statement of Operations.
Swap Agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. Swap agreements are privately negotiated in theover-the-counter (“OTC”) market and may be entered into as a bilateral contract (“OTC swaps”) or centrally cleared (“centrally cleared swaps”). The Fund may enter into swap agreements to manage its exposure to market, interest rate, foreign currencies and credit risk. The value of swap agreements are equal to the Fund’s obligations (or rights) under swap agreements, which will generally be equal to the net amounts to be paid or received under the agreements based upon the relative values of the positions held by each party to the agreements. In connection with these arrangements, securities may be identified as collateral in accordance with the terms of the swap agreements to provide assets of value and recourse in the event of default or bankruptcy by the counterparty.
Swaps are marked to market daily using pricing sources approved by the Trustees and the change in value, if any, is recorded as unrealized gain or loss. For OTC swaps, payments received or made at the beginning of the measurement period are recorded as realized gain or loss upon termination or maturity of the OTC swap. A liquidation payment received or made at the termination of the OTC swap is recorded as a realized gain or loss. Net periodic payments received or paid by the Fund are included as part of realized gains (losses). Upon entering a centrally cleared swap, the Fund is required to deposit initial margin with the broker in the form of cash or assets determined to be liquid (the amount is subject to the clearing organization that clears the trade). Daily changes in valuation of centrally cleared swaps, if any, are reported as “Payable/Receivable for variation margin on centrally cleared swap agreements” on the Consolidated Statement of Operations.
Swap agreements involve, to varying degrees, elements of market risk and exposure to loss. 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 instruments and the inability of counterparties or clearing house to perform. The counterparty risk for centrally cleared swap agreements is generally lower than for OTC swap agreements because generally a clearing organization becomes substituted for each counterparty to a centrally cleared swap agreement and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to a clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members will satisfy its obligations to the Fund.
The notional amounts reflect the extent of the total investment exposure the Fund has under the swap agreement. The Fund bears the risk of loss of the amount expected to be received under a swap agreement (i.e., any unrealized appreciation) in the event of the default or bankruptcy of the swap agreement counterparty. The notional amount and related unrealized appreciation (depreciation) of each swap agreement at period end is disclosed in the swap tables in the Consolidated Schedule of Portfolio Investments. The Fund is a party to International Swap Dealers Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, such as OTC swap contracts, entered into by the Fund, through the VIP Subsidiary or Cayman Subsidiary, and those counterparties. The ISDA Master Agreements maintain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding OTC swap transactions under the applicable ISDA Master Agreement.
Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional amount and are subject to interest rate risk exposure. Interest rate swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make. If the other party to an interest rate swap defaults, a Fund’s risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive. As of December 31, 2018, the Fund entered into centrally cleared interest rate swap agreements to gain or reduce exposure to interest rates or to manage duration, the yield curve or interest rate risk by economically hedging the value of the fixed rate bonds which may decrease when interest rates rise (interest rate risk). The monthly average gross notional amount for interest rate swaps was $37.9 million for the year ended December 31, 2018.
Currency swaps are interest rate swaps in which one party pays a stream of interest payments, either fixed or floating, in exchange for another party’s stream of interest payments, either fixed or floating, based on the notional amounts of two different currencies. The notional amounts are typically determined based on the spot exchange rates at the inception of the trade. Currency swaps may also involve an exchange of notional amounts at the start, during and/or at expiration of the contract, either at the current spot rate or another specified rate. The monthly average gross notional amount for currency swaps was $2.2 million for the year ended December 31, 2018.
28
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty.
Total return swap agreements involve commitments to pay interest in exchange for a market-linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty. The monthly average gross notional amount for total return swaps was $2.6 million for the year ended December 31, 2018.
Credit default swap agreements may have as reference obligations one or more securities that are not currently held by the Fund. The protection “buyer” in a credit default contract is generally obligated to pay the protection “seller” an upfront, periodic, or daily stream of payments over the term of the contract provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, a Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if a Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront, periodic, or daily payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. The Fund’s obligations under a credit default swap agreement will be accrued daily (offset against any amounts owed to the Fund). In connection with credit default swaps in which a Fund is the buyer, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into certain offsetting positions, with a value at least equal to the Fund’s exposure (any accrued but unpaid net amounts owed by the Fund to any counterparty), on amarked-to-market basis. In connection with credit default swaps in which a Fund is the seller, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the Fund). Such segregation or “earmarking” will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will limit any potential leveraging of the Fund’s portfolio. Such segregation or “earmarking” will not limit the Fund’s exposure to loss.
As of December 31, 2018, the Fund entered into OTC and centrally cleared credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit risk). The monthly average gross notional amount for credit default swaps was $0.3 million for the year ended December 31, 2018.
Summary of Derivative Instruments
The following is a summary of the effect of derivative instruments on the Consolidated Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Asset Derivatives | Liability Derivatives | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value | Statement of Assets and Liabilities Location | Total Fair Value | ||||||||
Equity Risk | ||||||||||||
Futures Contracts | Receivable for variation margin on futures contracts | $ | 288,189 | Payable for variation margin on futures contracts | $ | 1,025,790 | ||||||
Contracts for differences | Receivable for variation margin on contracts for differences | 197,043 | Payable for variation margin on contracts for differences | 22,527 | ||||||||
Options Contracts | Written Options | 2,632,980 | ||||||||||
Total Return Swap Agreements | Unrealized appreciation on swap agreements | 159,512 | Unrealized depreciation on swap agreements | — | ||||||||
Credit Risk | ||||||||||||
Centrally Cleared Credit Default Swap Agreements | Receivable for variation margin on swap agreements* | — | Payable for variation margin on swap agreements* | 17,808 | ||||||||
Interest Rate Risk | ||||||||||||
Futures Contracts | Receivable for variation margin on futures contracts* | 422,682 | Payable for variation margin on futures contracts* | 37,811 | ||||||||
Interest Rate Swap Agreements | Unrealized appreciation on swap agreements* | 643,387 | Unrealized depreciation on swap agreements* | 270,213 | ||||||||
Swaption Contracts | Written Options | 104,357 | ||||||||||
Foreign Exchange Risk | ||||||||||||
Forward Currency Contracts | Unrealized appreciation on forward currency contracts | 275,258 | Unrealized depreciation on forward currency contracts | 296,918 |
* | Includes cumulative appreciation/depreciation of futures contracts and contracts for differences and cumulative unrealized gain (loss) on these swap agreements as reported in the Consolidated Schedule of Portfolio Investments. Only current day’s variation margin for both futures contracts and these centrally cleared swap agreements are reported within the Consolidated Statement of Assets and Liabilities. |
29
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
The following is a summary of the effect of derivative instruments on the Consolidated Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Net Realized Gains/(Losses) | |||||||||||||||||||||||||
on Derivatives Recognized as a Result from Operations | |||||||||||||||||||||||||
Net Realized Gains/(Losses) on Futures Contracts | Net Realized Gains/(Losses) on Contracts for differences | Net Realized Gains/(Losses) on Swap Agreements | Net Realized Option Contracts | Net Realized Gains/(Losses) on Forward Currency Contracts | |||||||||||||||||||||
Equity Risk | $ | 175,417 | 25,530 | $ | 580,832 | $ | 455,321 | $ | — | ||||||||||||||||
Credit Risk | — | — | (28,151 | ) | — | — | |||||||||||||||||||
Interest Rate Risk | (744,051 | ) | — | (25,545 | ) | (181,404 | ) | — | |||||||||||||||||
Foreign Exchange Rate Risk | — | — | (539,235 | ) | 173,956 | 700,813 | |||||||||||||||||||
Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized as a Result from Operations | |||||||||||||||||||||||||
Change in Net Unrealized Appreciation/ Depreciation on Futures Contracts | Change in Net Appreciation/ | Change in Net Agreements | Change in Net Option Contracts | Change in Net Unrealized Appreciation/ Depreciation on Forward Currency Contracts | |||||||||||||||||||||
Equity Risk | $ | (1,052,757 | ) | 174,516 | $ | (661,008 | ) | $ | (1,142,413 | ) | $ | — | |||||||||||||
Credit Risk | — | — | 5,125 | — | — | ||||||||||||||||||||
Interest Rate Risk | 498,208 | — | 293,470 | (203,293 | ) | — | |||||||||||||||||||
Foreign Exchange Rate Risk | — | — | (200,423 | ) | (92,408 | ) | (276,672 | ) |
The Fund is generally subject to master netting agreements that allow for amounts owed between the Fund and the counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The master netting agreements do not apply to amounts owed to/from different counterparties. The amounts shown in the Consolidated Statement of Assets and Liabilities do not take into consideration the effects of legally enforceable master netting agreements. The table below presents the gross and net amounts of these assets and liabilities with any offsets to reflect the Fund’s ability to transact net amounts in accordance with the master netting agreements at December 31, 2018. For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to master netting arrangements in the Consolidated Statement of Assets and Liabilities. This table also summarizes the fair values of derivative instruments on the Fund’s Consolidated Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018.
As of December 31, 2018, the Fund’s derivative assets and liabilities by type were as follows:
Assets | Liabilities | |||||||||
Derivative Financial Instruments: | ||||||||||
Forward currency contracts | $ | 275,258 | $ | 296,918 | ||||||
Futures contracts | — | 53,522 | ||||||||
Contracts for differences | — | 1,320 | ||||||||
Option contracts | — | 2,737,337 | ||||||||
Swap agreements | 234,630 | 32,216 | ||||||||
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Total derivative assets and liabilities in the Consolidated Statement of Assets and Liabilities | 509,888 | 3,121,313 | ||||||||
Derivatives not subject to a master netting agreement or similar agreement (“MNA”) | (75,118 | ) | (101,223 | ) | ||||||
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Total assets and liabilities subject to a MNA | $ | 434,770 | $ | 3,020,090 | ||||||
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The following table presents the Fund’s derivative assets by counterparty net of amounts available for offset under MNA and net of the related collateral received by the Fund as of December 31, 2018:
Counterparty | Derivative Assets Subject to a MNA by Counterparty | Derivatives for Offset | Non-cash Received* | Cash Received* | Net Amount of Derivative Assets | ||||||||||||||||||||
BNP Paribas SA | $ | 140,331 | $ | (74,191 | ) | $ | — | $ | (66,140 | ) | $ | — | |||||||||||||
Citigroup | 41,094 | (41,094 | ) | — | — | — | |||||||||||||||||||
Goldman Sachs | 60,996 | (60,996 | ) | — | — | — | |||||||||||||||||||
JPMorgan Chase | 127,155 | (127,155 | ) | — | — | — | |||||||||||||||||||
Morgan Stanley | 65,075 | (65,075 | ) | — | — | — | |||||||||||||||||||
UBS Warburg | 119 | (119 | ) | — | — | — | |||||||||||||||||||
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Total | $ | 434,770 | $ | (368,630 | ) | $ | — | $ | (66,140 | ) | $ | — | |||||||||||||
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30
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
The following table presents the Fund’s derivative liabilities by counterparty net of amounts available for offset under MNA and net of the related collateral received by the Fund as of December 31, 2018:
Counterparty | Derivative Liabilities by Counterparty | Derivatives Available for Offset | Non-cash Pledged* | Cash Pledged* | Net Amount of Derivative Liabilities | ||||||||||||||||||||
Bank of America | $ | 174,079 | $ | — | $ | — | $ | (174,079 | ) | $ | — | ||||||||||||||
Barclays Bank | 243,625 | — | — | — | 243,625 | ||||||||||||||||||||
BNP Paribas SA | 74,191 | (74,191 | ) | — | — | — | |||||||||||||||||||
Citigroup | 205,975 | (41,094 | ) | — | — | 164,881 | |||||||||||||||||||
Credit Suisse First Boston | 64,176 | — | — | — | 64,176 | ||||||||||||||||||||
Deutsche Bank | 36,968 | — | — | — | 36,968 | ||||||||||||||||||||
Goldman Sachs | 163,225 | (60,996 | ) | — | — | 102,229 | |||||||||||||||||||
JPMorgan Chase | 228,644 | (127,155 | ) | — | — | 101,489 | |||||||||||||||||||
Morgan Stanley | 462,889 | (65,075 | ) | — | — | 397,814 | |||||||||||||||||||
Nomura | 139,089 | — | — | — | 139,089 | ||||||||||||||||||||
UBS Warburg | 1,227,229 | (119 | ) | — | — | 1,227,110 | |||||||||||||||||||
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Total | $ | 3,020,090 | $ | (368,630 | ) | $ | — | $ | (174,079 | ) | $ | 2,477,381 | |||||||||||||
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* | The actual collateral received or pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Consolidated Statement of Assets and Liabilities. |
Recent Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2017-08 “Premium Amortization on Purchased Callable Debt Securities” (“ASU2017-08”), which shortens the premium amortization period for purchasednon-contingently callable debt securities. ASU2017-08 specifies that the premium amortization period ends at the earliest call date for purchasednon-contingently callable debt securities. ASU2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management does not believe that adoption of ASU2017-08 will materially impact the Fund’s financial statements.
In August 2018, FASB issued ASUNo. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Consolidated Statement of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Consolidated Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (3,178,036 | ) | ||
From net realized gains | — | ||||
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Change in net assets resulting from distributions to shareholders | $ | (3,178,036 | ) | ||
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3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has retained an independent money management organization (the “Subadviser”), to make investment decisions on behalf of the Fund. Pursuant to a subadvisory agreement with BlackRock Investment Management, LLC (“BlackRock Investment”), BlackRock Investment provides investment advisory services as the Subadviser for the Fund subject to the general supervision of the Trustees and the Manager. The Manager is entitled to a fee, computed daily and paid monthly, based on the average daily net assets of the Fund. Expenses incurred by the Fund for investment advisory and management services are reflected on the Consolidated Statement of Operations as “Manager fees.” For its services, the Subadviser is entitled to a fee payable by the Manager. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2020.
For the year ended December 31, 2018, the annual rate paid to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL MVP BlackRock Global Strategy Plus Fund | 0.10 | % | 0.15 | % | ||||||
AZL BlackRock Global Allocation Fund | 0.75 | % | 1.19 | % |
31
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Consolidated Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no contractual reimbursements subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Consolidated Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | |||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 228,562,361 | $ | 7,733,243 | $ | (19,949,641 | ) | $ | (783,761 | ) | $ | (5,555,830 | ) | $ | 210,006,372 | 19,830,630 | $ | 4,741,531 | ||||||||||||||||||||||
AZL MSCI Global Equity Index Fund | 146,445,694 | 2,537,199 | (14,125,506 | ) | 3,242,260 | (17,134,713 | ) | 120,964,934 | 12,060,312 | 2,435,800 | ||||||||||||||||||||||||||||||
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$ | 375,008,055 | $ | 10,270,442 | $ | (34,075,147 | ) | $ | 2,458,499 | $ | (22,690,543 | ) | $ | 330,971,306 | 31,890,942 | $ | 7,177,331 | ||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the Securities and Exchange Commission (“SEC” or the “Commission”). The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Consolidated Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a Trust-wide asset-based fee, which is based on the following schedule: 0.05% of daily average net assets on the first $4 billion, 0.04% of daily average net assets on the next $2 billion, 0.02% of daily average net assets on the next $2 billion and 0.01% of daily average net assets over $8 billion. The overall Trust-wide fees are accrued daily and paid monthly and are subject to a minimum annual fee. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair value services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Consolidated Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives anannual 12b-1 fee in the maximum amount of 0.25% of the average daily net assets attributable of Class 2 shares, plus a Trust-wide annual fee of $42,500 paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $22,213 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Fund of Funds Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). Equity securities are valued at the last quoted sale price or, if there is no sale, the last quoted bid price is used for long securities and the last quoted ask price is used for securities sold short. Securities listed on NASDAQ Stock Market, Inc. (“NASDAQ”) are valued at the official closing
32
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
price as reported by NASDAQ. In each of these situations, valuations are typically categorized as a Level 1 in the fair value hierarchy. Investments inopen-end investment companies are valued at their respective net asset value as reported by such companies and are typically categorized as Level 1 in the fair value hierarchy.
Debt and other fixed income securities are generally valued at an evaluated bid price provided by an independent pricing source approved by the Trustees. To value debt securities, pricing services may use various pricing techniques which take into account appropriate factors such as market activity, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes. Short-term securities of sufficient credit quality with sixty days or less remaining until maturity may be valued at amortized cost, which approximates fair value. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
Options are generally valued at the average of the closing bid and ask quotations on the principal exchange on which the option is traded, which are then typically categorized as Level 1 in the fair value hierarchy. The Fund generally values index options at the average of the closing bid and ask quotations on the principal exchange on which the option is traded and are typically categorized as Level 1 in the fair value hierarchy. For options where market quotations are not readily available, fair value procedures as described below may be applied.
Forward currency contracts are generally valued at the forward foreign currency exchange rate as of the close of the NYSE and are typically categorized as Level 2 in the fair value hierarchy.
Non exchange-traded derivatives, such as swaps and certain options, are generally valued by approved independent pricing services utilizing techniques which take into account factors such as yield, quality, maturity, type of issue, trading characteristics, call features, credit ratings and other data, as well as broker quotes and are typically categorized as Level 2 in the fair value hierarchy.
Other assets and securities for which market quotations are not readily available, or are deemed unreliable are valued at fair value as determined in good faith by the Trustees or persons acting on the behalf of the Trustees. Fair value pricing may be used for significant events such as securities whose trading has been suspended, whose price has become stale or for which there is no currently available price at the close of the NYSE. Depending on the source and relative significance of valuation inputs, these instruments may be classified as Level 2 or Level 3 in the fair value hierarchy. The Fund utilizes a pricing service to assist in determining the fair value of securities when certain significant events occur that may affect the value of foreign securities.
In accordance with procedures adopted by the Trustees, fair value pricing may be used if events materially affecting the value of foreign securities occur between the time when the exchange on which they are traded closes and the time when the Fund’s net asset value is calculated. Management identifies possible fluctuation in international securities by monitoring the increase or decrease in the value of a designated benchmark index. In the event of an increase or decrease greater than predetermined levels, the Fund may use a systematic valuation model provided by an independent third party to fair value its international equity securities which are then typically categorized as Level 2 in the fair value hierarchy.
Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Common Stocks+ | ||||||||||||||||||||
Aerospace & Defense | $ | 2,031,649 | $ | 2,088,707 | $ | — | $ | 4,120,356 | ||||||||||||
Air Freight & Logistics | 106,626 | — | — | 106,626 | ||||||||||||||||
Airlines | 2,658,519 | 2,031,952 | — | 4,690,471 | ||||||||||||||||
Auto Components | 17,323 | 3,925,977 | — | 3,943,300 | ||||||||||||||||
Automobiles | 27,329 | 3,989,331 | — | 4,016,660 | ||||||||||||||||
Banks | 8,018,735 | 2,965,679 | — | 10,984,414 | ||||||||||||||||
Beverages | 191,454 | 1,886,825 | — | 2,078,279 | ||||||||||||||||
Biotechnology | 2,857,069 | — | — | 2,857,069 | ||||||||||||||||
Building Products | 255,987 | 684,101 | — | 940,088 | ||||||||||||||||
Capital Markets | 3,190,711 | — | — | 3,190,711 | ||||||||||||||||
Chemicals | 4,205,291 | 5,586,533 | — | 9,791,824 | ||||||||||||||||
Commercial Services & Supplies | 16,997 | 9,804 | — | 26,801 | ||||||||||||||||
Communications Equipment | 116,688 | 71,571 | — | 188,259 | ||||||||||||||||
Construction & Engineering | — | 954,861 | — | 954,861 | ||||||||||||||||
Construction Materials | 7,048 | 197,830 | — | 204,878 | ||||||||||||||||
Consumer Finance | 67,379 | — | — | 67,379 | ||||||||||||||||
Containers & Packaging | 27,625 | — | — | 27,625 | ||||||||||||||||
Distributors | — | 65,430 | — | 65,430 | ||||||||||||||||
Diversified Consumer Services | 15,073 | — | — | 15,073 | ||||||||||||||||
Diversified Financial Services | 230,723 | 192,102 | — | 422,825 | ||||||||||||||||
Diversified Telecommunication Services | 1,702,297 | 2,829,977 | — | 4,532,274 | ||||||||||||||||
Electric Utilities | 3,051,079 | 1,507,588 | — | 4,558,667 | ||||||||||||||||
Electrical Equipment | 110,214 | 1,584,987 | — | 1,695,201 | ||||||||||||||||
Electronic Equipment, Instruments & Components | 44,922 | 1,765,826 | — | 1,810,748 | ||||||||||||||||
Energy Equipment & Services | 339,142 | — | — | 339,142 | ||||||||||||||||
Entertainment | 805,233 | 121,994 | — | 927,227 | ||||||||||||||||
Equity Real Estate Investment Trusts | 787,594 | 698,053 | — | 1,485,647 | ||||||||||||||||
Food & Staples Retailing | 191,684 | 229,943 | — | 421,627 | ||||||||||||||||
Food Products | 123,016 | 7,944,187 | — | 8,067,203 | ||||||||||||||||
Gas Utilities | — | 1,354,487 | — | 1,354,487 | ||||||||||||||||
Health Care Equipment & Supplies | 491,681 | 5,271,826 | — | 5,763,507 | ||||||||||||||||
Health Care Providers & Services | 9,740,463 | 3,468,623 | — | 13,209,086 |
33
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Health Care Technology | $ | — | $ | 340,248 | $ | — | $ | 340,248 | ||||||||||||
Hotels, Restaurants & Leisure | 2,250,768 | 1,895,032 | — | 4,145,800 | ||||||||||||||||
Household Durables | — | 300,112 | — | 300,112 | ||||||||||||||||
Household Products | 3,798,369 | 19,387 | — | 3,817,756 | ||||||||||||||||
Independent Power and Renewable Electricity Producers | 799,652 | — | — | 799,652 | ||||||||||||||||
Industrial Conglomerates | 26,669 | 339,604 | — | 366,273 | ||||||||||||||||
Insurance | 3,661,856 | 893,701 | — | 4,555,557 | ||||||||||||||||
Interactive Media & Services | 7,884,979 | 2,029,647 | — | 9,914,626 | ||||||||||||||||
Internet & Direct Marketing Retail | 4,384,047 | 81,384 | — | 4,465,431 | ||||||||||||||||
IT Services | 2,314,471 | 66,156 | — | 2,380,627 | ||||||||||||||||
Life Sciences Tools & Services | 197,881 | — | — | 197,881 | ||||||||||||||||
Machinery | 946,537 | 1,587,555 | — | 2,534,092 | ||||||||||||||||
Media | 9,846,324 | 1,131,800 | — | 10,978,124 | ||||||||||||||||
Metals & Mining | 1,193,586 | 715,494 | — | 1,909,080 | ||||||||||||||||
Multiline Retail | 1,673,457 | — | — | 1,673,457 | ||||||||||||||||
Multi-Utilities | 795,356 | 138,513 | — | 933,869 | ||||||||||||||||
Oil, Gas & Consumable Fuels | 15,687,447 | 6,296,919 | — | 21,984,366 | ||||||||||||||||
Paper & Forest Products | 5,444 | 2,752 | 206,782 | 214,978 | ||||||||||||||||
Personal Products | 567,421 | 69,631 | — | 637,052 | ||||||||||||||||
Pharmaceuticals | 8,426,990 | 3,214,878 | — | 11,641,868 | ||||||||||||||||
Professional Services | — | 11,033 | — | 11,033 | ||||||||||||||||
Real Estate Management & Development | 67,523 | 4,196,345 | — | 4,263,868 | ||||||||||||||||
Road & Rail | 172,976 | 2,180,405 | — | 2,353,381 | ||||||||||||||||
Semiconductors & Semiconductor Equipment | 1,535,605 | 958,634 | — | 2,494,239 | ||||||||||||||||
Software | 8,529,009 | 59,006 | 3,081,884 | 11,669,899 | ||||||||||||||||
Specialty Retail | 331,811 | 903,233 | — | 1,235,044 | ||||||||||||||||
Technology Hardware, Storage & Peripherals | 6,847,897 | 53,082 | — | 6,900,979 | ||||||||||||||||
Textiles, Apparel & Luxury Goods | 61,298 | 74,748 | — | 136,046 | ||||||||||||||||
Thrifts & Mortgage Finance | — | 1,199,360 | — | 1,199,360 | ||||||||||||||||
Tobacco | 3,283,107 | 1,067,028 | — | 4,350,135 | ||||||||||||||||
Trading Companies & Distributors | — | 1,550 | — | 1,550 | ||||||||||||||||
Transportation Infrastructure | — | 326,492 | — | 326,492 | ||||||||||||||||
Wireless Telecommunication Services | 46,014 | 3,996,815 | — | 4,042,829 | ||||||||||||||||
Preferred Stocks | ||||||||||||||||||||
Banks | 533,004 | 55,500 | — | 588,504 | ||||||||||||||||
Chemicals | 4,450 | — | — | 4,450 | ||||||||||||||||
Consumer Finance | 364,457 | — | — | 364,457 | ||||||||||||||||
Health Care Providers & Services | — | — | 352,616 | 352,616 | ||||||||||||||||
Software | — | — | 628,410 | 628,410 | ||||||||||||||||
Technology Hardware, Storage & Peripherals | — | 24,933 | — | 24,933 | ||||||||||||||||
Convertible Preferred Stocks | — | 1,335,100 | — | 1,335,100 | ||||||||||||||||
Private Placements | ||||||||||||||||||||
Household Durables | — | — | — | # | — | |||||||||||||||
Internet Software & Services | — | — | 386,218 | 386,218 | ||||||||||||||||
Convertible Bonds | — | 698,215 | — | 698,215 | ||||||||||||||||
Bank Loans | — | 634,064 | — | 634,064 | ||||||||||||||||
Corporate Bonds+ | — | 13,581,390 | — | 13,581,390 | ||||||||||||||||
Foreign Bonds+ | — | 16,180,335 | — | 16,180,335 | ||||||||||||||||
Yankee Dollars+ | ||||||||||||||||||||
Paper & Forest Products | — | — | 794,040 | 794,040 | ||||||||||||||||
Other Yankee Dollars+ | — | 5,899,222 | — | 5,899,222 | ||||||||||||||||
U.S. Treasury Obligations | — | 103,437,943 | — | 103,437,943 | ||||||||||||||||
Purchased Options | — | 880,162 | — | 880,162 | ||||||||||||||||
Purchased Swaptions | — | 5,160 | — | 5,160 |
34
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Exchange Traded Fund | $ | 4,745,465 | $ | — | $ | — | $ | 4,745,465 | ||||||||||||
Short-Term Securities Held as Collateral for Securities on Loan | — | 11,159,870 | — | 11,159,870 | ||||||||||||||||
Affiliated Investment Company | 330,971,306 | — | — | 330,971,306 | ||||||||||||||||
Unaffiliated Investment Company | 2,230,455 | — | — | 2,230,455 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investment Securities | $ | 465,615,182 | $ | 239,470,632 | $ | 5,449,950 | $ | 710,535,764 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Securities Sold Short | (128,815 | ) | (658,602 | ) | — | (787,417 | ) | |||||||||||||
Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (352,728 | ) | — | — | (352,728 | ) | ||||||||||||||
Contracts for Differences | 174,516 | — | — | 174,516 | ||||||||||||||||
Written Options | (14,165 | ) | (2,618,815 | ) | — | (2,632,980 | ) | |||||||||||||
Written Swaptions | — | (104,357 | ) | — | (104,357 | ) | ||||||||||||||
Forward Currency Contracts | — | (21,660 | ) | — | (21,660 | ) | ||||||||||||||
Centrally Cleared Credit Default Swaps | — | (17,808 | ) | — | (17,808 | ) | ||||||||||||||
Centrally Cleared Interest Rate Swaps | — | 373,174 | — | 373,174 | ||||||||||||||||
Over-the-Counter Total Return Swaps | — | 159,512 | — | 159,512 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Investments | $ | 465,293,990 | $ | 236,582,076 | $ | 5,449,950 | $ | 707,326,016 | ||||||||||||
|
|
|
|
|
|
|
|
+ | For detailed industry descriptions, see the accompanying Consolidated Schedule of Portfolio Investments. |
# | Represents the interest in securities that were determined to have a value of zero at December 31, 2018. |
* | Other Financial Instruments would include any derivative instruments, such as futures contracts, contracts for differences, written options, forward currency contracts and swaps. These investments are generally recorded in the financial statements at the unrealized gain or loss on the investment except futures contracts, contracts for differences and centrally cleared interest rate swaps which are presented at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 557,938,484 | $ | 600,522,183 |
For the year ended December 31, 2018, purchases and sales of long-term U.S. government securities were as follows:
Purchases | Sales | |||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 342,903,719 | $ | 321,830,248 |
6. Restricted Securities
A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933 (the “1933 Act”) or pursuant to the resale limitations provided by Rule 144A under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Whether a restricted security is illiquid is determined pursuant to guidelines established by the Trustees. Not all restricted securities are considered illiquid. The illiquid restricted securities held as of December 31, 2018 are identified below.
Security | Acquisition Date(a) | Acquisition Cost | Shares or Principal Amount | Fair Value | Percentage of Net Assets | ||||||||||||||||||||
Domo, Inc., Class B | 4/1/15 | $ | 1,218,215 | $ | 9,632 | $ | 189,076 | 0.03 | % | ||||||||||||||||
Fieldwood Energy LLC | 3/13/18 | 81,305 | 3,485 | 132,430 | 0.02 | % | |||||||||||||||||||
Fieldwood Energy LLC | 4/25/18 | 247,017 | 941 | 35,758 | 0.00 | % | |||||||||||||||||||
Grand Rounds, Inc., Series C | 3/31/15 | 399,608 | 143,925 | 352,616 | 0.05 | % | |||||||||||||||||||
Inversiones Alsacia SA, 8.00%, 12/31/18 | 12/22/14 | 420,057 | 517,099 | 5,171 | 0.00 | % | |||||||||||||||||||
Lookout, Inc. | 3/4/15 | 63,364 | 5,547 | 111 | 0.00 | % | |||||||||||||||||||
Lookout, Inc. Preferred Shares, Series F | 9/19/14 | 730,222 | 63,925 | 386,107 | 0.05 | % | |||||||||||||||||||
Palantir Technologies, Inc., Series I | 3/27/14 | 712,042 | 116,157 | 628,409 | 0.09 | % | |||||||||||||||||||
Quintis Pty, Ltd. | 10/25/18 | 316,328 | 386,370 | 206,782 | 0.03 | % | |||||||||||||||||||
Uber Technologies, Inc. | 3/21/14 | 1,063,120 | 68,532 | 3,081,884 | 0.41 | % |
(a) | Acquisition date represents the initial purchase date of the security. |
35
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
7. Investment Risks
Bank Loan Risk: There are a number of risks associated with an investment in bank loans including credit risk, interest rate risk, liquidity risk and prepayment risk. Lack of an active trading market, restrictions on resale, irregular trading activity, wide bid/ask spreads and extended trade settlement periods may impair the Fund’s ability to sell bank loans within its desired time frame or at an acceptable price and its ability to accurately value existing and prospective investments. Extended trade settlement periods may result in cash not being immediately available to the Fund. As a result, the Fund may have to sell other investments or engage in borrowing transactions to raise cash to meet its obligations. The risk of holding bank loans is also directly tied to the risk of insolvency or bankruptcy of the issuing banks. These risks could cause the Fund to lose income or principal on a particular investment, which in turn could affect the Fund’s returns. The value of bank loans can be affected by and sensitive to changes in government regulation and to economic downturns in the United States and abroad. Bank loans generally are floating rate loans, which are subject to interest rate risk as the interest paid on the floating rate loans adjusts periodically based on changes in widely accepted reference rates.
Commodities-Related Investment Risk: Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or sectors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments. The U.S. Commodities Futures Trading Commission has proposed changes to certain of its rules governing investment in commodities by mutual funds, such as the Fund. In the event these changes are adopted, or if there are changes in the tax treatment of the Fund’s direct and indirect investments in commodities, the Fund may be unable to obtain exposure to commodity markets, or may be limited in the extent to which or manner in which it can obtain such exposure.
Derivatives Risk: The Fund may invest in derivatives as a principal strategy. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The counterparty to a derivatives contract could default. As required by applicable law, a Fund that invests in derivatives segregates cash or liquid securities, or both, to the extent that its obligations under the instrument are not covered through ownership of the underlying security, financial instrument, or currency.
Emerging Markets Risk: Emerging markets may have less developed trading markets and exchanges which may make it more difficult to sell securities at an acceptable price and their prices may be more volatile than securities of companies in more developed markets. Settlements of trades may be subject to greater delays so that the Fund may not receive the proceeds of a sale of a security on a timely basis. Emerging countries may also have less developed legal and accounting systems and investments may be subject to greater risks of government restrictions, nationalization, or confiscation.
Foreign Securities and Currencies Risk: Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of domestic issuers. Such risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those securities.
Security Quality Risk (also known as “High Yield Risk”): The Fund may invest in high yield, high risk debt securities and unrated securities of similar credit quality (commonly known as “junk bonds”) and may be subject to greater levels of credit and liquidity risk than funds that do not invest in such securities. These securities are considered predominately speculative with respect to the issuer’s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for these securities and reduce the Fund’s ability to sell these securities (liquidity risk). If the issuer of a security is in default with respect to interest or principal payments, the Fund may lose the value of its entire investment.
Short Sale Risk: The Fund may engage in short sales, which are transactions in which the Fund sells securities borrowed from others with the expectation that the price of the security will fall before the Fund must purchase the security to return it to the lender. The Fund may make short sales of securities, either as a hedge against potential declines in value of a portfolio security or to realize appreciation when a security that the Fund does not own declines in value. Because making short sales in securities that it does not own exposes the Fund to the risks associated with those securities, such short sales involve speculative exposure risk. The Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the security sold short. The Fund will realize a gain if the security declines in price between those dates. As a result, if the Fund makes short sales in securities that increase in value, it will likely underperform similar funds that do not make short sales in securities they do not own. There can be no assurance that the Fund will be able to close out a short sale position at any particular time or at an acceptable price. Although the Fund’s gain is limited to the amount at which it sold a security short, its potential loss is limited only by the maximum attainable price of the security, less the price at which the security was sold. The Fund may also pay transaction costs and borrowing fees in connection with short sales.
8. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $702,389,267. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 36,575,562 | ||
Unrealized (depreciation) | (32,951,653 | ) | ||
|
| |||
Net unrealized appreciation/(depreciation) | $ | 3,623,909 | ||
|
|
36
AZL MVP BlackRock Global Strategy Plus Fund
Notes to the Financial Statements
December 31, 2018
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 15,782,716 | $ | 101,649 | $ | 15,884,365 |
(a) | Total distributions paid may differ from the Consolidated Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 3,178,036 | $ | — | $ | 3,178,036 |
(a) | Total distributions paid may differ from the Consolidated Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Depreciation(a) | Total (Deficit) | |||||||||||||||||||||
AZL MVP BlackRock Global Strategy Plus Fund | $ | 19,848,933 | $ | 41,301,818 | $ | — | $ | 3,425,896 | $ | 64,576,647 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on foreign currency gains or losses, wash sales, mark-to-market of passive foreign investment companies and straddles. |
9. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Investment Adviser representing ownership in excess of 85% of the Fund. As of December 31, 2018, the Fund had a controlling interest (in excess of 50%) in the AZL MSCI Global Equity Index Fund, which is affiliated with the Investment
Adviser.
10. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP BlackRock Global Strategy Plus Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP BlackRock Global Strategy Plus Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 24.18% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $4,177,181.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $101,649.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
40
Approval of Investment Advisory Agreement — October 23, 2018 (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1)The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
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The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2)The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3)The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
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Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP DFA Multi-Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP DFA Multi-Strategy Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP DFA Multi-Strategy Fund.
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What factors affected the Fund’s performance for year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP DFA Multi-Strategy Fund (the “Fund”) returned-6.22%. That compared to a-4.38%, 0.01% and a-2.26% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Moderate Composite Index1, respectively.
The Fund is a fund of funds that pursues broad diversification across three equitysub-portfolios and one fixed incomesub-portfolio. The four underlying portfolios are managed by Dimensional Fund Advisors. Generally, the Fund allocates 50% to 70% of its assets to the underlying equity funds and between 30% and 50% to the underlying fixed-income fund. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund and market volatility.*
U.S. equities sustained a brief period of volatility during the first quarter, but still managed to post healthy gains for the first three quarters of the year. Markets gained on strong economic data coupled with positive earnings growth. However, volatility increased significantly in the fourth quarter as investors became concerned with continued Federal Reserve Board (the Fed) rate hikes, political and economic uncertainty, and contentious trade negotiations. The S&P 500 Index returned-4.38% for the year, while the S&P 400 Index2 returned-11.08% and the S&P 600 Index3 returned-8.48%. Growth stocks sharply outperformed value stocks during the year, although this trend reversed during the fourth quarter.
International developed market equities, as measured by the MSCI EAFE Index (net)4, returned-13.79% for the year, underperforming U.S. equities in general. However, international developed market equities generally outperformed their U.S. counterparts during the volatile fourth quarter.
The U.S. bond market ended the year flat, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining just 0.01%, although this return masks a good deal of activity in fixed income markets during the12-month period. Treasury yields rose during the first three quarters, then the yield curve flattened dramatically during the fourth quarter, leaving the intermediate part of the curve inverted. Investment grade corporate spreads widened sharply during the year, as investors became more risk averse, especially during the fourth quarter. The Fed hiked rates four times during the year.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. The Fund’s strategic allocation to international equities detracted, as international equities underperformed U.S. equities. The Fund further underperformed due to its strategic allocation to U.S.mid- andsmall-cap equities, which underperformed U.S.large-cap equities during 2018, as well as its bias toward value stocks, which generally underperformed growth stocks.*
Within the Fund’s fixed income holdings, the Fund’s shorter duration positioning contributed to returns relative to the Bloomberg Barclays U.S. Aggregate Bond Index, as longer-dated fixed income securities underperformed their shorter-dated counterparts. Compared to the Fund’s fixed income benchmark, the Fund benefited by holding currency-hedged exposure tonon-US bonds.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the very end of the year, and after stocks had already declined significantly, the MVP risk management process reduced equity exposure. During the short period remaining in the year, this reduced equity exposure detracted from relative performance as stocks rallied in the final days of the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL® MVP DFA Multi-Strategy Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of DFA Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||
1 | 3 | Inception | ||||||||||
Year | Year | (4/27/15) | ||||||||||
AZL®MVP DFA Multi-Strategy Fund | -6.22 | % | 4.80 | % | 2.45 | % | ||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 7.01 | % | ||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 1.32 | % | ||||||
Moderate Composite Index | -2.26 | % | 6.52 | % | 4.90 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL®MVP DFA Multi-Strategy Fund | 1.16 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager voluntarily reduced the management fee to 0.10% on all assets. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.15% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.30%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Fund and the Moderate Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (60%) S&P 500 and (40%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP DFA Multi-Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP DFA Multi-Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 1,000.00 | $ | 929.70 | $ | 0.73 | 0.15 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 1,000.00 | $ | 1,024.45 | $ | 0.77 | 0.15 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Domestic Equity Funds | 43.4 | % | |||
Fixed Income Funds | 39.8 | ||||
International Equity Funds | 11.9 | ||||
Money Markets | 0.1 | ||||
|
| ||||
Total Investment Securities | 95.2 | ||||
Net other assets (liabilities) | 4.8 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MVP DFA Multi-Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.1%): | ||||||||
Domestic Equity Funds (43.4%): | ||||||||
2,599,573 | AZL DFA U.S. Core Equity Fund | $ | 29,427,162 | |||||
798,811 | AZL DFA U.S. Small Cap Fund | 8,139,889 | ||||||
|
| |||||||
37,567,051 | ||||||||
|
| |||||||
Fixed Income Funds (39.8%): | ||||||||
3,438,436 | AZL DFA Five-Year Global Fixed Income Fund | 34,590,662 | ||||||
|
| |||||||
International Equity Funds (11.9%): | ||||||||
1,115,771 | AZL DFA International Core Equity Fund | 10,265,090 | ||||||
|
| |||||||
Total Affiliated Investment Companies (Cost $82,195,222) | 82,422,803 | |||||||
|
|
Shares | Fair Value | |||||||
Unaffiliated Investment Company (0.1%): | ||||||||
Money Markets (0.1%): | ||||||||
123,391 | Dreyfus Treasury Securities Cash Management Fund, Institutional Shares, 2.20% | $ | 123,391 | |||||
|
| |||||||
Total Unaffiliated Investment Company (Cost $123,391) | 123,391 | |||||||
|
| |||||||
Total Investment Securities (Cost $82,318,613) — 95.2%(a) | 82,546,194 | |||||||
Net other assets (liabilities) — 4.8% | 4,054,389 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 86,600,583 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $4,122,519 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Short Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 Index E-Mini March Futures (U.S. Dollar) | 3/15/19 | 32 | $ | (4,008,320 | ) | $ | (127,227 | ) | ||||||||
|
| |||||||||||||||
$ | (127,227 | ) | ||||||||||||||
|
|
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
U.S. Treasury 10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 13 | $ | 1,586,203 | $ | 37,663 | ||||||||||
|
| |||||||||||||||
$ | 37,663 | |||||||||||||||
|
| |||||||||||||||
Total Net Futures Contracts | $ | (89,564 | ) | |||||||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP DFA Multi-Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in non-affiliates, at cost | $ | 123,391 | |||
Investments in affiliates, at cost | 82,195,222 | ||||
|
| ||||
Investments in non-affiliates, at value | $ | 123,391 | |||
Investments in affiliates, at value | 82,422,803 | ||||
Segregated cash for collateral | 4,122,519 | ||||
Interest and dividends receivable | 7,530 | ||||
Receivable for capital shares issued | 7,732 | ||||
Receivable for variation margin on futures contracts | 109 | ||||
Prepaid expenses | 976 | ||||
|
| ||||
Total Assets | 86,685,060 | ||||
|
| ||||
Liabilities: | |||||
Payable for affiliated investments purchased | 61,750 | ||||
Payable for capital shares redeemed | 3,879 | ||||
Manager fees payable | 8,194 | ||||
Administration fees payable | 5,820 | ||||
Custodian fees payable | 295 | ||||
Administrative and compliance services fees payable | 381 | ||||
Transfer agent fees payable | 539 | ||||
Trustee fees payable | 146 | ||||
Other accrued liabilities | 3,473 | ||||
|
| ||||
Total Liabilities | 84,477 | ||||
|
| ||||
Net Assets | $ | 86,600,583 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 84,364,798 | |||
Total distributable earnings | 2,235,785 | ||||
|
| ||||
Net Assets | $ | 86,600,583 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 8,131,555 | ||||
Net Asset Value (offering and redemption price per share) | $ | 10.65 | |||
|
|
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 842,795 | |||
Interest | 74,198 | ||||
Dividends from non-affiliates | 1,630 | ||||
|
| ||||
Total Investment Income | 918,623 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 172,762 | ||||
Administration fees | 53,759 | ||||
Custodian fees | 2,734 | ||||
Administrative and compliance services fees | 1,457 | ||||
Transfer agent fees | 5,408 | ||||
Trustee fees | 4,578 | ||||
Professional fees | 3,938 | ||||
Shareholder reports | 2,383 | ||||
Other expenses | 831 | ||||
|
| ||||
Total expenses before reductions | 247,850 | ||||
Less expenses voluntarily waived/reimbursed by the Manager | (86,379 | ) | |||
Less expense contractually waived/reimbursed by the Manager | (32,488 | ) | |||
|
| ||||
Net expenses | 128,983 | ||||
|
| ||||
Net Investment Income/(Loss) | 789,640 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 424,311 | ||||
Net realized gains distributions from affiliated underlying funds | 1,458,320 | ||||
Net realized gains/(losses) on futures contracts | (289,751 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (8,186,298 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (118,762 | ) | |||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (6,712,180 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (5,922,540 | ) | ||
|
|
See accompanying notes to the financial statements.
5
AZL MVP DFA Multi-Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 789,640 | $ | 628,282 | ||||||
Net realized gains/(losses) on investments | 1,592,880 | 1,251,994 | ||||||||
Change in unrealized appreciation/depreciation on investments | (8,305,060 | ) | 5,892,528 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (5,922,540 | ) | 7,772,804 | |||||||
|
|
|
| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (1,931,934 | ) | (347,210 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (1,931,934 | ) | (347,210 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 25,192,387 | 26,450,692 | ||||||||
Proceeds from dividends reinvested | 1,931,934 | 347,210 | ||||||||
Value of shares redeemed | (10,425,833 | ) | (9,792,574 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | 16,698,488 | 17,005,328 | ||||||||
|
|
|
| |||||||
Change in net assets | 8,844,014 | 24,430,922 | ||||||||
Net Assets:(a) | ||||||||||
Beginning of period | 77,756,569 | 53,325,647 | ||||||||
|
|
|
| |||||||
End of period | $ | 86,600,583 | $ | 77,756,569 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 2,154,661 | 2,416,058 | ||||||||
Dividends reinvested | 169,766 | 31,168 | ||||||||
Shares redeemed | (897,570 | ) | (891,700 | ) | ||||||
|
|
|
| |||||||
Change in shares | 1,426,857 | 1,555,526 | ||||||||
|
|
|
|
(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP DFA Multi-Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, 2018 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | April 27, 2015 to December 31, 2015(a) | |||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.60 | $ | 10.36 | $ | 9.50 | $ | 10.00 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Investment Activities: | ||||||||||||||||||||
Net Investment Income/(Loss) | 0.08 | 0.09 | 0.05 | (0.01 | ) | |||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.79 | ) | 1.21 | 0.81 | (0.49 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total from Investment Activities | (0.71 | ) | 1.30 | 0.86 | (0.50 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Distributions to Shareholders From: | ||||||||||||||||||||
Net Investment Income | (0.08 | ) | (0.05 | ) | — | — | ||||||||||||||
Net Realized Gains | (0.16 | ) | (0.01 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Dividends | (0.24 | ) | (0.06 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Net Asset Value, End of Period | $ | 10.65 | $ | 11.60 | $ | 10.36 | $ | 9.50 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total Return(b) | (6.22 | )% | 12.55 | % | 9.05 | % | (5.00 | )%(c) | ||||||||||||
Ratios to Average Net Assets/Supplemental Data: | ||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 86,601 | $ | 77,757 | $ | 53,326 | $ | 26,087 | ||||||||||||
Net Investment Income/(Loss)(d) | 0.91 | % | 0.96 | % | 0.71 | % | (0.14 | )% | ||||||||||||
Expenses Before Reductions*(d)(e) | 0.29 | % | 0.30 | % | 0.36 | % | 0.52 | % | ||||||||||||
Expenses Net of Reductions*(d) | 0.15 | % | 0.15 | % | 0.15 | % | 0.14 | % | ||||||||||||
Portfolio Turnover Rate | 16 | % | 15 | % | 15 | % | 2 | %(c) |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | Period from commencement of share class. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Not annualized for periods less than one year. |
(d) | Annualized for periods less than one year. |
(e) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP DFA Multi-Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund did not enter into any futures contracts. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $4.0 million and the monthly average notional amount for short contracts was $0.3 million. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 127,227 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 37,663 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk |
| |||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (289,751 | ) | $ | (164,690 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net Realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 45,928 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (277,996 | ) | ||
From net realized gains | (69,214 | ) | |||
|
| ||||
Change in net assets resulting from distributions to shareholders | $ | (347,210 | ) |
9
AZL MVP DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate* | Annual Expense Limit | |||||||||
AZL MVP DFA Multi-Strategy Fund | 0.20 | % | 0.15 | % |
* | The Manager voluntarily reduced the management fee to 0.10% on all assets. The manager reserves the right to increase the management fee to the amount shown in the table at any time. |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.”
At December 31, 2018, the contractual reimbursements subject to repayment by the Fund in subsequent years were as follows:
Expires 12/31/2019 | Expires 12/31/2020 | Expires 12/31/2021 | Total | ||||||||||||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 31,356 | $ | 30,855 | $ | 32,488 | $ | 94,699 |
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL DFA Emerging Markets Core Equity Fund | $ | 3,914,946 | $ | 1,567,198 | $ | (4,591,122 | ) | $ | 30,349 | $ | (921,371 | ) | $ | — | — | $ | 113,806 | $ | — | ||||||||||||||||||||||||||
AZL DFA Five-Year Global Fixed Income Fund | 29,516,665 | 9,328,237 | (4,473,678 | ) | (80,323 | ) | 299,761 | 34,590,662 | 3,438,436 | 202,078 | — | ||||||||||||||||||||||||||||||||||
AZL DFA International Core Equity Fund | 5,452,804 | 6,614,584 | (178,438 | ) | 13,311 | (1,637,171 | ) | 10,265,090 | 1,115,771 | 123,293 | 35,354 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Core Equity Fund | 27,079,624 | 9,382,864 | (3,323,974 | ) | 405,666 | (4,117,018 | ) | 29,427,162 | 2,599,573 | 353,823 | 933,687 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Small Cap Fund | 7,729,721 | 2,829,960 | (664,601 | ) | 55,308 | (1,810,499 | ) | 8,139,889 | 798,811 | 49,795 | 489,279 | ||||||||||||||||||||||||||||||||||
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$ | 73,693,760 | $ | 29,722,843 | $ | (13,231,813 | ) | $ | 424,311 | $ | (8,186,298 | ) | $ | 82,422,803 | 7,952,591 | $ | 842,795 | $ | 1,458,320 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
10
AZL MVP DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $771 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 82,422,803 | $ | — | $ | — | $ | 82,422,803 | ||||||||||||
Unaffiliated Investment Company | 61,750 | — | — | 61,750 | ||||||||||||||||
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Total Investment Securities | 82,484,553 | — | — | 82,484,553 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (89,564 | ) | — | — | (89,564 | ) | ||||||||||||||
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Total Investments | $ | 82,394,989 | $ | — | $ | — | $ | 82,394,989 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 29,722,843 | $ | 13,231,813 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
11
AZL MVP DFA Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $82,582,126. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 1,209,346 | ||
Unrealized (depreciation) | (1,245,278 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | (35,932 | ) | |
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 817,569 | $ | 1,114,365 | $ | 1,931,934 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term Capital Gains | Total Distributions(a) | |||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 307,441 | $ | 39,769 | $ | 347,210 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL MVP DFA Multi-Strategy Fund | $ | 874,736 | $ | 1,396,981 | $ | — | $ | (35,932 | ) | $ | 2,235,785 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 90% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP DFA Multi-Strategy fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP DFA Multi-Strategy fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 41.51% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $146,616.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $1,114,365.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP Fidelity Institutional Asset Management
Multi-Strategy Fund
(formerly known as AZL® MVP Pyramis® Multi-Strategy Fund)
Annual Report
December 31, 2018
Table of Contents
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund Review (Unaudited)
(formerly known as AZL® MVP Pyramis® Multi-Strategy Fund)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund)
|
What factors affected the Fund’s performance for year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund (the “Fund”) returned-2.14%. That compared to a-4.38%, 0.01% and a-1.39% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Income & Growth Composite Index1, respectively.
The Fund’s primary subadviser changed its name during the period from Pyramis to FIAM (Fidelity Institutional Asset Management). As a result, the Fund’s name was changed to the AZL® Fidelity Institutional Asset Management Multi-Strategy Fund
The Fund currently invests in one underlying fund, the AZL® Fidelity Institutional Asset Management Multi-Strategy Fund. Approximately 60% of the underlying fund’s assets are managed by its subadviser, FIAM LLC, investing primarily in investment-grade fixed-income securities, and approximately 40% of the underlying fund’s assets are managed by itssub-subadviser, Geode Capital Management, LLC, investing in primarily inlarge-cap common stocks. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.*
Early in the period, U.S. stocks rallied amid the tailwinds of federal tax cuts and accelerating economic growth. However, economic growth slowed in the eurozone and other major markets, and investor confidence fell as the period wore on. Increasing global trade tensions and worries about global economic growth pushed stock markets sharply lower during the final quarter of the year. The S&P 500 Index oflarge-cap stocks declined 4.38%, marking the first annual loss in nine years.Mid- andsmall-cap stocks also fell into negative territory: The S&P 400 Index2 returned-11.08% and the S&P 600 Index3 returned-8.48%.
The U.S. bond market was marked by rising yields and the Federal Reserve Board’s (the Fed) tightening of monetary policy. The Fed raised short-term interest rates four times during the period, ending at a target range of 2.25% to 2.50%. Yields rose due to a combination of Fed moves and stronger economic growth, and higher yields pushed down bond prices. That muted bond returns during much of the period, and a flattening yield curve brought the gap between short- and long-term Treasury yields closer together. However, an uptick in stock market volatility late in the period drove investors toward relative safe investments such as Treasury bonds. That demand pushed yields lower and prices higher. Meanwhile, credit spreads on corporate bonds widened late in the period amid investors’ flight to safety. High-yield bonds were hurt by worries about rising corporate debt loads and lower oil prices.
The Fund underperformed its composite benchmark during the12-month period under review. However, the Fund’s equity component outperformed the equity benchmark.
Stock selection was a leading contributor to relative results, particularly in the healthcare and industrials sectors. However, stock selection within the materials and information technology sectors dragged on relative returns.*
The Fund’s overweight position in the strong-performing healthcare sector and an underweight to an underperforming financials sector also contributed positively to relative returns. The Fund’s value-oriented investment style dragged on relative results, however, as value stocks underperformed their growth counterparts.*
In a market characterized by higher interest rates and wider spreads across mostnon-U.S. Treasury sectors, the Fund’s fixed income component underperformed its fixed income benchmark. The Fund’s exposure to high-yield bonds detracted from relative results, as did an overweight to investment-grade credits in the banking sector. Anoff-benchmark allocation to Treasury inflation-protected securities, or TIPS, also hurt relative returns as inflation expectations declined late in the period.*
The Fund held futures to equitize its cash positions during the period. The exposure to this form of derivatives did not materially affect the Fund’s performance.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the end of the year, the MVP process led to a reduction in the Fund’s equity exposure. During this short period, the reduced equity exposure had little effect on relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek a high level of current income while maintaining prospects for capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing primarily in shares of another mutual fund managed by the manager, the AZL® Fidelity Institutional Asset Management Multi-Strategy Fund, combined with the MVP risk management process.
Investment Concerns
The Fund invests in an underlying fund, so its investment performance is directly related to the performance of that underlying fund. Before investing, investors should assess the risks associated with and types of investments made by of the underlying fund in which the Fund invests.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss.
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
High-yield bonds have a higher risk of default or other adverse credit events, but have the potential to pay higher earnings over investment-grade bonds. The higher risk of default, or the inability of the creditor to repay its debt, is the primary reason for the higher interest rates on high-yield bonds.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments. | ||||
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
|
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | 5 Year | Since Inception (4/30/12) | |||||||||||||
AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund | -2.14 | % | 3.06 | % | 0.99 | % | 4.27 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 11.47 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 1.99 | % | ||||||||
Income & Growth Composite Index | -1.39 | % | 5.07 | % | 5.02 | % | 5.85 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MVP Fidelity Institutional Asset Management Multi-Strategy Fund | 0.80 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.15% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.13%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Income & Growth Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (40%) S&P 500 and (60%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP FIAM Multi-Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP FIAM Multi-Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 1,000.00 | $ | 977.00 | $ | 0.70 | 0.14 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 1,000.00 | $ | 1,024.50 | $ | 0.71 | 0.14 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Balanced Funds | 95.4 | % | |||
|
| ||||
Total Investment Securities | 95.4 | ||||
Net other assets (liabilities) | 4.6 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MVP FIAM Multi-Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Company (95.4%): | ||||||||
Balanced Funds (95.4%): | ||||||||
19,142,180 | AZL Fidelity Institutional Asset Management Multi-Strategy Fund | $ | 234,683,127 | |||||
|
| |||||||
Total Affiliated Investment Company (Cost $241,413,975) | 234,683,127 | |||||||
|
| |||||||
Total Investment Securities (Cost $241,413,975) — 95.4%(a) | 234,683,127 | |||||||
Net other assets (liabilities) — 4.6% | 11,253,273 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 245,936,400 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $11,457,399 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Short Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 Index E-Mini March Futures (U.S. Dollar) | 3/18/19 | 132 | $ | (16,534,320 | ) | $ | (549,175 | ) | ||||||||
|
| |||||||||||||||
$ | (549,175 | ) | ||||||||||||||
|
|
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
U.S. Treasury 10-Year Note March Futures (U.S. Dollar) | 3/21/19 | 57 | $ | 6,954,889 | $ | 165,137 | ||||||||||
|
| |||||||||||||||
$ | 165,137 | |||||||||||||||
|
| |||||||||||||||
Total Net Futures Contracts | $ | (384,038 | ) | |||||||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP FIAM Multi-Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 241,413,975 | |||
|
| ||||
Investments in affiliates, at value | $ | 234,683,127 | |||
Segregated cash for collateral | 11,457,399 | ||||
Interest and dividends receivable | 21,258 | ||||
Receivable for investments sold | 46,564 | ||||
|
| ||||
Total Assets | | 246,208,348 | |||
|
| ||||
Liabilities: | |||||
Cash overdraft | 46,564 | ||||
Payable for capital shares redeemed | 174,388 | ||||
Payable for variation margin on futures contracts | | 552 | |||
Manager fees payable | 33,636 | ||||
Administration fees payable | 4,546 | ||||
Custodian fees payable | 329 | ||||
Administrative and compliance services fees payable | 846 | ||||
Transfer agent fees payable | 432 | ||||
Trustee fees payable | 324 | ||||
Other accrued liabilities | 10,331 | ||||
|
| ||||
Total Liabilities | | 271,948 | |||
|
| ||||
Net Assets | $ | 245,936,400 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 258,256,350 | |||
Total distributable earnings/(losses) | (12,319,950 | ) | |||
|
| ||||
Net Assets | $ | 245,936,400 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 22,021,768 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.17 | |||
|
|
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 5,722,833 | |||
Interest | 225,220 | ||||
Dividends from non-affiliates | 191 | ||||
|
| ||||
Total Investment Income | 5,948,244 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 263,446 | ||||
Administration fees | 53,122 | ||||
Custodian fees | 3,205 | ||||
Administrative and compliance services fees | 4,325 | ||||
Transfer agent fees | 5,362 | ||||
Trustee fees | 13,521 | ||||
Professional fees | 11,200 | ||||
Shareholder reports | 8,003 | ||||
Other expenses | 7,000 | ||||
|
| ||||
Total expenses | 369,184 | ||||
|
| ||||
Net Investment Income/(Loss) | 5,579,060 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on securities | (713,055 | ) | |||
Net realized gains distributions from affiliated underlying funds | 9,587,319 | ||||
Net realized gains/(losses) on futures contracts | (69,533 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (19,284,153 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (427,259 | ) | |||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (10,906,681 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (5,327,621 | ) | ||
|
|
See accompanying notes to the financial statements.
5
AZL MVP FIAM Multi-Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 5,579,060 | $ | (250,864 | ) | |||||
Net realized gains/(losses) on investments | 8,804,731 | 6,690,645 | ||||||||
Change in unrealized appreciation/depreciation on investments | (19,711,412 | ) | 22,568,686 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (5,327,621 | ) | 29,008,467 | |||||||
|
|
|
| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (8,614,102 | ) | (3,716,488 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (8,614,102 | ) | (3,716,488 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 5,246,612 | 2,016,003 | ||||||||
Proceeds from dividends reinvested | 8,614,102 | 3,716,488 | ||||||||
Value of shares redeemed | (28,825,642 | ) | (43,337,091 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (14,964,928 | ) | (37,604,600 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (28,906,651 | ) | (12,312,621 | ) | ||||||
Net Assets:(a) | ||||||||||
Beginning of period | 274,843,051 | 287,155,672 | ||||||||
|
|
|
| |||||||
End of period | $ | 245,936,400 | $ | 274,843,051 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 448,193 | 175,168 | ||||||||
Dividends reinvested | 749,704 | 325,722 | ||||||||
Shares redeemed | (2,447,578 | ) | (3,831,782 | ) | ||||||
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Change in shares | (1,249,681 | ) | (3,330,892 | ) | ||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP FIAM Multi-Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.81 | $ | 10.79 | $ | 11.33 | $ | 12.49 | $ | 12.39 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.28 | — | (a) | 0.15 | 0.43 | 0.12 | |||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.52 | ) | 1.17 | (0.07 | ) | (1.20 | ) | 0.17 | |||||||||||||||||
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Total from Investment Activities | (0.24 | ) | 1.17 | 0.08 | (0.77 | ) | 0.29 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.40 | ) | (0.15 | ) | (0.45 | ) | (0.18 | ) | (0.11 | ) | |||||||||||||||
Net Realized Gains | — | — | (0.17 | ) | (0.21 | ) | (0.08 | ) | |||||||||||||||||
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Total Dividends | (0.40 | ) | (0.15 | ) | (0.62 | ) | (0.39 | ) | (0.19 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 11.17 | $ | 11.81 | $ | 10.79 | $ | 11.33 | $ | 12.49 | |||||||||||||||
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Total Return(b) | (2.14 | )% | 10.93 | % | 0.82 | % | (6.21 | )% | 2.33 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 245,936 | $ | 274,843 | $ | 287,156 | $ | 307,668 | $ | 297,191 | |||||||||||||||
Net Investment Income/(Loss) | 2.12 | % | (0.09 | )% | 1.25 | % | 3.85 | % | 1.42 | % | |||||||||||||||
Expenses Before Reductions*(c) | 0.14 | % | 0.13 | % | 0.13 | % | 0.15 | % | 0.15 | % | |||||||||||||||
Expenses Net of Reductions* | 0.14 | % | 0.13 | % | 0.13 | % | 0.15 | % | 0.15 | % | |||||||||||||||
Portfolio Turnover Rate | 7 | % | 4 | % | 4 | % | 4 | % | 4 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | Represents less than $0.005. |
(b) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(c) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP FIAM Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP FIAM Multi-Strategy Fund (formerly, AZL MVP Pyramis® Multi-Strategy Fund) (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments, money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
8
AZL MVP FIAM Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $11.7 million and the monthly average notional amount for short contracts was $2.3 million. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 549,175 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 165,137 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk | ||||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (69,533 | ) | $ | (637,323 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 210,064 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (3,716,488 | ) | ||
From net realized gains | — | ||||
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Change in net assets resulting from distributions to shareholders | $ | (3,716,488 | ) |
9
AZL MVP FIAM Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP FIAM Multi-Strategy Fund | 0.10 | % | 0.15 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions | |||||||||||||||||||||||||||||||||||||
AZL FIAM Multi-Strategy Fund | $ | 260,858,132 | $ | 18,527,756 | $ | (24,705,553 | ) | $ | (713,055 | ) | $ | (19,284,153 | ) | $ | 234,683,127 | 19,142,180 | $ | 5,722,833 | $ | 9,587,319 | |||||||||||||||||||||||||
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$ | 260,858,132 | $ | 18,527,756 | $ | (24,705,553 | ) | $ | (713,055 | ) | $ | (19,284,153 | ) | $ | 234,683,127 | 19,142,180 | $ | 5,722,833 | $ | 9,587,319 | ||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $2,400 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
10
AZL MVP FIAM Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 234,683,127 | $ | — | $ | — | $ | 234,683,127 | ||||||||||||
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Total Investment Securities | 234,683,127 | — | — | 234,683,127 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (384,038 | ) | — | — | (384,038 | ) | ||||||||||||||
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Total Investments | $ | 234,299,089 | $ | — | $ | — | $ | 234,299,089 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 18,527,756 | $ | 24,705,553 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $244,401,957. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | — | ||
Unrealized (depreciation) | (9,718,830 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | (9,718,830 | ) | |
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11
AZL MVP FIAM Multi-Strategy Fund
Notes to the Financial Statements
December 31, 2018
As of the end of its tax year ended December 31, 2018, the Fund has capital loss carry forwards (“CLCFs”) as summarized in the table below. CLCFs subject to expiration are applied as short-term capital loss regardless of whether the originating capital loss was short-term or long-term. CLCFs that are not subject to expiration must be utilized before those that are subject to expiration. The Board does not intend to authorize a distribution of any realized gain for the Fund until any applicable CLCF has been offset or expires.
During the year ended December 31, 2018, the Fund utilized $3,914,190 in CLCFs to offset capital gains.
CLCFs not subject to expiration:
Short-Term Amount | Long-Term Amount | Total Amount | |||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 5,880,163 | $ | 6,972,889 | $ | 12,853,052 |
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 8,614,102 | $ | — | $ | 8,614,102 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 3,716,488 | $ | — | $ | 3,716,488 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL MVP FIAM Multi-Strategy Fund | $ | 10,251,932 | $ | — | $ | (12,853,052 | ) | $ | (9,718,830 | ) | $ | (12,319,950 | ) |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 85% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP FIAM Multi-Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP FIAM Multi-Strategy Fund (formerly known as AZL MVP Pyramis Multi-Strategy Fund) (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 25.49% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other Directorships Held Outside the AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
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Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL MVP FusionSM Dynamic Balanced Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL MVP FusionSM Dynamic Balanced Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL MVP FusionSMDynamic Balanced Fund. | ||
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What factors affected the Fund’s performance for the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL MVP FusionSM Dynamic Balanced Fund (the “Fund”) returned-5.40%. That compared to a-4.38%, 0.01% and-1.81% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Balanced Composite Index1, respectively.
The Fund is a fund of funds that achieves broad diversification by investing in underlying funds. The Fund typically holds between 40% and 60% of its assets in equity funds and 40% to 60% of its assets in fixed-income funds. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.*
Despite volatility in the first quarter, U.S. equities experienced healthy gains in the first three quarters of the year because of strong economic data and positive earnings growth. However, volatility increased during the fourth quarter. U.S.large-cap equities, as measured by the S&P 500 Index, fell 4.38% for the year, due to investors’ concerns over continued U.S. Federal Reserve Board (the Fed) interest rate hikes, political and economic uncertainty and contentious global trade negotiations.Mid- andsmall-cap stocks also declined for the year: The S&P 400 Index2 returned-11.08% and the S&P 600 Index3 returned-8.48%, for the12-month period. Growth stocks sharply outperformed value stocks in the first three quarters, but this trend reversed in the fourth quarter.
International developed market equities, as measured by the MSCI EAFE Index (net)4, underperformed U.S. equities returning-13.79% for the12-month period. Emerging markets equities, as measured by the MSCI EM Index (net)5, generated a return of-14.58%. Both developed and emerging international equities underperformed U.S. equities during the first three quarters, though they outperformed U.S. equities during the volatile fourth quarter.
The U.S. bond market ended the year flat, with a return of 0.01% for the Bloomberg Barclays U.S. Aggregate Bond Index. The Fed raised interest rates four times during the12-month period—once per quarter. Although treasury yields rose during the first three quarters, the yield curve flattened dramatically in the fourth quarter, leaving the intermediate portion of the curve inverted. Both investment-grade and high-yield corporate spreads widened sharply as investors became more risk averse—especially during the volatile fourth quarter.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. Allocations tomid- andsmall-cap U.S. equity detracted from the Fund’s performance relative to the S&P 500. Likewise, the Fund’s exposure to U.S. value stocks weighed on relative performance during the year. Allocations to international developed and emerging markets equities also detracted from results, as U.S. stocks outperformed foreign equities during the period.*
Additionally, security selection within the Fund’s equity and fixed income holdings had a net negative impact on relative results.
The Fund’soff-benchmark allocation to shorter-term bonds contributed to relative returns during the year, given the rising interest rate environment and these bonds’ lower sensitivity to interest rate changes.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the very end of the year, and after stocks had already declined significantly, the MVP risk management process reduced equity exposure. During the short period remaining in the year, this reduced equity exposure detracted from relative performance as stocks rallied in the final days of the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
5 | The MSCI Emerging Markets Index (“MSCI EM”) is a free float-adjusted market capitalization index that is designed to measure equity performance of emerging markets. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL MVP FusionSM Dynamic Balanced Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important consideration. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Permitted Underlying Funds that represent different classes in the Fund’s asset allocation.
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Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
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Returns on growth stocks may not move in tandem with returns on other categories of stocks or the market as a whole. Growth stocks may be susceptible to rapid price savings or to adverse developments in certain sectors of the market.
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Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
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International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
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Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
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Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss.
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Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
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Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
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For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus. |
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | 5 Year | 10 Year | |||||||||||||
AZL MVP FusionSMDynamic Balanced Fund | -5.40 | % | 3.82 | % | 2.93 | % | 7.18 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 13.12 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 3.48 | % | ||||||||
Balanced Composite Index | -1.81 | % | 5.80 | % | 5.63 | % | 8.52 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL MVP FusionSMDynamic Balanced Fund | 0.96 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.30% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.22%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Balanced Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (50%) S&P 500 and (50%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP Fusion Dynamic Balanced Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Fusion Dynamic Balanced Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 1,000.00 | $ | 952.40 | $ | 1.08 | 0.22 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 1,000.00 | $ | 1,024.10 | $ | 1.12 | 0.22 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 49.3 | % | |||
Domestic Equity Funds | 28.4 | ||||
International Equity Funds | 17.4 | ||||
|
| ||||
Total Investment Securities | 95.1 | ||||
Net other assets (liabilities) | 4.9 | ||||
|
| ||||
Net Assets | 100.0 | % | |||
|
|
3
AZL MVP Fusion Dynamic Balanced Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.1%): | ||||||||
Domestic Equity Funds (28.4%): | ||||||||
2,304,136 | AZL DFA U.S. Core Equity Fund | $ | 26,082,825 | |||||
1,234,189 | AZL DFA U.S. Small Cap Fund | 12,576,387 | ||||||
1,501,353 | AZL Gateway Fund | 18,826,965 | ||||||
2,494,712 | AZL Mid Cap Index Fund, Class 2 | 47,424,477 | ||||||
4,076,366 | AZL Russell 1000 Growth Index Fund, Class 2 | 55,153,230 | ||||||
7,221,904 | AZL Russell 1000 Value Index Fund, Class 2 | 81,029,766 | ||||||
1,688,737 | AZL Small Cap Stock Index Fund, Class 2 | 20,551,930 | ||||||
|
| |||||||
261,645,580 | ||||||||
|
| |||||||
Fixed Income Funds (49.3%): | ||||||||
2,360,565 | AZL Enhanced Bond Index Fund | 24,998,381 | ||||||
9,658,354 | AZL Fidelity Institutional Asset Management Total Bond Fund, Class 2 | 94,748,453 | ||||||
9,510,501 | AZL MetWest Total Return Bond Fund | 94,819,701 | ||||||
4,707,717 | PIMCO VIT Income Portfolio | 48,819,022 |
Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
Fixed Income Funds, continued | ||||||||
9,400,528 | PIMCO VIT Low Duration Portfolio | $ | 94,757,327 | |||||
9,061,871 | PIMCO VIT Total Return Portfolio | 94,968,410 | ||||||
|
| |||||||
453,111,294 | ||||||||
|
| |||||||
International Equity Funds (17.4%): | ||||||||
3,377,705 | AZL DFA International Core Equity Fund | 31,074,885 | ||||||
5,581,868 | AZL International Index Fund, Class 2 | 79,541,619 | ||||||
6,999,128 | AZL MSCI Emerging Markets Equity Index Fund, Class 2 | 48,923,903 | ||||||
|
| |||||||
159,540,407 | ||||||||
|
| |||||||
Total Affiliated Investment Companies (Cost $897,722,311) | 874,297,281 | |||||||
|
| |||||||
Total Investment Securities (Cost $897,722,311) — 95.1%(a) | 874,297,281 | |||||||
Net other assets (liabilities) — 4.9% | 44,908,396 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 919,205,677 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $45,617,740 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/15/19 | 172 | $ | 21,544,720 | $ | (702,084 | ) | |||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 186 | 22,694,902 | 532,048 | ||||||||||||
|
| |||||||||||||||
$ | (170,036 | ) | ||||||||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP Fusion Dynamic Balanced Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 897,722,311 | |||
|
| ||||
Investments in affiliates, at value | $ | 874,297,281 | |||
Segregated cash for collateral | 45,617,740 | ||||
Interest and dividends receivable | 731,101 | ||||
Receivable for affiliated investments sold | 236,606 | ||||
Prepaid expenses | 10,999 | ||||
|
| ||||
Total Assets | | 920,893,727 | |||
|
| ||||
Liabilities: | |||||
Cash overdraft | 236,606 | ||||
Payable for affiliated investments purchased | 651,627 | ||||
Payable for capital shares redeemed | 603,385 | ||||
Payable for variation margin on futures contracts | | 397 | |||
Manager fees payable | 158,664 | ||||
Administration fees payable | 4,448 | ||||
Custodian fees payable | 1,084 | ||||
Administrative and compliance services fees payable | 3,085 | ||||
Transfer agent fees payable | 470 | ||||
Trustee fees payable | 1,181 | ||||
Other accrued liabilities | 27,103 | ||||
|
| ||||
Total Liabilities | | 1,688,050 | |||
|
| ||||
Net Assets | $ | 919,205,677 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 881,167,425 | |||
Total distributable earnings | 38,038,252 | ||||
|
| ||||
Net Assets | $ | 919,205,677 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 88,048,259 | ||||
Net Asset Value (offering and redemption price per share) | $ | 10.44 | |||
|
|
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 19,309,949 | |||
Interest | 874,928 | ||||
Dividends from non-affiliates | 128 | ||||
|
| ||||
Total Investment Income | 20,185,005 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 2,055,863 | ||||
Administration fees | 58,154 | ||||
Custodian fees | 8,788 | ||||
Administrative and compliance services fees | 16,877 | ||||
Transfer agent fees | 5,951 | ||||
Trustee fees | 52,931 | ||||
Professional fees | 43,023 | ||||
Shareholder reports | 21,568 | ||||
Other expenses | 10,222 | ||||
|
| ||||
Total expenses | 2,273,377 | ||||
|
| ||||
Net Investment Income/(Loss) | 17,911,628 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 24,051,601 | ||||
Net realized gains distributions from affiliated underlying funds | 24,017,270 | ||||
Net realized gains/(losses) on futures contracts | (1,453,185 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (117,047,360 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (469,048 | ) | |||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (70,900,722 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (52,989,094 | ) | ||
|
|
See accompanying notes to the financial statements.
5
AZL MVP Fusion Dynamic Balanced Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 17,911,628 | $ | 11,085,118 | ||||||
Net realized gains/(losses) on investments | 46,615,686 | 61,823,722 | ||||||||
Change in unrealized appreciation/depreciation on investments | (117,516,408 | ) | 54,090,371 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (52,989,094 | ) | 126,999,211 | |||||||
|
|
|
| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (72,295,259 | ) | (118,036,718 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (72,295,259 | ) | (118,036,718 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 4,808,540 | 8,943,045 | ||||||||
Proceeds from dividends reinvested | 72,295,258 | 118,036,718 | ||||||||
Value of shares redeemed | (132,108,153 | ) | (138,571,442 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (55,004,355 | ) | (11,591,679 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (180,288,708 | ) | (2,629,186 | ) | ||||||
Net Assets:(a) | ||||||||||
Beginning of period | 1,099,494,385 | 1,102,123,571 | ||||||||
|
|
|
| |||||||
End of period | $ | 919,205,677 | $ | 1,099,494,385 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 414,118 | 713,387 | ||||||||
Dividends reinvested | 6,650,898 | 10,210,789 | ||||||||
Shares redeemed | (11,356,593 | ) | (11,323,719 | ) | ||||||
|
|
|
| |||||||
Change in shares | (4,291,577 | ) | (399,543 | ) | ||||||
|
|
|
|
(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Fusion Dynamic Balanced Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.91 | $ | 11.88 | $ | 12.15 | $ | 13.03 | $ | 12.62 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.22 | 0.14 | 0.20 | 0.24 | 0.15 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.83 | ) | 1.27 | 0.44 | (0.42 | ) | 0.44 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.61 | ) | 1.41 | 0.64 | (0.18 | ) | 0.59 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.15 | ) | (0.22 | ) | (0.29 | ) | (0.17 | ) | (0.18 | ) | |||||||||||||||
Net Realized Gains | (0.71 | ) | (1.16 | ) | (0.62 | ) | (0.53 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.86 | ) | (1.38 | ) | (0.91 | ) | (0.70 | ) | (0.18 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 10.44 | $ | 11.91 | $ | 11.88 | $ | 12.15 | $ | 13.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | (5.40 | )% | 12.23 | % | 5.40 | % | (1.27 | )% | 4.59 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 919,206 | $ | 1,099,494 | $ | 1,102,124 | $ | 1,171,370 | $ | 1,280,573 | |||||||||||||||
Net Investment Income/(Loss) | 1.74 | % | 1.00 | % | 1.48 | % | 1.80 | % | 1.13 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | |||||||||||||||
Expenses Net of Reductions* | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | |||||||||||||||
Portfolio Turnover Rate(c) | 15 | % | 17 | % | 52 | % | 11 | % | 23 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP Fusion Dynamic Balanced Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Fusion Dynamic Balanced Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments, money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
8
AZL MVP Fusion Dynamic Balanced Fund
Notes to the Financial Statements
December 31, 2018
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The monthly average notional amount for these contracts was $50.8 million for the year ended December 31, 2018. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 702,084 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 532,048 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk | ||||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (1,453,185 | ) | $ | (1,149,437 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 680,389 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (18,503,054 | ) | ||
From net realized gains | (99,533,664 | ) | |||
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Change in net assets resulting from distributions to shareholders | $ | (118,036,718 | ) |
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AZL MVP Fusion Dynamic Balanced Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Fusion Dynamic Balanced Fund | 0.20 | % | 0.30 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL DFA International Core Equity Fund | $ | 39,248,531 | $ | 1,908,895 | $ | (2,722,019 | ) | $ | 366,446 | $ | (7,726,968 | ) | $ | 31,074,885 | 3,377,705 | $ | 655,290 | $ | 187,905 | ||||||||||||||||||||||||||
AZL DFA U.S. Core Equity Fund | 33,559,467 | 1,193,181 | (5,592,223 | ) | 1,396,012 | (4,473,612 | ) | 26,082,825 | 2,304,136 | 327,901 | 865,281 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Small Cap Fund | 17,104,974 | 870,160 | (2,810,691 | ) | 600,217 | (3,188,273 | ) | 12,576,387 | 1,234,189 | 80,376 | 789,784 | ||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | 27,573,381 | 560,233 | (2,369,297 | ) | (108,337 | ) | (657,599 | ) | 24,998,381 | 2,360,565 | 560,233 | — | |||||||||||||||||||||||||||||||||
AZL FIAM Total Bond Fund | 110,713,901 | 2,918,116 | (14,493,658 | ) | (337,826 | ) | (4,052,080 | ) | 94,748,453 | 9,658,354 | 2,918,116 | — | |||||||||||||||||||||||||||||||||
AZL Gateway Fund | 33,620,784 | 256,761 | (14,005,916 | ) | 2,331,659 | (3,376,323 | ) | 18,826,965 | 1,501,353 | 256,761 | — | ||||||||||||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 124,645,530 | 4,122,712 | (31,872,642 | ) | 2,685,580 | (20,039,561 | ) | 79,541,619 | 5,581,868 | 2,622,106 | 1,279,732 | ||||||||||||||||||||||||||||||||||
AZL MetWest Total Return Bond Fund | 110,373,633 | 2,068,217 | (15,078,457 | ) | (278,239 | ) | (2,265,453 | ) | 94,819,701 | 9,510,501 | 2,068,216 | — | |||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 33,557,418 | 32,150,023 | (6,695,978 | ) | 1,183,346 | (12,770,332 | ) | 47,424,477 | 2,494,712 | 494,234 | 4,079,590 | ||||||||||||||||||||||||||||||||||
AZL MSCI Emerging Markets Equity Fund, Class 2 | 53,193,311 | 15,017,173 | (10,122,977 | ) | 1,783,105 | (10,946,709 | ) | 48,923,903 | 6,999,128 | 721,875 | 1,466,654 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Growth Index Fund | 91,065,279 | 18,551,336 | (51,595,983 | ) | 11,956,767 | (14,824,169 | ) | 55,153,230 | 4,076,366 | 548,943 | 4,858,293 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Value Index Fund | 91,073,802 | 40,766,178 | (34,380,777 | ) | 2,943,865 | (19,373,302 | ) | 81,029,766 | 7,221,904 | 1,751,535 | 6,764,943 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 11,360,051 | 17,519,582 | (2,406,488 | ) | 545,250 | (6,466,465 | ) | 20,551,930 | 1,688,737 | 212,311 | 2,217,338 | ||||||||||||||||||||||||||||||||||
PIMCO VIT Income Portfolio | 48,497,065 | 2,807,559 | (775,002 | ) | (16,979 | ) | (1,693,621 | ) | 48,819,022 | 4,707,717 | 1,507,011 | 344,934 | |||||||||||||||||||||||||||||||||
PIMCO VIT Low Duration Portfolio | 109,839,812 | 1,964,420 | (15,380,143 | ) | (930,585 | ) | (736,177 | ) | 94,757,327 | 9,400,528 | 1,964,420 | — | |||||||||||||||||||||||||||||||||
PIMCO VIT Total Return Portfolio | 110,066,916 | 3,783,438 | (14,356,548 | ) | (68,680 | ) | (4,456,716 | ) | 94,968,410 | 9,061,871 | 2,620,621 | 1,162,816 | |||||||||||||||||||||||||||||||||
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$ | 1,045,493,855 | $ | 146,457,984 | $ | (224,658,799 | ) | $ | 24,051,601 | $ | (117,047,360 | ) | $ | 874,297,281 | 81,179,634 | $ | 19,309,949 | $ | 24,017,270 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
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AZL MVP Fusion Dynamic Balanced Fund
Notes to the Financial Statements
December 31, 2018
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $9,435 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments inopen-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 874,297,281 | $ | — | $ | — | $ | 874,297,281 | ||||||||||||
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Total Investment Securities | 874,297,281 | — | — | 874,297,281 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (170,036 | ) | — | — | (170,036 | ) | ||||||||||||||
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Total Investments | $ | 874,127,245 | $ | — | $ | — | $ | 874,127,245 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 146,457,982 | $ | 224,658,799 |
11
AZL MVP Fusion Dynamic Balanced Fund
Notes to the Financial Statements
December 31, 2018
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $901,058,691. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 3,676,470 | ||
Unrealized (depreciation) | (30,437,880 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | (26,761,410 | ) | |
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 21,121,964 | $ | 51,173,295 | $ | 72,295,259 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 18,503,054 | $ | 99,533,664 | $ | 118,036,718 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MVP Fusion Dynamic Balanced Fund | $ | 23,671,642 | $ | 41,128,020 | $ | — | $ | (26,761,410 | ) | $ | 38,038,252 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 90% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Fusion Dynamic Balanced Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Fusion Dynamic Balanced Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 8.61% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $8,592,225.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $51,173,294.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other Directorships AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other Directorships AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL MVP FusionSM Dynamic Conservative Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL MVP FusionSM Dynamic Conservative Fund Review (Unaudited)
Allianz Investment Management LLC serves as Manager for the AZL MVP FusionSMDynamic Conservative Fund.
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What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL MVP FusionSM Dynamic Conservative Fund (the “Fund”) returned-3.75%. That compared to a-4.38%, 0.01% and a-1.19% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Conservative Composite Index1, respectively.
The Fund is a fund of funds that achieves broad diversification by investing in underlying funds. The Fund typically holds between 25% and 45% of its assets in equity funds and 55% to 75% of its assets in fixed-income funds. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.*
Despite volatility in the first quarter, U.S. equities had healthy gains for the first three quarters of the year. Markets rose on strong economic data coupled with positive earnings growth. However, volatility increased significantly in the fourth quarter amid investor concerns over continued U.S. Federal Reserve Board (the Fed) rate hikes, political and economic uncertainty, and contentious trade negotiations.Large-cap stocks outperformedsmall-cap stocks in 2018. The S&P 500 Index returned-4.38% for the year, while the S&P 400 Index2 returned-11.08% and the S&P 6003 Index returned-8.48%. Growth stocks sharply outperformed value stocks during the year, although this trend reversed during the fourth quarter.
International developed market equities, as measured by the MSCI EAFE Index (net)4, underperformed U.S. equities, returning-13.79% for the year. Emerging markets equities, as measured by the MSCI EM Index (net)5, returned-14.58%. Both developed and emerging international equities underperformed U.S. equities during the first three quarters of the year, but generally held up better than U.S. equities during the volatile fourth quarter.
The U.S. bond market ended the year flat, with a return of 0.01% for the Bloomberg Barclays U.S. Aggregate Bond Index. The Fed raised interest rates four times during the period—once per quarter. Although Treasury yields rose during the first three quarters, the yield curve flattened dramatically in the fourth quarter, leaving the intermediate portion of the curve inverted. Both investment-grade and high-yield corporate spreads widened sharply as investors became more risk averse, especially during the fourth quarter.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. Allocations tomid- andsmall-cap U.S. equities detracted from the Fund’s performance relative to the S&P 500. Likewise, the Fund’s exposure to U.S. value stocks weighed on relative performance during the year. Allocations to international developed and emerging markets equities also detracted from results as U.S. stocks outperformed foreign equities during the period.*
In addition, security selection within the Fund’s holdings had a net negative impact on relative results. The security selection effect was negative across both the Fund’s equity and fixed income holdings.*
The Fund’soff-benchmark allocation to shorter-term bonds contributed to relative returns during the year given the rising interest rate environment and these bonds’ lower sensitivity to interest rate changes.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process largely maintained a neutral equity allocation for most of the year relative to its target, which resulted in a fairly muted impact on relative performance during the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
5 | The MSCI Emerging Markets Index (“MSCI EM”) is a free float-adjusted market capitalization index that is designed to measure equity performance of emerging markets. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL MVP FusionSMDynamic Conservative Fund Review(Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important consideration. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Permitted Underlying Funds that represent different classes in the Fund’s asset allocation. | ||||
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
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Stocks are more volatile and carry more risk and return potential than other forms of investments.
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Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
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International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
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Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
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Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss.
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Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
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For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (10/23/09) | |||||||||||||
AZL MVP FusionSMDynamic Conservative Fund | -3.75 | % | 3.48 | % | 2.88 | % | 5.06 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 11.92 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 3.17 | % | ||||||||
Conservative Composite Index | -1.19 | % | 4.70 | % | 4.72 | % | 6.41 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL MVP FusionSMDynamic Conservative Fund | 0.96 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.35% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.23%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Conservative Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (35%) S&P 500 and (65%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP Fusion Dynamic Conservative Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Fusion Dynamic Conservative Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 1,000.00 | $ | 969.60 | $ | 1.19 | 0.24 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 1,000.00 | $ | 1,024.00 | $ | 1.22 | 0.24 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 63.2 | % | |||
Domestic Equity Funds | 21.1 | ||||
International Equity Funds | 10.8 | ||||
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Total Investment Securities | 95.1 | ||||
Net other assets (liabilities) | 4.9 | ||||
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Net Assets | 100.0 | % | |||
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3
AZL MVP Fusion Dynamic Conservative Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.1%): | ||||||||
Domestic Equity Funds (20.9%): | ||||||||
283,188 | AZL DFA U.S. Core Equity Fund | $ | 3,205,689 | |||||
203,183 | AZL DFA U.S. Small Cap Fund | 2,070,432 | ||||||
280,157 | AZL Gateway Fund | 3,513,164 | ||||||
456,655 | AZL Mid Cap Index Fund, Class 2 | 8,681,007 | ||||||
843,403 | AZL Russell 1000 Growth Index Fund, Class 2 | 11,411,247 | ||||||
1,439,131 | AZL Russell 1000 Value Index Fund, Class 2 | 16,147,050 | ||||||
345,192 | AZL Small Cap Stock Index Fund, Class 2 | 4,200,982 | ||||||
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49,229,571 | ||||||||
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Fixed Income Funds (63.5%): | ||||||||
1,108,193 | AZL Enhanced Bond Index Fund | 11,735,762 | ||||||
3,182,160 | AZL Fidelity Institutional Asset Management Total Bond Fund, Class 2 | 31,216,994 | ||||||
3,140,353 | AZL MetWest Total Return Bond Fund | 31,309,316 | ||||||
1,417,579 | PIMCO VIT Income Portfolio | 14,700,292 |
Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
Fixed Income Funds, continued | ||||||||
2,871,302 | PIMCO VIT Low Duration Portfolio | $ | 28,942,719 | |||||
2,991,948 | PIMCO VIT Total Return Portfolio | 31,355,612 | ||||||
|
| |||||||
149,260,695 | ||||||||
|
| |||||||
International Equity Funds (10.7%): | ||||||||
603,077 | AZL DFA International Core Equity Fund | 5,548,312 | ||||||
883,467 | AZL International Index Fund, Class 2 | 12,589,403 | ||||||
1,000,678 | AZL MSCI Emerging Markets Equity Index Fund, Class 2 | 6,994,738 | ||||||
|
| |||||||
25,132,453 | ||||||||
|
| |||||||
Total Affiliated Investment Companies (Cost $230,613,473) | 223,622,719 | |||||||
|
| |||||||
Total Investment Securities (Cost $230,613,473) — 95.1%(a) | 223,622,719 | |||||||
Net other assets (liabilities) — 4.9% | 11,506,595 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 235,129,314 | ||||||
|
|
Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $11,775,647 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/15/19 | 32 | $ | 4,008,320 | $ | (209,423 | ) | |||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 62 | 7,564,967 | 177,349 | ||||||||||||
|
| |||||||||||||||
$ | (32,074 | ) | ||||||||||||||
|
|
See accompanying notes to the financial statements.
4
AZL MVP Fusion Dynamic Conservative Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 230,613,473 | |||
|
| ||||
Investments in affiliates, at value | $ | 223,622,719 | |||
Segregated cash for collateral | 11,775,647 | ||||
Interest and dividends receivable | 223,539 | ||||
Receivable for capital shares issued | 120,364 | ||||
Receivable for affiliated investments sold | 51,404 | ||||
Prepaid expenses | 3,009 | ||||
|
| ||||
Total Assets | 235,796,682 | ||||
|
| ||||
Liabilities: | |||||
Cash overdraft | 51,404 | ||||
Payable for affiliated investments purchased | 203,221 | ||||
Payable for capital shares redeemed | 360,433 | ||||
Manager fees payable | 40,203 | ||||
Administration fees payable | 3,996 | ||||
Custodian fees payable | 509 | ||||
Administrative and compliance services fees payable | 710 | ||||
Transfer agent fees payable | 379 | ||||
Trustee fees payable | 272 | ||||
Other accrued liabilities | 6,241 | ||||
|
| ||||
Total Liabilities | 667,368 | ||||
|
| ||||
Net Assets | $ | 235,129,314 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 230,243,220 | |||
Total distributable earnings | 4,886,094 | ||||
|
| ||||
Net Assets | $ | 235,129,314 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 21,064,874 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.16 | |||
|
|
For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 5,085,512 | |||
Interest | 219,795 | ||||
Dividends from non-affiliates | 903 | ||||
|
| ||||
Total Investment Income | 5,306,210 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 512,127 | ||||
Administration fees | 52,362 | ||||
Custodian fees | 5,141 | ||||
Administrative and compliance services fees | 4,144 | ||||
Transfer agent fees | 5,286 | ||||
Trustee fees | 12,995 | ||||
Professional fees | 10,661 | ||||
Shareholder reports | 5,522 | ||||
Other expenses | 2,074 | ||||
|
| ||||
Total expenses | 610,312 | ||||
|
| ||||
Net Investment Income/(Loss) | 4,695,898 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 4,370,787 | ||||
Net realized gains distributions from affiliated underlying funds | 4,643,482 | ||||
Net realized gains/(losses) on futures contracts | (255,760 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (22,666,116 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (60,287 | ) | |||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (13,967,894 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (9,271,996 | ) | ||
|
|
See accompanying notes to the financial statements.
5
AZL MVP Fusion Dynamic Conservative Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 4,695,898 | $ | 3,125,506 | ||||||
Net realized gains/(losses) on investments | 8,758,509 | 9,880,206 | ||||||||
Change in unrealized appreciation/depreciation on investments | (22,726,403 | ) | 11,531,737 | |||||||
|
|
|
| |||||||
Change in net assets resulting from operations | (9,271,996 | ) | 24,537,449 | |||||||
|
|
|
| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (12,826,949 | ) | (16,173,947 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from distributions to shareholders | (12,826,949 | ) | (16,173,947 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 18,300,210 | 11,558,632 | ||||||||
Proceeds from dividends reinvested | 12,826,949 | 16,173,947 | ||||||||
Value of shares redeemed | (42,470,441 | ) | (45,413,236 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (11,343,282 | ) | (17,680,657 | ) | ||||||
|
|
|
| |||||||
Change in net assets | (33,442,227 | ) | (9,317,155 | ) | ||||||
Net Assets:(a) | ||||||||||
Beginning of period | 268,571,541 | 277,888,696 | ||||||||
|
|
|
| |||||||
End of period | $ | 235,129,314 | $ | 268,571,541 | ||||||
|
|
|
| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,523,988 | 937,909 | ||||||||
Dividends reinvested | 1,122,218 | 1,348,953 | ||||||||
Shares redeemed | (3,537,200 | ) | (3,701,038 | ) | ||||||
|
|
|
| |||||||
Change in shares | (890,994 | ) | (1,414,176 | ) | ||||||
|
|
|
|
(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Fusion Dynamic Conservative Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.23 | $ | 11.89 | $ | 11.93 | $ | 12.63 | $ | 12.53 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.23 | 0.16 | 0.19 | 0.25 | 0.16 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.67 | ) | 0.93 | 0.44 | (0.35 | ) | 0.44 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total from Investment Activities | (0.44 | ) | 1.09 | 0.63 | (0.10 | ) | 0.60 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.17 | ) | (0.23 | ) | (0.28 | ) | (0.17 | ) | (0.19 | ) | |||||||||||||||
Net Realized Gains | (0.46 | ) | (0.52 | ) | (0.39 | ) | (0.43 | ) | (0.31 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Dividends | (0.63 | ) | (0.75 | ) | (0.67 | ) | (0.60 | ) | (0.50 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Asset Value, End of Period | $ | 11.16 | $ | 12.23 | $ | 11.89 | $ | 11.93 | $ | 12.63 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Return(a) | (3.75 | )% | 9.31 | % | 5.32 | % | (0.77 | )% | 4.81 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 235,129 | $ | 268,572 | $ | 277,889 | $ | 268,335 | $ | 271,443 | |||||||||||||||
Net Investment Income/(Loss) | 1.83 | % | 1.14 | % | 1.63 | % | 2.09 | % | 1.25 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.24 | % | 0.23 | % | 0.24 | % | 0.24 | % | 0.24 | % | |||||||||||||||
Expenses Net of Reductions* | 0.24 | % | 0.23 | % | 0.24 | % | 0.24 | % | 0.24 | % | |||||||||||||||
Portfolio Turnover Rate | 16 | % | 18 | % | 62 | % | 16 | % | 36 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP Fusion Dynamic Conservative Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Fusion Dynamic Conservative Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP Fusion Dynamic Conservative Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The monthly average notional amount for these contracts was $12.6 million for the year ended December 31, 2018. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 209,423 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 177,349 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk | ||||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (255,760 | ) | $ | (284,349 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 224,062 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (4,942,273 | ) | ||
From net realized gains | (11,231,674 | ) | |||
|
| ||||
Change in net assets resulting from distributions to shareholders | $ | (16,173,947 | ) |
9
AZL MVP Fusion Dynamic Conservative Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Fusion Dynamic Conservative Fund | 0.20 | % | 0.35 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL DFA International Core Equity Fund | $ | 6,998,217 | $ | 746,092 | $ | (895,537 | ) | $ | 184,587 | $ | (1,485,047 | ) | $ | 5,548,312 | 603,077 | $ | 116,970 | $ | 33,540 | ||||||||||||||||||||||||||
AZL DFA U.S. Core Equity Fund | 4,306,633 | 153,949 | (883,978 | ) | 209,446 | (580,361 | ) | 3,205,689 | 283,188 | 40,300 | 106,347 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Small Cap Fund | 2,803,677 | 189,663 | (495,622 | ) | 113,986 | (541,272 | ) | 2,070,432 | 203,183 | 13,234 | 130,021 | ||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | 12,949,335 | 373,013 | (1,233,420 | ) | (49,218 | ) | (303,948 | ) | 11,735,762 | 1,108,193 | 260,315 | — | |||||||||||||||||||||||||||||||||
AZL FIAM Total Bond Fund | 31,390,779 | 4,997,143 | (3,824,608 | ) | (51,048 | ) | (1,295,272 | ) | 31,216,994 | 3,182,160 | 939,258 | — | |||||||||||||||||||||||||||||||||
AZL Gateway Fund | 6,907,550 | 78,597 | (3,291,352 | ) | 582,201 | (763,832 | ) | 3,513,164 | 280,157 | 46,956 | — | ||||||||||||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 20,859,328 | 2,171,080 | (7,791,300 | ) | 806,014 | (3,455,719 | ) | 12,589,403 | 883,467 | 405,843 | 198,074 | ||||||||||||||||||||||||||||||||||
AZL MetWest Total Return Bond Fund | 35,206,826 | 1,543,581 | (4,642,884 | ) | (134,803 | ) | (663,404 | ) | 31,309,316 | 3,140,353 | 665,089 | — | |||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 7,018,616 | 5,090,221 | (1,436,828 | ) | 254,882 | (2,245,884 | ) | 8,681,007 | 456,655 | 89,910 | 742,154 | ||||||||||||||||||||||||||||||||||
AZL MSCI Emerging Markets Equity Fund, Class 2 | 7,000,327 | 2,259,020 | (889,598 | ) | 159,233 | (1,534,244 | ) | 6,994,738 | 1,000,678 | 111,698 | 226,940 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Growth Index Fund | 17,333,662 | 3,631,175 | (8,822,292 | ) | 2,012,788 | (2,744,086 | ) | 11,411,247 | 843,403 | 111,486 | 986,680 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Value Index Fund | 17,379,950 | 8,559,812 | (6,656,117 | ) | 414,808 | (3,551,403 | ) | 16,147,050 | 1,439,131 | 334,220 | 1,290,858 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 2,783,265 | 3,255,422 | (695,474 | ) | 155,826 | (1,298,057 | ) | 4,200,982 | 345,192 | 42,750 | 446,474 | ||||||||||||||||||||||||||||||||||
PIMCO VIT Income Portfolio | 17,152,980 | 699,520 | (2,605,022 | ) | 94,613 | (641,799 | ) | 14,700,292 | 1,417,579 | 477,516 | 104,068 | ||||||||||||||||||||||||||||||||||
PIMCO VIT Low Duration Portfolio | 29,371,462 | 3,347,419 | (3,293,597 | ) | (189,128 | ) | (293,437 | ) | 28,942,719 | 2,871,302 | 581,360 | — | |||||||||||||||||||||||||||||||||
PIMCO VIT Total Return Portfolio | 35,982,856 | 1,990,073 | (5,155,566 | ) | (193,400 | ) | (1,268,351 | ) | 31,355,612 | 2,991,948 | 848,607 | 378,326 | |||||||||||||||||||||||||||||||||
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$ | 255,445,463 | $ | 39,085,780 | $ | (52,613,195 | ) | $ | 4,370,787 | $ | (22,666,116 | ) | $ | 223,622,719 | 21,049,666 | $ | 5,085,512 | $ | 4,643,482 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
10
AZL MVP Fusion Dynamic Conservative Fund
Notes to the Financial Statements
December 31, 2018
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $2,342 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments inopen-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 223,622,719 | $ | — | $ | — | $ | 223,622,719 | ||||||||||||
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Total Investment Securities | 223,622,719 | — | — | 223,622,719 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (32,074 | ) | — | — | (32,074 | ) | ||||||||||||||
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Total Investments | $ | 223,590,645 | $ | — | $ | — | $ | 223,590,645 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 39,085,780 | $ | 52,613,195 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
11
AZL MVP Fusion Dynamic Conservative Fund
Notes to the Financial Statements
December 31, 2018
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $232,402,787. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | — | ||
Unrealized (depreciation) | (8,780,068 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | (8,780,068 | ) | |
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 5,442,607 | $ | 7,384,342 | $ | 12,826,949 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 5,491,981 | $ | 10,681,966 | $ | 16,173,947 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MVP Fusion Dynamic Conservative Fund | $ | 5,970,156 | $ | 7,696,006 | $ | — | $ | (8,780,068 | ) | $ | 4,886,094 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 90% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Fusion Dynamic Conservative Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Fusion Dynamic Conservative Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
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Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 5.91% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $2,018,122.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $7,384,342.
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A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL MVP FusionSM Dynamic Moderate Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL MVP FusionSM Dynamic Moderate Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the MVP FusionSMDynamic Moderate Fund.
|
What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL MVP FusionSM Dynamic Moderate Fund (the “Fund”) returned-6.46%. That compared to a-4.38%, 0.01% and a-2.26% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Moderate Composite Index1, respectively.
The Fund is a fund of funds that achieves broad diversification by investing in underlying funds. The Fund typically holds between 50% and 70% of its assets in equity funds and 30% to 50% of its assets in fixed-income funds. The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.*
Despite volatility during the first quarter, U.S. equities had healthy gains for the first three quarters of the year due to strong economic data coupled with positive earnings growth. However, volatility increased significantly in the fourth quarter amid investor concerns over continued U.S. Federal Reserve Board (the Fed) rate hikes, political and economic uncertainty, and contentious trade negotiations.Large-cap stocks outperformedsmall-cap stocks in 2018. The S&P 500 Index returned-4.38% for the year, while the S&P 400 Index2 returned-11.08% and the S&P 600 Index3 returned-8.48%. Growth stocks sharply outperformed value stocks during the year, although this trend reversed during the fourth quarter.
International developed market equities, as measured by the MSCI EAFE Index (net)4, underperformed U.S. equities, returning-13.79% for the year. Emerging markets equities, as measured by the MSCI EM Index (net)5, also underperformed, returning-14.58%. Both developed and emerging markets international equities underperformed U.S. equities during the first three quarters of the year, but generally held up better than U.S. equities during the volatile fourth quarter.
The U.S. bond market ended the year flat, with a return of 0.01% for the Bloomberg Barclays U.S. Aggregate Bond Index. The Fed raised interest rates four times during the period—once per quarter. Although Treasury yields rose during the first three quarters, the yield curve flattened dramatically in the fourth quarter, leaving the intermediate portion of the curve inverted. Both investment-grade and high-yield corporate spreads widened sharply as investors became more risk averse, especially during the fourth quarter.
The Fund, which invests in both U.S. and international markets, underperformed its composite benchmark in 2018. Allocations tomid- andsmall-cap U.S. equities detracted from the Fund’s performance relative to the S&P 500. Likewise, the Fund’s exposure to U.S. value stocks weighed on relative performance during the year. Allocations to international and emerging markets equities also detracted from results as U.S. stocks outperformed foreign equities during the period.*
Additionally, security selection within the Fund’s holdings had a net negative impact on relative results across both the Fund’s equity and fixed income holdings.*
The Fund’soff-benchmark allocation to shorter-term bonds contributed to relative returns during the year, as these bonds are less sensitive to interest rate changes in a rising interest rate environment.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the end of the year, the MVP risk management process reduced equity exposure. However, as market volatility increased at the end of the year, the MVP risk management process reduced equity exposure. This reduced equity exposure at the end of December slightly detracted from relative performance as stocks rallied to finish out the year.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
5 | The MSCI Emerging Markets Index (“MSCI EM”) is a free float-adjusted market capitalization index that is designed to measure equity performance of emerging markets. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL MVP FusionSM Dynamic Moderate Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Permitted Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility. | ||||
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates. Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss. | ||||
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
|
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | 5 Year | 10 Year | |||||||||||||
AZL MVP FusionSMDynamic Moderate Fund | -6.46 | % | 3.60 | % | 2.64 | % | 7.57 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 13.12 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 3.48 | % | ||||||||
Moderate Composite Index | -2.26 | % | 6.52 | % | 6.22 | % | 9.48 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL MVP FusionSMDynamic Moderate Fund | 0.98 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.30% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.22%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Moderate Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (60%) S&P 500 and (40%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP Fusion Dynamic Moderate Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Fusion Dynamic Moderate Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 1,000.00 | $ | 940.10 | $ | 1.08 | 0.22 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 1,000.00 | $ | 1,024.10 | $ | 1.12 | 0.22 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 39.5 | % | |||
Domestic Equity Funds | 34.1 | ||||
International Equity Funds | 21.5 | ||||
|
| ||||
Total Investment Securities | 95.1 | ||||
Net other assets (liabilities) | 4.9 | ||||
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| ||||
Net Assets | 100.0 | % | |||
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3
AZL MVP Fusion Dynamic Moderate Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.1%): | ||||||||
Domestic Equity Funds (34.1%): | ||||||||
4,184,373 | AZL DFA U.S. Core Equity Fund | $ | 47,367,099 | |||||
3,554,145 | AZL DFA U.S. Small Cap Fund | 36,216,741 | ||||||
3,997,239 | AZL Gateway Fund | 50,125,373 | ||||||
6,817,288 | AZL Mid Cap Index Fund, Class 2 | 129,596,650 | ||||||
10,505,772 | AZL Russell 1000 Growth Index Fund, Class 2 | 142,143,098 | ||||||
18,472,652 | AZL Russell 1000 Value Index Fund, Class 2 | 207,263,151 | ||||||
4,391,327 | AZL Small Cap Stock Index Fund, Class 2 | 53,442,444 | ||||||
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| |||||||
666,154,556 | ||||||||
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| |||||||
Fixed Income Funds (39.5%): | ||||||||
2,487,274 | AZL Enhanced Bond Index Fund | 26,340,228 | ||||||
16,999,732 | AZL Fidelity Institutional Asset Management Total Bond Fund, Class 2 | 166,767,373 | ||||||
16,726,074 | AZL MetWest Total Return Bond Fund | 166,758,959 | ||||||
8,013,546 | PIMCO VIT Income Portfolio | 83,100,476 |
Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
Fixed Income Funds, continued | ||||||||
16,069,361 | PIMCO VIT Low Duration Portfolio | $ | 161,979,164 | |||||
15,951,520 | PIMCO VIT Total Return Portfolio | 167,171,929 | ||||||
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| |||||||
772,118,129 | ||||||||
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International Equity Funds (21.5%): | ||||||||
10,330,760 | AZL DFA International Core Equity Fund | 95,042,994 | ||||||
13,322,889 | AZL International Index Fund, Class 2 | 189,851,166 | ||||||
19,319,267 | AZL MSCI Emerging Markets Equity Index Fund, Class 2 | 135,041,675 | ||||||
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| |||||||
419,935,835 | ||||||||
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| |||||||
Total Affiliated Investment Companies (Cost $1,911,328,770) | 1,858,208,520 | |||||||
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| |||||||
Total Investment Securities (Cost $1,911,328,770) — 95.1%(a) | 1,858,208,520 | |||||||
Net other assets (liabilities) — 4.9% | 95,521,952 | |||||||
|
| |||||||
Net Assets — 100.0% | $ | 1,953,730,472 | ||||||
|
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Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $96,246,113 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/15/19 | 359 | $ | 44,968,340 | $ | (1,150,599 | ) | |||||||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 315 | 38,434,914 | 894,514 | ||||||||||||||||
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| |||||||||||||||||||
$ | (256,085 | ) | ||||||||||||||||||
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See accompanying notes to the financial statements.
4
AZL MVP Fusion Dynamic Moderate Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 1,911,328,770 | |||
|
| ||||
Investments in affiliates, at value | $ | 1,858,208,520 | |||
Segregated cash for collateral | 96,246,113 | ||||
Interest and dividends receivable | 1,296,927 | ||||
Receivable for affiliated investments sold | 320,622 | ||||
Receivable for variation margin on futures contracts | | 269 | |||
Prepaid expenses | 21,785 | ||||
|
| ||||
Total Assets | | 1,956,094,236 | |||
|
| ||||
Liabilities: | |||||
Cash overdraft | 320,622 | ||||
Payable for affiliated investments purchased | 1,127,986 | ||||
Payable for capital shares redeemed | 513,040 | ||||
Manager fees payable | 338,005 | ||||
Administration fees payable | 4,269 | ||||
Custodian fees payable | 2,113 | ||||
Administrative and compliance services fees payable | 6,277 | ||||
Transfer agent fees payable | 522 | ||||
Trustee fees payable | 2,404 | ||||
Other accrued liabilities | 48,526 | ||||
|
| ||||
Total Liabilities | | 2,363,764 | |||
|
| ||||
Net Assets | $ | 1,953,730,472 | |||
|
| ||||
Net Assets Consist of: | |||||
Paid in capital | $ | 1,860,584,053 | |||
Total distributable earnings | 93,146,419 | ||||
|
| ||||
Net Assets | $ | 1,953,730,472 | |||
|
| ||||
Shares of beneficial interest (unlimited number of shares authorized, no par value) | 189,499,758 | ||||
Net Asset Value (offering and redemption price per share) | $ | 10.31 | |||
|
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 39,808,259 | |||
Interest | 1,860,301 | ||||
Dividends from non-affiliates | 268 | ||||
|
| ||||
Total Investment Income | 41,668,828 | ||||
|
| ||||
Expenses: | |||||
Manager fees | 4,441,598 | ||||
Administration fees | 64,613 | ||||
Custodian fees | 17,050 | ||||
Administrative and compliance services fees | 35,679 | ||||
Transfer agent fees | 6,724 | ||||
Trustee fees | 111,958 | ||||
Professional fees | 90,596 | ||||
Shareholder reports | 36,296 | ||||
Other expenses | 23,189 | ||||
|
| ||||
Total expenses | 4,827,703 | ||||
|
| ||||
Net Investment Income/(Loss) | 36,841,125 | ||||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 57,023,641 | ||||
Net realized gains distributions from affiliated underlying funds | 61,149,429 | ||||
Net realized gains/(losses) on futures contracts | (4,016,279 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (286,503,870 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (1,083,208 | ) | |||
|
| ||||
Net realized and Change in net unrealized gains/losses on investments | (173,430,287 | ) | |||
|
| ||||
Change in Net Assets Resulting From Operations | $ | (136,589,162 | ) | ||
|
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See accompanying notes to the financial statements.
5
AZL MVP Fusion Dynamic Moderate Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 36,841,125 | $ | 21,228,686 | ||||||
Net realized gains/(losses) on investments | 114,156,791 | 148,291,138 | ||||||||
Change in unrealized appreciation/depreciation on investments | (287,587,078 | ) | 140,203,541 | |||||||
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|
| |||||||
Change in net assets resulting from operations | (136,589,162 | ) | 309,723,365 | |||||||
|
|
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| |||||||
Distributions to Shareholders:(a) | ||||||||||
Distributions | (167,837,097 | ) | (222,327,220 | ) | ||||||
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|
| |||||||
Change in net assets resulting from distributions to shareholders | (167,837,097 | ) | (222,327,220 | ) | ||||||
|
|
|
| |||||||
Capital Transactions: | ||||||||||
Proceeds from shares issued | 12,607,258 | 8,791,608 | ||||||||
Proceeds from dividends reinvested | 167,837,097 | 222,327,220 | ||||||||
Value of shares redeemed | (283,774,000 | ) | (293,361,499 | ) | ||||||
|
|
|
| |||||||
Change in net assets resulting from capital transactions | (103,329,645 | ) | (62,242,671 | ) | ||||||
|
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| |||||||
Change in net assets | (407,755,904 | ) | 25,153,474 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 2,361,486,376 | 2,336,332,902 | ||||||||
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|
| |||||||
End of period | $ | 1,953,730,472 | $ | 2,361,486,376 | ||||||
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| |||||||
Share Transactions: | ||||||||||
Shares issued | 1,082,105 | 727,313 | ||||||||
Dividends reinvested | 15,468,857 | 19,249,110 | ||||||||
Shares redeemed | (24,299,498 | ) | (24,205,850 | ) | ||||||
|
|
|
| |||||||
Change in shares | (7,748,536 | ) | (4,229,427 | ) | ||||||
|
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Fusion Dynamic Moderate Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 11.97 | $ | 11.60 | $ | 12.15 | $ | 13.05 | $ | 12.68 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.21 | 0.12 | 0.18 | 0.22 | 0.14 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.93 | ) | 1.46 | 0.32 | (0.45 | ) | 0.40 | ||||||||||||||||||
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Total from Investment Activities | (0.72 | ) | 1.58 | 0.50 | (0.23 | ) | 0.54 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.14 | ) | (0.20 | ) | (0.27 | ) | (0.17 | ) | (0.17 | ) | |||||||||||||||
Net Realized Gains | (0.80 | ) | (1.01 | ) | (0.78 | ) | (0.50 | ) | — | ||||||||||||||||
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Total Dividends | (0.94 | ) | (1.21 | ) | (1.05 | ) | (0.67 | ) | (0.17 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 10.31 | $ | 11.97 | $ | 11.60 | $ | 12.15 | $ | 13.05 | |||||||||||||||
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Total Return(a) | (6.46 | )% | 13.98 | % | 4.29 | % | (1.71 | )% | 4.24 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 1,953,730 | $ | 2,361,486 | $ | 2,336,333 | $ | 2,466,434 | $ | 2,724,412 | |||||||||||||||
Net Investment Income/(Loss) | 1.66 | % | 0.90 | % | 1.38 | % | 1.61 | % | 1.04 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | |||||||||||||||
Expenses Net of Reductions* | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | 0.22 | % | |||||||||||||||
Portfolio Turnover Rate | 18 | % | 17 | % | 58 | % | 13 | % | 20 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
See accompanying notes to the financial statements.
7
AZL MVP Fusion Dynamic Moderate Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Fusion Dynamic Moderate Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP Fusion Dynamic Moderate Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The monthly average notional amount for these contracts was $107.8 million for the year ended December 31, 2018. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 1,150,599 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 894,514 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk |
| |||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (4,016,279 | ) | $ | (2,210,584 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 1,127,376 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (36,719,006 | ) | ||
From net realized gains | (185,608,214 | ) | |||
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| ||||
Change in net assets resulting from distributions to shareholders | $ | (222,327,220 | ) |
9
AZL MVP Fusion Dynamic Moderate Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Fusion Dynamic Moderate Fund | 0.20 | % | 0.30 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL DFA International Core Equity Fund | $ | 119,970,024 | $ | 5,492,449 | $ | (7,882,505 | ) | $ | 1,086,045 | $ | (23,623,019 | ) | $ | 95,042,994 | 10,330,760 | $ | 2,011,305 | $ | 576,744 | ||||||||||||||||||||||||||
AZL DFA U.S. Core Equity Fund | 60,247,547 | 2,166,850 | (9,437,392 | ) | 2,363,013 | (7,972,919 | ) | 47,367,099 | 4,184,373 | 595,476 | 1,571,374 | ||||||||||||||||||||||||||||||||||
AZL DFA U.S. Small Cap Fund | 48,348,380 | 2,505,839 | (7,146,324 | ) | 1,621,049 | (9,112,203 | ) | 36,216,741 | 3,554,145 | 231,467 | 2,274,374 | ||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | 59,336,541 | 607,863 | (32,158,635 | ) | (882,081 | ) | (563,460 | ) | 26,340,228 | 2,487,274 | 607,861 | — | |||||||||||||||||||||||||||||||||
AZL FIAM Total Bond Fund | 195,092,711 | 5,215,362 | (25,721,933 | ) | (1,090,922 | ) | (6,727,845 | ) | 166,767,373 | 16,999,732 | 5,215,362 | — | |||||||||||||||||||||||||||||||||
AZL Gateway Fund | 83,822,440 | 691,905 | (31,525,589 | ) | 5,048,500 | (7,911,883 | ) | 50,125,373 | 3,997,239 | 691,906 | — | ||||||||||||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 310,202,260 | 9,544,687 | (87,726,644 | ) | 7,339,712 | (49,508,849 | ) | 189,851,166 | 13,322,889 | 6,414,203 | 3,130,484 | ||||||||||||||||||||||||||||||||||
AZL MetWest Total Return Bond Fund | 194,346,284 | 3,696,409 | (26,750,169 | ) | (978,989 | ) | (3,554,576 | ) | 166,758,959 | 16,726,074 | 3,696,408 | — | |||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 95,682,061 | 82,433,643 | (17,574,213 | ) | 3,300,987 | (34,245,828 | ) | 129,596,650 | 6,817,288 | 1,359,513 | 11,221,931 | ||||||||||||||||||||||||||||||||||
AZL MSCI Emerging Markets Equity Fund, Class 2 | 143,689,713 | 38,850,239 | (21,969,973 | ) | 3,914,185 | (29,442,489 | ) | 135,041,675 | 19,319,267 | 1,981,513 | 4,025,895 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Growth Index Fund, Class 2 | 231,038,729 | 41,189,416 | (121,987,807 | ) | 28,364,450 | (36,461,690 | ) | 142,143,098 | 10,505,772 | 1,424,632 | 12,608,384 | ||||||||||||||||||||||||||||||||||
AZL Russell 1000 Value Index Fund, Class 2 | 231,617,334 | 99,256,349 | (81,450,791 | ) | 6,782,243 | (48,941,984 | ) | 207,263,151 | 18,472,652 | 4,491,403 | 17,347,124 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 36,551,620 | 39,604,274 | (8,143,294 | ) | 1,803,422 | (16,373,578 | ) | 53,442,444 | 4,391,327 | 550,585 | 5,750,228 | ||||||||||||||||||||||||||||||||||
PIMCO VIT Income Portfolio | 95,562,194 | 3,345,007 | (12,676,208 | ) | 532,910 | (3,663,427 | ) | 83,100,476 | 8,013,546 | 2,757,858 | 587,149 | ||||||||||||||||||||||||||||||||||
PIMCO VIT Low Duration Portfolio | 155,302,712 | 30,514,242 | (21,289,680 | ) | (1,184,093 | ) | (1,364,017 | ) | 161,979,164 | 16,069,361 | 3,116,921 | — | |||||||||||||||||||||||||||||||||
PIMCO VIT Total Return Portfolio | 194,296,831 | 6,718,892 | (25,810,901 | ) | (996,790 | ) | (7,036,103 | ) | 167,171,929 | 15,951,520 | 4,661,846 | 2,055,742 | |||||||||||||||||||||||||||||||||
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$ | 2,255,107,381 | $ | 371,833,426 | $ | (539,252,058 | ) | $ | 57,023,641 | $ | (286,503,870 | ) | $ | 1,858,208,520 | 171,143,219 | $ | 39,808,259 | $ | 61,149,429 | |||||||||||||||||||||||||||
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10
AZL MVP Fusion Dynamic Moderate Fund
Notes to the Financial Statements
December 31, 2018
Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $20,396 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Fund of Funds Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments inopen-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 1,858,208,520 | $ | — | $ | — | $ | 1,858,208,520 | ||||||||||||
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Total Investment Securities | 1,858,208,520 | — | — | 1,858,208,520 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (256,085 | ) | — | — | (256,085 | ) | ||||||||||||||
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Total Investments | $ | 1,857,952,435 | $ | — | $ | — | $ | 1,857,952,435 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 371,833,426 | $ | 539,252,058 |
11
AZL MVP Fusion Dynamic Moderate Fund
Notes to the Financial Statements
December 31, 2018
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $1,916,969,672. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 14,762,695 | ||
Unrealized (depreciation) | (73,523,847 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | (58,761,152 | ) | |
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The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 47,347,962 | $ | 120,489,135 | $ | 167,837,097 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 36,719,006 | $ | 185,608,214 | $ | 222,327,220 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MVP Fusion Dynamic Moderate Fund | $ | 50,733,557 | $ | 101,174,014 | $ | — | $ | (58,761,152 | ) | $ | 93,146,419 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership of 85% of the Fund. As of December 31, 2018, the Fund had a controlling interest (in excess of 50%) in the AZL MetWest Total Return Bond Fund, which is affiliated with the Investment Adviser.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Fusion Dynamic Moderate Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Fusion Dynamic Moderate Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 9.32% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $22,523,353.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $120,489,135.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
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The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address,and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address,and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
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Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
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The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP Growth Index Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP Growth Index Strategy Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP Growth Index Strategy Fund.
|
What factors affected the Fund’s performance for the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP Growth Index Strategy Fund (the “Fund”) returned-6.45%. That compared to a-4.38%, 0.01% and a-3.00% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Growth Composite Index1, respectively.
The Fund is a fund of funds that pursues broad diversification across four equitysub-portfolios and one fixed-incomesub-portfolio. The four equitysub-portfolios pursue passive strategies that aim to achieve, before fees, returns similar to the S&P 500 Index, the S&P 400 Index2, the S&P 600 Index3 and the MSCI EAFE Index4, which represents shares of large companies in developed foreign markets. The fixed-incomesub-portfolio is an enhanced bond index strategy that seeks to achieve a return that exceeds that of the Bloomberg Barclays Capital U.S. Aggregate Bond Index. Generally, the Fund allocates 65% to 85% of its assets to the underlying equity index funds and between 15% and 35% to the underlying bond index fund.*
The Fund also employs the MVP (Managed Volatility Portfolio) risk management process, which is intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.
U.S. equities sustained a brief period of volatility in the first quarter, but still had healthy gains in the first three quarters of the year due to strong economic data coupled with positive earnings growth. However, volatility increased significantly during the fourth quarter, as investors became increasingly concerned with continuing interest rate hikes from the U.S. Federal Reserve Board (the Fed), political and economic uncertainty, and contentious trade negotiations. The S&P 500 fell 4.38% for the12-month period. The S&P 400 Index was also down, returning-11.08%, and the S&P 600 Index returned-8.48%. Growth stocks sharply outperformed value stocks in the first three quarters, but this trend reversed in the fourth quarter.
International developed markets, as measured by the MSCI EAFE Index (net), underperformed U.S. equities, returning-13.79% for the year. Although international developed markets underperformed U.S. equities in the first three quarters, they outperformed during the volatile fourth quarter.
The U.S. bond market ended the year flat, with a return of 0.01% for the Bloomberg Barclays U.S. Aggregate Bond Index. The Fed raised interest rates four times during the period—once per quarter. Although Treasury yields rose during the first three quarters, the yield curve flattened dramatically in the fourth quarter, leaving the intermediate portion of the curve inverted. Investment-grade corporate spreads widened sharply as investors became more risk averse.
The Fund, which invests in both U.S. and international markets, underperformed its blended benchmark during the12-month period. This underperformance was due largely to a strategic allocation to international equities, as these underperformed U.S. equities for most of the year. A strategic allocation to U.S.mid- andsmall-cap equities during the period also detracted from performance as these stocks underperformed U.S.large-cap equities.*
Within the Fund’s fixed income holdings, an overweight allocation to corporate bonds detracted from relative results, causing the Fund’s fixed income allocation to modestly lag its fixed income benchmark for the period.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the end of the year, the MVP risk management process reduced equity exposure. Over this short period, reduced equity exposure had little effect on relative performance.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Standard & Poor’s MidCap 400 Index (“S&P 400”) is the most widely used index formid-sized companies. The S&P 400 covers 7% of the U.S. equities market, and is part of a series of S&P U.S. indexes that can be used as building blocks for portfolio composition. |
3 | The Standard & Poor’s SmallCap 600 Index (“S&P 600”) covers approximately 3% of the domestic equities market. Measuring thesmall-cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. |
4 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. |
The indexes defined above are unmanaged. Investors cannot invest directly in an index.
1
AZL®MVP Growth Index Strategy Fund Review(Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Index Strategy Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small-tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
The performance of the Fund is expected to be lower than that of the Indexes because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss. | ||||
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities.
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments. traditional instruments. | ||||
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (1/10/12) | |||||||||||||
AZL® MVP Growth Index Strategy Fund | -6.45 | % | 5.03 | % | 4.12 | % | 7.36 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 12.30 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 2.12 | % | ||||||||
Growth Composite Index | -3.00 | % | 7.57 | % | 7.09 | % | 9.81 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MVP Growth Index Strategy Fund | 0.67 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.20% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.11%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Growth Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for
investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (75%) S&P 500 and (25%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
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AZL MVP Growth Index Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Growth Index Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Growth Index Strategy Fund | $ | 1,000.00 | $ | 929.00 | $ | 0.58 | 0.12 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Growth Index Strategy Fund | $ | 1,000.00 | $ | 1,024.60 | $ | 0.61 | 0.12 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Domestic Equity Funds | 51.1 | % | |||
Fixed Income Funds | 25.9 | ||||
International Equity Funds | 18.5 | ||||
Money Markets | — | ^ | |||
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Total Investment Securities | 95.5 | ||||
Net other assets (liabilities) | 4.5 | ||||
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Net Assets | 100.0 | % | |||
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^ | Represents less than 0.05%. |
3
AZL MVP Growth Index Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.5%): | ||||||||
Domestic Equity Funds (51.1%): | ||||||||
13,362,660 | AZL Mid Cap Index Fund, Class 2 | $ | 254,024,169 | |||||
58,805,701 | AZL S&P 500 Index Fund, Class 2 | 859,151,295 | ||||||
10,280,442 | AZL Small Cap Stock Index Fund, Class 2 | 125,112,978 | ||||||
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1,238,288,442 | ||||||||
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Fixed Income Funds (25.9%): | ||||||||
59,370,548 | AZL Enhanced Bond Index Fund | 628,734,103 | ||||||
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International Equity Funds (18.5%): | ||||||||
31,383,390 | AZL International Index Fund, Class 2 | 447,213,308 | ||||||
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Total Affiliated Investment Companies (Cost $2,249,766,741) | 2,314,235,853 | |||||||
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Shares | Fair Value | |||||||
Unaffiliated Investment Company (0.0%)+: | ||||||||
Money Markets (0.0%)+: | ||||||||
373,308 | Dreyfus Treasury Securities Cash Management Fund, Institutional Shares, 2.20% | $ | 373,308 | |||||
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Total Unaffiliated Investment Company (Cost $373,308) | 373,308 | |||||||
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Total Investment Securities (Cost $2,250,140,049) — 95.5%(a) | 2,314,609,161 | |||||||
Net other assets (liabilities) — 4.5% | 108,556,150 | |||||||
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Net Assets — 100.0% | $ | 2,423,165,311 | ||||||
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Percentages indicated are based on net assets as of December 31, 2018.
+ | Represents less than 0.05%. |
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $109,470,052 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Short Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/15/19 | 2,009 | $ | (251,647,340 | ) | $ | (7,604,221 | ) | ||||||||
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$ | (7,604,221 | ) | ||||||||||||||
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Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 228 | $ | 27,819,557 | $ | 660,548 | ||||||||||
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$ | 660,548 | |||||||||||||||
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Total Net Futures Contracts | $ | (6,943,673 | ) | |||||||||||||
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See accompanying notes to the financial statements.
4
AZL MVP Growth Index Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments innon-affiliates, at cost | $ | 373,308 | |||
Investments in affiliates, at cost | 2,249,766,741 | ||||
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Investments innon-affiliates, at value | $ | 373,308 | |||
Investments in affiliates, at value | 2,314,235,853 | ||||
Segregated cash for collateral | 109,470,052 | ||||
Interest and dividends receivable | 211,720 | ||||
Receivable for capital shares issued | 120,355 | ||||
Receivable for variation margin on futures contracts | | 173 | |||
Prepaid expenses | 25,340 | ||||
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Total Assets | | 2,424,436,801 | |||
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Liabilities: | |||||
Payable for affiliated investments purchased | 373,308 | ||||
Payable for capital shares redeemed | 609,078 | ||||
Manager fees payable | 210,600 | ||||
Administration fees payable | 4,445 | ||||
Custodian fees payable | 1,036 | ||||
Administrative and compliance services fees payable | 8,098 | ||||
Transfer agent fees payable | 577 | ||||
Trustee fees payable | 3,101 | ||||
Other accrued liabilities | 61,247 | ||||
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Total Liabilities | | 1,271,490 | |||
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Net Assets | $ | 2,423,165,311 | |||
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Net Assets Consist of: | |||||
Paid in capital | $ | 2,263,433,848 | |||
Total distributable earnings | 159,731,463 | ||||
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Net Assets | $ | 2,423,165,311 | |||
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Shares of beneficial interest (unlimited number of shares authorized, no par value) | 173,221,265 | ||||
Net Asset Value (offering and redemption price per share) | $ | 13.99 | |||
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 45,979,427 | |||
Interest | 2,243,190 | ||||
Dividends from non-affiliates | 7,334 | ||||
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Total Investment Income | 48,229,951 | ||||
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Expenses: | |||||
Manager fees | 2,644,860 | ||||
Administration fees | 67,589 | ||||
Custodian fees | 8,514 | ||||
Administrative and compliance services fees | 42,577 | ||||
Transfer agent fees | 7,090 | ||||
Trustee fees | 133,970 | ||||
Professional fees | 110,674 | ||||
Shareholder reports | 43,261 | ||||
Other expenses | 27,218 | ||||
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Total expenses | 3,085,753 | ||||
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Net Investment Income/(Loss) | 45,144,198 | ||||
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Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 5,694,913 | ||||
Net realized gains distributions from affiliated underlying funds | 73,669,654 | ||||
Net realized gains/(losses) on futures contracts | 733,818 | ||||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (285,831,994 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (8,378,348 | ) | |||
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Net realized and Change in net unrealized gains/losses on investments | (214,111,957 | ) | |||
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Change in Net Assets Resulting From Operations | $ | (168,967,759 | ) | ||
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See accompanying notes to the financial statements.
5
AZL MVP Growth Index Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 45,144,198 | $ | 17,933,830 | ||||||
Net realized gains/(losses) on investments | 80,098,385 | 82,582,429 | ||||||||
Change in unrealized appreciation/depreciation on investments | (294,210,342 | ) | 258,251,323 | |||||||
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Change in net assets resulting from operations | (168,967,759 | ) | 358,767,582 | |||||||
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Distributions to Shareholders:(a) | ||||||||||
Distributions | (102,284,487 | ) | (116,041,350 | ) | ||||||
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Change in net assets resulting from distributions to shareholders | (102,284,487 | ) | (116,041,350 | ) | ||||||
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Capital Transactions: | ||||||||||
Proceeds from shares issued | 104,828,201 | 137,649,163 | ||||||||
Proceeds from dividends reinvested | 102,284,487 | 116,041,350 | ||||||||
Value of shares redeemed | (147,250,114 | ) | (105,234,549 | ) | ||||||
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Change in net assets resulting from capital transactions | 59,862,574 | 148,455,964 | ||||||||
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Change in net assets | (211,389,672 | ) | 391,182,196 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 2,634,554,983 | 2,243,372,787 | ||||||||
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End of period | $ | 2,423,165,311 | $ | 2,634,554,983 | ||||||
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Share Transactions: | ||||||||||
Shares issued | 6,733,674 | 9,175,322 | ||||||||
Dividends reinvested | 6,814,423 | 7,824,771 | ||||||||
Shares redeemed | (9,619,518 | ) | (7,008,917 | ) | ||||||
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Change in shares | 3,928,579 | 9,991,176 | ||||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Growth Index Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 15.56 | $ | 14.08 | $ | 13.55 | $ | 13.90 | $ | 13.23 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.26 | 0.11 | 0.14 | 0.25 | 0.10 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (1.22 | ) | 2.10 | 0.77 | (0.36 | ) | 0.75 | ||||||||||||||||||
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Total from Investment Activities | (0.96 | ) | 2.21 | 0.91 | (0.11 | ) | 0.85 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.13 | ) | (0.18 | ) | (0.30 | ) | (0.12 | ) | (0.10 | ) | |||||||||||||||
Net Realized Gains | (0.48 | ) | (0.55 | ) | (0.08 | ) | (0.12 | ) | (0.08 | ) | |||||||||||||||
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Total Dividends | (0.61 | ) | (0.73 | ) | (0.38 | ) | (0.24 | ) | (0.18 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 13.99 | $ | 15.56 | $ | 14.08 | $ | 13.55 | $ | 13.90 | |||||||||||||||
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Total Return(a) | (6.45 | )% | 15.96 | % | 6.80 | % | (0.80 | )% | 6.47 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 2,423,165 | $ | 2,634,555 | $ | 2,243,373 | $ | 1,392,460 | $ | 1,118,257 | |||||||||||||||
Net Investment Income/(Loss) | 1.71 | % | 0.74 | % | 1.55 | % | 2.17 | % | 1.05 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.12 | % | 0.11 | % | 0.12 | % | 0.12 | % | 0.12 | % | |||||||||||||||
Expenses Net of Reductions* | 0.12 | % | 0.11 | % | 0.12 | % | 0.12 | % | 0.12 | % | |||||||||||||||
Portfolio Turnover Rate | 4 | % | 4 | % | 4 | %(c) | 1 | % | 1 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Cost of purchases and proceeds from sales of portfolio securities incurred to realign the Fund’s portfolio after the fund merger are excluded from the portfolio turnover rate. If such amounts had not been excluded, the portfolio turnover rate would have been 4%. |
See accompanying notes to the financial statements.
7
AZL MVP Growth Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Growth Index Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP Growth Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $108.3 million and the monthly average notional amount for short contracts was $28.9 million. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 7,604,221 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 660,548 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk | ||||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | 733,818 | $ | (9,213,980 | ) | ||||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 835,632 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (28,019,405 | ) | ||
From net realized gains | (88,021,945 | ) | |||
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Change in net assets resulting from distributions to shareholders | $ | (116,041,350 | ) |
9
AZL MVP Growth Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Growth Index Strategy Fund | 0.10 | % | 0.20 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions | |||||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 620,115,513 | $ | 51,285,434 | $ | (25,443,802 | ) | $ | (1,604,672 | ) | $ | (15,618,370 | ) | $ | 628,734,103 | 59,370,548 | $ | 13,753,910 | $ | — | |||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 500,304,956 | 42,776,669 | (4,171,472 | ) | 178,247 | (91,875,092 | ) | 447,213,308 | 31,383,390 | 13,364,970 | 6,522,840 | ||||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 293,043,151 | 25,075,504 | (6,751,950 | ) | (41 | ) | (57,342,495 | ) | 254,024,169 | 13,362,660 | 2,709,583 | 22,365,921 | |||||||||||||||||||||||||||||||||
AZL S&P 500 Index Fund, Class 2 | 943,860,209 | 52,612,501 | (50,094,387 | ) | 6,911,393 | (94,138,421 | ) | 859,151,295 | 58,805,701 | 14,851,587 | 31,210,403 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 145,968,711 | 14,869,867 | (9,077,970 | ) | 209,986 | (26,857,616 | ) | 125,112,978 | 10,280,442 | 1,299,377 | 13,570,490 | ||||||||||||||||||||||||||||||||||
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$ | 2,503,292,540 | $ | 186,619,975 | $ | (95,539,581 | ) | $ | 5,694,913 | $ | (285,831,994 | ) | $ | 2,314,235,853 | 173,202,741 | $ | 45,979,427 | $ | 73,669,654 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $24,012 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings.Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
10
AZL MVP Growth Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments inopen-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 2,314,235,853 | $ | — | $ | — | $ | 2,314,235,853 | ||||||||||||
Unaffiliated Investment Company | 373,308 | — | — | 373,308 | ||||||||||||||||
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Total Investment Securities | 2,314,609,161 | — | — | 2,314,609,161 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (6,943,673 | ) | — | — | (6,943,673 | ) | ||||||||||||||
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Total Investments | $ | 2,307,665,488 | $ | — | $ | — | $ | 2,307,665,488 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Growth Index Strategy Fund | $ | 186,619,975 | $ | 95,539,581 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $2,256,522,437. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 110,028,439 | ||
Unrealized (depreciation) | (51,941,715 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | 58,086,724 | ||
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AZL MVP Growth Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Growth Index Strategy Fund | $ | 28,652,893 | $ | 73,631,594 | $ | 102,284,487 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Growth Index Strategy Fund | $ | 28,362,008 | $ | 87,679,342 | $ | 116,041,350 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total Earnings/ | |||||||||||||||||||||
AZL MVP Growth Index Strategy Fund | $ | 65,147,887 | $ | 63,836,044 | $ | — | $ | 58,086,724 | $ | 187,070,655 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales and straddles. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2(a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership of 85% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Growth Index Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Growth Index Strategy Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 41.11% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $6,907,686.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $73,631,595.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Fund of Funds Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address,and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other Directorships AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address,and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other Directorships AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP Moderate Index Strategy Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP Moderate Index Strategy Fund Review (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP Moderate Index Strategy Fund.
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What factors affected the Fund’s performance for the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP Moderate Index Strategy Fund (the “Fund”) returned-5.26%. That compared to a-4.38%, 0.01% and a-2.26% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Moderate Composite Index1, respectively.
The Fund is designed to provide a diversified portfolio consisting of index funds in equity and fixed income asset classes, combined with the MVP (Managed Volatility Portfolio) risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.
U.S. equities experienced healthy gains in the first three quarters as a result of strong economic data and positive earnings growth. However, volatility increased during the fourth quarter. U.S.large-cap equities fell, as measured by the S&P 500 Index, due to investors’ concerns over continued Federal Reserve Board (the Fed) interest rate hikes, political and economic uncertainty, and contentious global trade negotiations. Mid- andsmall-cap stocks also performed poorly for the year. Growth stocks sharply outperformed value stocks in the first three quarters, but this trend reversed in the fourth quarter.
International developed markets, as measured by the MSCI EAFE Index (net)2, underperformed U.S. domestic markets, returning-13.79% for the12-month period. Thoughnon-U.S. developed markets underperformed U.S. equities during the first three quarters, they outpaced U.S. stocks during the volatile fourth quarter.
The U.S. bond market ended the year flat, with a return of just 0.01% for the Bloomberg Barclays U.S. Aggregate Bond Index. The Fed raised interest rates four times during the12-month period—once per quarter. Treasury yields rose during the first three quarters, however, the yield curve flattened dramatically in the fourth quarter, leaving the intermediate portion of the curve inverted. Investment-grade corporate spreads widened sharply as investors became more risk averse.
The Fund, which invests in both U.S. and international markets, underperformed its blended benchmark for the12- month period. This underperformance was due largely to a strategic allocation to international equities, as these underperformed U.S. equities for most of the year. A strategic allocation to U.S.mid- andsmall-cap equities during the period detracted from performance as well, as these underperformed U.S.large-cap equities. An overweight allocation to corporate bonds hurt relative results, causing the Fund’s fixed-income allocation to modestly lag its fixed-income benchmark for the period.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the
period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the very end of the year, and after stocks had already declined significantly, the MVP risk management process reduced equity exposure. During the short period remaining in the year, this reduced equity exposure detracted from relative performance as stocks rallied in the final days of the period. *
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
2 | The Morgan Stanley Capital International, Europe, Australasia and Far East (“MSCI EAFE”) Index is a free float-adjusted market capitalization-weighted index that is unmanaged and is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. Investors cannot invest directly in an index. |
1
AZL® MVP Moderate Index Strategy Fund Review (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Index Strategy Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
The performance of the Fund is expected to be lower than that of the Indexes because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities.
Bonds offer a relatively stable level of income, although bond prices will fluctuate, providing the potential for principal gain or loss.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s prospectus.
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Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
Since | ||||||||||||||||
1 | 3 | 5 | Inception | |||||||||||||
Year | Year | Year | (1/10/12) | |||||||||||||
AZL® MVP Moderate Index Strategy Fund | -5.26 | % | 4.19 | % | 3.48 | % | 6.98 | % | ||||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.49 | % | 12.30 | % | ||||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.52 | % | 2.12 | % | ||||||||
Moderate Composite Index | -2.26 | % | 6.52 | % | 6.22 | % | 8.30 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MVP Moderate Index Strategy Fund | 0.69 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.15% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.12%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard & Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Moderate Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (60%) S&P 500 and (40%) Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP Moderate Index Strategy Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP Moderate Index Strategy Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Moderate Index Strategy Fund | $ | 1,000.00 | $ | 944.20 | $ | 0.64 | 0.13 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP Moderate Index Strategy Fund | $ | 1,000.00 | $ | 1,024.55 | $ | 0.66 | 0.13 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Fixed Income Funds | 41.1 | % | |||
Domestic Equity Funds | 39.6 | ||||
International Equity Funds | 14.3 | ||||
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Total Investment Securities | 95.0 | ||||
Net other assets (liabilities) | 5.0 | ||||
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Net Assets | 100.0 | % | |||
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3
AZL MVP Moderate Index Strategy Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.0%): | ||||||||
Domestic Equity Funds (39.6%): | ||||||||
2,151,458 | AZL Mid Cap Index Fund, Class 2 | $ | 40,899,214 | |||||
9,085,420 | AZL S&P 500 Index Fund, Class 2 | 132,737,984 | ||||||
1,634,016 | AZL Small Cap Stock Index Fund, Class 2 | 19,885,973 | ||||||
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193,523,171 | ||||||||
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Fixed Income Funds (41.1%): | ||||||||
19,001,640 | AZL Enhanced Bond Index Fund | 201,227,371 | ||||||
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Shares | Fair Value | |||||||
Affiliated Investment Companies, continued | ||||||||
International Equity Funds (14.3%): | ||||||||
4,914,048 | AZL International Index Fund, Class 2 | $ | 70,025,179 | |||||
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Total Affiliated Investment Companies (Cost $462,045,201) | 464,775,721 | |||||||
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Total Investment Securities | 464,775,721 | |||||||
Net other assets (liabilities) — 5.0% | 24,296,465 | |||||||
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Net Assets — 100.0% | $ | 489,072,186 | ||||||
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Percentages indicated are based on net assets as of December 31, 2018.
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $23,831,772 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 IndexE-Mini March Futures (U.S. Dollar) | 3/15/19 | 2 | $ | 250,520 | $ | 292 | ||||||||||
U.S. Treasury10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 78 | 9,517,217 | 223,704 | ||||||||||||
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$ | 223,996 | |||||||||||||||
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See accompanying notes to the financial statements.
4
AZL MVP Moderate Index Strategy Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investments in affiliates, at cost | $ | 462,045,201 | |||
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Investments in affiliates, at value | 464,775,721 | ||||
Cash | 46,815 | ||||
Segregated cash for collateral | 23,831,772 | ||||
Interest and dividends receivable | 42,076 | ||||
Receivable for capital shares issued | 493,519 | ||||
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Total Assets | | 489,189,903 | |||
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Liabilities: | |||||
Payable for affiliated investments purchased | 46,815 | ||||
Payable for variation margin on futures contracts | | 628 | |||
Manager fees payable | 42,724 | ||||
Administration fees payable | 4,514 | ||||
Custodian fees payable | 478 | ||||
Administrative and compliance services fees payable | 1,664 | ||||
Transfer agent fees payable | 447 | ||||
Trustee fees payable | 637 | ||||
Other accrued liabilities | 19,810 | ||||
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Total Liabilities | | 117,717 | |||
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Net Assets | $ | 489,072,186 | |||
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Net Assets Consist of: | |||||
Paid in capital | $ | 460,671,877 | |||
Total distributable earnings | 28,400,309 | ||||
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Net Assets | $ | 489,072,186 | |||
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Shares of beneficial interest (unlimited number of shares authorized, no par value) | 36,828,473 | ||||
Net Asset Value (offering and redemption price per share) | $ | 13.28 | |||
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 9,470,011 | |||
Interest | 454,726 | ||||
Dividends from non-affiliates | 542 | ||||
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Total Investment Income | 9,925,279 | ||||
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Expenses: | |||||
Manager fees | 534,839 | ||||
Administration fees | 54,900 | ||||
Custodian fees | 5,002 | ||||
Administrative and compliance services fees | 8,755 | ||||
Transfer agent fees | 5,572 | ||||
Trustee fees | 27,518 | ||||
Professional fees | 22,572 | ||||
Shareholder reports | 13,928 | ||||
Other expenses | 14,599 | ||||
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Total expenses | 687,685 | ||||
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Net Investment Income/(Loss) | 9,237,594 | ||||
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Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 6,503,157 | ||||
Net realized gains distributions from affiliated underlying funds | 11,585,609 | ||||
Net realized gains/(losses) on futures contracts | (1,671,319 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (52,560,364 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | 14,787 | ||||
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Net realized and Change in net unrealized gains/losses on investments | (36,128,130 | ) | |||
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Change in Net Assets Resulting From Operations | $ | (26,890,536 | ) | ||
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See accompanying notes to the financial statements.
5
AZL MVP Moderate Index Strategy Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 9,237,594 | $ | 3,927,262 | ||||||
Net realized gains/(losses) on investments | 16,417,447 | 19,344,279 | ||||||||
Change in unrealized appreciation/depreciation on investments | (52,545,577 | ) | 43,328,822 | |||||||
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Change in net assets resulting from operations | (26,890,536 | ) | 66,600,363 | |||||||
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Distributions to Shareholders:(a) | ||||||||||
Distributions | (23,512,014 | ) | (21,285,161 | ) | ||||||
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Change in net assets resulting from distributions to shareholders | (23,512,014 | ) | (21,285,161 | ) | ||||||
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Capital Transactions: | ||||||||||
Proceeds from shares issued | 10,442,882 | 12,154,646 | ||||||||
Proceeds from dividends reinvested | 23,512,014 | 21,285,161 | ||||||||
Value of shares redeemed | (46,347,799 | ) | (46,999,547 | ) | ||||||
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Change in net assets resulting from capital transactions | (12,392,903 | ) | (13,559,740 | ) | ||||||
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Change in net assets | (62,795,453 | ) | 31,755,462 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 551,867,639 | 520,112,177 | ||||||||
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End of period | $ | 489,072,186 | $ | 551,867,639 | ||||||
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Share Transactions: | ||||||||||
Shares issued | 718,590 | 848,360 | ||||||||
Dividends reinvested | 1,679,430 | 1,506,381 | ||||||||
Shares redeemed | (3,157,169 | ) | (3,305,040 | ) | ||||||
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Change in shares | (759,149 | ) | (950,299 | ) | ||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP Moderate Index Strategy Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | |||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 14.68 | $ | 13.50 | $ | 13.49 | $ | 14.37 | $ | 13.34 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.26 | 0.12 | 0.23 | 0.25 | 0.06 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (1.00 | ) | 1.64 | 0.48 | (0.71 | ) | 1.06 | ||||||||||||||||||
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Total from Investment Activities | (0.74 | ) | 1.76 | 0.71 | (0.46 | ) | 1.12 | ||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.13 | ) | (0.24 | ) | (0.30 | ) | (0.07 | ) | (0.05 | ) | |||||||||||||||
Net Realized Gains | (0.53 | ) | (0.34 | ) | (0.40 | ) | (0.35 | ) | (0.04 | ) | |||||||||||||||
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Total Dividends | (0.66 | ) | (0.58 | ) | (0.70 | ) | (0.42 | ) | (0.09 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 13.28 | $ | 14.68 | $ | 13.50 | $ | 13.49 | $ | 14.37 | |||||||||||||||
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Total Return(a) | (5.26 | )% | 13.21 | % | 5.43 | % | (3.21 | )% | 8.42 | % | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 489,072 | $ | 551,868 | $ | 520,112 | $ | 520,844 | $ | 467,457 | |||||||||||||||
Net Investment Income/(Loss) | 1.73 | % | 0.73 | % | 1.71 | % | 1.97 | % | 0.65 | % | |||||||||||||||
Expenses Before Reductions*(b) | 0.13 | % | 0.12 | % | 0.13 | % | 0.13 | % | 0.14 | % | |||||||||||||||
Expenses Net of Reductions* | 0.13 | % | 0.12 | % | 0.13 | % | 0.13 | % | 0.14 | % | |||||||||||||||
Portfolio Turnover Rate | 5 | % | 5 | % | 108 | %(c) | 2 | % | 1 | % |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(b) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(c) | Effective October 14, 2016, the investment strategy of the Fund changed. Costs of purchases and proceeds from sales of portfolio securities associated with the changes in investment strategy contributed to higher portfolio turnover rate for the period ended December 31, 2016 as compared to prior years. |
See accompanying notes to the financial statements.
7
AZL MVP Moderate Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversifiedopen-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP Moderate Index Strategy Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds”, which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments, money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
8
AZL MVP Moderate Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
Futures Contracts
During the year ended December 31, 2018, the Fund did not enter into any futures contracts. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The monthly average notional amount for these contracts was $25.3 million for the year ended December 31, 2018. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk | ||||||||||||
Equity Contracts | Receivable for variation margin on futures contracts | $ | 292 | Payable for variation margin on futures contracts | $ | — | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 223,704 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives Recognized | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk | ||||||||||
Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (1,671,319 | ) | $ | (268,560 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 283,347 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under RegulationS-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (8,896,990 | ) | ||
From net realized gains | (12,388,171 | ) | |||
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Change in net assets resulting from distributions to shareholders | $ | (21,285,161 | ) |
9
AZL MVP Moderate Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP Moderate Index Strategy Fund | 0.10 | % | 0.15 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 205,949,814 | $ | 9,060,261 | $ | (8,105,085 | ) | $ | (332,821 | ) | $ | (5,344,798 | ) | $ | 201,227,371 | 19,001,640 | $ | 4,421,640 | $ | — | |||||||||||||||||||||||||
AZL International Index Fund, Class 2 | 84,102,886 | 4,164,903 | (3,740,731 | ) | 756,926 | (15,258,805 | ) | 70,025,179 | 4,914,048 | 2,126,305 | 1,037,753 | ||||||||||||||||||||||||||||||||||
AZL Mid Cap Index Fund, Class 2 | 50,599,678 | 4,037,287 | (4,601,401 | ) | 865,964 | (10,002,314 | ) | 40,899,214 | 2,151,458 | 436,258 | 3,601,030 | ||||||||||||||||||||||||||||||||||
AZL S&P 500 Index Fund, Class 2 | 157,945,419 | 7,632,805 | (20,185,913 | ) | 4,275,930 | (16,930,257 | ) | 132,737,984 | 9,085,420 | 2,279,280 | 4,789,876 | ||||||||||||||||||||||||||||||||||
AZL Small Cap Stock Index Fund, Class 2 | 25,801,367 | 2,363,478 | (4,191,840 | ) | 937,158 | (5,024,190 | ) | 19,885,973 | 1,634,016 | 206,528 | 2,156,950 | ||||||||||||||||||||||||||||||||||
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$ | 524,399,164 | $ | 27,258,734 | $ | (40,824,970 | ) | $ | 6,503,157 | $ | (52,560,364 | ) | $ | 464,775,721 | 36,786,582 | $ | 9,470,011 | $ | 11,585,609 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonableout-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certainout-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $4,879 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, eachnon-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
10
AZL MVP Moderate Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments inopen-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 464,775,721 | $ | — | $ | — | $ | 464,775,721 | ||||||||||||
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Total Investment Securities | 464,775,721 | — | — | 464,775,721 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | 223,996 | — | — | 223,996 | ||||||||||||||||
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Total Investments | $ | 464,999,717 | $ | — | $ | — | $ | 464,999,717 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP Moderate Index Strategy Fund | $ | 27,258,734 | $ | 40,824,970 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $462,238,025. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 10,298,592 | ||
Unrealized (depreciation) | (7,760,896 | ) | ||
|
| |||
Net unrealized appreciation/(depreciation) | $ | 2,537,696 | ||
|
|
11
AZL MVP Moderate Index Strategy Fund
Notes to the Financial Statements
December 31, 2018
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Moderate Index Strategy Fund | $ | 9,436,246 | $ | 14,075,768 | $ | 23,512,014 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP Moderate Index Strategy Fund | $ | 8,896,990 | $ | 12,388,171 | $ | 21,285,161 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ Depreciation(a) | Total Accumulated Earnings/ (Deficit) | |||||||||||||||||||||
AZL MVP Moderate Index Strategy Fund | $ | 11,104,558 | $ | 14,900,672 | $ | — | $ | 2,537,696 | $ | 28,542,926 |
(a) | The difference between book-basis andtax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales and straddles. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 85% of the Fund.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP Moderate Index Strategy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP Moderate Index Strategy Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 17.04% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $4,833,332.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $14,075,768.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent12-month period ended June 30th is available (i) without charge, upon request, by calling800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on FormN-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Peter R. Burnim (1947) Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen for Allianz VIP and VIP FOF Trust | Other AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
18
Officers
Name, Address, and Age | Positions Held with Allianz VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Suite 1500 50 South Sixth Street | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC. | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
AZL® MVP T. Rowe Price Capital Appreciation Plus Fund
Annual Report
December 31, 2018
Management Discussion and Analysis
Page 1
Expense Examples and Portfolio Composition
Page 3
Schedule of Portfolio Investments
Page 4
Statement of Assets and Liabilities
Page 5
Page 5
Statements of Changes in Net Assets
Page 6
Page 7
Notes to the Financial Statements
Page 8
Report of Independent Registered Public Accounting Firm
Page 13
Other Federal Income Tax Information
Page 14
Page 15
Approval of Investment Advisory Agreement
Page 16
Information about the Board of Trustees and Officers
Page 18
This report is submitted for the general information of the shareholder of the Fund. The report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which contains details concerning the sales charges and other pertinent information.
AZL® MVP T. Rowe Price Capital Appreciation Plus Fund (Unaudited)
Allianz Investment Management LLC serves as the Manager for the AZL® MVP T. Rowe Price Capital Appreciation Plus Fund.
|
What factors affected the Fund’s performance during the year ended December 31, 2018?
For the year ended December 31, 2018, the AZL® MVP T. Rowe Price Capital Appreciation Plus Fund (the “Fund”) returned-1.67%. That compared to a-4.38%, 0.01% and a-2.26% total return for its benchmarks, the S&P 500 Index1, the Bloomberg Barclays U.S. Aggregate Bond Index1, and the Moderate Composite Index1, respectively.
The Fund is a fund of funds that invests primarily in a combination of three underlying mutual funds (the “Underlying Funds”), which are managed by the Manager. The Fund is designed to provide a diversified portfolio consisting of Underlying Funds in equity and fixed income asset classes, combined with the MVP (Managed Volatility Portfolio) risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk, such as the current level of fund volatility.*
U.S. stocks declined in 2018. It was the worst year for the U.S. equity market since 2008. Stocks actually rose for much of the year, though the advance was somewhat sluggish. Market volatility was elevated through 2018, thanks partly to rising interest rates: The Federal Reserve Board (the Fed) continued its normalization of monetary policy, with four short-term interest rate hikes in 2018.
While most major U.S. stock indexes reachedall-time highs around the end of the third quarter of 2018, equities plunged in the final months of the year. Several indexes were in bear market territory—down at least 20% from recent highs—by the end of the year. Stocks fell sharply due to multiple factors including: expectations of additional interest rate increases from the Fed in 2019; expectations of slowing corporate earnings growth in 2019, as tailwinds from the late-2017 tax reform that boosted corporate earnings in 2018 subside; signs of slowing economic growth in different parts of the world; and increased U.S.-China tensions.
The Fund’s exposure to passive strategies through the AZL S&P 500 Index Fund and the AZL Enhanced Bond Index Fund dragged on returns, as those portions underperformed the active equity and fixed income portions of the AZL T. Rowe Price Capital Appreciation Fund.*
The active equity portion of the Fund strongly outperformed the S&P 500 Index. The portfolio’s fixed income holdings posted a slightly negative return during the12-month period, modestly underperforming the Bloomberg Barclays U.S. Aggregate Bond Index. Within equities, the utilities sector contributed the most to relative performance driven by both an overweight position and stock selection. The information technology sector also contributed to relative results due to stock selection decisions. On the downside, the consumer discretionary sector detracted from relative performance due to stock selection effects.*
The Fund’s above-benchmark exposure to high-yield securities within its fixed income holdings weighed on performance relative to its fixed income benchmark. The portfolio’s underweight to U.S. Treasuries also detracted from relative results as Treasuries outperformed other components of the Bloomberg Barclays U.S. Aggregate Bond Index.*
Overall, the Fund’s exposure to equities increased compared to the beginning of the reporting period. The Fund opportunistically added to several names in the utilities and industrials sectors that offer attractive long-term risk/return profiles. The Fund also trimmed select names that had performed well in the healthcare sector. *
The Fund’s overall weighting in fixed income increased during the year, as the subadvisor added to bank loans and select high-quality shorter duration investment-grade bonds. Late in the year, the Fund added to select high-yield and investment-grade bonds amid wider credit spreads.*
The Fund maintained exposure to covered call options—a type of derivative that provided downside protection for the portfolio while offering the benefits of owning a stock, such as dividends and capital appreciation, so long as the stock remains below the option strike price. The Fund’s covered call strategy made a modestly positive contribution to the Fund’s return. The Fund held rights at various points during the period to buy stocks at a predetermined price in the future, generating minimal exposure.*
The MVP risk management process, which includes the use of derivatives, worked as intended during the period under review. The MVP risk management process generally maintained a neutral equity allocation for most of the year relative to its target. However, as market volatility increased at the very end of the year, and after stocks had already declined significantly, the MVP risk management process reduced equity exposure. During the short period remaining in the year, this reduced equity exposure detracted from relative performance as stocks rallied in the final days of the period.*
Past performance does not guarantee future results.
* | The Fund’s portfolio composition is subject to change. There is no guarantee that any sectors mentioned will continue to perform well or that securities in such sectors will be held by the Fund in the future. The information contained in this commentary is for informational purposes only and should not be construed as a recommendation to purchase or sell securities in the sector mentioned. The Fund’s holdings and weightings are as of December 31, 2018. |
1 | For a complete description of the Fund’s performance benchmarks please refer to page 2 of this report. |
1
AZL® MVP T. Rowe Price Capital Appreciation Plus Fund (Unaudited)
Fund Objective
The Fund’s investment objective is to seek long-term capital appreciation with preservation of capital as an important intermediate-term objective. This objective may be changed by the Trustees of the Fund without shareholder approval. The Fund seeks to achieve its objective by investing in a combination of Index Strategy Underlying Funds that represent different classes in the Fund’s asset allocation.
Investment Concerns
The Fund invests in underlying funds, so its investment performance is directly related to the performance of those underlying funds. Before investing, investors should assess the risks associated with and types of investments made by each of the underlying funds in which the Fund invests.
International investing may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.
The performance of the Fund is expected to be lower than that of the Indexes because of Fund fees and expenses. Securities in which the Fund will invest may involve substantial risk and may be subject to sudden severe price declines.
Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Small- tomid-capitalization companies typically have a higher risk of failure and historically have experienced a greater degree of volatility.
Investing in a single industry or sector, or concentrating investments in a limited number of industries or sectors, tends to increase the risk that economic, political, or regulatory developments affecting certain industries or sectors will have a large impact on the value of the portfolio.
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High-yield bonds have a higher risk of default or other adverse credit events, but have the potential to pay higher earnings over investment-grade bonds. The higher risk of default, or the inability of the creditor to repay its debt, is the primary reason for the higher interest rates on high-yield bonds.
Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund’s performance may be more volatile than if it did not hold these securities. | ||||
Debt securities held by the Fund may decline in value due to rising interest rates. Interest rates in the U.S. have been gradually increasing and are expected to continue on this path in the near future, which may increase the Fund’s exposure to risks related to rising rates.
Investing in derivatives instruments involves risks that may be different from or greater than the risk associated with investing directly in securities or other traditional instruments.
For a complete description of these and other risks associated with investing in a mutual Fund, please refer to the Fund’s | ||||
Growth of $10,000 Investment
The chart above represents a comparison of a hypothetical investment in the Fund versus a similar investment in the Fund’s benchmarks as well as the component indexes of the Fund’s benchmark, and represents the reinvestment of dividends and capital gains in the Fund.
Average Annual Total Returns as of December 31, 2018
1 Year | 3 Year | Since Inception (1/10/14) | ||||||||||
AZL® MVP T. Rowe Price Capital Appreciation Plus Fund | -1.67 | % | 6.52 | % | 6.99 | % | ||||||
S&P 500 Index | -4.38 | % | 9.26 | % | 8.60 | % | ||||||
Bloomberg Barclays U.S. Aggregate Bond Index | 0.01 | % | 2.06 | % | 2.39 | % | ||||||
Moderate Composite Index | -2.26 | % | 6.52 | % | 6.23 | % |
Past performance does not guarantee future results. The performance data quoted represents past performance and current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than the original cost. To obtain performance information current to the most recent month end, please visit www.Allianzlife.com.
Expense Ratio | Gross | |||
AZL® MVP T. Rowe Price Capital Appreciation Plus Fund | 0.87 | % |
The above expense ratio is based on the current Fund prospectus dated May 1, 2018. The Manager and the Fund have entered into a written contract limiting operating expenses, excluding certain expenses (such as interest expense and acquired fund fees and expenses), to 0.15% through April 30, 2020. Additional information pertaining to the December 31, 2018 expense ratio can be found in the Financial Highlights.
Acquired fund fees and expenses are incurred indirectly by the Fund through the valuation of the Fund’s investments in the Permitted Underlying Funds. Accordingly, acquired fund fees and expenses affect the Fund’s total returns. Because these fees and expenses are not included in the Fund’s financial highlights, the Fund’s total annual fund operating expenses, as shown in the current prospectus, do not correlate to the ratios of expenses to average net assets shown in the Financial Highlights. Without acquired fund fees and expenses the Fund’s gross expense ratio would be 0.12%.
The total return of the Fund does not reflect the effect of any insurance charges, the annual maintenance fee or the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Such charges, fees and tax payments would reduce the performance quoted.
The Fund’s performance is measured against the Standard and Poor’s 500 Index (“S&P 500”), the Bloomberg Barclays U.S. Aggregate Bond Index and the Moderate Composite Index (“Composite”). The S&P 500 is representative of 500 selected common stocks, most of which are listed on the New York Stock Exchange, and is a measure of the U.S. Stock market as a whole. The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Composite is a blended index comprised of (60%) of the S&P 500 and (40%) of the Bloomberg Barclays U.S. Aggregate Bond Index. These indexes are unmanaged and do not reflect the deduction of fees associated with a mutual fund, such as investment management and fund accounting fees. The Fund’s performance reflects the deduction of fees for services provided to the Fund. Investors cannot invest directly in an index.
2
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Expense Examples
(Unaudited)
As a shareholder of the AZL MVP T. Rowe Price Capital Appreciation Plus Fund (the “Fund”), you incur ongoing costs, including management fees, distribution fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Please note that the expenses shown in each table do not reflect expenses that apply to the subaccount or the insurance contract. If the expenses that apply to the subaccount of the insurance contract were included, your costs would have been higher.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the periods presented below.
TheActual Expense table below provides information about actual account values and actual expenses. You may use the information below, 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 table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | $ | 1,000.00 | $ | 968.00 | $ | 0.60 | 0.12 | % |
TheHypothetical Expense table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s 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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning Account Value 7/1/18 | Ending Account Value 12/31/18 | Expenses Paid During Period 7/1/18 - 12/31/18* | Annualized Expense Ratio During Period 7/1/18 - 12/31/18 | |||||||||||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | $ | 1,000.00 | $ | 1,024.60 | $ | 0.61 | 0.12 | % |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by 184/365 (to reflect the one half year period). |
Portfolio Composition
(Unaudited)
Investments | Percent of Net Assets | ||||
Domestic Equity Funds | 76.5 | % | |||
Fixed Income Funds | 19.0 | ||||
Money Markets | — | ^ | |||
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Total Investment Securities | 95.5 | ||||
Net other assets (liabilities) | 4.5 | ||||
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Net Assets | 100.0 | % | |||
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^ | Represents less than 0.05%. |
3
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Schedule of Portfolio Investments
December 31, 2018
Shares | Fair Value | |||||||
Affiliated Investment Companies (95.5%): | ||||||||
Domestic Equity Funds (76.5%): | ||||||||
19,197,526 | AZL S&P 500 Index Fund, Class 2 | $ | 280,475,858 | |||||
32,361,360 | AZL T. Rowe Price Capital Appreciation Fund | 547,877,821 | ||||||
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828,353,679 | ||||||||
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Fixed Income Funds (19.0%): | ||||||||
19,426,650 | AZL Enhanced Bond Index Fund | 205,728,223 | ||||||
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Total Affiliated Investment Companies (Cost $999,129,326) | 1,034,081,902 | |||||||
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Shares | Fair Value | |||||||
Unaffiliated Investment Company (0.0%)+: | ||||||||
Money Markets (0.0%)+: | ||||||||
94,769 | Dreyfus Treasury Securities Cash Management Fund, Institutional Shares, 2.20% | $ | 94,769 | |||||
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Total Unaffiliated Investment Company (Cost $94,769) | 94,769 | |||||||
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Total Investment Securities | 1,034,176,671 | |||||||
Net other assets (liabilities) — 4.5% | 49,198,367 | |||||||
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Net Assets — 100.0% | $ | 1,083,375,038 | ||||||
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Percentages indicated are based on net assets as of December 31, 2018.
+ | Represents less than 0.05%. |
(a) | See Federal Tax Information listed in the Notes to the Financial Statements. |
Futures Contracts
Cash of $48,614,618 has been segregated to cover margin requirements for the following open contracts as of December 31, 2018:
Short Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
S&P 500 Index E-Mini March Futures (U.S. Dollar) | 3/15/19 | 883 | $ | (110,604,580 | ) | $ | (4,162,137 | ) | ||||||||
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$ | (4,162,137 | ) | ||||||||||||||
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Long Futures
Description | Expiration Date | Number of Contracts | Notional Amount | Value and Unrealized | ||||||||||||
U.S. Treasury 10-Year Note March Futures (U.S. Dollar) | 3/20/19 | 162 | $ | 19,766,527 | $ | 469,438 | ||||||||||
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$ | 469,438 | |||||||||||||||
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Total Net Futures Contracts | $ | (3,692,699 | ) | |||||||||||||
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See accompanying notes to the financial statements.
4
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Statement of Assets and Liabilities
December 31, 2018
Assets: | |||||
Investment securities, at cost | $ | 94,769 | |||
Investments in affiliates, at cost | 999,129,326 | ||||
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Investment securities, at value | $ | 94,769 | |||
Investments in affiliates, at value | 1,034,081,902 | ||||
Segregated cash for collateral | 48,614,618 | ||||
Interest and dividends receivable | 93,427 | ||||
Receivable for capital shares issued | 712,416 | ||||
Prepaid expenses | 12,328 | ||||
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Total Assets | 1,083,609,460 | ||||
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Liabilities: | |||||
Payable for affiliated investments purchased | 94,769 | ||||
Payable for variation margin on futures contracts | 1,776 | ||||
Manager fees payable | 93,574 | ||||
Administration fees payable | 4,902 | ||||
Custodian fees payable | 515 | ||||
Administrative and compliance services fees payable | 4,001 | ||||
Transfer agent fees payable | 529 | ||||
Trustee fees payable | 1,532 | ||||
Other accrued liabilities | 32,824 | ||||
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Total Liabilities | 234,422 | ||||
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Net Assets | $ | 1,083,375,038 | |||
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Net Assets Consist of: | |||||
Paid in capital | $ | 996,493,561 | |||
Total distributable earnings | 86,881,477 | ||||
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Net Assets | $ | 1,083,375,038 | |||
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Shares of beneficial interest (unlimited number of shares authorized, no par value) | 90,564,534 | ||||
Net Asset Value (offering and redemption price per share) | $ | 11.96 | |||
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For the Year Ended December 31, 2018
Investment Income: | |||||
Dividends from affiliates | $ | 14,548,088 | |||
Interest | 956,834 | ||||
Dividends from non-affiliates | 4,017 | ||||
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Total Investment Income | 15,508,939 | ||||
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Expenses: | |||||
Manager fees | 1,118,842 | ||||
Administration fees | 59,678 | ||||
Custodian fees | 5,170 | ||||
Administrative and compliance services fees | 18,636 | ||||
Transfer agent fees | 6,128 | ||||
Trustee fees | 58,391 | ||||
Professional fees | 49,326 | ||||
Shareholder reports | 22,315 | ||||
Other expenses | 10,822 | ||||
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Total expenses | 1,349,308 | ||||
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Net Investment Income/(Loss) | 14,159,631 | ||||
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Net realized and Change in net unrealized gains/losses on investments | |||||
Net realized gains/(losses) on affiliated underlying funds | 3,100,358 | ||||
Net realized gains distributions from affiliated underlying funds | 41,256,524 | ||||
Net realized gains/(losses) on futures contracts | (1,675,414 | ) | |||
Change in net unrealized appreciation/depreciation on affiliated underlying funds | (72,162,873 | ) | |||
Change in net unrealized appreciation/depreciation on futures contracts | (4,113,823 | ) | |||
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Net realized and Change in net unrealized gains/losses on investments | (33,595,228 | ) | |||
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Change in Net Assets Resulting From Operations | $ | (19,435,597 | ) | ||
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See accompanying notes to the financial statements.
5
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Statements of Changes in Net Assets
For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | |||||||||
Change In Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income/(loss) | $ | 14,159,631 | $ | 10,383,590 | ||||||
Net realized gains/(losses) on investments | 42,681,468 | 37,922,870 | ||||||||
Change in unrealized appreciation/depreciation on investments | (76,276,696 | ) | 83,960,228 | |||||||
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Change in net assets resulting from operations | (19,435,597 | ) | 132,266,688 | |||||||
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Distributions to Shareholders:(a) | ||||||||||
Distributions | (48,843,888 | ) | (30,920,746 | ) | ||||||
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Change in net assets resulting from distributions to shareholders | (48,843,888 | ) | (30,920,746 | ) | ||||||
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Capital Transactions: | ||||||||||
Proceeds from shares issued | 73,125,433 | 107,423,431 | ||||||||
Proceeds from dividends reinvested | 48,843,888 | 30,920,746 | ||||||||
Value of shares redeemed | (66,407,984 | ) | (43,312,937 | ) | ||||||
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Change in net assets resulting from capital transactions | 55,561,337 | 95,031,240 | ||||||||
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Change in net assets | (12,718,148 | ) | 196,377,182 | |||||||
Net Assets:(a) | ||||||||||
Beginning of period | 1,096,093,186 | 899,716,004 | ||||||||
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End of period | $ | 1,083,375,038 | $ | 1,096,093,186 | ||||||
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Share Transactions: | ||||||||||
Shares issued | 5,649,568 | 8,806,847 | ||||||||
Dividends reinvested | 3,904,388 | 2,526,205 | ||||||||
Shares redeemed | (5,211,798 | ) | (3,545,096 | ) | ||||||
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Change in shares | 4,342,158 | 7,787,956 | ||||||||
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(a) | Prior year distribution character information and undistributed (distributions in excess of) net investment income has been modified or removed to conform with current year Regulation S-X presentation changes. See Note 2 in the Notes to the Financial Statements. |
See accompanying notes to the financial statements.
6
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the periods indicated)
Year Ended December 31, | January 10, 2014 to December 31, 2014(a) | ||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||
Net Asset Value, Beginning of Period | $ | 12.71 | $ | 11.47 | $ | 10.88 | $ | 10.45 | $ | 10.00 | |||||||||||||||
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Investment Activities: | |||||||||||||||||||||||||
Net Investment Income/(Loss) | 0.16 | 0.11 | 0.03 | 0.04 | 0.01 | ||||||||||||||||||||
Net Realized and Unrealized Gains/(Losses) on Investments | (0.34 | ) | 1.50 | 0.79 | 0.39 | 1.11 | |||||||||||||||||||
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Total from Investment Activities | (0.18 | ) | 1.61 | 0.82 | 0.43 | 1.12 | |||||||||||||||||||
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Distributions to Shareholders From: | |||||||||||||||||||||||||
Net Investment Income | (0.13 | ) | (0.15 | ) | (0.17 | ) | — | (0.01 | ) | ||||||||||||||||
Net Realized Gains | (0.44 | ) | (0.22 | ) | (0.06 | ) | — | (b) | (0.66 | ) | |||||||||||||||
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Total Dividends | (0.57 | ) | (0.37 | ) | (0.23 | ) | — | (b) | (0.67 | ) | |||||||||||||||
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Net Asset Value, End of Period | $ | 11.96 | $ | 12.71 | $ | 11.47 | $ | 10.88 | $ | 10.45 | |||||||||||||||
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Total Return(c) | (1.67 | )% | 14.21 | % | 7.62 | % | 4.15 | % | 11.19 | %(d) | |||||||||||||||
Ratios to Average Net Assets/Supplemental Data: | |||||||||||||||||||||||||
Net Assets, End of Period (000’s) | $ | 1,083,375 | $ | 1,096,093 | $ | 899,716 | $ | 664,399 | $ | 288,843 | |||||||||||||||
Net Investment Income/(Loss)(e) | 1.27 | % | 1.03 | % | 0.61 | % | 0.49 | % | 0.26 | % | |||||||||||||||
Expenses Before Reductions*(e)(f) | 0.12 | % | 0.12 | % | 0.12 | % | 0.13 | % | 0.14 | % | |||||||||||||||
Expenses Net of Reductions*(e) | 0.12 | % | 0.12 | % | 0.12 | % | 0.13 | % | 0.14 | % | |||||||||||||||
Portfolio Turnover Rate | 5 | % | 3 | % | 52 | %(g) | 1 | % | 1 | %(d) |
* | The expense ratios exclude the impact of fees/expenses paid by each underlying fund. |
(a) | Period from commencement of share class. |
(b) | Represents less than $0.005. |
(c) | The returns include reinvested dividends and fund level expenses, but exclude insurance contract charges. If these charges were included, the returns would have been lower. |
(d) | Not annualized for periods less than one year. |
(e) | Annualized for periods less than one year. |
(f) | Excludes fee reductions. If such fee reductions had not occurred, the ratios would have been as indicated. |
(g) | Effective October 14, 2016, the investment strategy of the Fund changed. Costs of purchases and proceeds from sales of portfolio securities associated with the changes in investment strategy contributed to higher portfolio turnover rate for the period ended December 31, 2016 as compared to prior years. |
See accompanying notes to the financial statements.
7
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Notes to the Financial Statements
December 31, 2018
1. Organization
The Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”) was organized as a Delaware statutory trust on June 16, 2004. The Trust is a diversified open-end management investment company registered under the Investment Company Act of 1940, as amended, (the “1940 Act”) and thus is determined to be an investment company, and follows the investment company accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 “Financial Services — Investment Companies.” The Trust consists of 12 separate investment portfolios (collectively, the “Funds”), of which one is included in this report, the AZL MVP T. Rowe Price Capital Appreciation Plus Fund (the “Fund”), and 11 are presented in separate reports.
The Fund is a “fund of funds,” which means that the Fund invests primarily in other mutual funds (the “Underlying Funds”). Underlying Funds invest in stock, bonds, and other securities and reflect varying amounts of potential investment risk and reward. The Underlying Funds record their investments at fair value. Periodically, the Fund will adjust its asset allocation as it seeks to achieve its investment objective.
The Trust is authorized to issue an unlimited number of shares of the Fund without par value. Shares of the Fund are available through the variable annuity contracts offered through the separate accounts of participating insurance companies. Currently, the Fund only offers its shares to separate accounts of Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, affiliates of the Trust and the Manager, as defined below.
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects that risk of loss to be remote.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements requires management to make certain 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Security Valuation
The Fund records its investments at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. The valuation techniques used to determine fair value are further described in Note 4 below.
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Net realized gains and losses on investments sold and on foreign currency transactions are recorded on the basis of identified cost. Interest income is recorded on the accrual basis and includes, where applicable, the amortization of premiums or accretion of discounts. Dividend income is recorded on the ex-dividend date except in the case of foreign securities, in which case dividends are recorded as soon as such information becomes available.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. The Fund distributes its dividends from net investment income and net realized capital gains, if any, on an annual basis. The amount of distributions from net investment income and from net realized gains is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. These “book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital, net operating loss, reclassification of certain market discounts, gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales and differing treatment on certain investments) do not require reclassification. Distributions to shareholders that exceed net investment income and net realized gains for tax purposes are reported as distributions of capital.
Expense Allocation
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses attributable to more than one Fund are allocated among the respective Funds based upon relative net assets or some other reasonable method. Expenses which are attributable to more than one Trust are allocated across the Allianz Variable Insurance Products and Allianz Variable Insurance Products Fund of Funds Trusts based upon relative net assets or another reasonable basis. Allianz Investment Management LLC (the “Manager”), serves as the investment manager for the Trust and the Allianz Variable Insurance Products Trust.
Affiliated Securities Transactions
Pursuant to Rule 17a-7 under the 1940 Act (the “Rule”), the Fund may engage in securities transactions with affiliated investment companies and advisory accounts managed by the Manager and Subadviser. Any such purchase or sale transaction must be effected without a brokerage commission or other remuneration, except for customary transfer fees. The transaction must be effected at the current market price, which is either the security’s last sale price on an exchange or, if there are no transactions in the security that day, at the average of the highest bid and lowest asked price. During the year ended December 31, 2018, the Fund did not engage in any Rule 17a-7 transactions under the Rule.
Derivative Instruments
All open derivative positions at period end are reflected on the Fund’s Schedule of Portfolio Investments. The following is a description of the derivative instruments utilized by the Fund, including the primary underlying risk exposures related to each instrument type. The Fund’s allocation to the MVP (Managed Volatility Portfolio) risk management process may include (a) derivatives such as index futures, other futures contracts, options, and other similar securities and (b) cash, money market equivalents, short-term debt instruments,
8
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Notes to the Financial Statements
December 31, 2018
money market funds, and short-term debt funds to satisfy all applicable margin requirements and to provide additional portfolio liquidity to satisfy large redemptions and any margin calls. Due to the leverage provided by derivatives, the notional value of the Fund’s derivative positions could exceed 20% of the Fund’s value. The Fund may also use futures to gain equity exposure and may hold cash as a buffer in the event of market shocks.
Futures Contracts
During the year ended December 31, 2018, the Fund invested in futures contracts to reduce volatility and limit the need to decrease or increase allocations to underlying funds. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and a payable or receivable for the change in value (“variation margin”) is recorded by the Fund. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, elements of market risk (generally equity price risk related to stock futures, interest rate risk related to bond futures, and foreign currency risk related to currency futures) and exposure to loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. The primary risks associated with the use of futures contracts are the imperfect correlation between the change in fair value of the underlying securities and the prices of futures contracts, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. For the year ended December 31, 2018, the monthly average notional amount for long contracts was $51.7 million and the monthly average notional amount for short contracts was $9.2 million. Realized gains and losses are reported as “Net realized gains/(losses) on futures contracts” on the Statement of Operations.
Summary of Derivative Instruments
The following is a summary of the fair values of derivative instruments on the Fund’s Statement of Assets and Liabilities, categorized by risk exposure, as of December 31, 2018:
Asset Derivative | Liability Derivative | |||||||||||
Primary Risk Exposure | Statement of Assets and Liabilities Location | Total Fair Value* | Statement of Assets and Liabilities Location | Total Fair Value* | ||||||||
Equity Risk |
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Equity Contracts | Receivable for variation margin on futures contracts | $ | — | Payable for variation margin on futures contracts | $ | 4,162,137 | ||||||
Interest Rate Risk | ||||||||||||
Interest Rate Contracts | Receivable for variation margin on futures contracts | 469,438 | Payable for variation margin on futures contracts | — |
* | For futures contracts, the amounts represent the cumulative appreciation/depreciation of these futures contracts as reported in the Schedule of Portfolio Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities as variation margin on futures contracts. |
The following is a summary of the effect of derivative instruments on the Statement of Operations, categorized by risk exposure, for the year ended December 31, 2018:
Primary Risk Exposure | Location of Gains/(Losses) on Derivatives Recognized | Realized Gains/(Losses) on Derivatives | Change in Net Unrealized Appreciation/Depreciation on Derivatives Recognized | |||||||
Equity Risk |
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Equity Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | $ | (1,675,414 | ) | $ | (4,699,842 | ) | |||
Interest Rate Risk | ||||||||||
Interest Rate Contracts | Net realized gains/(losses) on futures contracts/Change net in unrealized appreciation/depreciation on futures contracts | — | 586,019 |
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. In addition, the amendments clarify that materiality is an appropriate consideration when evaluating disclosure requirements. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU 2018-13. The Fund has early adopted ASU 2018-13 eliminated and modified disclosures with the financial statements prepared as of December 31, 2018.
In August 2018, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted amendments to certain financial statement disclosure requirements to conform them to GAAP for investment companies. These amendments made certain removals from changes to and additions to existing disclosure requirements under Regulation S-X. The Fund’s adoption of these amendments, effective with the financial statements prepared as of December 31, 2018 had no effect on the Funds’ net assets or results of operations. As a result of adopting these amendments, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets presented herein have been reclassified to conform to the current year presentation, which includes all distributions to each class of shareholders, other than tax basis return of capital distributions, in one line item per share class. Prior to adoption of this amendment, the distributions to shareholders in the December 31, 2017 Statements of Changes in Net Assets appeared as follows:
For the Year Ended December 31, 2017 | |||||
Distributions to Shareholders: | |||||
From net investment income | $ | (12,492,263 | ) | ||
From net realized gains | (18,428,483 | ) | |||
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Change in net assets resulting from distributions to shareholders | $ | (30,920,746 | ) |
9
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Notes to the Financial Statements
December 31, 2018
3. Fees and Transactions with Affiliates and Other Parties
The Manager provides investment advisory and management services for the Fund. The Manager has contractually agreed to waive fees and reimburse the Fund to limit the annual expenses, excluding interest expense (e.g., cash overdraft fees), taxes, brokerage commissions, acquired fund fees and expenses, other expenditures that are capitalized in accordance with U.S. GAAP and other extraordinary expenses not incurred in the ordinary course of the Fund’s business, based on the daily net assets of the Fund, through April 30, 2019. Expenses incurred for investment advisory and management services are reflected on the Statement of Operations as “Manager fees.”
For the year ended December 31, 2018, the annual rate due to the Manager and the annual expense limit were as follows:
Annual Rate | Annual Expense Limit | |||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | 0.10 | % | 0.15 | % |
Any amounts contractually waived or reimbursed by the Manager in a particular fiscal year will be subject to repayment by the Fund to the Manager to the extent that from time to time through the next three fiscal years the repayment will not cause the Fund’s expenses to exceed the lesser of the stated limit at the time of the waiver or the current stated limit. Any amounts recouped by the Manager during the year are reflected on the Statement of Operations as “Recoupment of prior expenses reimbursed by the Manager.” At December 31, 2018, there were no remaining contractual reimbursements that are subject to repayment by the Fund in subsequent years.
In addition, the Manager may voluntarily waive or reimburse additional fees in order to maintain more competitive expense ratios. Any voluntary waivers or reimbursements are not subject to repayment in subsequent years. Information on the total amount waived/reimbursed by the Manager or repaid to the Manager by the Fund during the year can be found on the Statement of Operations. During the year ended December 31, 2018, there were no voluntary waivers.
The Manager or an affiliate of the Manager serves as the investment adviser of certain underlying funds in which the Fund invests. At December 31, 2018, these underlying funds are noted as Affiliated Investment Companies in the Fund’s Schedule of Portfolio Investments. Additional information, including financial statements, about these Funds is available at www.allianzlife.com. The Manager or an affiliate of the Manager is paid a separate fee from the underlying funds for such services. A summary of the Fund’s investments in affiliated investment companies for the year ended December 31, 2018 is as follows:
Fair Value 12/31/17 | Purchases at Cost | Proceeds from Sales | Net Realized Gain(Loss) | Net Change in Unrealized Appreciation (Depreciation) | Fair Value 12/31/18 | Shares as of 12/31/2018 | Dividend Income | Net Realized Gains Distributions from Affiliated Underlying Funds | |||||||||||||||||||||||||||||||||||||
AZL Enhanced Bond Index Fund | $ | 196,788,055 | $ | 30,575,626 | $ | (16,019,228 | ) | $ | (556,517 | ) | $ | (5,059,713 | ) | $ | 205,728,223 | 19,426,650 | $ | 4,573,930 | $ | — | |||||||||||||||||||||||||
AZL S&P 500 Index Fund, Class 2 | 297,886,624 | 30,932,602 | (19,870,146 | ) | 3,257,456 | (31,730,678 | ) | 280,475,858 | 19,197,526 | 4,697,551 | 9,871,837 | ||||||||||||||||||||||||||||||||||
AZL T. Rowe Price Capital Appreciation Fund | 546,357,130 | 50,046,052 | (13,552,298 | ) | 399,419 | (35,372,482 | ) | 547,877,821 | 32,361,360 | 5,276,607 | 31,384,687 | ||||||||||||||||||||||||||||||||||
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$ | 1,041,031,809 | $ | 111,554,280 | $ | (49,441,672 | ) | $ | 3,100,358 | $ | (72,162,873 | ) | $ | 1,034,081,902 | 70,985,536 | $ | 14,548,088 | $ | 41,256,524 | |||||||||||||||||||||||||||
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Pursuant to separate agreements between the Funds and the Manager, the Manager provides a Chief Compliance Officer (“CCO”) and certain compliance oversight and regulatory filing services to the Trust. Under these agreements the Manager is entitled to an amount equal to a portion of the compensation and certain other expenses related to the individuals performing the CCO and compliance oversight services, as well as $100 per hour for time incurred in connection with the preparation and filing of certain documents with the SEC. The fees are paid to the Manager on a quarterly basis. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administrative and compliance services fees.”
Citi Fund Services Ohio, Inc. (“Citi” or the “Administrator”), a wholly owned subsidiary of Citigroup, Inc., with which an officer of the Trust is affiliated, serves as the Trust’s administrator and fund accountant, and assists the Trust in all aspects of its administration and operation. The Administrator is entitled to a fee, accrued daily and paid monthly. The Administrator is entitled to an annual fee for each additional class of shares of any Fund, certain annual fees in supporting fair values services, and a Trust-wide annual fee for providing infrastructure and support in implementing the written policies and procedures comprising the Fund’s compliance program. The Administrator is also reimbursed for certain expenses incurred. The total expenses incurred by the Fund for these services are reflected on the Statement of Operations as “Administration fees.”
FIS Investor Services LLC (“FIS”) serves as the Fund’s transfer agent. Under the Transfer Agent Agreement, the Trust pays FIS a fee for its services and reimburses FIS for all of their reasonable out-of-pocket expenses incurred in providing these services.
The Bank of New York Mellon (“BNY Mellon” or the “Custodian”) serves as the Trust’s custodian and securities lending agent. For these services as custodian, the Funds pay BNY Mellon a fee based on a percentage of assets held on behalf of the Funds, plus certain out-of-pocket charges.
Allianz Life Financial Services, LLC (“ALFS”), an affiliate of the Manager, serves as distributor of the Fund. ALFS receives an annual a Trust-wide annual fee of $7,500, paid by the Manager from its profits and not by the Trust, for recordkeeping and reporting services.
In addition, certain legal fees and expenses are paid to a law firm, Dorsey & Whitney LLP, of which the Secretary of the Fund is Senior Counsel. During the year ended December 31, 2018, $10,090 was paid from the Fund relating to these fees and expenses.
Certain Officers and Trustees of the Trust are affiliated with the Manager or the Administrator. Such Officers (except for the Trust’s CCO as noted above) and Trustees receive no compensation from the Trust for serving in their respective roles. For their service to the Trust and to the Allianz Variable Insurance Products Trust, each non-interested Trustee receives a $174,000 annual Board retainer, the Lead Director receives an additional $43,500 annually and the Chair of the Nominating and Corporate Governance Committee receives an additional $26,100 annually. In addition, the Trustees are reimbursed for certain expenses associated with attending Board meetings. Compensation to the Trustees is allocated between the Trust and the Allianz Variable Insurance Products Trust in proportion to the assets under management of each trust. During the year ended December 31, 2018, actual Trustee compensation was $1,287,600 in total for both trusts.
10
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Notes to the Financial Statements
December 31, 2018
4. Investment Valuation Summary
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The inputs used for valuing the Fund’s investments are summarized in the three broad levels listed below:
● | Level 1 — quoted prices in active markets for identical assets |
● | Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds, credit risk, etc.) |
● | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The inputs or methodology used for valuing investments is not necessarily an indication of the risk associated with investing in those investments.
Investments in other investment companies are valued at their published net asset value (“NAV”). Security prices are generally provided by an independent third party pricing service approved by the Trust’s Board of Trustees (the “Board” or “Trustees”) as of the close of the New York Stock Exchange (“NYSE”) (generally 4:00 pm Eastern Time). The investments utilizing Level 1 valuations represent investments in open-end investment companies. Futures contracts are valued at the last sales price as of the close of the primary exchange and are typically categorized as Level 1 in the fair value hierarchy.
The following is a summary of the valuation inputs used as of December 31, 2018 in valuing the Fund’s investments based upon the three levels defined above:
Investment Securities: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Affiliated Investment Company | $ | 1,034,081,902 | $ | — | $ | — | $ | 1,034,081,902 | ||||||||||||
Unaffiliated Investment Company | 94,769 | — | — | 94,769 | ||||||||||||||||
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Total Investment Securities | 1,034,176,671 | — | — | 1,034,176,671 | ||||||||||||||||
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Other Financial Instruments:* | ||||||||||||||||||||
Futures Contracts | (3,692,699 | ) | — | — | (3,692,699 | ) | ||||||||||||||
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Total Investments | $ | 1,030,483,972 | $ | — | $ | — | $ | 1,030,483,972 | ||||||||||||
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* | Other Financial Instruments would include any derivative instruments, such as futures contracts. These investments are generally presented in the financial statements at variation margin. |
5. Security Purchases and Sales
For the year ended December 31, 2018, cost of purchases and proceeds from sales of securities (excluding securities maturing less than one year from acquisition) were as follows:
Purchases | Sales | |||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | $ | 111,554,280 | $ | 49,441,672 |
6. Investment Risks
Derivatives Risk: The Fund may invest directly or through affiliated or unaffiliated mutual funds or unregistered investment pools in derivative instruments such as futures, options, and options on futures. A derivative is a financial contract whose value depends on, or is derived from, the value of an underlying asset, reference rate, or risk. Use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of other risks, such as liquidity risk, interest rate risk, market risk, credit risk, and selection risk. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value may not correlate perfectly with the underlying asset, rate, or index. Using derivatives may result in losses, possibly in excess of the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. The other party to a derivatives contract could default.
Fund of Fund Risk: The Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of any investment management fees and other expenses of the underlying funds. Further due to the fees and expenses paid by the Fund, as well as small variations in the Fund’s actual allocations to the underlying funds and any futures and cash held in the Fund’s portfolio, the performance and income distributions of the Fund will not be the same as the performance and income distributions of the underlying funds.
7. Federal Tax Information
It is the policy of the Fund to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined under Subchapter M of the Internal Revenue Code, and to make distributions of net investment income and net realized gains sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provisions for federal income taxes are required in the financial statements.
Management of the Fund has reviewed tax positions taken in tax years that remain subject to examination by all major tax jurisdictions, including federal (i.e., the last four tax year ends and the interim tax period since then, as applicable). Management believes that there is no tax liability resulting from unrecognized tax benefits related to uncertain tax positions taken.
Cost of securities, including derivatives and short positions as applicable, for federal income tax purposes at December 31, 2018 is $1,000,444,938. The gross unrealized appreciation/(depreciation) on a tax basis is as follows:
Unrealized appreciation | $ | 38,541,738 | ||
Unrealized (depreciation) | (4,810,005 | ) | ||
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Net unrealized appreciation/(depreciation) | $ | 33,731,733 | ||
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11
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Notes to the Financial Statements
December 31, 2018
The tax character of dividends paid to shareholders during the year ended December 31, 2018 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP T. Rowe Capital Appreciation Plus Fund | $ | 13,580,212 | $ | 35,263,676 | $ | 48,843,888 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
The tax character of dividends paid to shareholders during the year ended December 31, 2017 were as follows:
Ordinary Income | Net Long-Term | Total Distributions(a) | |||||||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | $ | 12,552,270 | $ | 18,368,476 | $ | 30,920,746 |
(a) | Total distributions paid may differ from the Statements of Changes in Net Assets because dividends are recognized when actually paid for tax purposes. |
At December 31, 2018, the components of accumulated earnings on a tax basis were as follows:
Undistributed Ordinary Income | Undistributed Long-Term Capital Gains | Accumulated Capital and Other Losses | Unrealized Appreciation/ | Total (Deficit) | |||||||||||||||||||||
AZL MVP T. Rowe Price Capital Appreciation Plus Fund | $ | 25,425,167 | $ | 32,396,701 | $ | — | $ | 33,731,733 | $ | 91,553,601 |
(a) | The difference between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to tax deferral of losses on wash sales. |
8. Ownership and Principal Holders
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumptions of control of the fund, under section 2 (a)(9) of the 1940 Act. As of December 31, 2018, the Fund had an individual shareholder account which is affiliated with the Manager representing ownership in excess of 85% of the Fund. As of December 31, 2018, the Fund had a controlling interest (in excess of 50%) in the AZL T. Rowe Price Capital Appreciation Fund, which is affiliated with the Investment Adviser.
9. Subsequent Events
Management of the Fund has evaluated the need for additional disclosures or adjustments resulting from events through the date the financial statements were issued. Based on this evaluation, there were no subsequent events to report that would have material impact on the Fund’s financial statements.
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Allianz Variable Insurance Products Fund of Funds Trust and Shareholders of
AZL MVP T. Rowe Price Capital Appreciation Plus Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of portfolio investments, of AZL MVP T. Rowe Price Capital Appreciation Plus Fund (one of the funds constituting Allianz Variable Insurance Products Fund of Funds Trust, referred to hereafter as the “Fund”) as of December 31, 2018, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the year ended December 31, 2018 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2018, and the results of its operations, changes in its net assets, and the financial highlights for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended December 31, 2017 and the financial highlights for each of the periods ended on or prior to December 31, 2017 (not presented herein, other than the statement of changes in net assets and the financial highlights) were audited by other auditors whose report dated February 23, 2018 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the transfer agent. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2019
We have served as the auditor of one or more investment companies in the Allianz Variable Insurance Products complex since 2018.
13
Other Federal Income Tax Information (Unaudited)
For the year ended December 31, 2018, 51.94% of the total ordinary income dividends paid by the Fund qualify for the corporate dividends received deductions available to corporate shareholders.
During the year ended December 31, 2018, the Fund declared net short-term capital gain distributions of $2,597,583.
During the year ended December 31, 2018, the Fund declared net long-term capital gain distributions of $35,263,675.
14
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request, by visiting the Securities and Exchange Commission’s (‘‘Commission’’) website at www.sec.gov, or by calling 800-624-0197.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (i) without charge, upon request, by calling 800-624-0197; (ii) on the Allianz Variable Insurance Products Trust’s website at https://www.allianzlife.com; and (iii) on the Commission’s website at http://www.sec.gov.
The Fund files complete Schedules of Portfolio Holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Schedules of Portfolio Holdings for the Fund in this report are available without charge on the Commission’s website at http://www.sec.gov, or may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330.
15
Approval of Investment Advisory Agreement (Unaudited)
Subject to the general supervision of the Board of Trustees (the “Board”) and in accordance with the investment objectives and restrictions of each separate series (together, the “Funds”) of the Allianz Variable Insurance Products Fund of Funds Trust (the “Trust”), investment advisory services are provided to the Funds by Allianz Investment Management LLC (the “Manager”). As used in this section, “Fund” refers to any of the Funds. The Manager manages each Fund pursuant to an investment management agreement (the “Management Agreement”) with the Trust in respect of each such Fund. The Management Agreement provides that the Manager, subject to the supervision and approval of the Board, is responsible for the management of each Fund. For management services, each Fund pays the Manager an investment advisory fee based upon each Fund’s average daily net assets. The Manager has contractually agreed to limit the expenses of each Fund by reimbursing the Fund if and when total Fund operating expenses exceed certain amounts until at least May 1, 2020 (the “Expense Limitation Agreement”).
In reviewing the services provided by the Manager and the terms of the Management Agreement, the Board receives and reviews information related to the Manager’s experience and expertise in the variable insurance marketplace. Currently, the Funds are offered only through variable annuities and variable life insurance policies, and not in the retail fund market. In addition, the Board receives information regarding the Manager’s expertise with regard to portfolio diversification and asset allocation requirements within variable insurance products issued by Allianz Life Insurance Company of North America (“Allianz Life”) and its subsidiary, Allianz Life Insurance Company of New York (“Allianz of New York”). Currently, the Funds are offered only through Allianz Life and Allianz of New York variable products.
As required by the Investment Company Act of 1940 (the “1940 Act”), the Board has reviewed and approved the Management Agreement with the Manager. The Board’s decision to approve this contract reflects the exercise of its business judgment on whether to approve new arrangements and continue the existing arrangements. During its review of the contract, the Board considered many factors, among the most material of which are: the Fund’s investment objectives and long-term performance; the Manager’s management philosophy, personnel, processes and investment performance, including its compliance history and the adequacy of its compliance processes; the preferences and expectations of Fund shareholders (and underlying contract owners) and their relative sophistication; the continuing state of competition in the mutual fund industry; and comparable fees in the mutual fund industry.
The Board also considered the compensation and benefits received by the Manager. This includes fees received for services provided to a Fund by employees of the Manager or of affiliates of the Manager and research services received by the Manager from brokers that execute Fund trades, as well as advisory fees. The Board considered the fact that: (1) the Manager and the Trust are parties to an Administrative Services Agreement and a Compliance Services Agreement, under which the Manager is compensated by the Trust for performing certain administrative and compliance services including providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer; and (2) Allianz Life Financial Services, LLC, an affiliated person of the Manager, is a registered securities broker-dealer and received (along with its affiliated persons) payments made by the underlying funds pursuant to Rule 12b-1.
The Board is aware that various courts have interpreted provisions of the 1940 Act and have indicated in their decisions that the following factors may be relevant to an adviser’s compensation: the nature and quality of the services provided by the adviser, including the performance of the fund; the adviser’s cost of providing the services; the extent to which the adviser may realize “economies of scale” as the fund grows larger; any indirect benefits that may accrue to the adviser and its affiliates as a result of the adviser’s relationship with the fund; performance and expenses of comparable funds; the profitability of acting as adviser to the fund; and the extent to which the independent Board members, who are not “interested persons” of a fund as defined by the 1940 Act, are fully informed about all facts bearing on the adviser’s services and fees. The Board is aware of these factors and takes them into account in its review of the Management Agreement for the Funds.
The Board considered and weighed these circumstances in light of its experience in governing the Trust, and is assisted in its deliberations by the advice of independent legal counsel to the independent Trustees. In this regard, the Board requests and receives a significant amount of information about the Funds and the Manager. Some of this information is provided at each regular meeting of the Board; additional information is provided in connection with the particular meeting or meetings at which the Board’s formal review of an advisory contract occurs. In between regularly scheduled meetings, the Board may receive information on particular matters as the need arises. Thus, the Board’s evaluation of the Management Agreement is informed by reports covering such matters as: the Manager’s investment philosophy, personnel and processes, and the Fund’s investment performance (in absolute terms as well as in relationship to its benchmark). In connection with comparing the performance of each Fund versus its benchmark, the Board receives reports on the extent to which the Fund’s performance may be attributed to various applicable factors, such as asset class allocation decisions and volatility management strategies, the performance of the underlying funds, rebalancing decisions, and the impact of cash positions and Fund fees and expenses. The Board also receives reports on the Funds’ expenses (including the advisory fee itself and the overall expense structure of the Funds, both in absolute terms and relative to similar and/or competing funds, with due regard for the Expense Limitation Agreement and additional voluntary expense limitations); the nature and extent of the advisory and other services provided to the Fund by the Manager and its affiliates; compliance and audit reports concerning the Funds and the companies that service them; and relevant developments in the mutual fund industry and how the Funds and/or the Manager are responding to them.
The Board also receives financial information about the Manager, including reports on the compensation and benefits the Manager derives from its relationships with the Funds. These reports cover not only the fees under the Management Agreement, but also fees, if any, received for providing other services to the Funds. The reports also discuss any indirect or “fall out” benefits the Manager or its affiliates may derive from its relationship with the Funds.
The Management Agreement was most recently considered at Board meetings held in the fall of 2018. Information relevant to the approval of the Management Agreement was considered at a telephonic Board meeting on October 17, 2018, and at an “in person” Board meeting held October 23, 2018. The Management Agreement was approved at the Board meeting on October 23, 2018. At such meeting the Board also approved the Expense Limitation Agreement between the Manager and the Trust for the period ending April 30, 2020. In connection with such meetings, the Trustees requested and evaluated extensive materials from the Manager, including performance and expense information for other investment companies with similar investment objectives derived from data compiled by an independent third party provider and other sources believed to be reliable by the Manager and the Trustees. Prior to voting, the Trustees reviewed the proposed approval/continuance of the Agreement with management and with experienced counsel who are independent of the Manager and received a memorandum from such counsel discussing the legal standards for their consideration of the proposed approvals/continuances. The independent Trustees also discussed the proposed approvals/continuances in a private session with such counsel at which no representatives of the Manager were present. In reaching its determinations relating to the approval and/or continuance of the Agreement, in respect of each Fund, the Board considered all factors it believed relevant. The Board based its decision to approve the Management Agreement on the totality of the circumstances and relevant factors, and with a view to past and future long-term considerations. Not all of the factors and considerations discussed above and below are necessarily relevant to every Fund, and the Board did not assign relative weights to factors discussed herein or deem any one or group of them to be controlling in and of themselves.
An SEC rule requires that shareholder reports include a discussion of certain factors relating to the selection of the investment adviser and the approval of the advisory fee. The “factors” enumerated by the SEC are set forth below in italics, as well as the Board’s conclusions regarding such factors:
(1) The nature, extent and quality of services provided by the Manager. The Trustees noted that the Manager, subject to the control of the Board, administers each Fund’s business and other affairs. The Trustees noted that the Manager also provides the Trust and each Fund with such administrative and other services (exclusive of, and in addition to, any such services provided by any others retained by the Trust on behalf of the Funds) and executive and other personnel as are necessary for the operation of the Trust and the Funds. Except for the Trust’s Chief Compliance Officer and certain compliance staff, the Manager pays all of the compensation of Trustees and officers of the Trust who are employees of the Manager or its affiliates.
16
The Board considered the scope and quality of services provided by the Manager and noted that the scope of such services provided had expanded as a result of recent regulatory and other developments. The Board noted that, for example, the Manager is responsible for maintaining and monitoring its own compliance program, and this compliance program has been continuously refined and enhanced in light of new regulatory requirements. The Board considered the capabilities and resources which the Manager has dedicated to performing services on behalf of the Trust and its Funds. The quality of administrative and other services, including the Manager’s role in coordinating the activities of the Trust’s other service providers, also were considered. The Board concluded that, overall, they were satisfied with the nature, extent and quality of services provided (and expected to be provided) to the Trust and to each of the Funds under the Management Agreement.
(2) The investment performance of the Funds and the Manager. In connection with every in-person quarterly Board meeting and the fall 2018 contract review process, Trustees received extensive information on the performance results of each Fund. This included, for example, performance information on absolute total return, performance versus the appropriate benchmark(s), the contribution to performance of the Manager’s asset class allocation decisions and volatility management strategies, the performance of the underlying funds, and the impact on performance of rebalancing decisions, cash and Fund fees. This included Lipper performance information on the Funds for the previous quarter, year-to-date, and previous one-, three- and five-year periods, to the extent the Funds were in existence for such periods. (For Funds that have been in existence for less than five years, the Board received performance information on shorter time periods to the extent available.) For example, in connection with the Board meeting held October 23, 2018, the Manager reported that for the five Funds for which performance information for the five year period ended June 30, 2018 was available, one was in the top 40%, three were in the middle 20%, and one was in the bottom 40%. Only one of these Funds was in the bottom 40% for the three- or one-year periods. The Manager reported that for the three-year period ended June 30, 2018, for the eight Funds for which three-year performance information was available, four Funds were in the top 40%, three Funds were in the middle 20%, and one Fund was in the bottom 40%. For the 12 Funds for which one-year performance information was available, for the one-year period ended June 30, 2018, seven Funds were in the top 40%, three Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Manager also reported upon the performance of the MVP Funds compared to custom managed-volatility peer groups. For the six Funds for which five-year performance information was available, for the five-year period ended June 30, 2018, four Funds were in the top 40% and two Funds were in the middle 20%. For the eight Funds for which three-year performance information was available, for the three-year period ended June 30, 2018, five Funds were in the top 40%, two Funds were in the middle 20%, and one was in the bottom 40%. For the 10 Funds for which one-year performance was available, for the one-year period ended June 30, 2018, six Funds were in the top 40%, two Funds were in the middle 20%, and two Funds were in the bottom 40%.
At the Board meeting held October 23, 2018, the Trustees determined that the investment performance of the Funds was acceptable.
(3) The costs of services to be provided and profits to be realized by the Manager and its affiliates from the relationship with the Funds. The Board considered that the Manager receives an advisory fee from each of the Funds. The Manager reported that for the three MVP Fusion Dynamic Funds the advisory fee paid put these Funds in the 48th percentile of the customized peer group. The Manager reported that for three MVP Index Strategy Funds the advisory fee paid put them in the 23rd percentile of the customized peer group, and for the AZL Balanced Index Strategy Fund the advisory fee paid put it in the 8th percentile of the customized peer group. The Manager reported that for the AZL DFA Multi-Strategy Fund, the advisory fee paid was in the 11th percentile. The Manager reported that for the AZL MVP BlackRock Global Strategy Plus, AZL MVP DFA Multi-Strategy, AZL MVP FIAM Multi-Strategy, and AZL MVP T. Rowe Price Capital Appreciation Plus Funds, the advisory fee paid was in the 10th percentile. (A lower percentile reflects lower fund fees and is better for fund shareholders.) Trustees were provided with information on the total expense ratios of the Funds and other funds in the customized peer groups, and the Manager reported upon the challenges in making peer group comparisons for the Funds.
The Manager provided information concerning the profitability of the Manager’s investment advisory activities for the period from 2015 through December 31, 2017. The Board recognized that it is difficult to make comparisons of profitability from investment company advisory agreements because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocation of expenses and the adviser’s capital structure and cost of capital. In considering profitability information, the Board considered the possible effect of certain fall-out benefits to the Manager and its affiliates. The Board focused on profitability of the Manager’s relationships with the Funds before taxes and distribution expenses. The Board recognized that the Manager should earn a reasonable level of profits for the services it provides to each Fund.
The Board also considered that Wilshire Funds Management (“Wilshire”) serves as a consultant to the Manager in preparing statistical and other factual information for use in the creation and maintenance of the asset allocation models for the AZL MVP Fusion Dynamic Funds, pursuant to an agreement between the Manager and Wilshire. Wilshire serves as a consultant to the Manager with respect to selecting the AZL MVP Fusion Dynamic Funds’ underlying funds and the asset allocations among the underlying funds. The Manager, not any Fund, pays a consultant fee to Wilshire.
Based upon the information provided, the Board concluded that the Funds’ advisory fees and expense ratios are not unreasonable, and determined that there was no evidence that the Manager’s level of profitability from its relationship with the Funds was excessive.
(4) and (5) The extent to which economies of scale would be realized as the Funds grow, and whether fee levels reflect these economies of scale. The Board noted that the advisory fee schedules for the Funds do not contain breakpoints that reduce the fee rate on assets above specified levels. The Board recognized that breakpoints may be an appropriate way for the Manager to share its economies of scale, if any, with Funds that have substantial assets. The Board found there was no uniform methodology for establishing breakpoints that give effect to Fund-specific services provided by the Manager. The Board noted that in the fund industry as a whole, as well as among funds similar to the Funds, there is no uniformity or pattern in the fees and asset levels at which breakpoints (if any) apply. Depending on the age, size, and other characteristics of a particular fund and its manager’s cost structure, different conclusions can be drawn as to whether there are economies of scale to be realized at any particular level of assets, notwithstanding the intuitive conclusion that such economies exist, or will be realized at some level of total assets. Moreover, because different managers have different cost structures and service models, it is difficult to draw meaningful conclusions from the breakpoints that may have been adopted by other funds. The Board also noted that the advisory agreements for many funds do not have breakpoints at all, or if breakpoints exist, they may be at asset levels significantly greater than those of the individual Funds. The Board also noted that the total assets in all of the Funds, as of June 30, 2018, were approximately $11.2 billion and that the largest Fund, the AZL MVP Growth Index Strategy Fund, had assets of approximately $2.6 billion.
The Board noted that the Manager has agreed to temporarily limit Fund expenses under the Expense Limitation Agreement, which has the same effect of reducing expenses as would the implementation of advisory fee breakpoints. The Manager has committed to continue to consider the continuation of expense limits and/or advisory fee breakpoints as the Funds grow larger. The Board receives quarterly reports on the level of Fund assets. The Board expects to continue to consider: (a) the extent to which economies of scale have been realized, and (b) whether the advisory fee should be modified, either in connection with the next renewal of the Agreements or by modifying the Expense Limitation Agreement, to reflect such economies of scale, if any.
Having taken these factors into account, the Board concluded that the absence of breakpoints in the Funds’ advisory fee rate schedules was acceptable under each Fund’s circumstances.
17
Information about the Board of Trustees and Officers (Unaudited)
The Trust is managed by the Trustees in accordance with the laws of the state of Delaware governing business trusts. There are currently eight Trustees, one of whom is an “interested person” of the Trust within the meaning of that term under the 1940 Act. The Trustees and Officers of the Trust, and their addresses, ages, positions held with the Trust, terms of office with the Trust and length of time served, principal occupation(s) during the past five years, the number of portfolios in the Trust they oversee, and other directorships held during the past five years are as follows:
Non-Interested Trustees(1)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other Directorships AZL Fund Complex | |||||
Peter R. Burnim (1947) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/07 | Consultant/Chair, various companies: Chairman, Emrys Analytics and subsidiaries, July 2015 to present; Chairman, Argus Investment Strategies Fund Ltd., February 2013 to 2017; Managing Director, iQ Venture Advisors, LLC, 2005 to present; Chairman, Northstar Group Holdings Ltd. Bermuda, 2011 to present; Chairman Sterling Bank & Trust (Bahamas) Ltd., 2016 to present, and Expert Witness, Massachusetts Department of Revenue, 2011 to 2016. | 34 | Argus Group Holdings and Subsidiaries; Northstar Group Holdings; Sterling Trust (Cayman) Ltd.; Sterling Bank & Trust Limited (Bahamas); Emrys Analytics; EGB Insurance. | |||||
Peggy L. Ettestad (1957) 5701 Golden Hills Drive Minneapolis, MN 55416 | Lead Independent Trustee | Since 10/14 (Trustee since 2/07) | Managing Director, Red Canoe Management Consulting LLC, 2008 to present | 34 | Luther College | |||||
Tamara Lynn Fagely (1958) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Retired; Chief Operations Officer, Hartford Funds, March 2012 to December 2013 | 34 | Diamond Hill Funds (13 funds) | |||||
Richard H. Forde (1953) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 12/17 | Member of the Board and Chairman of the Finance and Investment Committee, Connecticut Water Service, Inc., October 2013 to present; Senior Vice President and Chief Investment Officer, CIGNA, 2004 to 2012 | 34 | Connecticut Water Service, Inc. | |||||
Claire R. Leonardi (1955) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Chief Executive Officer, Health eSense Inc., 2015 to Present; CEO, Connecticut Innovations, Inc., 2012 to 2015 | 34 | reSet Social Enterprise Investment Fund | |||||
Dickson W. Lewis (1948) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 2/04 | Retired; Vice President/General Manager, Yearbooks & Canada-Lifetouch National School Studios, 2006 to 2014 | 34 | None | |||||
Arthur C. Reeds, III (1944) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 10/99 | Retired | 34 | Connecticut Water Service, Inc. |
Interested Trustees(3)
Name, Address, and Year of Birth | Positions VIP and VIP | Term of Office(2)/Length | Principal Occupation(s) During Past 5 Years | Number of VIP and VIP | Other Directorships AZL Fund Complex | |||||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | Trustee | Since 6/11 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present | 34 | None |
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Officers
Name, Address, and Age | Positions Held with VIP and VIP FOF Trust | Term of Office(2)/Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Brian Muench (1970) 5701 Golden Hills Drive Minneapolis, MN 55416 | President | Since 11/10 | President, Allianz Investment Management LLC, November 2010 to present; Vice President, Allianz Life, April 2011 to present. | |||
Michael Radmer (1945) Dorsey & Whitney LLP, Suite 1500 50 South Sixth Street Minneapolis, MN55402-1498 | Secretary | Since 02/02 | Senior Counsel (previously, Partner), Dorsey and Whitney LLP since 1976. | |||
Bashir C. Asad (1963) Citi Fund Services Ohio, Inc. 4400 Easton Commons, Suite 200 Columbus, OH 43219 | Treasurer, Principal Accounting Officer and Principal Financial Officer | Since 06/16 | Senior Vice President, Citi Fund Services Ohio, Inc. | |||
Chris R. Pheiffer (1968) 5701 Golden Hills Drive Minneapolis, MN 55416 | Chief Compliance Officer(4) and Anti-MoneyLaundering Compliance Officer | Since 02/14 | Chief Compliance Officer of the VIP Trust and the FOF Trust, February 2014 to present; Deputy Chief Compliance Officer of the VIP Trust and the FOF Trust and Compliance Director, Allianz Life, February 2007 to February 2014. |
(1) | Member of the Audit Committee. |
(2) | Indefinite. |
(3) | Is an “interested person”, as defined by the 1940 Act, due to employment by Allianz. |
(4) | The Manager and the Trust are parties to a Chief Compliance Officer Agreement under which the Manager is compensated by the Trust for providing an employee of the Manager or one of its affiliates to act as the Trust’s Chief Compliance Officer. The Chief Compliance Officer and Anti-Money Laundering Compliance Officer is not considered a corporate officer or executive employee of the Trust. |
19
The Allianz VIP Fund of Funds are distributed by Allianz Life Financial Services, LLC | ||
These Funds are not FDIC Insured. | ANNRPT1218 2/19 |
Item 2. | Code of Ethics. |
(a) | The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is included as an Exhibit. |
(b) | During the period covered by the report, with respect to the registrant’s code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; there have been no amendments to, nor any waivers granted from, a provision that relates to any element of the code of ethics definition enumerated in paragraph (b) of this Item 2. |
Item 3. | Audit Committee Financial Expert. |
(a)(1) | The registrant’s board of directors has determined that the registrant has at least one audit committee financial expert serving on its audit committee. |
(a)(2) | The audit committee financial expert is Arthur C. Reeds III, who is “independent” for purposes of this Item 3 of FormN-CSR. |
Item 4. | Principal Accountant Fees and Services. |
2018 | 2017* | |||||||||
(a) | Audit Fees | $ | 180,000 | $ | 162,600 | |||||
(b) | Audit-Related Fees | $ | 0 | $ | 6,000 | |||||
Related to the consent on FormN-1A for the annual registration statement. | ||||||||||
2018 | 2017* | |||||||||
(c) | Tax Fees | $ | 54,000 | $ | 39,240 | |||||
Preparation of the funds’ federal income tax returns. | ||||||||||
2018 | 2017* | |||||||||
(d) | All Other Fees | $ | 0 | $ | 0 |
4(e)(1) | The Audit Committee (“Committee”) of the Registrant is responsible forpre-approving all audit andnon-audit services performed by the independent auditor in order to assure that the provision of such services does not impair the auditor’s independence. Before the Registrant engages the independent auditor to render a service, the engagement must be either specifically approved by the Committee or entered into pursuant to thepre-approval policy. The Committee may delegate preapproval authority to one or more of its members. The member or members to whom such authority is delegated shall report anypre-approval decisions to the Committee at its next scheduled meeting. The Committee may not delegate to management the Committee’s responsibilities topre-approve services performed by the independent auditor. The Committee has delegatedpre-approval authority to its Chairman for any services not exceeding $10,000. |
4(e)(2) | During the previous two fiscal years, the Registrant did not receive anynon-audit services pursuant to a waiver from the audit committee approval orpre-approval requirement under paragraph (c)(7)(i)(C) of Rule2-01 of RegulationS-X. |
4(f) | Not applicable |
4(g) |
|
2018 | 2017* | |||
$54,000 | $ | 45,240 |
4(h) | Not applicable |
* | Fees shown above for the year 2017 are those of the previous audit firm, KPMG LLP. Effective November 2, 2018, PricewaterhouseCoopers LLP replaced KPMG LLP as Principal Accountant. |
Item 5. Audit | Committee of Listed Registrants. |
Not applicable.
Item 6. | Investments. |
(a) | The Schedule of Investments as of the close of the reporting period are included as part of the report to shareholders filed under Item 1 of the FormN-CSR. |
(b) | Not applicable. |
Item 7. | Disclosure of Proxy Voting Policies and Procedures forClosed-End Management Investment Companies. |
Not applicable.
Item 8. | Portfolio Managers ofClosed-End Management Investment Companies. |
Not applicable.
Item 9. | Purchases of Equity Securities byClosed-End Management Investment Company and Affiliated Purchasers. |
Not applicable.
Item 10. | Submission of Matters to a Vote of Security Holders. |
Not applicable.
Item 11. | Controls and Procedures. |
(a) | The registrant’s principal executive officer and principal financial officer have concluded, based on their evaluation of the registrant’s disclosure controls and procedures as conducted within 90 days of the filing date of this report, that these disclosure controls and procedures are adequately designed and are operating effectively to ensure that information required to be disclosed by the registrant on FormN-CSR is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule30a-3(d) under the Act (17 CFR270.30a-3(d)) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. | Disclosure of Securities Lending Activities forClosed-End Management Investment Companies. |
Not applicable.
Item 13. | Exhibits. |
(a)(1) | The code of ethics that is the subject of the disclosure required by Item 2 is attached hereto. |
(a)(2) | Certifications pursuant to Rule30a-2(a) are attached hereto. |
(a)(3) | Not applicable. |
(a)(4) | Not applicable. |
(b) | Certifications pursuant to Rule30a-2(b) are furnished herewith. |
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) Allianz Variable Insurance Products Fund of Funds Trust |
By (Signature and Title) | /s/ Brian Muench | |||
Brian Muench, Principal Executive Officer |
Date February 28, 2019 |
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/ Brian Muench | |||
Brian Muench, Principal Executive Officer |
Date February 28, 2019 |
By (Signature and Title) | /s/ Bashir C. Asad | |||
Bashir C. Asad, Principal Financial Officer & Principal Accounting Officer |
Date February 28, 2019 |