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 811-2794
MFS SERIES TRUST III
(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and address of agents for service)
Registrant’s telephone number, including area code: (617) 954-5000
Date of fiscal year end: January 31
Date of reporting period: January 31, 2010
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
MFS® High Income Fund
SIPC Contact Information:
You may obtain information about the Securities Investor Protection Corporation (“SIPC”), including the SIPC Brochure, by contacting SIPC either by telephone (202-371-8300) or by accessing SIPC’s website address (www.sipc.org).
The report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ
NO BANK GUARANTEE
1/31/10
MFH-ANN
LETTER FROM THE CEO
Dear Shareholders:
Most global financial markets, after suffering the biggest declines since the Great Depression, experienced an impressive resurgence during 2009. Despite this turnaround, the U.S. Federal Reserve Board and central banks around the world continued to hold interest rates at historical lows. As most asset prices rebounded in the second half of 2009 and the demand for liquidity waned, the debate over the existence of asset bubbles and the need for monetary policy changes grew louder, creating added uncertainty about the timing and amount of any future interest rate changes.
Even with the significant market gains of 2009, many analysts seem to be predicting one of two likely scenarios for the U.S. economy. More conservative pundits say the recession for large areas of the country will continue to “moderate” — meaning the economy will continue to deteriorate, but at a slower pace. The more optimistic scenario is that a broader recovery will take hold and continue to gain momentum gradually.
Regardless of which recovery scenario plays out, the approximately 15 million Americans who are currently unemployed are almost certain to feel excluded — at least until significant job creation occurs. Meanwhile, an overleveraged global financial system continues to raise doubts about a prolonged upturn. Although progress has been made in recapitalizing U.S. and European banks, financial instability remains the biggest threat to sustainable growth.
While there remains lingering skepticism among many economists, MFS® believes that worldwide markets will stabilize with potential for growth. We are also mindful of the many challenges still facing our global economy, and we want to take this opportunity to remind investors about the merits of maintaining a long-term view, adhering to basic investing principles such as asset allocation and diversification, and working closely with advisors to identify and research investment opportunities.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
March 15, 2010
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top five industries (i) | | |
| Medical & Health Technology & Services | | 7.4% |
| Energy — Independent | | 6.9% |
| Gaming & Lodging | | 6.1% |
| Broadcasting | | 5.6% |
| Utilities — Electric Power | | 5.4% |
| | |
| Credit quality of long-term debt securities (a)(r) |
| AAA | | 0.9% |
| AA | | 0.2% |
| BBB | | 3.0% |
| BB | | 27.3% |
| B | | 42.1% |
| CCC | | 19.6% |
| CC | | 2.2% |
| C | | 0.5% |
| D | | 1.0% |
| Not Rated | | 3.2% |
| |
| Portfolio facts | | |
| Average Duration (d)(i) | | 4.1 |
| Average Effective Maturity (i)(m) | | 6.0 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a)(b) | | B |
| (a) | Includes debt securities that either have long-term public ratings or are U.S. Government-Related Securities. U.S. Government-Related Securities consist of U.S. Treasury securities, and certain securities issued by certain U.S. Government agencies or U.S. Government-Sponsored entities. U.S. Government-Related Securities are assigned a “AAA” rating. Each long-term rated security is assigned a rating in accordance with the following ratings hierarchy: If a security is rated by Moody’s, then that rating is used; if not rated by Moody’s, then a Standard & Poor’s rating is used; if not rated by S&P, then a Fitch rating is used. Securities that do not have a long-term public rating (with the exception of U.S. Government-Related Securities) are excluded from the average credit quality calculation and are included in the above credit quality of long-term debt securities table as “Not Rated”, subject to the next sentence. Convertible bonds, currencies, futures, options, swaps, cash, and cash-equivalents are excluded from both the above credit quality of long-term debt securities table and the average credit quality calculation. Average ratings are converted to the S&P scale and are subject to change. |
| (b) | The average credit quality of rated securities is a market weighted average (using a linear scale) of debt securities that either have long-term public ratings or are U.S. Government-Related securities. All securities that do not have a long-term public rating (with the exception of U.S. Government-Related securities) are excluded from the average credit quality calculation. |
2
Portfolio Composition – continued
| (d) | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. |
| (i) | For purposes of this presentation, the bond component includes accrued interest amounts and may be positively or negatively impacted by the equivalent exposure from derivative holdings, if applicable. Equivalent Exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. |
| (m) | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
| (r) | Percentages are based on the total market value of long-term debt securities as of 1/31/10. |
Percentages are based on net assets as of 1/31/10, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
3
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended January 31, 2010, Class A shares of the MFS High Income Fund (the “fund”) provided a total return of 42.99%, at net asset value. This compares with a return of 51.15% for the fund’s benchmark, the Barclays Capital U.S. High-Yield Corporate Bond Index.
Market Environment
After having suffered through one of the largest and most concentrated downturns since the 1930s, most asset markets staged a remarkable rebound during 2009. During the early stages of the period, the fallout from a series of tumultuous financial events pushed global equity and credit markets to their lowest points during the crisis. Not only did Europe and Japan fall into very deep recessions, but an increasingly powerful engine of global growth – emerging markets – also contracted almost across the board. The subsequent recovery in global activity has been similarly synchronized, led importantly by emerging Asian economies, but broadening to include most of the global economy to varying degrees. Primary drivers of the recovery included an unwinding of the inventory destocking that took place earlier, as well as massive fiscal and monetary stimulus.
During the first half of the reporting period, with the policy rate having been cut almost to 0%, the Fed continued to use its new lending facilities to alleviate ever-tightening credit markets. On the fiscal front, the U.S. Treasury designed and began implementing a massive fiscal stimulus package. As inflationary concerns diminished in the face of global deleveraging and equity and credit markets deteriorated more sharply, central banks around the world also cut interest rates dramatically. By the middle of the period, several central banks had approached their lower bound on policy rates and were examining the implementation and ramifications of quantitative easing as a means to further loosen monetary policy to offset the continuing fall in global economic activity.
However, by the end of the period, there were ever-broadening signs that the global macroeconomic deterioration had passed, which caused the subsequent rise in asset valuations. As most asset prices rebounded in the second half of the period and the demand for liquidity waned, the debate concerning the existence of asset bubbles and the need for monetary exit strategies had begun, creating added uncertainty regarding the forward path of policy rates.
Detractors from Performance
Relative to the Barclays Capital U.S. High-Yield Corporate Bond Index, the fund’s lesser exposure to “BB” and “CCC” rated (r) securities detracted from performance. Bonds in these quality segments performed exceptionally well
4
Management Review – continued
over the reporting period as investors appeared to be recovering their appetite for risk in an improving economy.
The fund’s return from yield, which was less than that of the index, was another negative factor for relative performance.
Security selection also held back relative returns. Debt holdings of power generation companies NRG Energy, Edison Mission, and Texas Competitive Electric Holdings, hospital operators Hospital Corporation of America and Community Health Systems, and funeral, cremation and cemetery services provider Service Corporation International were among the fund’s top relative detractors.
Contributors to Performance
The fund’s greater exposure to “B” rated securities contributed to performance as credit spreads narrowed and lower-quality securities outperformed higher-quality issues over the reporting period.
Yield curve (y) positioning, particularly a lesser exposure to the long end of the curve, was another positive factor for performance.
Top individual contributors during the reporting period included the fund’s debt holdings of Spanish-language network television operator Univision Communications, auto maker Ford Motor Company, oil and natural gas company Chaparral Energy, flash memory products maker Spansion (h), television station operator Local TV LLC, used car auction company KAR Holdings, and television broadcaster Allbritton Communications.
Respectfully,
| | |
| John Addeo | | David Cole |
| Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The primary source for bond quality ratings is Moody’s Investors Service. If not available, ratings by Standard & Poor’s are used. For securities which are not rated by either of the two agencies, the security is considered Not Rated. |
| (y) | A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
PERFORMANCE SUMMARY THROUGH 1/31/10
The following chart illustrates a representative class of the fund’s historical performance in comparison to its benchmark(s). Performance results include the deduction of the maximum applicable sales charge and reflect the percentage change in net asset value, including reinvestment of dividends and capital gains distributions. The performance of other share classes will be greater than or less than that of the class depicted below. Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect sales charges, commissions or expenses. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your shares, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the redemption of fund shares.
Growth of a Hypothetical $10,000 Investment
6
Performance Summary – continued
Total Returns through 1/31/10
Average annual without sales charge
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | A | | 2/17/78 | | 42.99% | | 4.16% | | 4.54% | | N/A | | |
| | | B | | 9/27/93 | | 41.40% | | 3.38% | | 3.79% | | N/A | | |
| | | C | | 1/03/94 | | 41.82% | | 3.39% | | 3.77% | | N/A | | |
| | | I | | 1/02/97 | | 42.90% | | 4.40% | | 4.80% | | N/A | | |
| | | R1 | | 4/01/05 | | 41.39% | | N/A | | N/A | | 3.73% | | |
| | | R2 | | 10/31/03 | | 42.65% | | 3.84% | | N/A | | 5.10% | | |
| | | R3 | | 4/01/05 | | 42.55% | | N/A | | N/A | | 4.48% | | |
| | | R4 | | 4/01/05 | | 43.33% | | N/A | | N/A | | 4.84% | | |
| | | 529A | | 7/31/02 | | 42.40% | | 3.85% | | N/A | | 7.40% | | |
| | | 529B | | 7/31/02 | | 41.40% | | 3.22% | | N/A | | 6.70% | | |
| | | 529C | | 7/31/02 | | 41.26% | | 3.17% | | N/A | | 6.70% | | |
| Comparative benchmark | | | | | | | | | | |
| | | Barclays Capital U.S. High-Yield
Corporate Bond Index (f) | | 51.15% | | 6.76% | | 6.90% | | N/A | | |
| Average annual with sales charge | | | | | | | | | | |
| | | A
With Initial Sales Charge (4.75%) | | 36.20% | | 3.15% | | 4.03% | | N/A | | |
| | | B
With CDSC (Declining over six years from 4% to 0%) (x) | | 37.40% | | 3.09% | | 3.79% | | N/A | | |
| | | C
With CDSC (1% for 12 months) (x) | | 40.82% | | 3.39% | | 3.77% | | N/A | | |
| | | 529A
With Initial Sales Charge (4.75%) | | 35.64% | | 2.85% | | N/A | | 6.71% | | |
| | | 529B
With CDSC (Declining over six years from 4% to 0%) (x) | | 37.40% | | 2.93% | | N/A | | 6.70% | | |
| | | 529C
With CDSC (1% for 12 months) (x) | | 40.26% | | 3.17% | | N/A | | 6.70% | | |
Class I, R1, R2, R3, and R4 shares do not have a sales charge.
CDSC – Contingent Deferred Sales Charge.
| (f) | Source: FactSet Reasearch Systems Inc. |
| (t) | For the period from the class’ inception date through the stated period end (for those share classes with less than 10 years of performance history). No comparative benchmark performance information is provided for “life” periods. (See Notes to Performance Summary.) |
| (x) | Assuming redemption at the end of the applicable period. |
7
Performance Summary – continued
Benchmark Definition
Barclays Capital U.S. High-Yield Corporate Bond Index – a market capitalization-weighted index that measures the performance of non-investment grade, fixed rate debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded.
It is not possible to invest directly in an index.
Notes to Performance Summary
Class 529 shares are only available in conjunction with qualified tuition programs, such as the MFS 529 Savings Plan. There also is an additional fee, which is detailed in the program description, on qualified tuition programs. If this fee was reflected, the performance for Class 529 shares would have been lower. This annual fee is waived for Oregon residents and for those accounts with assets of $25,000 or more.
Average annual total return represents the average annual change in value for each share class for the periods presented. Life returns are presented where the share class has less than 10 years of performance history and represent the average annual total return from the class inception date to the stated period end date. As the fund’s share classes may have different inception dates, the life returns may represent different time periods and may not be comparable. As a result, no comparative benchmark performance information is provided for life periods.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
8
EXPENSE TABLE
Fund expenses borne by the shareholders during the period,
August 1, 2009 through January 31, 2010
As a shareholder of the fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on certain purchase or redemption payments, and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period August 1, 2009 through January 31, 2010.
The expenses include the payment of a portion of the transfer-agent-related expenses of MFS funds that invest in the fund. For further information, please see the Notes to the Financial Statements.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table 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 the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line for each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
9
Expense Table – continued
| | | | | | | | | | |
Share
Class | | | | Annualized
Expense
Ratio | | Beginning
Account Value
8/1/09 | | Ending
Account Value
1/31/10 | | Expenses
Paid During
Period (p)
8/1/09-1/31/10 |
| A | | Actual | | 0.96% | | $1,000.00 | | $1,146.16 | | $5.19 |
| | Hypothetical (h) | | 0.96% | | $1,000.00 | | $1,020.37 | | $4.89 |
| B | | Actual | | 1.71% | | $1,000.00 | | $1,138.18 | | $9.22 |
| | Hypothetical (h) | | 1.71% | | $1,000.00 | | $1,016.59 | | $8.69 |
| C | | Actual | | 1.71% | | $1,000.00 | | $1,141.60 | | $9.23 |
| | Hypothetical (h) | | 1.71% | | $1,000.00 | | $1,016.59 | | $8.69 |
| I | | Actual | | 0.71% | | $1,000.00 | | $1,144.05 | | $3.84 |
| | Hypothetical (h) | | 0.71% | | $1,000.00 | | $1,021.63 | | $3.62 |
| R1 | | Actual | | 1.71% | | $1,000.00 | | $1,138.15 | | $9.22 |
| | Hypothetical (h) | | 1.71% | | $1,000.00 | | $1,016.59 | | $8.69 |
| R2 | | Actual | | 1.21% | | $1,000.00 | | $1,144.77 | | $6.54 |
| | Hypothetical (h) | | 1.21% | | $1,000.00 | | $1,019.11 | | $6.16 |
| R3 | | Actual | | 0.96% | | $1,000.00 | | $1,142.67 | | $5.18 |
| | Hypothetical (h) | | 0.96% | | $1,000.00 | | $1,020.37 | | $4.89 |
| R4 | | Actual | | 0.71% | | $1,000.00 | | $1,147.52 | | $3.84 |
| | Hypothetical (h) | | 0.71% | | $1,000.00 | | $1,021.63 | | $3.62 |
| 529A | | Actual | | 1.06% | | $1,000.00 | | $1,142.11 | | $5.72 |
| | Hypothetical (h) | | 1.06% | | $1,000.00 | | $1,019.86 | | $5.40 |
| 529B | | Actual | | 1.81% | | $1,000.00 | | $1,137.96 | | $9.75 |
| | Hypothetical (h) | | 1.81% | | $1,000.00 | | $1,016.08 | | $9.20 |
| 529C | | Actual | | 1.81% | | $1,000.00 | | $1,137.62 | | $9.75 |
| | Hypothetical (h) | | 1.81% | | $1,000.00 | | $1,016.08 | | $9.20 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads). If these transaction costs had been included, your costs would have been higher. |
10
PORTFOLIO OF INVESTMENTS
1/31/10
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Bonds - 88.8% | | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Aerospace - 0.9% | | | | | | |
| Bombardier, Inc., 6.3%, 2014 (n) | | $ | 2,025,000 | | $ | 2,035,125 |
| Bombardier, Inc., 7.45%, 2034 (z) | | | 670,000 | | | 614,725 |
| Hawker Beechcraft Acquisition Co. LLC, 8.5%, 2015 | | | 3,883,000 | | | 2,669,563 |
| Spirit AeroSystems Holdings, Inc., 7.5%, 2017 (n) | | | 1,295,000 | | | 1,304,713 |
| Vought Aircraft Industries, Inc., 8%, 2011 | | | 1,680,000 | | | 1,667,400 |
| | | | | | |
| | | | | | $ | 8,291,526 |
| Airlines - 1.8% | | | | | | |
| American Airlines Pass-Through Trust, 6.817%, 2011 | | $ | 3,745,000 | | $ | 3,698,188 |
| AMR Corp., 7.858%, 2011 | | | 2,300,000 | | | 2,317,250 |
| Continental Airlines, Inc., 7.339%, 2014 | | | 5,719,000 | | | 5,447,348 |
| Continental Airlines, Inc., 6.9%, 2017 | | | 592,700 | | | 564,547 |
| Continental Airlines, Inc., 6.748%, 2017 | | | 1,152,807 | | | 1,072,110 |
| Delta Air Lines, Inc., 7.111%, 2011 | | | 2,425,000 | | | 2,449,250 |
| Delta Air Lines, Inc., 7.711%, 2011 | | | 1,345,000 | | | 1,331,550 |
| | | | | | |
| | | | | | $ | 16,880,243 |
| Apparel Manufacturers - 0.3% | | | | | | |
| Hanes Brand, Inc., 8%, 2016 | | $ | 830,000 | | $ | 850,750 |
| Levi Strauss & Co., 9.75%, 2015 | | | 1,880,000 | | | 1,964,600 |
| | | | | | |
| | | | | | $ | 2,815,350 |
| Asset Backed & Securitized - 2.2% | | | | | | |
| Airlie Ltd., CDO, FRN, 2.151%, 2011 (a)(p)(z) | | $ | 2,452,690 | | $ | 1,201,818 |
| Anthracite Ltd., CDO, 6%, 2037 (z) | | | 5,148,000 | | | 257,400 |
| Babson Ltd., CLO, “D”, FRN, 1.751%, 2018 (n) | | | 2,385,000 | | | 1,353,488 |
| Banc of America Commercial Mortgage, Inc., FRN, 5.811%, 2017 | | | 1,843,262 | | | 1,464,064 |
| Citigroup Commercial Mortgage Trust, FRN, 5.7%, 2017 | | | 2,948,120 | | | 567,899 |
| Credit Suisse Mortgage Capital Certificate, 5.343%, 2039 | | | 1,967,534 | | | 1,530,996 |
| CWCapital Cobalt Ltd., CDO, “E2”, 6%, 2045 (z) | | | 1,061,364 | | | 21,227 |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.549%, 2050 (z) | | | 612,466 | | | 12,249 |
| CWCapital Cobalt Ltd., CDO, “G”, FRN, 1.749%, 2050 (z) | | | 1,898,608 | | | 37,972 |
| Falcon Franchise Loan LLC, FRN, 3.67%, 2025 (i)(z) | | | 10,928,295 | | | 763,888 |
| First Union National Bank Commercial Mortgage Trust, 6.75%, 2032 | | | 2,000,000 | | | 1,776,995 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.062%, 2051 | | | 2,285,000 | | | 725,261 |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.002%, 2030 (i) | | | 10,167,103 | | | 307,115 |
11
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Asset Backed & Securitized - continued | | | | | | |
| Merrill Lynch Mortgage Trust, FRN, 5.828%, 2050 | | $ | 2,285,000 | | $ | 638,904 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.204%, 2049 | | | 5,320,927 | | | 4,173,756 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.747%, 2050 | | | 1,366,000 | | | 924,980 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.747%, 2050 | | | 3,115,000 | | | 2,687,594 |
| Morgan Stanley Capital I, Inc., 1.269%, 2039 (i)(z) | | | 20,517,431 | | | 326,022 |
| TIERS Beach Street Synthetic, CLO, FRN, 6.787%, 2011 (z) | | | 2,750,000 | | | 2,234,100 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.753%, 2047 | | | 1,738,692 | | | 285,070 |
| Wachovia Credit, CDO, FRN, 1.601%, 2026 (z) | | | 1,320,000 | | | 52,800 |
| | | | | | |
| | | | | | $ | 21,343,598 |
| Automotive - 3.2% | | | | | | |
| Accuride Corp., 8.5%, 2015 (d) | | $ | 1,380,000 | | $ | 1,259,250 |
| Allison Transmission, Inc., 11%, 2015 (n) | | | 5,350,000 | | | 5,644,250 |
| Allison Transmission, Inc., 11.25%, 2015 (n)(p) | | | 1,939,800 | | | 2,041,640 |
| FCE Bank PLC, 7.125%, 2012 | | EUR | 4,600,000 | | | 6,346,011 |
| Ford Motor Credit Co. LLC, 12%, 2015 | | $ | 8,973,000 | | | 10,304,315 |
| Goodyear Tire & Rubber Co., 9%, 2015 | | | 2,440,000 | | | 2,513,200 |
| Goodyear Tire & Rubber Co., 10.5%, 2016 | | | 1,985,000 | | | 2,153,725 |
| | | | | | |
| | | | | | $ | 30,262,391 |
| Basic Industry - 0.1% | | | | | | |
| TriMas Corp., 9.75%, 2017 (n) | | $ | 565,000 | | $ | 563,588 |
| | |
| Broadcasting - 4.7% | | | | | | |
| Allbritton Communications Co., 7.75%, 2012 | | $ | 4,255,000 | | $ | 4,223,088 |
| Bonten Media Acquisition Co., 9%, 2015 (p)(z) | | | 4,861,454 | | | 1,765,721 |
| Inmarsat Finance PLC, 7.375%, 2017 (n) | | | 2,070,000 | | | 2,124,338 |
| Intelsat Jackson Holdings Ltd., 9.5%, 2016 | | | 7,695,000 | | | 8,118,225 |
| Lamar Media Corp., 6.625%, 2015 | | | 3,830,000 | | | 3,686,375 |
| Lamar Media Corp., “C”, 6.625%, 2015 | | | 1,485,000 | | | 1,414,463 |
| LBI Media, Inc., 8.5%, 2017 (z) | | | 1,450,000 | | | 1,232,500 |
| LIN TV Corp., 6.5%, 2013 | | | 3,220,000 | | | 3,075,100 |
| Local TV Finance LLC, 9.25%, 2015 (p)(z) | | | 5,429,812 | | | 2,873,276 |
| Newport Television LLC, 13%, 2017 (n)(p) | | | 4,536,531 | | | 2,119,883 |
| Nexstar Broadcasting Group, Inc., 0.5% to 2011, 7% to 2014 (n)(p) | | | 4,026,839 | | | 3,220,465 |
| Nexstar Broadcasting Group, Inc., 7%, 2014 | | | 1,328,000 | | | 1,062,400 |
| Salem Communications Corp., 9.625%, 2016 (n) | | | 970,000 | | | 1,023,350 |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 1,540,000 | | | 1,586,200 |
| Univision Communications, Inc., 12%, 2014 (n) | | | 1,540,000 | | | 1,663,200 |
12
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Broadcasting - continued | | | | | | |
| Univision Communications, Inc., 10.5%, 2015 (n)(p) | | $ | 6,036,087 | | $ | 5,068,804 |
| Young Broadcasting, Inc., 8.75%, 2014 (d) | | | 1,640,000 | | | 11,480 |
| | | | | | |
| | | | | | $ | 44,268,868 |
| Brokerage & Asset Managers - 0.6% | | | | | | |
| Janus Capital Group, Inc., 6.95%, 2017 | | $ | 4,410,000 | | $ | 4,366,032 |
| Nuveen Investments, Inc., 10.5%, 2015 | | | 1,555,000 | | | 1,438,375 |
| | | | | | |
| | | | | | $ | 5,804,407 |
| Building - 2.1% | | | | | | |
| Associated Materials, Inc., 11.25%, 2014 | | $ | 2,360,000 | | $ | 2,360,000 |
| Building Materials Corp. of America, 7.75%, 2014 | | | 1,990,000 | | | 2,067,113 |
| CEMEX Finance Europe B.V., 9.625%, 2017 (n) | | EUR | 1,765,000 | | | 2,483,851 |
| Norcraft Cos., LP, 10.5%, 2015 (n) | | $ | 1,105,000 | | | 1,149,200 |
| Nortek, Inc., 11%, 2013 | | | 4,730,933 | | | 4,967,480 |
| Owens Corning, 9%, 2019 | | | 3,510,000 | | | 4,035,422 |
| Ply Gem Industries, Inc., 11.75%, 2013 | | | 1,855,000 | | | 1,887,463 |
| USG Corp., 9.75%, 2014 (n) | | | 555,000 | | | 588,300 |
| | | | | | |
| | | | | | $ | 19,538,829 |
| Business Services - 2.7% | | | | | | |
| First Data Corp., 9.875%, 2015 | | $ | 8,650,000 | | $ | 7,720,125 |
| First Data Corp., 11.25%, 2016 | | | 4,295,000 | | | 3,586,325 |
| Iron Mountain, Inc., 6.625%, 2016 | | | 3,045,000 | | | 2,953,650 |
| Iron Mountain, Inc., 8.375%, 2021 | | | 1,790,000 | | | 1,857,125 |
| SunGard Data Systems, Inc., 9.125%, 2013 | | | 3,970,000 | | | 4,039,475 |
| SunGard Data Systems, Inc., 10.25%, 2015 | | | 3,253,000 | | | 3,374,988 |
| Terremark Worldwide, Inc., 12%, 2017 (n) | | | 2,000,000 | | | 2,215,000 |
| | | | | | |
| | | | | | $ | 25,746,688 |
| Cable TV - 3.4% | | | | | | |
| CCO Holdings LLC, 8.75%, 2013 | | $ | 8,620,000 | | $ | 8,738,525 |
| Charter Communications Holding Co., LLC, 8.375%, 2014 (n) | | | 2,255,000 | | | 2,294,463 |
| Charter Communications Holding Co., LLC, 10.875%, 2014 (n) | | | 2,725,000 | | | 3,052,000 |
| CSC Holdings, Inc., 6.75%, 2012 | | | 456,000 | | | 474,240 |
| CSC Holdings, Inc., 8.5%, 2014 (n) | | | 4,275,000 | | | 4,531,500 |
| DIRECTV Holdings LLC, 7.625%, 2016 | | | 2,750,000 | | | 3,011,250 |
| Mediacom LLC, 9.125%, 2019 (n) | | | 1,560,000 | | | 1,560,000 |
| Videotron LTEE, 6.875%, 2014 | | | 1,860,000 | | | 1,850,700 |
| Virgin Media Finance PLC, 9.125%, 2016 | | | 4,528,000 | | | 4,709,120 |
| Virgin Media Finance PLC, 9.5%, 2016 | | | 1,900,000 | | | 2,014,000 |
| | | | | | |
| | | | | | $ | 32,235,798 |
13
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Chemicals - 3.0% | | | | | | |
| Ashland, Inc., 9.125%, 2017 (n) | | $ | 5,595,000 | | $ | 6,098,550 |
| Hexion Finance Escrow LLC, 8.875%, 2018 (z) | | | 2,205,000 | | | 2,125,069 |
| Hexion Specialty Chemicals, Inc., 9.75%, 2014 | | | 2,660,000 | | | 2,573,550 |
| Huntsman International LLC, 5.5%, 2016 (n) | | | 2,115,000 | | | 1,845,338 |
| Innophos Holdings, Inc., 8.875%, 2014 | | | 3,800,000 | | | 3,876,000 |
| Lumena Resources Corp., 12%, 2014 (n) | | | 4,192,000 | | | 3,690,236 |
| Momentive Performance Materials, Inc., 12.5%, 2014 (n) | | | 3,765,000 | | | 4,216,800 |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 1,785,000 | | | 1,548,488 |
| Nalco Co., 8.875%, 2013 | | | 2,090,000 | | | 2,147,475 |
| | | | | | |
| | | | | | $ | 28,121,506 |
| Computer Software - Systems - 0.3% | | | | | | |
| DuPont Fabros Technology, Inc., 8.5%, 2017 (n) | | $ | 2,805,000 | | $ | 2,875,125 |
| | |
| Construction - 0.2% | | | | | | |
| Lennar Corp., 12.25%, 2017 | | $ | 1,285,000 | | $ | 1,567,700 |
| | |
| Consumer Products - 0.9% | | | | | | |
| ACCO Brands Corp., 10.625%, 2015 (n) | | $ | 395,000 | | $ | 432,525 |
| ACCO Brands Corp., 7.625%, 2015 | | | 1,275,000 | | | 1,195,313 |
| Jarden Corp., 7.5%, 2017 | | | 3,450,000 | | | 3,467,250 |
| Libbey Glass, Inc., 10%, 2015 (z) | | | 235,000 | | | 237,938 |
| Scotts Miracle-Gro Co., 7.25%, 2018 | | | 685,000 | | | 696,988 |
| Visant Holding Corp., 8.75%, 2013 | | | 2,170,000 | | | 2,224,250 |
| | | | | | |
| | | | | | $ | 8,254,264 |
| Consumer Services - 2.2% | | | | | | |
| Corrections Corp. of America, 6.25%, 2013 | | $ | 2,330,000 | | $ | 2,335,825 |
| Corrections Corp. of America, 7.75%, 2017 | | | 1,400,000 | | | 1,438,500 |
| KAR Holdings, Inc., 10%, 2015 | | | 2,400,000 | | | 2,544,000 |
| KAR Holdings, Inc., FRN, 4.249%, 2014 | | | 1,660,000 | | | 1,535,500 |
| Service Corp. International, 7.375%, 2014 | | | 2,670,000 | | | 2,696,700 |
| Service Corp. International, 7%, 2017 | | | 6,380,000 | | | 6,300,250 |
| Ticketmaster Entertainment, Inc., 10.75%, 2016 | | | 3,555,000 | | | 3,883,838 |
| | | | | | |
| | | | | | $ | 20,734,613 |
| Containers - 1.4% | | | | | | |
| Crown Americas LLC, 7.625%, 2013 | | $ | 1,223,000 | | $ | 1,261,219 |
| Graham Packaging Holdings Co., 9.875%, 2014 | | | 4,840,000 | | | 4,979,150 |
| Greif, Inc., 6.75%, 2017 | | | 3,415,000 | | | 3,355,238 |
| Owens-Brockway Glass Container, Inc., 8.25%, 2013 | | | 980,000 | | | 999,600 |
| Owens-Illinois, Inc., 7.375%, 2016 | | | 1,760,000 | | | 1,830,400 |
| Reynolds Group, 7.75%, 2016 (n) | | | 1,260,000 | | | 1,269,450 |
| | | | | | |
| | | | | | $ | 13,695,057 |
14
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Defense Electronics - 0.4% | | | | | | |
| L-3 Communications Corp., 6.125%, 2014 | | $ | 3,320,000 | | $ | 3,361,500 |
| | |
| Electronics - 1.0% | | | | | | |
| Avago Technologies Ltd., 11.875%, 2015 | | $ | 2,260,000 | | $ | 2,502,950 |
| Flextronics International Ltd., 6.25%, 2014 | | | 925,000 | | | 918,063 |
| Freescale Semiconductor, Inc., 8.875%, 2014 | | | 3,285,000 | | | 2,923,650 |
| Jabil Circuit, Inc., 7.75%, 2016 | | | 2,740,000 | | | 2,918,100 |
| | | | | | |
| | | | | | $ | 9,262,763 |
| Emerging Market Sovereign - 0.1% | | | | | | |
| Republic of Argentina, FRN, 0.943%, 2012 | | $ | 1,291,763 | | $ | 1,107,471 |
| | |
| Energy - Independent - 6.8% | | | | | | |
| Chaparral Energy, Inc., 8.875%, 2017 | | $ | 3,465,000 | | $ | 3,014,550 |
| Chesapeake Energy Corp., 7%, 2014 | | | 1,245,000 | | | 1,254,338 |
| Chesapeake Energy Corp., 9.5%, 2015 | | | 785,000 | | | 855,650 |
| Chesapeake Energy Corp., 6.375%, 2015 | | | 3,885,000 | | | 3,807,300 |
| Forest Oil Corp., 8.5%, 2014 | | | 595,000 | | | 624,750 |
| Forest Oil Corp., 7.25%, 2019 | | | 1,520,000 | | | 1,527,600 |
| Hilcorp Energy I LP, 9%, 2016 (n) | | | 4,515,000 | | | 4,684,313 |
| Mariner Energy, Inc., 8%, 2017 | | | 2,875,000 | | | 2,810,313 |
| McMoRan Exploration Co., 11.875%, 2014 | | | 1,825,000 | | | 1,989,250 |
| Newfield Exploration Co., 6.625%, 2014 | | | 2,080,000 | | | 2,100,800 |
| Newfield Exploration Co., 6.625%, 2016 | | | 1,070,000 | | | 1,070,000 |
| OPTI Canada, Inc., 8.25%, 2014 | | | 3,355,000 | | | 2,952,400 |
| Penn Virginia Corp., 10.375%, 2016 | | | 5,160,000 | | | 5,682,450 |
| Petrohawk Energy Corp., 10.5%, 2014 | | | 2,230,000 | | | 2,464,150 |
| Pioneer Natural Resources Co., 6.875%, 2018 | | | 2,900,000 | | | 2,848,937 |
| Pioneer Natural Resources Co., 7.5%, 2020 | | | 1,960,000 | | | 1,990,174 |
| Plains Exploration & Production Co., 7%, 2017 | | | 5,740,000 | | | 5,661,075 |
| Quicksilver Resources, Inc., 8.25%, 2015 | | | 4,690,000 | | | 4,830,700 |
| Range Resources Corp., 8%, 2019 | | | 4,375,000 | | | 4,659,375 |
| SandRidge Energy, Inc., 9.875%, 2016 (n) | | | 895,000 | | | 950,938 |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 5,405,000 | | | 5,377,975 |
| Southwestern Energy Co., 7.5%, 2018 | | | 2,905,000 | | | 3,093,825 |
| | | | | | |
| | | | | | $ | 64,250,863 |
| Entertainment - 0.8% | | | | | | |
| AMC Entertainment, Inc., 11%, 2016 | | $ | 2,935,000 | | $ | 3,155,125 |
| AMC Entertainment, Inc., 8.75%, 2019 | | | 2,575,000 | | | 2,665,125 |
| Cinemark USA, Inc., 8.625%, 2019 | | | 2,155,000 | | | 2,246,588 |
| | | | | | |
| | | | | | $ | 8,066,838 |
15
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Financial Institutions - 2.6% | | | | | | |
| CIT Group, Inc., 7%, 2017 | | $ | 4,650,000 | | $ | 3,964,125 |
| GMAC, Inc., 6.875%, 2011 | | | 3,373,000 | | | 3,373,000 |
| GMAC, Inc., 7%, 2012 | | | 1,745,000 | | | 1,731,913 |
| GMAC, Inc., 6.75%, 2014 | | | 6,260,000 | | | 6,087,850 |
| GMAC, Inc., 8%, 2031 | | | 3,553,000 | | | 3,401,998 |
| International Lease Finance Corp., 5.625%, 2013 | | | 7,620,000 | | | 6,270,102 |
| | | | | | |
| | | | | | $ | 24,828,988 |
| Food & Beverages - 1.8% | | | | | | |
| ARAMARK Corp., 8.5%, 2015 | | $ | 2,151,000 | | $ | 2,156,378 |
| B&G Foods, Inc., 7.625%, 2018 | | | 1,110,000 | | | 1,121,100 |
| Dean Foods Co., 7%, 2016 | | | 3,190,000 | | | 3,110,250 |
| Del Monte Foods Co., 6.75%, 2015 | | | 3,920,000 | | | 4,008,200 |
| Michael Foods, Inc., 8%, 2013 | | | 3,105,000 | | | 3,170,981 |
| Pinnacle Foods Finance LLC, 9.25%, 2015 | | | 3,580,000 | | | 3,597,900 |
| | | | | | |
| | | | | | $ | 17,164,809 |
| Forest & Paper Products - 2.5% | | | | | | |
| Buckeye Technologies, Inc., 8.5%, 2013 | | $ | 3,448,000 | | $ | 3,508,340 |
| Cascades, Inc., 7.75%, 2017 (n) | | | 1,870,000 | | | 1,907,400 |
| Georgia-Pacific Corp., 7.125%, 2017 (n) | | | 3,480,000 | | | 3,567,000 |
| Georgia-Pacific Corp., 8%, 2024 | | | 2,860,000 | | | 2,974,400 |
| Georgia-Pacific Corp., 7.25%, 2028 | | | 865,000 | | | 834,725 |
| Graphic Packaging International Corp., 9.5%, 2013 | | | 2,705,000 | | | 2,779,388 |
| Jefferson Smurfit Corp., 8.25%, 2012 (d) | | | 1,095,000 | | | 914,325 |
| JSG Funding PLC, 7.75%, 2015 | | | 690,000 | | | 672,750 |
| Millar Western Forest Products Ltd., 7.75%, 2013 | | | 4,885,000 | | | 3,956,850 |
| Smurfit Kappa Group PLC, 7.75%, 2019 (n) | | EUR | 1,920,000 | | | 2,648,770 |
| | | | | | |
| | | | | | $ | 23,763,948 |
| Gaming & Lodging - 5.2% | | | | | | |
| Ameristar Casinos, Inc., 9.25%, 2014 (n) | | $ | 1,380,000 | | $ | 1,424,850 |
| Boyd Gaming Corp., 6.75%, 2014 | | | 3,940,000 | | | 3,644,500 |
| Firekeepers Development Authority, 13.875%, 2015 (n) | | | 1,450,000 | | | 1,660,250 |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (d)(n) | | | 3,300,000 | | | 33,000 |
| Harrah’s Operating Co., Inc., 11.25%, 2017 | | | 3,715,000 | | | 3,947,188 |
| Harrah’s Operating Co., Inc., 10%, 2018 | | | 571,000 | | | 453,945 |
| Harrah’s Operating Co., Inc., 10%, 2018 | | | 4,971,000 | | | 3,951,945 |
| Host Hotels & Resorts, Inc., 7.125%, 2013 | | | 1,155,000 | | | 1,163,663 |
| Host Hotels & Resorts, Inc., 6.75%, 2016 | | | 3,645,000 | | | 3,562,988 |
| Host Hotels & Resorts, Inc., 9%, 2017 (n) | | | 2,455,000 | | | 2,626,850 |
| MGM Mirage, 6.75%, 2013 | | | 3,410,000 | | | 3,103,100 |
| MGM Mirage, 10.375%, 2014 (n) | | | 1,520,000 | | | 1,668,200 |
16
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Gaming & Lodging - continued | | | | | | |
| MGM Mirage, 7.5%, 2016 | | $ | 1,835,000 | | $ | 1,532,225 |
| MGM Mirage, 11.125%, 2017 (n) | | | 1,280,000 | | | 1,440,000 |
| MGM Mirage, 11.375%, 2018 (n) | | | 400,000 | | | 378,000 |
| Penn National Gaming, Inc., 8.75%, 2019 (n) | | | 2,915,000 | | | 2,973,300 |
| Pinnacle Entertainment, Inc., 7.5%, 2015 | | | 3,935,000 | | | 3,639,875 |
| Royal Caribbean Cruises Ltd., 7%, 2013 | | | 2,105,000 | | | 2,089,213 |
| Royal Caribbean Cruises Ltd., 11.875%, 2015 | | | 3,765,000 | | | 4,395,638 |
| Starwood Hotels & Resorts Worldwide, Inc., 6.75%, 2018 | | | 1,565,000 | | | 1,561,088 |
| Station Casinos, Inc., 6%, 2012 (d) | | | 4,027,000 | | | 684,590 |
| Station Casinos, Inc., 6.5%, 2014 (d) | | | 6,495,000 | | | 32,475 |
| Station Casinos, Inc., 6.875%, 2016 (d) | | | 7,690,000 | | | 38,450 |
| Station Casinos, Inc., 7.75%, 2016 (d) | | | 1,413,000 | | | 250,808 |
| Wyndham Worldwide Corp., 6%, 2016 | | | 3,585,000 | | | 3,471,176 |
| | | | | | |
| | | | | | $ | 49,727,317 |
| Industrial - 1.1% | | | | | | |
| Altra Holdings, Inc., 8.125%, 2016 (n) | | $ | 1,925,000 | | $ | 1,987,563 |
| Aquilex Corp., 11.125%, 2016 (n) | | | 730,000 | | | 759,200 |
| Baldor Electric Co., 8.625%, 2017 | | | 3,660,000 | | | 3,724,050 |
| Great Lakes Dredge & Dock Corp., 7.75%, 2013 | | | 2,325,000 | | | 2,325,000 |
| Johnsondiversey Holdings, Inc., 8.25%, 2019 (n) | | | 1,910,000 | | | 1,981,625 |
| | | | | | |
| | | | | | $ | 10,777,438 |
| Insurance - 0.8% | | | | | | |
| ING Groep N.V., 5.775% to 2015, FRN to 2049 | | $ | 5,180,000 | | $ | 4,075,883 |
| MetLife, Inc., 9.25% to 2038, FRN to 2068 (n) | | | 3,400,000 | | | 3,808,000 |
| | | | | | |
| | | | | | $ | 7,883,883 |
| Insurance - Property & Casualty - 0.8% | | | | | | |
| Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2088 (n) | | $ | 3,440,000 | | $ | 3,784,000 |
| USI Holdings Corp., 9.75%, 2015 (z) | | | 3,165,000 | | | 2,935,538 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 (z) | | | 1,481,000 | | | 1,332,900 |
| | | | | | |
| | | | | | $ | 8,052,438 |
| Machinery & Tools - 0.6% | | | | | | |
| Case New Holland, Inc., 7.125%, 2014 | | $ | 1,975,000 | | $ | 1,975,000 |
| Rental Service Corp., 9.5%, 2014 | | | 3,625,000 | | | 3,670,313 |
| | | | | | |
| | | | | | $ | 5,645,313 |
| Major Banks - 1.6% | | | | | | |
| Bank of America Corp., 8% to 2018, FRN to 2049 | | $ | 7,780,000 | | $ | 7,386,721 |
| JPMorgan Chase & Co., 7.9% to 2018, FRN to 2049 | | | 6,505,000 | | | 6,663,137 |
| Royal Bank of Scotland Group PLC, FRN, 7.648%, 2049 | | | 1,745,000 | | | 1,359,163 |
| | | | | | |
| | | | | | $ | 15,409,021 |
17
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Medical & Health Technology & Services - 7.2% | | | | | | |
| Biomet, Inc., 10%, 2017 | | $ | 2,740,000 | | $ | 2,979,750 |
| Biomet, Inc., 11.625%, 2017 | | | 2,645,000 | | | 2,909,500 |
| Community Health Systems, Inc., 8.875%, 2015 | | | 6,075,000 | | | 6,280,031 |
| Cooper Cos., Inc., 7.125%, 2015 | | | 2,045,000 | | | 2,009,213 |
| DaVita, Inc., 6.625%, 2013 | | | 1,454,000 | | | 1,457,635 |
| DaVita, Inc., 7.25%, 2015 | | | 3,720,000 | | | 3,724,650 |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 2,540,000 | | | 2,844,800 |
| HCA, Inc., 6.375%, 2015 | | | 4,325,000 | | | 3,989,813 |
| HCA, Inc., 9.25%, 2016 | | | 14,535,000 | | | 15,334,425 |
| HCA, Inc., 8.5%, 2019 (n) | | | 2,055,000 | | | 2,173,163 |
| HealthSouth Corp., 8.125%, 2020 | | | 4,215,000 | | | 4,130,700 |
| Psychiatric Solutions, Inc., 7.75%, 2015 | | | 1,775,000 | | | 1,699,563 |
| Psychiatric Solutions, Inc., 7.75%, 2015 (n) | | | 950,000 | | | 885,875 |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 3,120,000 | | | 3,229,200 |
| U.S. Oncology, Inc., 10.75%, 2014 | | | 3,480,000 | | | 3,627,900 |
| United Surgical Partners International, Inc., 8.875%, 2017 | | | 840,000 | | | 863,100 |
| United Surgical Partners International, Inc., 9.25%, 2017 (p) | | | 1,325,000 | | | 1,379,656 |
| Universal Hospital Services, Inc., 8.5%, 2015 (p) | | | 3,330,000 | | | 3,255,075 |
| Universal Hospital Services, Inc., FRN, 3.859%, 2015 | | | 1,015,000 | | | 867,825 |
| VWR Funding, Inc., 10.25%, 2015 (p) | | | 4,996,063 | | | 5,220,885 |
| | | | | | |
| | | | | | $ | 68,862,759 |
| Metals & Mining - 2.7% | | | | | | |
| Arch Western Finance LLC, 6.75%, 2013 | | $ | 3,570,000 | | $ | 3,534,300 |
| Cloud Peak Energy, Inc., 8.25%, 2017 (n) | | | 2,330,000 | | | 2,388,250 |
| Cloud Peak Energy, Inc., 8.5%, 2019 (n) | | | 2,330,000 | | | 2,423,200 |
| FMG Finance Ltd., 10.625%, 2016 (n) | | | 3,590,000 | | | 4,065,675 |
| Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017 | | | 6,390,000 | | | 6,949,125 |
| Freeport-McMoRan Copper & Gold, Inc., FRN, 3.881%, 2015 | | | 1,088,000 | | | 1,081,972 |
| Peabody Energy Corp., 5.875%, 2016 | | | 3,065,000 | | | 3,003,700 |
| Peabody Energy Corp., 7.375%, 2016 | | | 2,185,000 | | | 2,321,563 |
| | | | | | |
| | | | | | $ | 25,767,785 |
| Natural Gas - Distribution - 0.8% | | | | | | |
| AmeriGas Partners LP, 7.125%, 2016 | | $ | 4,165,000 | | $ | 4,217,063 |
| Inergy LP, 6.875%, 2014 | �� | | 3,625,000 | | | 3,615,938 |
| | | | | | |
| | | | | | $ | 7,833,001 |
| Natural Gas - Pipeline - 1.8% | | | | | | |
| Atlas Pipeline Partners LP, 8.125%, 2015 | | $ | 3,565,000 | | $ | 3,297,625 |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 2,775,000 | | | 2,566,875 |
| Deutsche Bank (El Paso Performance-Linked Trust, CLN), 7.75%, 2011 (n) | | | 2,085,000 | | | 2,170,679 |
18
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Natural Gas - Pipeline - continued | | | | | | |
| El Paso Corp., 8.25%, 2016 | | $ | 2,575,000 | | $ | 2,774,563 |
| El Paso Corp., 7%, 2017 | | | 1,440,000 | | | 1,472,265 |
| El Paso Corp., 7.75%, 2032 | | | 1,440,000 | | | 1,431,199 |
| MarkWest Energy Partners LP, 6.875%, 2014 | | | 2,520,000 | | | 2,469,600 |
| MarkWest Energy Partners LP, 8.75%, 2018 | | | 815,000 | | | 847,600 |
| | | | | | |
| | | | | | $ | 17,030,406 |
| Network & Telecom - 2.3% | | | | | | |
| Cincinnati Bell, Inc., 8.375%, 2014 | | $ | 6,315,000 | | $ | 6,362,363 |
| Citizens Communications Co., 9%, 2031 | | | 1,140,000 | | | 1,128,600 |
| Nordic Telephone Co. Holdings, 8.875%, 2016 (n) | | | 3,965,000 | | | 4,222,725 |
| Qwest Communications International, Inc., 8%, 2015 (n) | | | 1,290,000 | | | 1,335,150 |
| Qwest Communications International, Inc., 7.125%, 2018 (z) | | | 2,790,000 | | | 2,720,250 |
| Qwest Corp, 8.375%, 2016 | | | 1,220,000 | | | 1,335,900 |
| Windstream Corp., 8.625%, 2016 | | | 5,065,000 | | | 5,197,956 |
| | | | | | |
| | | | | | $ | 22,302,944 |
| Oil Services - 0.7% | | | | | | |
| Allis-Chalmers Energy, Inc., 8.5%, 2017 | | $ | 2,645,000 | | $ | 2,380,500 |
| Basic Energy Services, Inc., 7.125%, 2016 | | | 1,055,000 | | | 907,300 |
| Expro Finance Luxembourg, 8.5%, 2016 (n) | | | 860,000 | | | 855,700 |
| McJunkin Red Man Holding Corp., 9.5%, 2016 (z) | | | 1,455,000 | | | 1,451,363 |
| Trico Shipping A.S., 11.875%, 2014 (n) | | | 900,000 | | | 945,000 |
| | | | | | |
| | | | | | $ | 6,539,863 |
| Oils - 0.2% | | | | | | |
| Holly Corp., 9.875%, 2017 (n) | | $ | 1,020,000 | | $ | 1,081,200 |
| Petroplus Holdings AG, 9.375%, 2019 (n) | | | 1,275,000 | | | 1,262,250 |
| | | | | | |
| | | | | | $ | 2,343,450 |
| Other Banks & Diversified Financials - 0.4% | | | | | | |
| Capital One Financial Corp., 10.25%, 2039 | | $ | 1,670,000 | | $ | 1,911,831 |
| LBG Capital No. 1 PLC, 7.875%, 2020 (z) | | | 2,075,000 | | | 1,826,000 |
| | | | | | |
| | | | | | $ | 3,737,831 |
| Precious Metals & Minerals - 0.9% | | | | | | |
| Teck Resources Ltd., 9.75%, 2014 | | $ | 1,665,000 | | $ | 1,902,263 |
| Teck Resources Ltd., 10.25%, 2016 | | | 810,000 | | | 925,425 |
| Teck Resources Ltd., 10.75%, 2019 | | | 4,485,000 | | | 5,281,088 |
| | | | | | |
| | | | | | $ | 8,108,776 |
| Printing & Publishing - 1.0% | | | | | | |
| American Media Operations, Inc., 9%, 2013 (p)(z) | | $ | 271,299 | | $ | 170,444 |
19
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Printing & Publishing - continued | | | | | | |
| American Media Operations, Inc., 14%, 2013 (p)(z) | | $ | 2,900,166 | | $ | 1,784,972 |
| Nielsen Finance LLC, 10%, 2014 | | | 4,365,000 | | | 4,539,600 |
| Nielsen Finance LLC, 11.5%, 2016 | | | 2,020,000 | | | 2,262,400 |
| Nielsen Finance LLC, 0% to 2011, 12.5% to 2016 | | | 421,000 | | | 385,215 |
| Tribune Co., 5.25%, 2015 (d) | | | 2,550,000 | | | 714,000 |
| | | | | | |
| | | | | | $ | 9,856,631 |
| Railroad & Shipping - 0.4% | | | | | | |
| Kansas City Southern Railway, 8%, 2015 | | $ | 3,610,000 | | $ | 3,713,788 |
| TFM S.A. de C.V., 9.375%, 2012 | | | 238,000 | | | 243,950 |
| | | | | | |
| | | | | | $ | 3,957,738 |
| Real Estate - 0.1% | | | | | | |
| CB Richard Ellis Group, Inc., 11.625%, 2017 | | $ | 1,020,000 | | $ | 1,147,500 |
| | |
| Retailers - 3.1% | | | | | | |
| Couche-Tard, Inc., 7.5%, 2013 | | $ | 705,000 | | $ | 713,813 |
| Dollar General Corp., 11.875%, 2017 (p) | | | 1,318,000 | | | 1,515,700 |
| Federated Retail Holdings, Inc., 5.9%, 2016 | | | 3,460,000 | | | 3,304,300 |
| Limited Brands, Inc., 5.25%, 2014 | | | 2,480,000 | | | 2,393,200 |
| Limited Brands, Inc., 6.95%, 2033 | | | 1,150,000 | | | 994,750 |
| Macy’s Retail Holdings, Inc., 5.75%, 2014 | | | 4,065,000 | | | 4,075,163 |
| Neiman Marcus Group, Inc., 10.375%, 2015 | | | 3,205,000 | | | 3,140,900 |
| Sally Beauty Holdings, Inc., 10.5%, 2016 | | | 4,520,000 | | | 4,836,400 |
| Toys “R” Us, Inc., 7.625%, 2011 | | | 1,185,000 | | | 1,223,513 |
| Toys “R” Us, Inc., 10.75%, 2017 (n) | | | 4,665,000 | | | 5,166,488 |
| Toys “R” Us, Inc., 8.5%, 2017 (n) | | | 1,775,000 | | | 1,828,250 |
| | | | | | |
| | | | | | $ | 29,192,477 |
| Specialty Chemicals - 0.2% | | | | | | |
| Airgas, Inc., 7.125%, 2018 (z) | | $ | 1,790,000 | | $ | 1,879,500 |
| | |
| Specialty Stores - 0.3% | | | | | | |
| Payless ShoeSource, Inc., 8.25%, 2013 | | $ | 2,922,000 | | $ | 2,984,093 |
| | |
| Supermarkets - 0.2% | | | | | | |
| SUPERVALU, Inc., 8%, 2016 | | $ | 1,850,000 | | $ | 1,850,000 |
| | |
| Telecommunications - Wireless - 3.7% | | | | | | |
| Cricket Communications, Inc., 7.75%, 2016 | | $ | 2,040,000 | | $ | 2,052,750 |
| Crown Castle International Corp., 9%, 2015 | | | 2,705,000 | | | 2,931,544 |
| Crown Castle International Corp., 7.75%, 2017 (n) | | | 1,265,000 | | | 1,363,038 |
| Crown Castle International Corp., 7.125%, 2019 | | | 4,420,000 | | | 4,386,850 |
20
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Telecommunications - Wireless - continued | | | | | | |
| Digicel Group Ltd., 12%, 2014 (n) | | $ | 560,000 | | $ | 621,600 |
| Digicel Group Ltd., 8.25%, 2017 (n) | | | 3,050,000 | | | 2,950,875 |
| Nextel Communications, Inc., 6.875%, 2013 | | | 2,845,000 | | | 2,652,963 |
| NII Holdings, Inc., 10%, 2016 (n) | | | 2,645,000 | | | 2,764,025 |
| SBA Communications Corp., 8%, 2016 (n) | | | 935,000 | | | 970,063 |
| SBA Communications Corp., 8.25%, 2019 (n) | | | 795,000 | | | 834,750 |
| Sprint Nextel Corp., 8.375%, 2017 | | | 3,795,000 | | | 3,700,125 |
| Sprint Nextel Corp., 8.75%, 2032 | | | 4,410,000 | | | 3,969,000 |
| Wind Acquisition Finance S.A., 12%, 2015 (n) | | | 5,690,000 | | | 6,130,975 |
| | | | | | |
| | | | | | $ | 35,328,558 |
| Telephone Services - 0.3% | | | | | | |
| Frontier Communications Corp., 8.125%, 2018 | | $ | 3,150,000 | | $ | 3,173,625 |
| | |
| Tobacco - 0.4% | | | | | | |
| Alliance One International, Inc., 10%, 2016 (n) | | $ | 3,285,000 | | $ | 3,482,100 |
| | |
| Transportation - Services - 1.1% | | | | | | |
| Commercial Barge Line Co., 12.5%, 2017 | | $ | 3,220,000 | | $ | 3,356,850 |
| Hertz Corp., 8.875%, 2014 | | | 4,510,000 | | | 4,543,825 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 (n) | | | 2,910,000 | | | 3,011,850 |
| | | | | | |
| | | | | | $ | 10,912,525 |
| Utilities - Electric Power - 4.9% | | | | | | |
| AES Corp., 8%, 2017 | | $ | 6,450,000 | | $ | 6,498,375 |
| Calpine Corp., 8%, 2016 (n) | | | 2,690,000 | | | 2,743,800 |
| Dynegy Holdings, Inc., 7.5%, 2015 (n) | | | 2,160,000 | | | 1,922,400 |
| Dynegy Holdings, Inc., 7.5%, 2015 | | | 3,080,000 | | | 2,756,600 |
| Dynegy Holdings, Inc., 7.75%, 2019 | | | 1,280,000 | | | 1,024,000 |
| Edison Mission Energy, 7%, 2017 | | | 5,640,000 | | | 4,455,600 |
| Energy Future Holdings, 10%, 2020 (z) | | | 1,920,000 | | | 1,972,800 |
| Mirant North America LLC, 7.375%, 2013 | | | 1,830,000 | | | 1,820,850 |
| NRG Energy, Inc., 7.375%, 2016 | | | 12,045,000 | | | 11,984,775 |
| RRI Energy, Inc., 7.875%, 2017 | | | 1,496,000 | | | 1,424,940 |
| Texas Competitive Electric Holdings LLC, 10.25%, 2015 | | | 13,290,000 | | | 10,399,425 |
| | | | | | |
| | | | | | $ | 47,003,565 |
| Total Bonds (Identified Cost, $851,923,586) | | | | | $ | 845,597,268 |
| | |
| Floating Rate Loans (g)(r) - 5.3% | | | | | | |
| Aerospace - 0.2% | | | | | | |
| Hawker Beechcraft Acquisition Co. LLC, Term Loan B, 10.5%, 2014 | | $ | 1,966,304 | | $ | 1,846,359 |
21
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Floating Rate Loans (g)(r) - continued | | | | | | |
| Automotive - 1.5% | | | | | | |
| Accuride Corp., Term Loan B, 10%, 2012 | | $ | 450,714 | | $ | 450,231 |
| Federal Mogul Corp., Term Loan B, 2.16%, 2014 | | | 4,186,196 | | | 3,542,569 |
| Ford Motor Co., Term Loan B, 3.25%, 2013 | | | 11,265,400 | | | 10,523,089 |
| | | | | | |
| | | | | | $ | 14,515,889 |
| Broadcasting - 0.8% | | | | | | |
| Gray Television, Inc., Term Loan B, 3.75%, 2014 | | $ | 1,680,290 | | $ | 1,541,666 |
| Local TV Finance LLC, Term Loan B, 2.26%, 2013 | | | 1,371,349 | | | 1,193,074 |
| Young Broadcasting, Inc., Term Loan B, 4.75%, 2012 (d) | | | 4,655,104 | | | 3,654,257 |
| Young Broadcasting, Inc., Term Loan B-1, 4.75%, 2012 (d) | | | 1,350,054 | | | 1,059,792 |
| | | | | | |
| | | | | | $ | 7,448,789 |
| Building - 0.1% | | | | | | |
| Building Materials Corp., Term Loan B, 3%, 2014 | | $ | 1,387,924 | | $ | 1,350,912 |
| | |
| Business Services - 0.0% | | | | | | |
| First Data Corp., Term Loan B-2, 2.99%, 2014 | | $ | 341,648 | | $ | 295,193 |
| | |
| Chemicals - 0.8% | | | | | | |
| LyondellBasell, Dutch Tranche Revolving Credit Loan, 3.73%, 2014 | | $ | 120,558 | | $ | 87,179 |
| LyondellBasell, Dutch Tranche Term Loan A, 3.73%, 2014 | | | 272,889 | | | 197,334 |
| LyondellBasell, German Term Loan B-1, 3.98%, 2014 | | | 346,110 | | | 250,282 |
| LyondellBasell, German Term Loan B-2, 3.98%, 2014 | | | 346,110 | | | 250,282 |
| LyondellBasell, German Term Loan B-3, 3.98%, 2014 | | | 346,110 | | | 250,282 |
| LyondellBasell, Second Priority DIP Term Loan, 5.79%, 2010 (o) | | | 1,931,144 | | | 2,019,252 |
| LyondellBasell, Super Priority DIP Term Loan, 9.16%, 2010 (q) | | | 568,664 | | | 592,406 |
| LyondellBasell, Term Loan B-1, 7%, 2014 | | | 1,501,867 | | | 1,086,045 |
| LyondellBasell, Term Loan B-2, 7%, 2014 | | | 1,501,867 | | | 1,086,045 |
| LyondellBasell, Term Loan B-3, 7%, 2014 | | | 1,501,867 | | | 1,086,045 |
| LyondellBasell, U.S. Tranche Revolving Credit Loan, 3.73%, 2014 | | | 452,092 | | | 326,921 |
| LyondellBasell, U.S. Tranche Term Loan A, 3.76%, 2014 | | | 861,362 | | | 622,877 |
| | | | | | |
| | | | | | $ | 7,854,950 |
| Gaming & Lodging - 0.7% | | | | | | |
| Green Valley Ranch Gaming LLC, Second Lien Term Loan, 3.5%, 2014 | | $ | 4,910,923 | | $ | 720,270 |
| MGM Mirage, Term Loan B, 6%, 2011 (o) | | | 3,721,575 | | | 3,578,295 |
| Motorcity Casino, Term Loan B, 8.5%, 2012 | | | 1,911,660 | | | 1,883,782 |
| | | | | | |
| | | | | | $ | 6,182,347 |
| Printing & Publishing - 0.3% | | | | | | |
| Ascend Media LLC, Term Loan, 10.25%, 2012 (d) | | $ | 458,900 | | $ | 8 |
| Tribune Co., Term Loan B, 6.5%, 2014 (d) | | | 5,696,035 | | | 3,246,740 |
| | | | | | |
| | | | | | $ | 3,246,748 |
22
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Floating Rate Loans (g)(r) - continued | | | | | | |
| Real Estate - 0.1% | | | | | | |
| CB Richard Ellis Services, Term Loan B, 6%, 2013 | | $ | 715,530 | | $ | 699,431 |
| | |
| Specialty Stores - 0.4% | | | | | | |
| Michaels Stores, Inc., Term Loan B, 2.56%, 2013 | | $ | 1,608,727 | | $ | 1,449,363 |
| Michaels Stores, Inc., Term Loan B-2, 4.81%, 2016 | | | 2,121,222 | | | 2,016,928 |
| | | | | | |
| | | | | | $ | 3,466,291 |
| Utilities - Electric Power - 0.4% | | | | | | |
| TXU Corp., Term Loan B-2, 3.73%, 2014 | | $ | 421,960 | | $ | 344,952 |
| TXU Corp., Term Loan B-3, 3.73%, 2014 | | | 3,631,949 | | | 2,948,438 |
| | | | | | |
| | | | | | $ | 3,293,390 |
| Total Floating Rate Loans (Identified Cost, $52,820,866) | | | | | $ | 50,200,299 |
| | |
| Common Stocks - 1.1% | | | | | | |
| Automotive - 0.0% | | | | | | |
| Oxford Automotive, Inc. (a) | | | 1,087 | | $ | 0 |
| | |
| Broadcasting - 0.0% | | | | | | |
| Supermedia, Inc. (a) | | | 2,828 | | $ | 102,685 |
| | |
| Cable TV - 0.3% | | | | | | |
| Cablevision Systems Corp. (a) | | | 41,600 | | $ | 869,440 |
| Comcast Corp., “A” | | | 93,700 | | | 1,483,271 |
| Time Warner Cable, Inc. | | | 19,833 | | | 864,520 |
| | | | | | |
| | | | | | $ | 3,217,231 |
| Construction - 0.2% | | | | | | |
| Nortek, Inc. (a) | | | 48,660 | | $ | 1,897,749 |
| | |
| Energy - Integrated - 0.1% | | | | | | |
| Chevron Corp. | | | 9,500 | | $ | 685,140 |
| | |
| Entertainment - 0.0% | | | | | | |
| Madison Square Garden Inc., “A” (a) | | | 10,400 | | $ | 203,840 |
| | |
| Gaming & Lodging - 0.1% | | | | | | |
| Ameristar Casinos, Inc. | | | 35,000 | | $ | 518,350 |
| Pinnacle Entertainment, Inc. (a) | | | 107,700 | | | 878,832 |
| | | | | | |
| | | | | | $ | 1,397,182 |
| Printing & Publishing - 0.2% | | | | | | |
| American Media, Inc. (a) | | | 49,687 | | $ | 142,603 |
23
Portfolio of Investments – continued
| | | | | | | | | | |
| Issuer | | | | | | Shares/Par | | Value ($) |
| | | | | | | | | | |
| Common Stocks - continued | | | | | | | | | | |
| Printing & Publishing - continued | | | | | |
| Dex One Corp. (a) | | | | | | | 39,052 | | $ | 1,310,587 |
| Golden Books Family Entertainment, Inc. (a) | | 206,408 | | | 0 |
| World Color Press, Inc. (a) | | 15,138 | | | 174,244 |
| | | | | | | | | | |
| | | | | $ | 1,627,434 |
| Special Products & Services - 0.0% | | | | | |
| Mark IV Industries LLC, Common Units, “A” (a) | | 2,318 | | $ | 34,770 |
| | |
| Telephone Services - 0.2% | | | | | |
| Windstream Corp. | | 151,600 | | $ | 1,562,996 |
| Total Common Stocks (Identified Cost, $20,792,361) | | | | $ | 10,729,027 |
| | |
| Preferred Stocks - 0.4% | | | | | |
| Broadcasting - 0.0% | | | | | |
| Spanish Broadcasting Systems, Inc., “B”, 10.75% (p) | | 2,088 | | $ | 313,200 |
| | |
| Financial Institutions - 0.2% | | | | | |
| GMAC, Inc., 7% (z) | | 1,826 | | $ | 1,305,019 |
| | |
| Major Banks - 0.2% | | | | | |
| Bank of America Corp., 8.625% | | 78,950 | | $ | 1,937,433 |
| Total Preferred Stocks (Identified Cost, $5,379,900) | | | | $ | 3,555,652 |
| | | | |
| | | Strike Price | | First Exercise | | | | |
| Warrants - 0.0% | | | | | | | | | | |
| Construction - 0.0% | | | | | | | | | | |
Building Materials Holding Corp.
(1 share for 1 warrant) (a) | | $ | 0.47 | | 10/24/08 | | 4,362 | | $ | 0 |
| | | | |
| Printing & Publishing - 0.0% | | | | | | | | | | |
World Color Press, Inc.
(1 share for 1 warrant) (a) | | $ | 13.00 | | 8/26/09 | | 8,580 | | $ | 47,190 |
World Color Press, Inc.
(1 share for 1 warrant) (a) | | | 16.30 | | 8/26/09 | | 8,580 | | | 32,605 |
| Total Warrants (Identified Cost, $398,977) | | | | | | $ | 79,795 |
24
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| Money Market Funds (v) - 2.7% | | | | | |
MFS Institutional Money Market Portfolio, 0.14%,
at Cost and Net Asset Value | | 25,282,620 | | $ | 25,282,620 |
| Total Investments (Identified Cost, $956,598,310) | | | | $ | 935,444,661 |
| | |
| Other Assets, Less Liabilities - 1.7% | | | | | 16,575,763 |
| Net Assets - 100.0% | | | | $ | 952,020,424 |
| (a) | Non-income producing security. |
| (d) | Non-income producing security - in default. |
| (g) | The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated. |
| (i) | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (n) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $172,156,497, representing 18.1% of net assets. |
| (o) | All or a portion of this position has not settled. Upon settlement date, interest rates for unsettled amounts will be determined. The rate shown represents the weighted average coupon rate for settled amounts. |
| (p) | Payment-in-kind security. |
| (q) | All or a portion of this position represents an unfunded loan commitment. The rate shown represents a weighted average coupon rate on the full position, including the unfunded loan commitment which has no current coupon rate. |
| (r) | Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. |
| (v) | Underlying fund that is available only to investment companies managed by MFS. The rate quoted is the annualized seven-day yield of the fund at period end. |
| (z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | Current
Market
Value |
| Airgas, Inc., 7.125%, 2018 | | 1/26/10 | | $1,892,851 | | $1,879,500 |
| Airlie Ltd., CDO, FRN, 2.151%, 2011 | | 10/13/06-12/22/09 | | 2,452,690 | | 1,201,818 |
| American Media Operations, Inc., 9%, 2013 | | 1/30/09-11/02/09 | | 186,155 | | 170,444 |
| American Media Operations, Inc., 14%, 2013 | | 1/30/09-11/02/09 | | 1,730,455 | | 1,784,972 |
| Anthracite Ltd., CDO, 6%, 2037 | | 5/14/02 | | 4,459,609 | | 257,400 |
| Bombardier, Inc., 7.45%, 2034 | | 1/25/10 | | 621,436 | | 614,725 |
| Bonten Media Acquisition Co., 9%, 2015 | | 5/22/07-12/01/09 | | 4,869,505 | | 1,765,721 |
| CWCapital Cobalt Ltd., CDO, “E2”, 6%, 2045 | | 3/20/06-11/25/09 | | 1,020,247 | | 21,227 |
25
Portfolio of Investments – continued
| | | | | | |
| Restricted Securities - continued | | Acquisition
Date | | Cost | | Current
Market
Value |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.549%, 2050 | | 4/12/06-1/28/10 | | $612,466 | | $12,249 |
| CWCapital Cobalt Ltd., CDO, “G”, FRN, 1.749%, 2050 | | 4/12/06-1/28/10 | | 1,898,608 | | 37,972 |
| Energy Future Holdings, 10%, 2020 | | 1/07/10 | | 1,949,028 | | 1,972,800 |
| Falcon Franchise Loan LLC, FRN, 3.67%, 2025 | | 1/29/03 | | 1,154,111 | | 763,888 |
| GMAC, Inc., 7% (Preferred Stock) | | 12/29/08 | | 1,406,020 | | 1,305,019 |
| Hexion Finance Escrow LLC, 8.875%, 2018 | | 1/14/10-1/26/10 | | 2,164,530 | | 2,125,069 |
| LBG Capital No. 1 PLC, 7.875%, 2020 | | 1/08/10 | | 1,868,092 | | 1,826,000 |
| LBI Media, Inc., 8.5%, 2017 | | 7/18/07 | | 1,430,322 | | 1,232,500 |
| Libbey Glass, Inc., 10%, 2015 | | 1/28/10 | | 230,493 | | 237,938 |
| Local TV Finance LLC, 9.25%, 2015 | | 11/09/07-12/15/09 | | 5,270,302 | | 2,873,276 |
| McJunkin Red Man Holding Corp., 9.5%, 2016 | | 1/21/10-1/22/10 | | 1,476,752 | | 1,451,363 |
| Morgan Stanley Capital I, Inc., 1.269%, 2039 | | 7/20/04 | | 559,957 | | 326,022 |
| Qwest Communications International, Inc., 7.125%, 2018 | | 1/07/10-1/08/10 | | 2,750,213 | | 2,720,250 |
| TIERS Beach Street Synthetic, CLO, FRN, 6.787%, 2011 | | 5/17/06 | | 2,750,000 | | 2,234,100 |
| USI Holdings Corp., 9.75%, 2015 | | 4/26/07-6/08/07 | | 3,193,812 | | 2,935,538 |
| Wachovia Credit, CDO, FRN, 1.601%, 2026 | | 6/08/06 | | 1,320,000 | | 52,800 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 | | 12/16/09-1/05/10 | | 1,315,576 | | 1,332,900 |
| Total Restricted Securities | | | | | | $31,135,491 |
| % of Net Assets | | | | | | 3.3% |
Derivative Contracts at 1/31/10
Forward Foreign Currency Exchange Contracts at 1/31/10
| | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts
to
Deliver/
Receive | | Settlement
Date Range | | In
Exchange
for | | Contracts
at Value | | Net
Unrealized
Appreciation
(Depreciation) |
| Asset Derivatives | | | | | | | | | | |
| SELL | | EUR | | HSBC Bank | | 2,596,651 | | 3/15/10 | | $3,703,534 | | $3,599,901 | | $103,633 |
| SELL | | EUR | | UBS AG | | 5,957,956 | | 3/15/10 | | 8,685,925 | | 8,259,892 | | 426,033 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $529,666 |
| | | | | | | | | | | | | | |
At January 31, 2010, the fund had sufficient cash and/or securities to cover any commitments under these derivative contracts.
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| CLO | | Collateralized Loan Obligation |
26
Portfolio of Investments – continued
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
See Notes to Financial Statements
27
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 1/31/10
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | |
| Assets | | | |
Investments- | | | |
Non-affiliated issuers, at value (identified cost, $931,315,690) | | $910,162,041 | |
Underlying funds, at cost and value | | 25,282,620 | |
Total investments, at value (identified cost, $956,598,310) | | $935,444,661 | |
Cash | | 1,882,830 | |
Receivables for | | | |
Forward foreign currency exchange contracts | | 529,666 | |
Investments sold | | 9,560,417 | |
Fund shares sold | | 896,744 | |
Interest | | 17,946,716 | |
Other assets | | 12,758 | |
Total assets | | $966,273,792 | |
| Liabilities | | | |
Payables for | | | |
Distributions | | $1,277,962 | |
Investments purchased | | 7,066,091 | |
Fund shares reacquired | | 5,452,040 | |
Payable to affiliates | | | |
Investment adviser | | 47,983 | |
Shareholder servicing costs | | 217,462 | |
Distribution and service fees | | 28,470 | |
Administrative services fee | | 1,674 | |
Program manager fees | | 17 | |
Payable for independent Trustees’ compensation | | 82,994 | |
Accrued expenses and other liabilities | | 78,675 | |
Total liabilities | | $14,253,368 | |
Net assets | | $952,020,424 | |
| Net assets consist of | | | |
Paid-in capital | | $1,371,414,763 | |
Unrealized appreciation (depreciation) on investments and translation
of assets and liabilities in foreign currencies | | (20,626,465 | ) |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (394,686,210 | ) |
Accumulated distributions in excess of net investment income | | (4,081,664 | ) |
Net assets | | $952,020,424 | |
Shares of beneficial interest outstanding | | 292,356,924 | |
See Notes to Financial Statements
28
Statement of Assets and Liabilities – continued
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share (a) |
Class A | | $531,989,546 | | 163,419,075 | | $3.26 |
Class B | | 46,689,876 | | 14,306,737 | | 3.26 |
Class C | | 73,474,540 | | 22,471,876 | | 3.27 |
Class I | | 283,704,278 | | 87,195,707 | | 3.25 |
Class R1 | | 1,199,852 | | 368,005 | | 3.26 |
Class R2 | | 5,250,912 | | 1,611,626 | | 3.26 |
Class R3 | | 7,928,644 | | 2,436,403 | | 3.25 |
Class R4 | | 147,560 | | 45,312 | | 3.26 |
Class 529A | | 858,396 | | 263,806 | | 3.25 |
Class 529B | | 315,077 | | 96,818 | | 3.25 |
Class 529C | | 461,743 | | 141,559 | | 3.26 |
| (a) | Maximum offering price per share was equal to the net asset value per share for all share classes, except for Classes A and 529A, for which the maximum offering prices per share were $3.42 and $3.41, respectively. On sales of $50,000 or more, the maximum offering prices of Class A and Class 529A shares are reduced. A contingent deferred sales charge may be imposed on redemptions of Class A, Class B, Class C, Class 529B, and Class 529C shares. Redemption price per share was equal to the net asset value per share for Classes I, R1, R2, R3, R4, and 529A. |
See Notes to Financial Statements
29
Financial Statements
STATEMENT OF OPERATIONS
Year ended 1/31/10
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | |
| Net investment income | | | |
Income | | | |
Interest | | $77,490,656 | |
Dividends | | 939,863 | |
Dividends from underlying funds | | 63,077 | |
Foreign taxes withheld | | (18,524 | ) |
Total investment income | | $78,475,072 | |
Expenses | | | |
Management fee | | $3,723,242 | |
Distribution and service fees | | 2,248,009 | |
Program manager fees | | 1,255 | |
Shareholder servicing costs | | 1,562,139 | |
Administrative services fee | | 146,824 | |
Independent Trustees’ compensation | | 49,631 | |
Custodian fee | | 131,947 | |
Shareholder communications | | 64,617 | |
Auditing fees | | 70,598 | |
Legal fees | | 58,653 | |
Miscellaneous | | 230,384 | |
Total expenses | | $8,287,299 | |
Fees paid indirectly | | (24,562 | ) |
Reduction of expenses by investment adviser | | (4,750 | ) |
Net expenses | | $8,257,987 | |
Net investment income | | $70,217,085 | |
Realized and unrealized gain (loss) on investments
and foreign currency transactions | | | |
Realized gain (loss) (identified cost basis) | | | |
Investment transactions | | $(16,941,862 | ) |
Swap transactions | | (11,352,995 | ) |
Foreign currency transactions | | (105,700 | ) |
Net realized gain (loss) on investments
and foreign currency transactions | | $(28,400,557 | ) |
Change in unrealized appreciation (depreciation) | | | |
Investments | | $235,096,645 | |
Swap transactions | | 9,483,556 | |
Translation of assets and liabilities in foreign currencies | | (243,946 | ) |
Net unrealized gain (loss) on investments
and foreign currency translation | | $244,336,255 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | $215,935,698 | |
Change in net assets from operations | | $286,152,783 | |
See Notes to Financial Statements
30
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | |
| | | Years ended 1/31 | |
| | | 2010 | | | 2009 | |
| Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $70,217,085 | | | $66,750,841 | |
Net realized gain (loss) on investments and
foreign currency transactions | | (28,400,557 | ) | | (69,846,251 | ) |
Net unrealized gain (loss) on investments and
foreign currency translation | | 244,336,255 | | | (201,411,630 | ) |
Change in net assets from operations | | $286,152,783 | | | $(204,507,040 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(70,778,121 | ) | | $(68,512,369 | ) |
From tax return of capital | | — | | | (507,505 | ) |
Total distributions declared to shareholders | | $(70,778,121 | ) | | $(69,019,874 | ) |
Change in net assets from fund share transactions | | $86,914,666 | | | $(39,014,000 | ) |
Total change in net assets | | $302,289,328 | | | $(312,540,914 | ) |
| Net assets | | | | | | |
At beginning of period | | 649,731,096 | | | 962,272,010 | |
At end of period (including accumulated distributions in excess of net investment income of $4,081,664 and undistributed net investment income of $2,067,418) | | $952,020,424 | | | $649,731,096 | |
See Notes to Financial Statements
31
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years (or life of a particular share class, if shorter). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | |
| Class A | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.98 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.25 | | | $0.26 | | | $0.27 | | | $0.27 | | | $0.27 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.77 | | | (1.08 | ) | | (0.31 | ) | | 0.11 | | | (0.13 | ) |
Total from investment operations | | $1.02 | | | $(0.82 | ) | | $(0.04 | ) | | $0.38 | | | $0.14 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.25 | ) | | $(0.27 | ) | | $(0.30 | ) | | $(0.28 | ) | | $(0.30 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.25 | ) | | $(0.27 | ) | | $(0.30 | ) | | $(0.28 | ) | | $(0.30 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.26 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
Total return (%) (r)(s)(t) | | 42.99 | | | (24.05 | ) | | (1.20 | ) | | 10.30 | | | 3.61 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.00 | | | 1.05 | | | 0.97 | | | 1.00 | | | 1.00 | |
Expenses after expense reductions (f) | | 1.00 | | | 1.05 | | | 0.97 | | | 1.00 | | | 1.00 | |
Net investment income | | 8.68 | | | 8.22 | | | 7.17 | | | 7.09 | | | 6.85 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $531,990 | | | $360,076 | | | $504,159 | | | $671,019 | | | $703,305 | |
See Notes to Financial Statements
32
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class B | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | | | $3.99 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.24 | | | $0.25 | | | $0.25 | | | $0.24 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.32 | ) | | 0.10 | | | (0.13 | ) |
Total from investment operations | | $0.99 | | | $(0.84 | ) | | $(0.07 | ) | | $0.35 | | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.23 | ) | | $(0.25 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.27 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.23 | ) | | $(0.25 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.27 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.26 | | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | |
Total return (%) (r)(s)(t) | | 41.40 | | | (24.51 | ) | | (1.87 | ) | | 9.53 | | | 2.90 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.75 | | | 1.75 | | | 1.67 | | | 1.71 | | | 1.72 | |
Expenses after expense reductions (f) | | 1.75 | | | 1.75 | | | 1.67 | | | 1.71 | | | 1.72 | |
Net investment income | | 8.11 | | | 7.41 | | | 6.47 | | | 6.40 | | | 6.26 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $46,690 | | | $52,384 | | | $113,331 | | | $195,028 | | | $275,363 | |
See Notes to Financial Statements
33
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class C | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.50 | | | $3.60 | | | $3.94 | | | $3.84 | | | $4.00 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.24 | | | $0.25 | | | $0.24 | | | $0.24 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.77 | | | (1.09 | ) | | (0.32 | ) | | 0.11 | | | (0.13 | ) |
Total from investment operations | | $1.00 | | | $(0.85 | ) | | $(0.07 | ) | | $0.35 | | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.23 | ) | | $(0.25 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.27 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.23 | ) | | $(0.25 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.27 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.27 | | | $2.50 | | | $3.60 | | | $3.94 | | | $3.84 | |
Total return (%) (r)(s)(t) | | 41.82 | | | (24.72 | ) | | (1.84 | ) | | 9.52 | | | 2.91 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.74 | | | 1.75 | | | 1.67 | | | 1.70 | | | 1.72 | |
Expenses after expense reductions (f) | | 1.74 | | | 1.75 | | | 1.67 | | | 1.70 | | | 1.72 | |
Net investment income | | 7.80 | | | 7.44 | | | 6.46 | | | 6.39 | | | 6.26 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $73,475 | | | $39,345 | | | $69,505 | | | $92,050 | | | $108,181 | |
See Notes to Financial Statements
34
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class I | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.98 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.26 | | | $0.27 | | | $0.29 | | | $0.28 | | | $0.28 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.32 | ) | | 0.11 | | | (0.13 | ) |
Total from investment operations | | $1.02 | | | $(0.81 | ) | | $(0.03 | ) | | $0.39 | | | $0.15 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.26 | ) | | $(0.28 | ) | | $(0.31 | ) | | $(0.29 | ) | | $(0.31 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.26 | ) | | $(0.28 | ) | | $(0.31 | ) | | $(0.29 | ) | | $(0.31 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.25 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
Total return (%) (r)(s) | | 42.90 | | | (23.82 | ) | | (0.90 | ) | | 10.62 | | | 3.92 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.75 | | | 0.76 | | | 0.67 | | | 0.70 | | | 0.71 | |
Expenses after expense reductions (f) | | 0.75 | | | 0.76 | | | 0.67 | | | 0.70 | | | 0.71 | |
Net investment income | | 8.97 | | | 8.55 | | | 7.47 | | | 7.38 | | | 7.24 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $283,704 | | | $185,811 | | | $257,572 | | | $246,306 | | | $231,455 | |
See Notes to Financial Statements
35
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class R1 | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 (i) | |
| Net asset value, beginning of period | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | | | $3.89 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.24 | | | $0.24 | | | $0.24 | | | $0.19 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.09 | ) | | (0.31 | ) | | 0.11 | | | (0.03 | )(g) |
| Total from investment operations | | $0.99 | | | $(0.85 | ) | | $(0.07 | ) | | $0.35 | | | $0.16 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.23 | ) | | $(0.24 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.22 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
| Total distributions declared to shareholders | | $(0.23 | ) | | $(0.24 | ) | | $(0.27 | ) | | $(0.25 | ) | | $(0.22 | ) |
| Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
| Net asset value, end of period | | $3.26 | | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | |
| Total return (%) (r)(s) | | 41.39 | | | (24.52 | ) | | (1.96 | ) | | 9.41 | | | 4.28 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
| Expenses before expense reductions (f) | | 1.74 | | | 1.76 | | | 1.77 | | | 1.89 | | | 1.91 | (a) |
| Expenses after expense reductions (f) | | 1.74 | | | 1.76 | | | 1.76 | | | 1.79 | | | 1.85 | (a) |
| Net investment income | | 7.96 | | | 7.53 | | | 6.35 | | | 6.27 | | | 6.08 | (a) |
| Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
| Net assets at end of period (000 omitted) | | $1,200 | | | $937 | | | $1,273 | | | $361 | | | $231 | |
See Notes to Financial Statements
36
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class R2 | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.93 | | | $3.83 | | | $3.98 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.24 | | | $0.25 | | | $0.26 | | | $0.26 | | | $0.24 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.78 | | | (1.08 | ) | | (0.32 | ) | | 0.10 | | | (0.11 | ) |
| Total from investment operations | | $1.02 | | | $(0.83 | ) | | $(0.06 | ) | | $0.36 | | | $0.13 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.25 | ) | | $(0.26 | ) | | $(0.29 | ) | | $(0.26 | ) | | $(0.28 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
| Total distributions declared to shareholders | | $(0.25 | ) | | $(0.26 | ) | | $(0.29 | ) | | $(0.26 | ) | | $(0.28 | ) |
| Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
| Net asset value, end of period | | $3.26 | | | $2.49 | | | $3.58 | | | $3.93 | | | $3.83 | |
| Total return (%) (r)(s) | | 42.65 | | | (24.21 | ) | | (1.79 | ) | | 9.91 | | | 3.45 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
| Expenses before expense reductions (f) | | 1.25 | | | 1.25 | | | 1.30 | | | 1.44 | | | 1.46 | |
| Expenses after expense reductions (f) | | 1.25 | | | 1.25 | | | 1.29 | | | 1.34 | | | 1.42 | |
| Net investment income | | 8.47 | | | 7.99 | | | 6.83 | | | 6.71 | | | 6.61 | |
| Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
| Net assets at end of period (000 omitted) | | $5,251 | | | $3,446 | | | $5,525 | | | $2,406 | | | $1,212 | |
See Notes to Financial Statements
37
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class R3 | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 (i) | |
| Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.88 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.25 | | | $0.26 | | | $0.27 | | | $0.27 | | | $0.21 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.31 | ) | | 0.10 | | | (0.02 | )(g) |
| Total from investment operations | | $1.01 | | | $(0.82 | ) | | $(0.04 | ) | | $0.37 | | | $0.19 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.25 | ) | | $(0.27 | ) | | $(0.30 | ) | | $(0.27 | ) | | $(0.25 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
| Total distributions declared to shareholders | | $(0.25 | ) | | $(0.27 | ) | | $(0.30 | ) | | $(0.27 | ) | | $(0.25 | ) |
| Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
| Net asset value, end of period | | $3.25 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
| Total return (%) (r)(s) | | 42.55 | | | (24.02 | ) | | (1.28 | ) | | 10.18 | | | 4.94 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
| Expenses before expense reductions (f) | | 1.00 | | | 1.01 | | | 1.05 | | | 1.07 | | | 1.15 | (a) |
| Expenses after expense reductions (f) | | 1.00 | | | 1.01 | | | 1.05 | | | 1.07 | | | 1.15 | (a) |
| Net investment income | | 8.75 | | | 8.35 | | | 7.08 | | | 6.90 | | | 6.73 | (a) |
| Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
| Net assets at end of period (000 omitted) | | $7,929 | | | $6,706 | | | $8,065 | | | $5,143 | | | $393 | |
See Notes to Financial Statements
38
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class R4 | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 (i) | |
Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.88 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.26 | | | $0.27 | | | $0.28 | | | $0.28 | | | $0.23 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.77 | | | (1.08 | ) | | (0.31 | ) | | 0.11 | | | (0.03 | )(g) |
Total from investment operations | | $1.03 | | | $(0.81 | ) | | $(0.03 | ) | | $0.39 | | | $0.20 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.26 | ) | | $(0.28 | ) | | $(0.31 | ) | | $(0.29 | ) | | $(0.26 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.26 | ) | | $(0.28 | ) | | $(0.31 | ) | | $(0.29 | ) | | $(0.26 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.26 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
Total return (%) (r)(s) | | 43.33 | | | (23.82 | ) | | (0.99 | ) | | 10.52 | | | 5.20 | (n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.74 | | | 0.76 | | | 0.76 | | | 0.80 | | | 0.80 | (a) |
Expenses after expense reductions (f) | | 0.74 | | | 0.76 | | | 0.76 | | | 0.80 | | | 0.80 | (a) |
Net investment income | | 8.78 | | | 8.56 | | | 7.38 | | | 7.29 | | | 7.11 | (a) |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $148 | | | $44 | | | $58 | | | $58 | | | $53 | |
See Notes to Financial Statements
39
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class 529A | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.98 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.25 | | | $0.25 | | | $0.26 | | | $0.26 | | | $0.26 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.31 | ) | | 0.11 | | | (0.14 | ) |
Total from investment operations | | $1.01 | | | $(0.83 | ) | | $(0.05 | ) | | $0.37 | | | $0.12 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.25 | ) | | $(0.26 | ) | | $(0.29 | ) | | $(0.27 | ) | | $(0.28 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.25 | ) | | $(0.26 | ) | | $(0.29 | ) | | $(0.27 | ) | | $(0.28 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.25 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
Total return (%) (r)(s)(t) | | 42.40 | | | (24.19 | ) | | (1.49 | ) | | 9.97 | | | 3.30 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.10 | | | 1.23 | | | 1.27 | | | 1.30 | | | 1.32 | |
Expenses after expense reductions (f) | | 1.10 | | | 1.23 | | | 1.27 | | | 1.30 | | | 1.32 | |
Net investment income | | 8.62 | | | 8.07 | | | 6.87 | | | 6.78 | | | 6.65 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $858 | | | $579 | | | $849 | | | $854 | | | $776 | |
See Notes to Financial Statements
40
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class 529B | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | | | $3.97 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.23 | | | $0.24 | | | $0.23 | | | $0.23 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.32 | ) | | 0.11 | | | (0.12 | ) |
Total from investment operations | | $0.99 | | | $(0.85 | ) | | $(0.08 | ) | | $0.34 | | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.23 | ) | | $(0.24 | ) | | $(0.26 | ) | | $(0.24 | ) | | $(0.26 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.23 | ) | | $(0.24 | ) | | $(0.26 | ) | | $(0.24 | ) | | $(0.26 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.25 | | | $2.49 | | | $3.58 | | | $3.92 | | | $3.82 | |
Total return (%) (r)(s)(t) | | 41.40 | | | (24.70 | ) | | (2.13 | ) | | 9.26 | | | 2.89 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.84 | | | 1.88 | | | 1.92 | | | 1.95 | | | 1.96 | |
Expenses after expense reductions (f) | | 1.84 | | | 1.88 | | | 1.92 | | | 1.95 | | | 1.96 | |
Net investment income | | 7.82 | | | 7.43 | | | 6.22 | | | 6.13 | | | 6.00 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $315 | | | $183 | | | $213 | | | $202 | | | $157 | |
See Notes to Financial Statements
41
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class 529C | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | | | $3.99 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.23 | | | $0.24 | | | $0.23 | | | $0.23 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 0.76 | | | (1.08 | ) | | (0.32 | ) | | 0.11 | | | (0.13 | ) |
Total from investment operations | | $0.99 | | | $(0.85 | ) | | $(0.08 | ) | | $0.34 | | | $0.10 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.23 | ) | | $(0.24 | ) | | $(0.26 | ) | | $(0.24 | ) | | $(0.26 | ) |
From tax return of capital | | — | | | (0.00 | )(w) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.23 | ) | | $(0.24 | ) | | $(0.26 | ) | | $(0.24 | ) | | $(0.26 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $3.26 | | | $2.50 | | | $3.59 | | | $3.93 | | | $3.83 | |
Total return (%) (r)(s)(t) | | 41.26 | | | (24.61 | ) | | (2.11 | ) | | 9.26 | | | 2.64 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.84 | | | 1.88 | | | 1.92 | | | 1.95 | | | 1.96 | |
Expenses after expense reductions (f) | | 1.84 | | | 1.88 | | | 1.91 | | | 1.95 | | | 1.96 | |
Net investment income | | 7.71 | | | 7.39 | | | 6.21 | | | 6.13 | | | 6.00 | |
Portfolio turnover | | 58 | | | 61 | | | 66 | | | 89 | | | 51 | |
Net assets at end of period (000 omitted) | | $462 | | | $221 | | | $322 | | | $500 | | | $417 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (g) | The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time. |
| (i) | For the period from the class’ inception, April 1, 2005 (Classes R1, R3, and R4) through the stated period end. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (t) | Total returns do not include any applicable sales charges. |
| (w) | Per share amount was less than $0.01 |
See Notes to Financial Statements
42
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS High Income Fund (the fund) is a series of MFS Series Trust III (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund may invest up to 100% of its portfolio in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund can invest in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries.
Investment Valuations – Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided
43
Notes to Financial Statements – continued
by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Swaps are generally valued at valuations provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in
44
Notes to Financial Statements – continued
determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities carried at market value. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures, forwards, swap contracts, and written options. The following is a summary of the levels used as of January 31, 2010 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | |
United States | | $9,106,507 | | $4,861,325 | | $142,603 | | $14,110,435 |
Canada | | 254,039 | | — | | — | | 254,039 |
| Non-U.S. Sovereign Debt | | — | | 1,107,471 | | — | | 1,107,471 |
| Corporate Bonds | | — | | 721,384,131 | | — | | 721,384,131 |
| Commercial Mortgage-Backed Securities | | — | | 16,172,544 | | — | | 16,172,544 |
| Floating Rate Loans | | — | | 50,200,299 | | — | | 50,200,299 |
| Asset-Backed Securities (including CDOs) | | — | | 3,969,236 | | 1,201,818 | | 5,171,054 |
| Foreign Bonds | | — | | 99,591,389 | | — | | 99,591,389 |
| Other Fixed Income Securities | | — | | 2,170,679 | | — | | 2,170,679 |
| Mutual Funds | | 25,282,620 | | — | | — | | 25,282,620 |
| Total Investments | | $34,643,166 | | $899,457,074 | | $1,344,421 | | $935,444,661 |
| | | | |
| Other Financial Instruments | | | | | | | | |
| Forward Currency Contracts | | $— | | $529,666 | | $— | | $529,666 |
45
Notes to Financial Statements – continued
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value. The table presents the activity of Level 3 securities held at the beginning and the end of the period.
| | | | | |
| | | U.S. Equity
Securities | | | Asset-Backed
Securities
(including CDOs) |
| Balance as of 1/31/09 | | $229,561 | | | $— |
Accrued discounts/premiums | | — | | | — |
Realized gain (loss) | | — | | | — |
Change in unrealized appreciation (depreciation) | | 226,242 | | | 556,430 |
Net purchases (sales) | | — | | | 126,690 |
Transfers in and/or out of Level 3 | | (313,200 | ) | | 518,698 |
| Balance as of 1/31/10 | | $142,603 | | | $1,201,818 |
The net change in unrealized appreciation (depreciation) from investments still held as Level 3 at January 31, 2010 is $592,703.
In January 2010, Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (the “Update”) was issued, and is effective for interim and annual reporting periods beginning after December 15, 2009. This Update provides for expanded disclosures about fair value measurements. Management is evaluating the application of the Update to the fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Update in the fund’s financial statements.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments. Derivatives may be used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
46
Notes to Financial Statements – continued
In this reporting period the fund adopted the disclosure provisions of FASB Accounting Standard Codification 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires enhanced disclosures about the fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the fund’s results of operations and financial position. Tabular disclosure regarding derivative fair value and gain/loss by contract type (e.g., interest rate contracts, foreign exchange contracts, credit contracts, etc.) is required and derivatives accounted for as hedging instruments under ASC 815 must be disclosed separately from those that do not qualify for hedge accounting. Even though the fund may use derivatives in an attempt to achieve an economic hedge, the fund’s derivatives are not accounted for as hedging instruments under ASC 815 because investment companies account for their derivatives at fair value and record any changes in fair value in current period earnings.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract Tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at January 31, 2010 which are not accounted for as hedging instruments under FASB Accounting Standard Codification 815, Derivatives and Hedging (ASC 815):
| | | | |
| | | | | Fair Value |
| Risk | | Derivative | | Asset Derivatives |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts | | $529,666 |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | | | | | |
| | | Swap
Transactions | | | Foreign
Currency
Transactions | |
| Foreign Exchange Contracts | | $— | | | $(149,759 | ) |
| Credit Contracts | | (11,352,995 | ) | | — | |
| Total | | $(11,352,995 | ) | | $(149,759 | ) |
47
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | | | | |
| | | Swap
Transactions | | Translation
of Assets
and
Liabilities in
Foreign
Currencies | |
| Foreign Exchange Contracts | | $— | | $(243,620 | ) |
| Credit Contracts | | 9,483,556 | | — | |
| Total | | $9,483,556 | | $(243,620 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported balance sheet assets and liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forwards, swaps and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts will be reported separately on the Statement of Assets and Liabilities as restricted
48
Notes to Financial Statements – continued
cash. Securities collateral pledged for the same purpose is noted in the Portfolio of Investments.
Forward Foreign Currency Exchange Contracts – The fund may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency transactions.
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. The fund’s maximum risk due to counterparty credit risk is the notional amount of the contract. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Swap Agreements – The fund may enter into swap agreements. A swap is generally an exchange of cash payments, at specified intervals or upon the occurrence of specified events, between the fund and a counterparty. The net cash payments exchanged are recorded as a realized gain or loss on swap transactions in the Statement of Operations. The value of the swap, which is adjusted daily and includes any related interest accruals to be paid or received by the fund, is recorded on the Statement of Assets and Liabilities. The daily change in value, including any related interest accruals to be paid or received, is recorded as unrealized appreciation or depreciation on swap transactions in the Statement of Operations. Amounts paid or received at the inception of the swap are reflected as premiums paid or received on the Statement of Assets and Liabilities and are amortized using the effective interest method over the term of the agreement. A liquidation payment received or made upon early termination is recorded as a realized gain or loss on swap transactions in the Statement of Operations.
49
Notes to Financial Statements – continued
Risks related to swap agreements include the possible lack of a liquid market, unfavorable market and interest rate movements of the underlying instrument and the failure of the counterparty to perform under the terms of the agreements. To address counterparty risk, swap transactions are limited to only highly-rated counterparties. The risk is further mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
The fund may enter into credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its credit risk exposure to defaults of corporate and sovereign issuers or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. In a credit default swap, the protection buyer can make an upfront payment and will make a stream of payments based on a fixed percentage applied to the contract notional amount to the protection seller in exchange for the right to receive a specified return upon the occurrence of a defined credit event on the reference obligation (which may be either a single security or a basket of securities issued by corporate or sovereign issuers) and, with respect to the rare cases where physical settlement applies, the delivery by the buyer to the seller of a defined deliverable obligation. Although contract-specific, credit events generally consist of a combination of the following: bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium, each as defined in the 2003 ISDA Credit Derivatives Definitions as amended by the relevant contract. Restructuring is generally not applicable when the reference obligation is issued by a North American corporation and obligation acceleration, obligation default, or repudiation/moratorium are generally only applicable when the reference obligation is issued by a sovereign entity or an entity in an emerging country. Upon determination of the final price for the deliverable obligation (or upon delivery of the deliverable obligation in the case of physical settlement), the difference between the value of the deliverable obligation and the swap’s notional amount is recorded as realized gain or loss on swap transactions in the Statement of Operations.
The fund’s maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk is mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
50
Notes to Financial Statements – continued
Hybrid Instruments – The fund may invest in indexed or hybrid securities on which any combination of interest payments, the principal or stated amount payable at maturity is determined by reference to prices of other securities, currencies, indices, economic factors or other measures, including interest rates, currency exchange rates, or securities indices. The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, swaps, options, futures and currencies. Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. Depending on the structure of the particular hybrid instrument, changes in a benchmark, underlying assets or economic indicator may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument. Also, the prices of the hybrid instrument and the benchmark, underlying asset or economic indicator may not move in the same direction or at the same time.
Loans and Other Direct Debt Instruments – The fund may invest in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. At January 31, 2010, the portfolio had unfunded loan commitments of $189,496, which could be extended at the option of the borrower and which are covered by sufficient cash and/or liquid securities held by the fund. The market value and obligation of the fund on these unfunded loan commitments is included in Investments, at value and Payable for investments purchased, respectively, on the Statement of Assets and Liabilities. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are
51
Notes to Financial Statements – continued
recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended January 31, 2010, is shown as a reduction of total expenses on the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns for the prior three fiscal years remain subject to examination by the Internal Revenue Service. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to expiration of capital loss carryforwards, amortization and accretion of debt securities, defaulted bonds, and derivative transactions.
52
Notes to Financial Statements – continued
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 1/31/10 | | 1/31/09 |
Ordinary income (including any
short-term capital gains) | | $70,778,121 | | $68,512,369 |
| Tax return of capital (a) | | — | | 507,505 |
| Total distributions | | $70,778,121 | | $69,019,874 |
| (a) | Distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital. |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 1/31/10 | | | |
| Cost of investments | | $960,069,206 | |
| Gross appreciation | | 52,360,559 | |
| Gross depreciation | | (76,985,104 | ) |
| Net unrealized appreciation (depreciation) | | $(24,624,545 | ) |
| |
| Undistributed ordinary income | | 3,992,815 | |
| Capital loss carryforwards | | (390,795,578 | ) |
| Post-October capital loss deferral | | (419,736 | ) |
| Other temporary differences | | (7,547,295 | ) |
As of January 31, 2010, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 1/31/11 | | $(159,064,624 | ) |
| 1/31/13 | | (19,406,719 | ) |
| 1/31/14 | | (20,014,075 | ) |
| 1/31/15 | | (43,048,498 | ) |
| 1/31/16 | | (1,964,268 | ) |
| 1/31/17 | | (94,687,685 | ) |
| 1/31/18 | | (52,609,709 | ) |
| | $(390,795,578 | ) |
The availability of a portion of the capital loss carryforwards, which were acquired on July 24, 2009 in connection with the MFS Floating Rate High Income Fund merger, may be limited in a given year.
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution, service, and program manager fees. The fund’s income and common expenses are allocated to shareholders based on the value of settled shares outstanding of each class. The fund’s realized and unrealized gain (loss) are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class
53
Notes to Financial Statements – continued
expenses. Class B and Class 529B shares will convert to Class A and Class 529A shares, respectively approximately eight years after purchase. The fund’s distributions declared to shareholders as reported on the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | | From tax return of
capital |
| | | Year ended
1/31/10 | | Year ended
1/31/09 | | Year ended
1/31/10 | | Year ended
1/31/09 |
| Class A | | $38,794,857 | | $36,552,210 | | $— | | $270,761 |
| Class B | | 4,068,631 | | 6,362,206 | | — | | 47,128 |
| Class C | | 4,547,529 | | 4,269,372 | | — | | 31,625 |
| Class I | | 22,136,323 | | 20,049,310 | | — | | 148,515 |
| Class R (b) | | — | | 12,334 | | — | | 91 |
| Class R1 | | 91,062 | | 84,430 | | — | | 625 |
| Former Class R2 (b) | | — | | 11,336 | | — | | 84 |
| Class R2 | | 355,102 | | 412,375 | | — | | 3,055 |
| Class R3 | | 669,860 | | 655,155 | | — | | 4,853 |
| Class R4 | | 10,405 | | 4,586 | | — | | 34 |
| Class 529A | | 59,891 | | 60,111 | | — | | 445 |
| Class 529B | | 19,193 | | 16,448 | | — | | 122 |
| Class 529C | | 25,268 | | 22,496 | | — | | 167 |
| Total | | $70,778,121 | | $68,512,369 | | $— | | $507,505 |
| (b) | At the close of business on April 18, 2008, Class R and Class R2 shares converted into Class R3 shares. |
| | Following the conversion, Class R3, Class R4, and Class R5 shares were renamed Class R2, Class R3, and Class R4 Shares, respectively. |
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund.
The management fee is computed daily and paid monthly at the following annual rates:
| | | |
| First $1.4 billion of average daily net assets | | 0.46 | % |
| Average daily net assets in excess of $1.4 billion | | 0.44 | % |
As part of a settlement agreement with the New York Attorney General concerning market timing and related matters, MFS had agreed to reduce the management fee to 0.39% of the fund’s average daily net assets in excess of $1.4 billion for the period March 1, 2004 through February 28, 2009. For the period February 1, 2009 through February 28, 2009, the fund’s average daily net assets did not exceed $1.4 billion, and therefore, the management fee was not reduced.
54
Notes to Financial Statements – continued
The management fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.46% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, as distributor, received $65,958 and $581 for the year ended January 31, 2010, as its portion of the initial sales charge on sales of Class A and Class 529A shares of the fund, respectively.
The Board of Trustees has adopted a distribution plan for certain class shares pursuant to Rule 12b-1 of the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD for services provided by MFD and financial intermediaries in connection with the distribution and servicing of certain share classes. One component of the plan is a distribution fee paid to MFD and another component of the plan is a service fee paid to MFD. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Distribution Plan Fee Table:
| | | | | | | | | | |
| | | Distribution
Fee Rate (d) | | Service
Fee Rate (d) | | Total
Distribution
Plan (d) | | Annual
Effective
Rate (e) | | Distribution
and Service
Fee |
| Class A | | — | | 0.25% | | 0.25% | | 0.25% | | $1,121,328 |
| Class B | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 494,773 |
| Class C | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 573,389 |
| Class R1 | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 11,299 |
| Class R2 | | 0.25% | | 0.25% | | 0.50% | | 0.50% | | 20,784 |
| Class R3 | | — | | 0.25% | | 0.25% | | 0.25% | | 19,010 |
| Class 529A | | — | | 0.25% | | 0.25% | | 0.26% | | 1,770 |
| Class 529B | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 2,425 |
| Class 529C | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 3,231 |
| Total Distribution and Service Fees | | $2,248,009 |
| (d) | In accordance with the distribution plan for certain classes, the fund pays distribution and/or service fees equal to these annual percentage rates of each class’ average daily net assets. The distribution and service fee rates disclosed by class represent the current rates in effect at the end of the reporting period. Any rate changes, if applicable, are detailed below. |
| (e) | The annual effective rates represent actual fees incurred under the distribution plan for the year ended January 31, 2010 based on each class’ average daily net assets. Assets attributable to Class A shares sold prior to March 1, 1991 are subject to a service fee of 0.15% annually. Effective March 1, 2009 the 0.10% Class A and 0.25% Class 529A annual distribution fees were eliminated. Prior to March 1, 2009, 0.05% of the Class A and 0.10% of the Class 529A distribution fees were paid by the fund. Payment of the remaining 0.05% of the Class A and 0.15% of the Class 529A distribution fee were not in effect. |
Certain Class A shares purchased prior to September 1, 2008 are subject to a contingent deferred sales charge (CDSC) in the event of a shareholder redemption within 12 months of purchase. Certain Class A shares purchased on or subsequent to September 1, 2008 are subject to a CDSC in the event of a
55
Notes to Financial Statements – continued
shareholder redemption within 24 months of purchase. Class C and Class 529C shares are subject to a CDSC in the event of a shareholder redemption within 12 months of purchase. Class B and Class 529B shares are subject to a CDSC in the event of a shareholder redemption within six years of purchase. All contingent deferred sales charges are paid to MFD and during the year ended January 31, 2010, were as follows:
| | |
| | | Amount |
| Class A | | $1,201 |
| Class B | | 42,185 |
| Class C | | 6,000 |
| Class 529B | | 158 |
| Class 529C | | — |
The fund has entered into and may from time to time enter into contracts with program managers and other parties which administer the tuition programs through which an investment in the fund’s 529 share classes is made. The fund has entered into an agreement with MFD pursuant to which MFD receives an annual fee of up to 0.10% of the average daily net assets attributable to each 529 share class. The services provided by MFD, or a third party with which MFD contracts, include recordkeeping and tax reporting and account services, as well as services designed to maintain the program’s compliance with the Internal Revenue Code and other regulatory requirements. Program manager fees for the year ended January 31, 2010, were as follows:
| | |
| | | Amount |
| Class 529A | | $690 |
| Class 529B | | 242 |
| Class 529C | | 323 |
| Total Program Manager Fees | | $1,255 |
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent calculated as a percentage of the average daily net assets of the fund as determined periodically under the supervision of the fund’s Board of Trustees. For the year ended January 31, 2010, the fee was $587,842, which equated to 0.0726% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses, sub-accounting and other shareholder servicing costs which may be paid to affiliated and unaffiliated service providers. For the year ended January 31, 2010, these out-of-pocket expenses, sub-accounting and other shareholder servicing costs amounted to $499,031.
56
Notes to Financial Statements – continued
Under a Special Servicing Agreement among MFS, each MFS fund which invests in other MFS funds (“MFS fund-of-funds”) and certain underlying funds in which a MFS fund-of-funds invests (“underlying funds”), each underlying fund may pay a portion of each MFS fund-of-fund’s transfer agent-related expenses, including sub-accounting fees payable to financial intermediaries, to the extent such payments do not exceed the benefits realized or expected to be realized by the underlying fund from the investment in the underlying fund by the MFS fund-of-fund. For the year ended January 31, 2010, these costs for the fund amounted to $475,266 and are reflected in the shareholder servicing costs on the Statement of Operations.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.0181% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Prior to December 31, 2001, the fund had an unfunded defined benefit plan (“DB plan”) for independent Trustees. As of December 31, 2001, the Board took action to terminate the DB plan with respect to then-current and any future independent Trustees, such that the DB Plan covers only certain of those former independent Trustees who retired on or before December 31, 2001. Effective January 1, 2002, accrued benefits under the DB Plan for then current independent Trustees who continued were credited to an unfunded retirement deferral plan (the “Retirement Deferral plan”), which was established for and exists solely with respect to these credited amounts, and is not available for other deferrals by these or other independent Trustees. Although the Retirement Deferral plan is unfunded, amounts deferred under the plan are periodically adjusted for investment experience as if they had been invested in shares of the fund. The DB Plan resulted in a pension expense of $7,109 and the Retirement Deferral plan resulted in an expense of $16,607. Both amounts are included in independent Trustees’ compensation for the year ended January 31, 2010. The liability for deferred retirement benefits payable to
57
Notes to Financial Statements – continued
certain independent Trustees under both Plans amounted to $82,963 at January 31, 2010, and is included in payable for independent Trustees’ compensation on the Statement of Assets and Liabilities.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended January 31, 2010, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $9,293 and are included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $4,750, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund may invest in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks a high level of current income consistent with preservation of capital and liquidity. Income earned on this investment is included in dividends from underlying funds on the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $487,705,462 and $439,858,715, respectively. Purchases exclude the value of securities acquired in connection with the MFS Floating Rate High Income Fund merger. (See Note 8.)
58
Notes to Financial Statements – continued
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | |
| | | Year ended
1/31/10 | | Year ended
1/31/09 |
| | | Shares | | Amount | | Shares | | Amount |
| Shares sold | | | | | | | | |
Class A | | 47,025,836 | | $130,866,079 | | 39,270,614 | | $114,346,041 |
Class B | | 2,678,743 | | 7,429,638 | | 2,108,924 | | 6,080,678 |
Class C | | 4,813,559 | | 13,626,827 | | 2,621,548 | | 7,756,685 |
Class I | | 30,232,861 | | 74,607,652 | | 10,454,235 | | 28,461,154 |
Class R (b) | | — | | — | | 8,814 | | 30,815 |
Class R1 | | 131,950 | | 375,294 | | 135,640 | | 430,416 |
Former Class R2 (b) | | — | | — | | 16,760 | | 59,117 |
Class R2 | | 731,210 | | 2,119,570 | | 770,913 | | 2,583,947 |
Class R3 | | 932,482 | | 2,612,548 | | 867,250 | | 2,705,416 |
Class R4 | | 24,139 | | 56,485 | | — | | — |
Class 529A | | 68,916 | | 198,713 | | 26,934 | | 86,553 |
Class 529B | | 35,100 | | 96,558 | | 29,584 | | 96,818 |
Class 529C | | 66,625 | | 196,029 | | 15,685 | | 55,574 |
| | 86,741,421 | | $232,185,393 | | 56,326,901 | | $162,693,214 |
| Shares issued in connection with acquisition of MFS Floating Rate High Income Fund | | | | | | | | |
Class A | | 17,654,238 | | $51,197,290 | | — | | $— |
Class C | | 5,697,032 | | 16,578,364 | | — | | — |
Class I | | 940,064 | | 2,726,184 | | — | | — |
| | 24,291,334 | | $70,501,838 | | — | | $— |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | |
Class A | | 9,615,040 | | $27,742,145 | | 8,522,508 | | $25,840,768 |
Class B | | 851,877 | | 2,410,812 | | 1,215,842 | | 3,755,641 |
Class C | | 974,815 | | 2,847,444 | | 827,066 | | 2,537,042 |
Class I | | 7,345,555 | | 21,092,141 | | 6,599,491 | | 19,991,465 |
Class R (b) | | — | | — | | 2,377 | | 8,295 |
Class R1 | | 31,453 | | 90,313 | | 28,088 | | 84,499 |
Former Class R2 (b) | | — | | — | | 2,439 | | 8,524 |
Class R2 | | 119,851 | | 344,136 | | 130,775 | | 401,436 |
Class R3 | | 232,543 | | 666,428 | | 220,194 | | 659,427 |
Class R4 | | 3,564 | | 10,405 | | 1,532 | | 4,620 |
Class 529A | | 20,655 | | 59,377 | | 19,892 | | 60,117 |
Class 529B | | 6,601 | | 19,036 | | 5,411 | | 16,298 |
Class 529C | | 8,583 | | 25,029 | | 7,407 | | 22,490 |
| | 19,210,537 | | $55,307,266 | | 17,583,022 | | $53,390,622 |
59
Notes to Financial Statements – continued
| | | | | | | | | | | | |
| | | Year ended
1/31/10 | | | Year ended
1/31/09 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | |
Class A | | (55,447,091 | ) | | $(153,720,450 | ) | | (44,085,754 | ) | | $(138,958,043 | ) |
Class B | | (10,189,357 | ) | | (28,591,984 | ) | | (13,928,873 | ) | | (43,599,676 | ) |
Class C | | (4,734,529 | ) | | (13,827,068 | ) | | (7,050,980 | ) | | (21,687,544 | ) |
Class I | | (25,964,933 | ) | | (68,364,346 | ) | | (14,421,677 | ) | | (43,334,484 | ) |
Class R (b) | | — | | | — | | | (216,978 | ) | | (770,497 | ) |
Class R1 | | (170,954 | ) | | (506,194 | ) | | (143,291 | ) | | (478,327 | ) |
Former Class R2 (b) | | — | | | — | | | (204,368 | ) | | (726,540 | ) |
Class R2 | | (620,978 | ) | | (1,739,112 | ) | | (1,062,157 | ) | | (3,255,693 | ) |
Class R3 | | (1,421,628 | ) | | (4,063,180 | ) | | (648,871 | ) | | (1,987,964 | ) |
Class 529A | | (58,344 | ) | | (157,127 | ) | | (51,450 | ) | | (163,260 | ) |
Class 529B | | (18,299 | ) | | (47,924 | ) | | (21,238 | ) | | (64,126 | ) |
Class 529C | | (22,044 | ) | | (62,446 | ) | | (24,382 | ) | | (71,682 | ) |
| | (98,648,157 | ) | | $(271,079,831 | ) | | (81,860,019 | ) | | $(255,097,836 | ) |
| Net change | | | | | | | | | | | | |
Class A | | 18,848,023 | | | $56,085,064 | | | 3,707,368 | | | $1,228,766 | |
Class B | | (6,658,737 | ) | | (18,751,534 | ) | | (10,604,107 | ) | | (33,763,357 | ) |
Class C | | 6,750,877 | | | 19,225,567 | | | (3,602,366 | ) | | (11,393,817 | ) |
Class I | | 12,553,547 | | | 30,061,631 | | | 2,632,049 | | | 5,118,135 | |
Class R (b) | | — | | | — | | | (205,787 | ) | | (731,387 | ) |
Class R1 | | (7,551 | ) | | (40,587 | ) | | 20,437 | | | 36,588 | |
Former Class R2 (b) | | — | | | — | | | (185,169 | ) | | (658,899 | ) |
Class R2 | | 230,083 | | | 724,594 | | | (160,469 | ) | | (270,310 | ) |
Class R3 | | (256,603 | ) | | (784,204 | ) | | 438,573 | | | 1,376,879 | |
Class R4 | | 27,703 | | | 66,890 | | | 1,532 | | | 4,620 | |
Class 529A | | 31,227 | | | 100,963 | | | (4,624 | ) | | (16,590 | ) |
Class 529B | | 23,402 | | | 67,670 | | | 13,757 | | | 48,990 | |
Class 529C | | 53,164 | | | 158,612 | | | (1,290 | ) | | 6,382 | |
| | 31,595,135 | | | $86,914,666 | | | (7,950,096 | ) | | $(39,014,000 | ) |
| (b) | At the close of business on April 18, 2008, Class R and Class R2 shares converted into Class R3 shares. Following the conversion, Class R3, Class R4, and Class R5 shares were renamed Class R2, Class R3, and Class R4 Shares, respectively. |
The fund is one of several mutual funds in which the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the purpose of exercising management or control. At the end of the period, the MFS Growth Allocation Fund, MFS Moderate Allocation Fund, MFS Conservative Allocation Fund, and MFS Lifetime 2020 Fund were the owners of record of approximately 11%, 10%, 4%, and 1% respectively, of the value of outstanding voting shares of the fund. In addition, the MFS Lifetime Retirement Income Fund, MFS Lifetime 2010 Fund, and MFS Lifetime 2030
60
Notes to Financial Statements – continued
Fund were each the owners of record of less than 1% of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended January 31, 2010, the fund’s commitment fee and interest expense were $12,267 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
| (7) | | Transactions in Underlying Funds-Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be affiliated issuers:
| | | | | | | | | |
| Underlying Funds | | Beginning
Shares/Par
Amount | | Acquisitions
Shares/Par
Amount | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount |
MFS Institutional Money
Market Portfolio | | 35,243,472 | | 330,513,313 | | (340,474,165 | ) | | 25,282,620 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $63,077 | | | $25,282,620 |
At close of business on July 24, 2009, the fund with net assets of $781,080,848, acquired all of the assets and liabilities of MFS Floating Rate High Income Fund. The purpose of the transaction was to provide shareholders of the MFS Floating Rate High Income Fund the opportunity to participate in a larger combined portfolio with an identical investment objective and similar investment policies and strategies. The acquisition was accomplished by a tax-free exchange of 24,291,334 shares of the fund (valued at $70,501,838) for all of the assets and liabilities of MFS Floating Rate High Income Fund. MFS
61
Notes to Financial Statements – continued
Floating Rate High Income Fund then distributed the shares of the fund that MFS Floating Rate High Income Fund received from the fund to its shareholders. MFS Floating Rate High Income Fund’s net assets on that date were $70,501,838, including investments valued at $65,831,372 with a cost basis of $69,733,956. For financial reporting purposes, assets received and shares issued by the fund were recorded at fair value; however, the cost basis of the investments received from MFS Floating Rate High Income Fund were carried forward to align ongoing reporting of the fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Series Trust III and the Shareholders of MFS High Income Fund:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS High Income Fund (the “Fund”) (one of the portfolios comprising MFS Series Trust III) as of January 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2010, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS High Income Fund as of January 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 22, 2010
63
RESULTS OF SHAREHOLDER MEETING
(unaudited)
At a special meeting of shareholders of MFS Series Trust III, which was held on January 28, 2010, the following actions were taken:
Item 1: To elect the following individuals as Trustees:
| | | | |
| | | Number of Dollars |
Nominee | | For | | Withheld Authority |
| Robert E. Butler | | 2,529,220,334.811 | | 53,455,079.624 |
| Lawrence H. Cohn | | 2,528,787,860.846 | | 53,887,553.589 |
| Maureen R. Goldfarb | | 2,529,336,917.346 | | 53,338,497.088 |
| David H. Gunning | | 2,529,682,589.176 | | 52,992,825.259 |
| William R. Gutow | | 2,529,034,053.902 | | 53,641,360.533 |
| Michael Hegarty | | 2,529,627,246.364 | | 53,048,168.071 |
| John P. Kavanaugh | | 2,529,463,862.073 | | 53,211,552.362 |
| Robert J. Manning | | 2,529,922,880.153 | | 52,752,534.282 |
| Robert C. Pozen | | 2,529,509,988.090 | | 53,165,426.345 |
| J. Dale Sherratt | | 2,529,912,329.793 | | 53,763,084.642 |
| Laurie J. Thomsen | | 2,529,271,338.607 | | 53,404,075.828 |
| Robert W. Uek | | 2,529,251,760.591 | | 53,423,653.843 |
64
TRUSTEES AND OFFICERS — IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of March 1, 2010, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
| INTERESTED TRUSTEES | | | | |
Robert J. Manning (k) (born 10/20/63) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chief Executive Officer, Chief Investment Officer and Director, President (until December 2009) |
Robert C. Pozen (k) (born 8/08/46) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman (since February 2004); Medtronic, Inc, (medical devices), Director (since 2004); Harvard Business School (education), Senior Lecturer (since 2008); Bell Canada Enterprises (telecommunications), Director (until February 2009); The Bank of New York, Director (finance), (March 2004 to May 2005); Telesat (satellite communications), Director (until November 2007) |
| INDEPENDENT TRUSTEES | | | | |
David H. Gunning (born 5/30/42) | | Trustee and Chair of Trustees | | January 2004 | | Retired; Cleveland-Cliffs Inc. (mining products and service provider), Vice Chairman/Director (until May 2007); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non Executive Chairman; Southwest Gas Corp. (natural gas distribution), Director (until May 2004); Portman Limited (mining), Director (until 2008) |
65
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Robert E. Butler (n) (born 11/29/41) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (until 2002) |
Lawrence H. Cohn, M.D.
(born 3/11/37) | | Trustee | | June 1989 | | Brigham and Women’s Hospital, Senior Cardiac Surgeon (since 2005); Harvard Medical School, Professor of Cardiac Surgery; Partners HealthCare, Physician Director of Medical Device Technology (since 2006); Brigham and Women’s Hospital, Chief of Cardiac Surgery (until 2005) |
Maureen R. Goldfarb
(born 4/6/55) | | Trustee | | January 2009 | | Private investor; John Hancock Financial Services, Inc., Executive Vice President (until 2004); John Hancock Mutual Funds, Trustee and Chief Executive Officer (until 2004) |
William R. Gutow
(born 9/27/41) | | Trustee | | December 1993 | | Private investor and real estate consultant ; Capital Entertainment Management Company (video franchise), Vice Chairman; Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2009) |
Michael Hegarty
(born 12/21/44) | | Trustee | | December 2004 | | Private investor; AXA Financial (financial services and insurance), Vice Chairman and Chief Operating Officer (until 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until 2001) |
John P. Kavanaugh
(born 11/4/54) | | Trustee | | January 2009 | | Private investor; The Hanover Insurance Group, Inc., Vice President and Chief Investment Officer (until 2006); Allmerica Investment Trust, Allmerica Securities Trust and Opus Investment Trust (investment companies), Chairman, President and Trustee (until 2006) |
66
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
J. Dale Sherratt
(born 9/23/38) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner |
Laurie J. Thomsen
(born 8/05/57) | | Trustee | | March 2005 | | New Profit, Inc. (venture philanthropy), Executive Partner (since 2006); Private investor; The Travelers Companies (commercial property liability insurance), Director; Prism Venture Partners (venture capital), Co-founder and General Partner (until June 2004) |
Robert W. Uek
(born 5/18/41) | | Trustee | | January 2006 | | Consultant to investment company industry; PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); TT International Funds (mutual fund complex), Trustee (until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (until 2005) |
| OFFICERS | | | | | | |
Maria F. Dwyer (k)
(born 12/01/58) | | President | | March 2004 | | Massachusetts Financial Services Company, Executive Vice President and Chief Regulatory Officer (since March 2004) Chief Compliance Officer (since December 2006); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (until March 2004) |
Christopher R. Bohane (k)
(born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
John M. Corcoran (k)
(born 4/13/65) | | Treasurer | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) |
67
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ethan D. Corey (k)
(born 11/21/63) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since 2004); Dechert LLP (law firm), Counsel (prior to December 2004) |
David L. DiLorenzo (k)
(born 8/10/68) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (until June 2005) |
Timothy M. Fagan (k)
(born 7/10/68) | | Assistant Secretary and Assistant Clerk | | September 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President, Senior Attorney and Chief Compliance Officer (until August 2005) |
Mark D. Fischer (k)
(born 10/27/70) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (until May 2005) |
Robyn L. Griffin
(born 7/04/75) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008); Liberty Mutual Group (insurance), Personal Market Assistant Controller (April 2006 – October 2006); Deloitte & Touche LLP (professional services firm), Senior Manager (prior to April 2006) |
Brian E. Langenfeld (k)
(born 3/07/73) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (until April 2006) |
68
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ellen Moynihan (k)
(born 11/13/57) | | Assistant Treasurer | | April 1997 | | Massachusetts Financial Services Company, Senior Vice President |
Susan S. Newton (k)
(born 3/07/50) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (until April 2005) |
Susan A. Pereira (k)
(born 11/05/70) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (until June 2004) |
Mark N. Polebaum (k)
(born 5/01/52) | | Secretary and Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (until January 2006) |
Frank L. Tarantino
(born 3/07/44) | | Independent Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (until June 2004) |
Richard S. Weitzel (k)
(born 7/16/70) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel (since 2004); Massachusetts Department of Business and Technology, General Counsel (until April 2004) |
James O. Yost (k)
(born 6/12/60) | | Assistant Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Messrs. Pozen and Manning served as Advisory Trustees. For the period March 2008 until October 2008, Ms. Dwyer served as Treasurer of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
69
Trustees and Officers – continued
| (n) | In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust held a shareholders’ meeting in January 2010 to elect Trustees, and will hold a shareholders’ meeting at least once every five years thereafter, to elect Trustees. Messrs. Butler, Kavanaugh, Sherratt, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2010, the Trustees served as board members of 99 funds within the MFS Family of Funds.
The Statement of Additional Information for the Fund and further information about the Trustees are available without charge upon request by calling 1-800-225-2606.
| | |
| Investment Adviser | | Custodian |
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741 | | JPMorgan Chase Bank
One Chase Manhattan Plaza, New York, NY 10081 |
| Distributor | | Independent Registered Public Accounting Firm |
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116-3741 | | Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
| Portfolio Managers | | |
John Addeo David Cole | | |
70
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The fund will notify shareholders of amounts for use in preparing 2010 income tax forms in January 2011.
71
MFS® PRIVACY NOTICE
Privacy is a concern for every investor today. At MFS Investment Management® and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include
| | Ÿ | | data from investment applications and other forms |
| | Ÿ | | share balances and transactional history with us, our affiliates, or others |
| | Ÿ | | facts from a consumer reporting agency |
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements.
Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you.
If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day.
Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours.
72
CONTACT US
Web site
mfs.com
MFS TALK
1-800-637-8255
24 hours a day
Account service and literature
Shareholders
1-800-225-2606
Investment professionals
1-800-343-2829
Retirement plan services
1-800-637-1255
Mailing address
MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Overnight mail
MFS Service Center, Inc.
c/o Boston Financial Data Services
30 Dan Road
Canton, MA 02021-2809
Save paper with eDelivery. MFS® will send you prospectuses, reports, and proxies directly via e-mail so you will get information faster with less mailbox clutter. 
To sign up: 1. go to mfs.com. 2. log in via MFS® Access. 3. select eDelivery. If you own your MFS fund shares through a financial institution or a retirement plan, MFS® TALK, MFS Access, and eDelivery may not be available to you.
MFS® High Yield Opportunities Fund
SIPC Contact Information:
You may obtain information about the Securities Investor Protection Corporation (“SIPC”), including the SIPC Brochure, by contacting SIPC either by telephone (202-371-8300) or by accessing SIPC’s website address (www.sipc.org).
The report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ
NO BANK GUARANTEE
1/31/10
HYO-ANN
LETTER FROM THE CEO
Dear Shareholders:
Most global financial markets, after suffering the biggest declines since the Great Depression, experienced an impressive resurgence during 2009. Despite this turnaround, the U.S. Federal Reserve Board and central banks around the world continued to hold interest rates at historical lows. As most asset prices rebounded in the second half of 2009 and the demand for liquidity waned, the debate over the existence of asset bubbles and the need for monetary policy changes grew louder, creating added uncertainty about the timing and amount of any future interest rate changes.
Even with the significant market gains of 2009, many analysts seem to be predicting one of two likely scenarios for the U.S. economy. More conservative pundits say the recession for large areas of the country will continue to “moderate” — meaning the economy will continue to deteriorate, but at a slower pace. The more optimistic scenario is that a broader recovery will take hold and continue to gain momentum gradually.
Regardless of which recovery scenario plays out, the approximately 15 million Americans who are currently unemployed are almost certain to feel excluded — at least until significant job creation occurs. Meanwhile, an overleveraged global financial system continues to raise doubts about a prolonged upturn. Although progress has been made in recapitalizing U.S. and European banks, financial instability remains the biggest threat to sustainable growth.
While there remains lingering skepticism among many economists, MFS® believes that worldwide markets will stabilize with potential for growth. We are also mindful of the many challenges still facing our global economy, and we want to take this opportunity to remind investors about the merits of maintaining a long-term view, adhering to basic investing principles such as asset allocation and diversification, and working closely with advisors to identify and research investment opportunities.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
March 15, 2010
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top five industries (i) |
| Medical & Health Technology & Services | | 6.5% |
| Gaming & Lodging | | 6.1% |
| Broadcasting | | 5.7% |
| Energy — Independent | | 5.6% |
| Utilities — Electric Power | | 4.8% |
| | |
| Credit quality of long-term debt securities (a)(r) |
| AAA | | 0.8% |
| AA | | 0.3% |
| A | | 0.6% |
| BBB | | 7.4% |
| BB | | 24.3% |
| B | | 36.1% |
| CCC | | 23.2% |
| CC | | 2.1% |
| C | | 0.6% |
| D | | 1.0% |
| Not Rated | | 3.6% |
| |
| Portfolio facts | | |
| Average Duration (d)(i) | | 4.3 |
| Average Effective Maturity (i)(m) | | 6.6 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a)(b) | | B+ |
| (a) | Includes debt securities that either have long-term public ratings or are U.S. Government-Related Securities. U.S. Government-Related Securities consist of U.S. Treasury securities, and certain securities issued by certain U.S. Government agencies or U.S. Government-Sponsored entities. U.S. Government-Related Securities are assigned a “AAA” rating. Each long-term rated security is assigned a rating in accordance with the following ratings hierarchy: If a security is rated by Moody’s, then that rating is used; if not rated by Moody’s, then a Standard & Poor’s rating is used; if not rated by S&P, then a Fitch rating is used. Securities that do not have a long-term public rating (with the exception of U.S. Government-Related Securities) are excluded from the average credit quality calculation and are included in the above credit quality of long-term debt securities table as “Not Rated”, subject to the next sentence. Convertible bonds, currencies, futures, options, swaps, cash, and cash-equivalents are excluded from both the above credit quality of long-term debt securities table and the average credit quality calculation. Average ratings are converted to the S&P scale and are subject to change. |
| (b) | The average credit quality of rated securities is a market weighted average (using a linear scale) of debt securities that either have long-term public ratings or are U.S. Government-Related securities. All securities that do not have a long-term public rating (with the exception of U.S. Government-Related securities) are excluded from the average credit quality calculation. |
2
Portfolio Composition – continued
| (d) | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. |
| (i) | For purposes of this presentation, the bond component includes accrued interest amounts and may be positively or negatively impacted by the equivalent exposure from derivative holdings, if applicable. Equivalent Exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. |
| (m) | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
| (r) | Percentages are based on the total market value of long-term debt securities as of 1/31/2010. |
Percentages are based on net assets as of 1/31/10, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
3
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended January 31, 2010, Class A shares of the MFS High Yield Opportunities Fund (the “fund”) provided a total return of 49.74%, at net asset value. This compares with a return of 51.15% for the fund’s benchmark, the Barclays Capital U.S. High-Yield Corporate Bond Index.
Market Environment
After having suffered through one of the largest and most concentrated downturns since the 1930s, most asset markets staged a remarkable rebound during 2009. During the early stages of the period, the fallout from a series of tumultuous financial events pushed global equity and credit markets to their lowest points during the crisis. Not only did Europe and Japan fall into very deep recessions, but an increasingly powerful engine of global growth – emerging markets – also contracted almost across the board. The subsequent recovery in global activity has been similarly synchronized, led importantly by emerging Asian economies, but broadening to include most of the global economy to varying degrees. Primary drivers of the recovery included an unwinding of the inventory destocking that took place earlier, as well as massive fiscal and monetary stimulus.
During the first half of the reporting period, with the policy rate having been cut almost to 0%, the Fed continued to use its new lending facilities to alleviate ever-tightening credit markets. On the fiscal front, the U.S. Treasury designed and began implementing a massive fiscal stimulus package. As inflationary concerns diminished in the face of global deleveraging and equity and credit markets deteriorated more sharply, central banks around the world also cut interest rates dramatically. By the middle of the period, several central banks had approached their lower bound on policy rates and were examining the implementation and ramifications of quantitative easing as a means to further loosen monetary policy to offset the continuing fall in global economic activity.
However, by the end of the period, there were ever-broadening signs that the global macroeconomic deterioration had passed, which caused the subsequent rise in asset valuations. As most asset prices rebounded in the second half of the period and the demand for liquidity waned, the debate concerning the existence of asset bubbles and the need for monetary exit strategies had begun, creating added uncertainty regarding the forward path of policy rates.
Detractors from Performance
Relative to the Barclays Capital U.S. High-Yield Corporate Bond Index, the fund’s lesser exposure to “BB” and “CCC” rated (r) securities detracted from performance. Bonds in these quality segments performed exceptionally well
4
Management Review – continued
over the reporting period as investors appeared to be recovering their appetite for risk in an improving economy.
A lesser exposure to corporate bonds in the industrial sector held back relative returns. A greater exposure to the banking and gaming sectors also hurt.
Security selection was another negative factor for relative returns. Debt holdings of power generation companies NRG Energy, Edison Mission, and Texas Competitive Electric Holdings, hospital operator Community Health Systems, and casino operators MGM Grand and Station Casinos were among the fund’s top relative detractors.
Contributors to Performance
During the reporting period, the fund’s return from yield, which was greater than that of the benchmark, was the principal contributor to relative performance.
A greater exposure to “B” rated securities was another positive factor for relative returns as credit spreads narrowed and lower-quality securities outperformed higher-quality issues over the reporting period.
The fund benefited from its greater exposure to emerging markets debt, particularly to bonds of Russia, Uruguay, Turkey, and Brazil, and to commercial mortgage-backed securities, as both market segments turned in strong performance over the reporting period.
Top individual contributors during the reporting period included the fund’s holdings of flash memory products maker Spansion (h), Spanish-language network television operator Univision Communications, finance company Nuveen Investments, auto maker Ford Motor Company, oil and natural gas company Chaparral Energy, television station operator Local TV LLC, airframe structures manufacturer Vought Aircraft Industries, and used car auction company KAR Holdings.
Respectfully,
| | | | |
| John Addeo | | David Cole | | Matthew Ryan |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The primary source for bond quality ratings is Moody’s Investors Service. If not available, ratings by Standard & Poor’s are used. For securities which are not rated by either of the two agencies, the security is considered Not Rated. |
5
Management Review – continued
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
6
PERFORMANCE SUMMARY THROUGH 1/31/10
The following chart illustrates a representative class of the fund’s historical performance in comparison to its benchmark(s). Performance results include the deduction of the maximum applicable sales charge and reflect the percentage change in net asset value, including reinvestment of dividends and capital gains distributions. The performance of other share classes will be greater than or less than that of the class depicted below. Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect sales charges, commissions or expenses. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your shares, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the redemption of fund shares.
Growth of a Hypothetical $10,000 Investment
7
Performance Summary – continued
Total Returns through 1/31/10
Average annual without sales charge
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | A | | 7/01/98 | | 49.74% | | 4.32% | | 6.05% | | N/A | | |
| | | B | | 7/01/98 | | 48.59% | | 3.61% | | 5.34% | | N/A | | |
| | | C | | 7/01/98 | | 48.77% | | 3.65% | | 5.36% | | N/A | | |
| | | I | | 7/01/98 | | 50.02% | | 4.65% | | 6.34% | | N/A | | |
| | | W | | 6/02/08 | | 49.72% | | N/A | | N/A | | 2.12% | | |
| | | R1 | | 6/02/08 | | 48.59% | | N/A | | N/A | | 1.24% | | |
| | | R2 | | 6/02/08 | | 49.30% | | N/A | | N/A | | 1.75% | | |
| | | R3 | | 6/02/08 | | 49.75% | | N/A | | N/A | | 2.07% | | |
| | | R4 | | 6/02/08 | | 50.11% | | N/A | | N/A | | 2.33% | | |
| Comparative benchmark | | | | | | | | | | |
| | | Barclays Capital U.S. High-Yield
Corporate Bond Index (f) | | 51.15% | | 6.76% | | 6.90% | | N/A | | |
| Average annual with sales charge | | | | | | | | | | |
| | | A
With Initial Sales Charge (4.75%) | | 42.63% | | 3.31% | | 5.53% | | N/A | | |
| | | B
With CDSC (Declining over six years from 4% to 0%) (x) | | 44.59% | | 3.34% | | 5.34% | | N/A | | |
| | | C
With CDSC (1% for 12 months) (x) | | 47.77% | | 3.65% | | 5.36% | | N/A | | |
Class I, W, R1, R2, R3, and R4 shares do not have a sales charge.
CDSC – Contingent Deferred Sales Charge.
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from the class inception date through the stated period end (for those share classes with less than 10 years of performance history). No comparative benchmark performance information is provided for “life” periods. (See Notes to Performance Summary.) |
| (x) | Assuming redemption at the end of the applicable period. |
Benchmark Definition
Barclays Capital U.S. High-Yield Corporate Bond Index – a market capitalization-weighted index that measures the performance of non-investment grade, fixed rate debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded.
It is not possible to invest directly in an index.
8
Performance Summary – continued
Notes to Performance Summary
Average annual total return represents the average annual change in value for each share class for the periods presented. Life returns are presented where the share class has less than 10 years of performance history and represent the average annual total return from the class inception date to the stated period end date. As the fund’s share classes may have different inception dates, the life returns may represent different time periods and may not be comparable. As a result, no comparative benchmark performance information is provided for life periods.
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
9
EXPENSE TABLE
Fund expenses borne by the shareholders during the period, August 1, 2009 through January 31, 2010
As a shareholder of the fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on certain purchase or redemption payments, and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period August 1, 2009 through January 31, 2010.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table 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 the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line for each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
10
Expense Table – continued
| | | | | | | | | | |
Share
Class | | | | Annualized
Expense
Ratio | | Beginning
Account Value
8/01/09 | | Ending
Account Value
1/31/10 | | Expenses
Paid During
Period (p)
8/01/09-1/31/10 |
| A | | Actual | | 0.95% | | $1,000.00 | | $1,165.68 | | $5.19 |
| | Hypothetical (h) | | 0.95% | | $1,000.00 | | $1,020.42 | | $4.84 |
| B | | Actual | | 1.70% | | $1,000.00 | | $1,159.05 | | $9.25 |
| | Hypothetical (h) | | 1.70% | | $1,000.00 | | $1,016.64 | | $8.64 |
| C | | Actual | | 1.70% | | $1,000.00 | | $1,161.69 | | $9.26 |
| | Hypothetical (h) | | 1.70% | | $1,000.00 | | $1,016.64 | | $8.64 |
| I | | Actual | | 0.70% | | $1,000.00 | | $1,166.85 | | $3.82 |
| | Hypothetical (h) | | 0.70% | | $1,000.00 | | $1,021.68 | | $3.57 |
| W | | Actual | | 0.80% | | $1,000.00 | | $1,164.56 | | $4.36 |
| | Hypothetical (h) | | 0.80% | | $1,000.00 | | $1,021.17 | | $4.08 |
| R1 | | Actual | | 1.70% | | $1,000.00 | | $1,159.05 | | $9.25 |
| | Hypothetical (h) | | 1.70% | | $1,000.00 | | $1,016.64 | | $8.64 |
| R2 | | Actual | | 1.20% | | $1,000.00 | | $1,161.85 | | $6.54 |
| | Hypothetical (h) | | 1.20% | | $1,000.00 | | $1,019.16 | | $6.11 |
| R3 | | Actual | | 0.95% | | $1,000.00 | | $1,165.66 | | $5.19 |
| | Hypothetical (h) | | 0.95% | | $1,000.00 | | $1,020.42 | | $4.84 |
| R4 | | Actual | | 0.70% | | $1,000.00 | | $1,167.11 | | $3.82 |
| | Hypothetical (h) | | 0.70% | | $1,000.00 | | $1,021.68 | | $3.57 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads). If these transaction costs had been included, your costs would have been higher. |
11
PORTFOLIO OF INVESTMENTS
1/31/10
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Bonds - 89.7% | | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Aerospace - 0.8% | | | | | | |
| Bombardier, Inc., 6.3%, 2014 (n) | | $ | 825,000 | | $ | 829,124 |
| Bombardier, Inc., 7.45%, 2034 (z) | | | 315,000 | | | 289,012 |
| Hawker Beechcraft Acquisition Co. LLC, 8.5%, 2015 | | | 2,062,000 | | | 1,417,624 |
| Spirit AeroSystems Holdings, Inc., 7.5%, 2017 (n) | | | 600,000 | | | 604,499 |
| Vought Aircraft Industries, Inc., 8%, 2011 | | | 940,000 | | | 932,949 |
| | | | | | |
| | | | | | $ | 4,073,208 |
| Airlines - 1.3% | | | | | | |
| American Airlines Pass-Through Trust, 6.817%, 2011 | | $ | 1,690,000 | | $ | 1,668,874 |
| AMR Corp., 7.858%, 2011 | | | 790,000 | | | 795,924 |
| Continental Airlines, Inc., 7.339%, 2014 | | | 3,604,000 | | | 3,432,809 |
| Continental Airlines, Inc., 6.9%, 2017 | | | 115,558 | | | 110,068 |
| Continental Airlines, Inc., 6.748%, 2017 | | | 218,373 | | | 203,087 |
| Delta Air Lines, Inc., 7.711%, 2011 | | | 620,000 | | | 613,799 |
| | | | | | |
| | | | | | $ | 6,824,561 |
| Apparel Manufacturers - 0.2% | | | | | | |
| Hanes Brand, Inc., 8%, 2016 | | $ | 390,000 | | $ | 399,749 |
| Levi Strauss & Co., 9.75%, 2015 | | | 825,000 | | | 862,124 |
| Propex Fabrics, Inc., 10%, 2012 (d) | | | 3,605,000 | | | 1,803 |
| | | | | | |
| | | | | | $ | 1,263,676 |
| Asset Backed & Securitized - 2.3% | | | | | | |
| Anthracite Ltd., CDO, 6%, 2037 (z) | | $ | 1,500,000 | | $ | 75,000 |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.549%, 2038 (z) | | | 1,209,166 | | | 48,367 |
| ARCap REIT, Inc., CDO, “H”, 6.08%, 2045 (z) | | | 1,025,662 | | | 38,462 |
| Babson Ltd., CLO, “D”, FRN, 1.751%, 2018 (n) | | | 1,005,000 | | | 570,338 |
| Banc of America Commercial Mortgage, Inc., FRN, 5.811%, 2017 | | | 868,209 | | | 689,600 |
| Banc of America Commercial Mortgage, Inc., FRN, 6.21%, 2018 (z) | | | 3,830,049 | | | 986,326 |
| Citigroup Commercial Mortgage Trust, FRN, 5.7%, 2017 | | | 2,500,000 | | | 481,577 |
| Credit Suisse Mortgage Capital Certificate, 5.343%, 2039 | | | 834,050 | | | 648,999 |
| Crest Ltd., CDO, 7%, 2040 | | | 993,500 | | | 49,675 |
| Falcon Franchise Loan LLC, FRN, 3.67%, 2025 (i)(z) | | | 1,386,371 | | | 96,907 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.745%, 2049 | | | 1,607,194 | | | 497,004 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.746%, 2049 | | | 2,453,353 | | | 711,374 |
12
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Asset Backed & Securitized - continued | | | | | | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.746%, 2049 | | $ | 6,734,569 | | $ | 1,776,544 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.061%, 2051 | | | 1,390,000 | | | 441,187 |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.002%, 2030 (i) | | | 1,492,265 | | | 45,075 |
| Merrill Lynch Mortgage Trust, FRN, 5.828%, 2050 | | | 1,390,000 | | | 388,655 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.204%, 2049 | | | 2,831,056 | | | 2,220,691 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.747%, 2050 | | | 725,000 | | | 490,929 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.747%, 2050 | | | 1,535,000 | | | 1,324,383 |
| Morgan Stanley Capital I, Inc., 1.269%, 2039 (i)(z) | | | 4,303,464 | | | 68,382 |
| Preferred Term Securities XII Ltd., CDO, 0%, 2033 (a)(e)(z) | | | 1,775,000 | | | 355 |
| Preferred Term Securities XVI Ltd., CDO, 0%, 2035 (a)(e)(z) | | | 3,250,000 | | | 325 |
| Preferred Term Securities XVII Ltd., CDO, 0%, 2035 (a)(e)(z) | | | 1,813,000 | | | 181 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.693%, 2047 | | | 1,607,503 | | | 301,491 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.752%, 2047 | | | 1,014,976 | | | 166,412 |
| | | | | | |
| | | | | | $ | 12,118,239 |
| Automotive - 2.5% | | | | | | |
| Accuride Corp., 8.5%, 2015 (d) | | $ | 790,000 | | $ | 720,875 |
| Allison Transmission, Inc., 11%, 2015 (n) | | | 2,470,000 | | | 2,605,849 |
| Allison Transmission, Inc., 11.25%, 2015 (n)(p) | | | 832,100 | | | 875,784 |
| FCE Bank PLC, 7.125%, 2012 | | EUR | 2,200,000 | | | 3,035,048 |
| Ford Motor Credit Co. LLC, 12%, 2015 | | $ | 4,026,000 | | | 4,623,333 |
| Goodyear Tire & Rubber Co., 9%, 2015 | | | 1,285,000 | | | 1,323,549 |
| Goodyear Tire & Rubber Co., 10.5%, 2016 | | | 335,000 | | | 363,474 |
| | | | | | |
| | | | | | $ | 13,547,912 |
| Basic Industry - 0.0% | | | | | | |
| TriMas Corp., 9.75%, 2017 (n) | | $ | 265,000 | | $ | 264,337 |
| | |
| Broadcasting - 4.9% | | | | | | |
| Allbritton Communications Co., 7.75%, 2012 | | $ | 1,992,000 | | $ | 1,977,059 |
| Bonten Media Acquisition Co., 9%, 2015 (p)(z) | | | 2,815,684 | | | 1,022,679 |
| Inmarsat Finance PLC, 7.375%, 2017 (n) | | | 970,000 | | | 995,462 |
| Intelsat Jackson Holdings Ltd., 9.5%, 2016 | | | 2,630,000 | | | 2,774,648 |
| Lamar Media Corp., 6.625%, 2015 | | | 1,415,000 | | | 1,361,936 |
| Lamar Media Corp., “C”, 6.625%, 2015 | | | 1,025,000 | | | 976,312 |
| LBI Media Holdings, Inc., 11%, 2013 | | | 3,825,000 | | | 2,907,000 |
13
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Broadcasting - continued | | | | | | |
| LBI Media, Inc., 8.5%, 2017 (z) | | $ | 1,420,000 | | $ | 1,207,000 |
| LIN TV Corp., 6.5%, 2013 | | | 1,780,000 | | | 1,699,900 |
| Local TV Finance LLC, 9.25%, 2015 (p)(z) | | | 3,279,937 | | | 1,735,632 |
| Newport Television LLC, 13%, 2017 (n)(p) | | | 3,196,281 | | | 1,493,594 |
| Nexstar Broadcasting Group, Inc., 0.5% to 2011, 7% to 2014 (n)(p) | | | 2,456,701 | | | 1,964,746 |
| Nexstar Broadcasting Group, Inc., 7%, 2014 | | | 811,000 | | | 648,800 |
| Salem Communications Corp., 9.625%, 2016 (n) | | | 465,000 | | | 490,575 |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 725,000 | | | 746,750 |
| Univision Communications, Inc., 12%, 2014 (n) | | | 705,000 | | | 761,400 |
| Univision Communications, Inc., 10.5%, 2015 (n)(p) | | | 3,925,825 | | | 3,296,712 |
| Young Broadcasting, Inc., 8.75%, 2014 (d) | | | 4,595,000 | | | 32,165 |
| | | | | | |
| | | | | | $ | 26,092,370 |
| Brokerage & Asset Managers - 0.6% | | | | | | |
| Janus Capital Group, Inc., 6.95%, 2017 | | $ | 2,075,000 | | $ | 2,054,312 |
| Nuveen Investments, Inc., 10.5%, 2015 | | | 1,400,000 | | | 1,295,000 |
| | | | | | |
| | | | | | $ | 3,349,312 |
| Building - 2.3% | | | | | | |
| Associated Materials, Inc., 11.25%, 2014 | | $ | 2,140,000 | | $ | 2,140,000 |
| Building Materials Corp. of America, 7.75%, 2014 | | | 1,180,000 | | | 1,225,725 |
| CEMEX Finance Europe B.V., 9.625%, 2017 (n) | | | EUR835,000 | | | 1,175,093 |
| CEMEX Finance LLC, 9.5%, 2016 (n) | | $ | 1,327,000 | | | 1,350,223 |
| Norcraft Cos., LP, 10.5%, 2015 (n) | | | 525,000 | | | 546,000 |
| Nortek, Inc., 11%, 2013 | | | 2,410,666 | | | 2,531,199 |
| Owens Corning, 9%, 2019 | | | 935,000 | | | 1,074,963 |
| Ply Gem Industries, Inc., 11.75%, 2013 | | | 875,000 | | | 890,313 |
| Ply Gem Industries, Inc., 13.125%, 2014 (z) | | | 1,065,000 | | | 1,065,000 |
| USG Corp., 9.75%, 2014 (n) | | | 135,000 | | | 143,100 |
| | | | | | |
| | | | | | $ | 12,141,616 |
| Business Services - 1.9% | | | | | | |
| First Data Corp., 9.875%, 2015 | | $ | 3,315,000 | | $ | 2,958,638 |
| First Data Corp., 11.25%, 2016 | | | 1,970,000 | | | 1,644,950 |
| Iron Mountain, Inc., 6.625%, 2016 | | | 1,420,000 | | | 1,377,400 |
| SunGard Data Systems, Inc., 9.125%, 2013 | | | 455,000 | | | 462,963 |
| SunGard Data Systems, Inc., 10.25%, 2015 | | | 2,758,000 | | | 2,861,425 |
| Terremark Worldwide, Inc., 12%, 2017 (n) | | | 625,000 | | | 692,188 |
| | | | | | |
| | | | | | $ | 9,997,564 |
14
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Cable TV - 2.8% | | | | | | |
| CCO Holdings LLC, 8.75%, 2013 | | $ | 4,045,000 | | $ | 4,100,619 |
| Charter Communications Holding Co., LLC, 8.375%, 2014 (n) | | | 1,075,000 | | | 1,093,813 |
| Charter Communications Holding Co., LLC, 10.875%, 2014 (n) | | | 870,000 | | | 974,400 |
| CSC Holdings, Inc., 8.5%, 2014 (n) | | | 540,000 | | | 572,400 |
| CSC Holdings, Inc., 8.5%, 2015 (n) | | | 1,090,000 | | | 1,152,675 |
| DIRECTV Holdings LLC, 7.625%, 2016 | | | 1,280,000 | | | 1,401,600 |
| Mediacom LLC, 9.125%, 2019 (n) | | | 700,000 | | | 700,000 |
| Videotron LTEE, 6.875%, 2014 | | | 835,000 | | | 830,825 |
| Virgin Media Finance PLC, 9.125%, 2016 | | | 3,244,000 | | | 3,373,760 |
| Virgin Media Finance PLC, 9.5%, 2016 | | | 700,000 | | | 742,000 |
| | | | | | |
| | | | | | $ | 14,942,092 |
| Chemicals - 2.6% | | | | | | |
| Ashland, Inc., 9.125%, 2017 (n) | | $ | 1,750,000 | | $ | 1,907,500 |
| Hexion Finance Escrow LLC, 8.875%, 2018 (z) | | | 1,055,000 | | | 1,016,756 |
| Hexion Specialty Chemicals, Inc., 9.75%, 2014 | | | 1,730,000 | | | 1,673,775 |
| Huntsman International LLC, 5.5%, 2016 (n) | | | 960,000 | | | 837,600 |
| Innophos Holdings, Inc., 8.875%, 2014 | | | 1,780,000 | | | 1,815,600 |
| Lumena Resources Corp., 12%, 2014 (n) | | | 2,519,000 | | | 2,217,487 |
| Momentive Performance Materials, Inc., 12.5%, 2014 (n) | | | 1,747,000 | | | 1,956,640 |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 1,815,000 | | | 1,574,513 |
| Nalco Co., 8.875%, 2013 | | | 980,000 | | | 1,006,950 |
| | | | | | |
| | | | | | $ | 14,006,821 |
| Computer Software - Systems - 0.3% | | | | | | |
| DuPont Fabros Technology, Inc., 8.5%, 2017 (n) | | $ | 1,310,000 | | $ | 1,342,750 |
| | |
| Construction - 0.2% | | | | | | |
| Lennar Corp., 12.25%, 2017 | | $ | 605,000 | | $ | 738,100 |
| Urbi Desarrollos Urbanos S.A. de C.V., 9.5%, 2020 (z) | | | 265,000 | | | 267,650 |
| | | | | | |
| | | | | | $ | 1,005,750 |
| Consumer Products - 0.7% | | | | | | |
| ACCO Brands Corp., 10.625%, 2015 (n) | | $ | 180,000 | | $ | 197,100 |
| ACCO Brands Corp., 7.625%, 2015 | | | 610,000 | | | 571,875 |
| Jarden Corp., 7.5%, 2017 | | | 1,650,000 | | | 1,658,250 |
| Libbey Glass, Inc., 10%, 2015 (z) | | | 230,000 | | | 232,875 |
| Scotts Miracle-Gro Co., 7.25%, 2018 | | | 325,000 | | | 330,688 |
| Visant Holding Corp., 8.75%, 2013 | | | 970,000 | | | 994,250 |
| | | | | | |
| | | | | | $ | 3,985,038 |
15
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Consumer Services - 1.4% | | | | | | |
| Grupo Posadas S.A. de C.V., 9.25%, 2015 (z) | | $ | 155,000 | | $ | 158,875 |
| KAR Holdings, Inc., 10%, 2015 | | | 1,620,000 | | | 1,717,200 |
| KAR Holdings, Inc., FRN, 4.248%, 2014 | | | 815,000 | | | 753,875 |
| Service Corp. International, 7%, 2017 | | | 2,870,000 | | | 2,834,125 |
| Ticketmaster Entertainment, Inc., 10.75%, 2016 | | | 1,885,000 | | | 2,059,363 |
| | | | | | |
| | | | | | $ | 7,523,438 |
| Containers - 1.3% | | | | | | |
| Crown Americas LLC, 7.625%, 2013 | | $ | 582,000 | | $ | 600,188 |
| Graham Packaging Holdings Co., 9.875%, 2014 | | | 3,720,000 | | | 3,826,950 |
| Greif, Inc., 6.75%, 2017 | | | 685,000 | | | 673,013 |
| Owens-Illinois, Inc., 7.375%, 2016 | | | 1,285,000 | | | 1,336,400 |
| Reynolds Group, 7.75%, 2016 (n) | | | 600,000 | | | 604,500 |
| | | | | | |
| | | | | | $ | 7,041,051 |
| Electronics - 0.7% | | | | | | |
| Avago Technologies Ltd., 11.875%, 2015 | | $ | 1,065,000 | | $ | 1,179,488 |
| Freescale Semiconductor, Inc., 8.875%, 2014 | | | 2,650,000 | | | 2,358,500 |
| | | | | | |
| | | | | | $ | 3,537,988 |
| Emerging Market Quasi-Sovereign - 4.1% | | | | | | |
| Banco do Brasil (Cayman Branch), 6%, 2020 (z) | | $ | 239,000 | | $ | 237,586 |
| BNDES Participacoes S.A., 6.5%, 2019 (n) | | | 760,000 | | | 792,300 |
| Ecopetrol S.A., 7.625%, 2019 | | | 547,000 | | | 592,128 |
| ELETROBRAS S.A., 6.875%, 2019 (n) | | | 124,000 | | | 129,270 |
| Export-Import Bank of Korea, 5.875%, 2015 | | | 619,000 | | | 664,637 |
| Gaz Capital S.A., 8.125%, 2014 (n) | | | 1,920,000 | | | 2,085,600 |
| KazMunaiGaz Finance B.V., 8.375%, 2013 (n) | | | 509,000 | | | 553,538 |
| KazMunaiGaz Finance B.V., 11.75%, 2015 (n) | | | 1,263,000 | | | 1,556,648 |
| KazMunaiGaz Finance B.V., 9.125%, 2018 (n) | | | 914,000 | | | 1,047,673 |
| Majapahit Holding B.V., 7.75%, 2016 (n) | | | 309,000 | | | 329,085 |
| Majapahit Holding B.V., 7.25%, 2017 (n) | | | 723,000 | | | 744,690 |
| Majapahit Holding B.V., 8%, 2019 (n) | | | 112,000 | | | 118,720 |
| Majapahit Holding B.V., 7.75%, 2020 (n) | | | 1,268,000 | | | 1,312,380 |
| OAO Gazprom, 9.625%, 2013 | | | 1,340,000 | | | 1,497,450 |
| Pemex Project Funding Master Trust, 5.75%, 2018 | | | 1,708,000 | | | 1,717,876 |
| Pemex Project Funding Master Trust, 6.625%, 2035 | | | 191,000 | | | 177,675 |
| Petrobras International Finance Co., 7.875%, 2019 | | | 1,185,000 | | | 1,343,708 |
| Petrobras International Finance Co., 6.875%, 2040 | | | 216,000 | | | 217,252 |
| Petroleos de Venezuela S.A., 5.25%, 2017 | | | 3,298,000 | | | 1,995,290 |
| Petroleos Mexicanos, 6%, 2020 (z) | | | 706,000 | | | 697,443 |
| Petroleum Co. of Trinidad & Tobago Ltd., 9.75%, 2019 (n) | | | 221,000 | | | 249,178 |
| Petróleos Mexicanos, 8%, 2019 | | | 1,062,000 | | | 1,210,680 |
16
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Emerging Market Quasi-Sovereign - continued | | | | | | |
| Qtel International Finance Ltd., 6.5%, 2014 (n) | | $ | 156,000 | | $ | 169,559 |
| Qtel International Finance Ltd., 7.875%, 2019 | | | 151,000 | | | 171,731 |
| Qtel International Finance Ltd., 7.875%, 2019 (n) | | | 682,000 | | | 775,633 |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 6.75%, 2019 (n) | | | 256,000 | | | 280,328 |
| RSHB Capital S.A., 7.125%, 2014 | | | 1,038,000 | | | 1,106,923 |
| Russian Agricultural Bank, 7.125%, 2014 (n) | | | 200,000 | | | 213,280 |
| | | | | | |
| | | | | | $ | 21,988,261 |
| Emerging Market Sovereign - 4.2% | | | | | | |
| Republic of Argentina, 2.5% to 2019, 3.75% to 2029, 5.25% to 2038 | | $ | 2,094,000 | | $ | 696,255 |
| Republic of Argentina, FRN, 0.943%, 2012 | | | 1,595,925 | | | 1,368,240 |
| Republic of Colombia, 7.375%, 2019 | | | 473,000 | | | 528,578 |
| Republic of Colombia, 7.375%, 2037 | | | 892,000 | | | 947,750 |
| Republic of Colombia, 6.125%, 2041 | | | 2,592,000 | | | 2,332,800 |
| Republic of Croatia, 6.75%, 2019 (n) | | | 345,000 | | | 365,451 |
| Republic of El Salvador, 7.375%, 2019 (n) | | | 142,000 | | | 149,455 |
| Republic of El Salvador, 8.25%, 2032 | | | 875,000 | | | 930,781 |
| Republic of Hungary, 6.25%, 2020 | | | 357,000 | | | 358,075 |
| Republic of Indonesia, 6.875%, 2018 (n) | | | 675,000 | | | 732,375 |
| Republic of Indonesia, 5.875%, 2020 (z) | | | 1,048,000 | | | 1,062,410 |
| Republic of Peru, 7.125%, 2019 | | | 270,000 | | | 305,100 |
| Republic of Peru, 7.35%, 2025 | | | 333,000 | | | 372,128 |
| Republic of Peru, 6.55%, 2037 | | | 860,000 | | | 864,300 |
| Republic of Philippines, 6.5%, 2020 | | | 198,000 | | | 209,385 |
| Republic of Philippines, 6.5%, 2020 | | | 158,000 | | | 167,085 |
| Republic of Philippines, 9.5%, 2030 | | | 234,000 | | | 302,445 |
| Republic of Philippines, 7.75%, 2031 | | | 346,000 | | | 381,465 |
| Republic of Philippines, 6.375%, 2034 | | | 1,357,000 | | | 1,278,973 |
| Republic of Turkey, 7.5%, 2017 | | | 159,000 | | | 179,670 |
| Republic of Turkey, 7%, 2019 | | | 883,000 | | | 962,470 |
| Republic of Turkey, 6.875%, 2036 | | | 2,843,000 | | | 2,821,678 |
| Republic of Ukraine, 6.385%, 2012 | | | 560,000 | | | 520,856 |
| Republic of Uruguay, 8%, 2022 | | | 2,331,000 | | | 2,665,499 |
| Republic of Uruguay, 6.875%, 2025 | | | 123,000 | | | 128,535 |
| Republic of Uruguay, 7.625%, 2036 | | | 236,000 | | | 254,290 |
| Republic of Venezuela, 7%, 2018 | | | 824,000 | | | 552,080 |
| Republic of Vietnam, 6.75%, 2020 (z) | | | 190,000 | | | 190,713 |
| State of Qatar, 4%, 2015 (n) | | | 328,000 | | | 328,410 |
| State of Qatar, 5.25%, 2020 (n) | | | 412,000 | | | 413,545 |
| | | | | | |
| | | | | | $ | 22,370,797 |
17
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Energy - Independent - 5.5% | | | | | | |
| Berry Petroleum Co., 10.25%, 2014 | | $ | 880,000 | | $ | 963,600 |
| Chaparral Energy, Inc., 8.875%, 2017 | | | 1,665,000 | | | 1,448,550 |
| Chesapeake Energy Corp., 9.5%, 2015 | | | 130,000 | | | 141,700 |
| Chesapeake Energy Corp., 6.375%, 2015 | | | 2,955,000 | | | 2,895,900 |
| Forest Oil Corp., 8.5%, 2014 | | | 750,000 | | | 787,500 |
| Forest Oil Corp., 7.25%, 2019 | | | 230,000 | | | 231,150 |
| Hilcorp Energy I LP, 9%, 2016 (n) | | | 2,125,000 | | | 2,204,688 |
| Mariner Energy, Inc., 8%, 2017 | | | 1,300,000 | | | 1,270,750 |
| McMoRan Exploration Co., 11.875%, 2014 | | | 1,615,000 | | | 1,760,350 |
| Newfield Exploration Co., 6.625%, 2016 | | | 525,000 | | | 525,000 |
| OPTI Canada, Inc., 8.25%, 2014 | | | 2,025,000 | | | 1,782,000 |
| Penn Virginia Corp., 10.375%, 2016 | | | 1,650,000 | | | 1,817,063 |
| Petrohawk Energy Corp., 10.5%, 2014 | | | 575,000 | | | 635,375 |
| Pioneer Natural Resources Co., 6.875%, 2018 | | | 1,340,000 | | | 1,316,405 |
| Pioneer Natural Resources Co., 7.5%, 2020 | | | 930,000 | | | 944,317 |
| Plains Exploration & Production Co., 7%, 2017 | | | 2,700,000 | | | 2,662,875 |
| Quicksilver Resources, Inc., 8.25%, 2015 | | | 2,170,000 | | | 2,235,100 |
| Range Resources Corp., 8%, 2019 | | | 1,505,000 | | | 1,602,825 |
| SandRidge Energy, Inc., 9.875%, 2016 (n) | | | 450,000 | | | 478,125 |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 2,070,000 | | | 2,059,650 |
| Southwestern Energy Co., 7.5%, 2018 | | | 1,335,000 | | | 1,421,775 |
| | | | | | |
| | | | | | $ | 29,184,698 |
| Energy - Integrated - 0.6% | | | | | | |
| CCL Finance Ltd., 9.5%, 2014 (n) | | $ | 1,580,000 | | $ | 1,682,700 |
| Listrindo Capital B.V., 9.25%, 2015 (z) | | | 143,000 | | | 146,934 |
| Pacific Rubiales Energy Corp., 8.75%, 2016 (n) | | | 975,000 | | | 1,014,000 |
| TNK-BP Finance S.A., 6.25%, 2015 (z) | | | 123,000 | | | 122,419 |
| TNK-BP Finance S.A., 7.25%, 2020 (z) | | | 151,000 | | | 149,641 |
| | | | | | |
| | | | | | $ | 3,115,694 |
| Entertainment - 0.8% | | | | | | |
| AMC Entertainment, Inc., 11%, 2016 | | $ | 1,240,000 | | $ | 1,333,000 |
| AMC Entertainment, Inc., 8.75%, 2019 | | | 2,000,000 | | | 2,070,000 |
| Cinemark USA, Inc., 8.625%, 2019 | | | 1,000,000 | | | 1,042,500 |
| | | | | | |
| | | | | | $ | 4,445,500 |
| Financial Institutions - 2.5% | | | | | | |
| CIT Group, Inc., 7%, 2017 | | $ | 2,175,000 | | $ | 1,854,188 |
| GMAC, Inc., 6.875%, 2011 | | | 1,601,000 | | | 1,601,000 |
| GMAC, Inc., 7%, 2012 | | | 835,000 | | | 828,738 |
| GMAC, Inc., 6.75%, 2014 | | | 2,800,000 | | | 2,723,000 |
| GMAC, Inc., 8%, 2031 | | | 2,468,000 | | | 2,363,110 |
18
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Financial Institutions - continued | | | | | | |
| International Lease Finance Corp., 5.625%, 2013 | | $ | 4,480,000 | | $ | 3,686,359 |
| | | | | | |
| | | | | | $ | 13,056,395 |
| Food & Beverages - 1.8% | | | | | | |
| ARAMARK Corp., 8.5%, 2015 | | $ | 1,070,000 | | $ | 1,072,675 |
| B&G Foods, Inc., 7.625%, 2018 | | | 530,000 | | | 535,300 |
| BFF International Ltd., 7.25%, 2020 (z) | | | 324,000 | | | 320,355 |
| CEDC Finance Corp. International, Inc., 9.125%, 2016 (n) | | | 453,000 | | | 475,650 |
| Dean Foods Co., 7%, 2016 | | | 1,485,000 | | | 1,447,875 |
| Del Monte Foods Co., 6.75%, 2015 | | | 2,180,000 | | | 2,229,050 |
| Independencia International, 9.875%, 2015 (d)(n) | | | 568,000 | | | 149,100 |
| Michael Foods, Inc., 8%, 2013 | | | 1,400,000 | | | 1,429,750 |
| Pinnacle Foods Finance LLC, 9.25%, 2015 | | | 1,670,000 | | | 1,678,350 |
| | | | | | |
| | | | | | $ | 9,338,105 |
| Forest & Paper Products - 2.8% | | | | | | |
| Abitibi-Consolidated, Inc., 7.4%, 2018 (d) | | $ | 1,870,000 | | $ | 402,050 |
| Cascades, Inc., 7.75%, 2017 (n) | | | 875,000 | | | 892,500 |
| Cellu Tissue Holdings, Inc., 11.5%, 2014 | | | 1,820,000 | | | 2,020,200 |
| Fibria, 9.25%, 2019 (n) | | | 629,000 | | | 702,908 |
| Georgia-Pacific Corp., 7.125%, 2017 (n) | | | 835,000 | | | 855,875 |
| Georgia-Pacific Corp., 8%, 2024 | | | 1,335,000 | | | 1,388,400 |
| Georgia-Pacific Corp., 7.25%, 2028 | | | 405,000 | | | 390,825 |
| Graphic Packaging International Corp., 9.5%, 2013 | | | 1,225,000 | | | 1,258,688 |
| Jefferson Smurfit Corp., 8.25%, 2012 (d) | | | 510,000 | | | 425,850 |
| JSG Funding PLC, 7.75%, 2015 | | | 1,365,000 | | | 1,330,875 |
| Millar Western Forest Products Ltd., 7.75%, 2013 | | | 4,965,000 | | | 4,021,650 |
| Smurfit Kappa Group PLC, 7.75%, 2019 (n) | | EUR | 900,000 | | | 1,241,611 |
| | | | | | |
| | | | | | $ | 14,931,432 |
| Gaming & Lodging - 5.4% | | | | | | |
| Ameristar Casinos, Inc., 9.25%, 2014 (n) | | $ | 700,000 | | $ | 722,750 |
| Boyd Gaming Corp., 6.75%, 2014 | | | 1,835,000 | | | 1,697,375 |
| Firekeepers Development Authority, 13.875%, 2015 (n) | | | 2,355,000 | | | 2,696,475 |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (d)(n) | | | 3,510,000 | | | 35,100 |
| Harrah’s Operating Co., Inc., 11.25%, 2017 | | | 1,040,000 | | | 1,105,000 |
| Harrah’s Operating Co., Inc., 10%, 2018 | | | 679,000 | | | 539,805 |
| Harrah’s Operating Co., Inc., 10%, 2018 | | | 4,151,000 | | | 3,300,045 |
| Host Hotels & Resorts, Inc., 7.125%, 2013 | | | 895,000 | | | 901,713 |
| Host Hotels & Resorts, Inc., 6.75%, 2016 | | | 1,505,000 | | | 1,471,138 |
| Host Hotels & Resorts, Inc., 9%, 2017 (n) | | | 650,000 | | | 695,500 |
| MGM Mirage, 6.75%, 2013 | | | 2,110,000 | | | 1,920,100 |
| MGM Mirage, 10.375%, 2014 (n) | | | 260,000 | | | 285,350 |
19
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Gaming & Lodging - continued | | | | | | |
| MGM Mirage, 7.5%, 2016 | | $ | 1,115,000 | | $ | 931,025 |
| MGM Mirage, 11.125%, 2017 (n) | | | 640,000 | | | 720,000 |
| MGM Mirage, 11.375%, 2018 (n) | | | 580,000 | | | 548,100 |
| MTR Gaming Group, Inc., 9%, 2012 | | | 970,000 | | | 795,400 |
| Newland International Properties Corp., 9.5%, 2014 (n) | | | 1,948,000 | | | 1,753,200 |
| Penn National Gaming, Inc., 8.75%, 2019 (n) | | | 1,340,000 | | | 1,366,800 |
| Pinnacle Entertainment, Inc., 7.5%, 2015 | | | 2,405,000 | | | 2,224,625 |
| Royal Caribbean Cruises Ltd., 7%, 2013 | | | 970,000 | | | 962,725 |
| Royal Caribbean Cruises Ltd., 11.875%, 2015 | | | 1,010,000 | | | 1,179,175 |
| Starwood Hotels & Resorts Worldwide, Inc., 6.75%, 2018 | | | 600,000 | | | 598,500 |
| Station Casinos, Inc., 6%, 2012 (d) | | | 2,359,000 | | | 401,030 |
| Station Casinos, Inc., 6.5%, 2014 (d) | | | 3,810,000 | | | 19,050 |
| Station Casinos, Inc., 6.875%, 2016 (d) | | | 6,275,000 | | | 31,375 |
| Station Casinos, Inc., 7.75%, 2016 (d) | | | 821,000 | | | 145,728 |
| Wyndham Worldwide Corp., 6%, 2016 | | | 1,555,000 | | | 1,505,629 |
| | | | | | |
| | | | | | $ | 28,552,713 |
| Industrial - 1.0% | | | | | | |
| Altra Holdings, Inc., 8.125%, 2016 (n) | | $ | 900,000 | | $ | 929,250 |
| Aquilex Corp., 11.125%, 2016 (n) | | | 1,065,000 | | | 1,107,600 |
| Baldor Electric Co., 8.625%, 2017 | | | 1,095,000 | | | 1,114,163 |
| Great Lakes Dredge & Dock Corp., 7.75%, 2013 | | | 1,080,000 | | | 1,080,000 |
| Johnsondiversey Holdings, Inc., 8.25%, 2019 (n) | | | 910,000 | | | 944,125 |
| | | | | | |
| | | | | | $ | 5,175,138 |
| Insurance - 0.8% | | | | | | |
| ING Groep N.V., 5.775% to 2015, FRN to 2049 | | $ | 2,825,000 | | $ | 2,222,851 |
| MetLife, Inc., 9.25% to 2038, FRN to 2068 (n) | | | 1,600,000 | | | 1,792,000 |
| | | | | | |
| | | | | | $ | 4,014,851 |
| Insurance - Property & Casualty - 1.2% | | | | | | |
| Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2088 (n) | | $ | 1,560,000 | | $ | 1,716,000 |
| USI Holdings Corp., 9.75%, 2015 (z) | | | 4,015,000 | | | 3,723,913 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 (z) | | | 1,230,000 | | | 1,107,000 |
| | | | | | |
| | | | | | $ | 6,546,913 |
| Machinery & Tools - 0.3% | | | | | | |
| Rental Service Corp., 9.5%, 2014 | | $ | 1,630,000 | | $ | 1,650,375 |
| | |
| Major Banks - 1.4% | | | | | | |
| Bank of America Corp., 8% to 2018, FRN to 2059 | | $ | 3,060,000 | | $ | 2,905,317 |
| JPMorgan Chase & Co., 7.9% to 2018, FRN to 2049 | | | 3,795,000 | | | 3,887,256 |
20
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Major Banks - continued | | | | | | |
| Royal Bank of Scotland Group PLC, FRN, 7.648%, 2049 | | $ | 820,000 | | $ | 638,690 |
| | | | | | |
| | | | | | $ | 7,431,263 |
| Medical & Health Technology & Services - 6.4% | | | | | | |
| Biomet, Inc., 11.625%, 2017 | | $ | 2,800,000 | | $ | 3,080,000 |
| Community Health Systems, Inc., 8.875%, 2015 | | | 2,820,000 | | | 2,915,175 |
| Cooper Cos., Inc., 7.125%, 2015 | | | 320,000 | | | 314,400 |
| DaVita, Inc., 6.625%, 2013 | | | 748,000 | | | 749,870 |
| DaVita, Inc., 7.25%, 2015 | | | 1,641,000 | | | 1,643,051 |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 1,265,000 | | | 1,416,800 |
| HCA, Inc., 9%, 2014 | | | 4,680,000 | | | 4,668,417 |
| HCA, Inc., 6.375%, 2015 | | | 2,325,000 | | | 2,144,813 |
| HCA, Inc., 9.25%, 2016 | | | 925,000 | | | 975,875 |
| HCA, Inc., 8.5%, 2019 (n) | | | 1,085,000 | | | 1,147,388 |
| HealthSouth Corp., 8.125%, 2020 | | | 1,955,000 | | | 1,915,900 |
| Psychiatric Solutions, Inc., 7.75%, 2015 (n) | | | 260,000 | | | 242,450 |
| Psychiatric Solutions, Inc., 7.75%, 2015 | | | 1,005,000 | | | 962,288 |
| Surgical Care Affiliates, Inc., 10%, 2017 (n) | | | 2,815,000 | | | 2,772,775 |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 1,450,000 | | | 1,500,750 |
| U.S. Oncology, Inc., 10.75%, 2014 | | | 1,615,000 | | | 1,683,638 |
| United Surgical Partners International, Inc., 8.875%, 2017 | | | 395,000 | | | 405,863 |
| United Surgical Partners International, Inc., 9.25%, 2017 (p) | | | 625,000 | | | 650,781 |
| Universal Hospital Services, Inc., 8.5%, 2015 (p) | | | 1,910,000 | | | 1,867,025 |
| Universal Hospital Services, Inc., FRN, 3.859%, 2015 | | | 590,000 | | | 504,450 |
| VWR Funding, Inc., 10.25%, 2015 (p) | | | 2,529,719 | | | 2,643,556 |
| | | | | | |
| | | | | | $ | 34,205,265 |
| Metals & Mining - 2.5% | | | | | | |
| Arch Western Finance LLC, 6.75%, 2013 | | $ | 1,210,000 | | $ | 1,197,900 |
| Bumi Capital Pte Ltd., 12%, 2016 (n) | | | 1,425,000 | | | 1,464,188 |
| Cloud Peak Energy, Inc., 8.25%, 2017 (n) | | | 1,090,000 | | | 1,117,250 |
| Cloud Peak Energy, Inc., 8.5%, 2019 (n) | | | 1,090,000 | | | 1,133,600 |
| FMG Finance Ltd., 10.625%, 2016 (n) | | | 1,615,000 | | | 1,828,988 |
| Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017 | | | 2,855,000 | | | 3,104,813 |
| Freeport-McMoRan Copper & Gold, Inc., FRN, 3.881%, 2015 | | | 934,000 | | | 928,826 |
| Gerdau Holdings, Inc., 7%, 2020 (n) | | | 485,000 | | | 487,425 |
| Peabody Energy Corp., 5.875%, 2016 | | | 10,000 | | | 9,800 |
| Peabody Energy Corp., 7.375%, 2016 | | | 1,640,000 | | | 1,742,500 |
| Vale Overseas Ltd., 6.875%, 2039 | | | 505,000 | | | 515,672 |
| | | | | | |
| | | | | | $ | 13,530,962 |
| Natural Gas - Distribution - 0.3% | | | | | | |
| AmeriGas Partners LP, 7.125%, 2016 | | $ | 1,515,000 | | $ | 1,533,938 |
21
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Natural Gas - Pipeline - 1.3% | | | | | | |
| Atlas Pipeline Partners LP, 8.125%, 2015 | | $ | 1,345,000 | | $ | 1,244,125 |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 1,655,000 | | | 1,530,875 |
| El Paso Corp., 8.25%, 2016 | | | 1,230,000 | | | 1,325,325 |
| El Paso Corp., 7%, 2017 | | | 670,000 | | | 685,012 |
| El Paso Corp., 7.75%, 2032 | | | 670,000 | | | 665,905 |
| MarkWest Energy Partners LP, 6.875%, 2014 | | | 1,280,000 | | | 1,254,400 |
| MarkWest Energy Partners LP, 8.75%, 2018 | | | 300,000 | | | 312,000 |
| | | | | | |
| | | | | | $ | 7,017,642 |
| Network & Telecom - 2.3% | | | | | | |
| Axtel S.A.B. de C.V., 9%, 2019 (n) | | $ | 159,000 | | $ | 163,373 |
| Cincinnati Bell, Inc., 8.375%, 2014 | | | 3,155,000 | | | 3,178,663 |
| Citizens Communications Co., 9%, 2031 | | | 540,000 | | | 534,600 |
| Global Village Telecom Finance LLC, 12%, 2011 (n) | | | 455,000 | | | 466,375 |
| Nordic Telephone Co. Holdings, 8.875%, 2016 (n) | | | 2,037,000 | | | 2,169,405 |
| Qwest Communications International, Inc., 8%, 2015 (n) | | | 605,000 | | | 626,175 |
| Qwest Communications International, Inc., 7.125%, 2018 (z) | | | 1,320,000 | | | 1,287,000 |
| Qwest Corp., 8.375%, 2016 | | | 646,000 | | | 707,370 |
| Telemar Norte Leste S.A., 9.5%, 2019 (n) | | | 942,000 | | | 1,120,980 |
| Windstream Corp., 8.625%, 2016 | | | 2,175,000 | | | 2,232,094 |
| | | | | | |
| | | | | | $ | 12,486,035 |
| Oil Services - 0.8% | | | | | | |
| Allis-Chalmers Energy, Inc., 8.5%, 2017 | | $ | 1,235,000 | | $ | 1,111,500 |
| Basic Energy Services, Inc., 7.125%, 2016 | | | 480,000 | | | 412,800 |
| Expro Finance Luxembourg, 8.5%, 2016 (n) | | | 400,000 | | | 398,000 |
| McJunkin Red Man Holding Corp., 9.5%, 2016 (z) | | | 685,000 | | | 683,288 |
| Trico Shipping A.S., 11.875%, 2014 (n) | | | 1,350,000 | | | 1,417,500 |
| | | | | | |
| | | | | | $ | 4,023,088 |
| Oils - 0.2% | | | | | | |
| Holly Corp., 9.875%, 2017 (n) | | $ | 485,000 | | $ | 514,100 |
| Petroplus Holdings AG, 9.375%, 2019 (n) | | | 605,000 | | | 598,950 |
| | | | | | |
| | | | | | $ | 1,113,050 |
| Other Banks & Diversified Financials - 1.0% | | | | | | |
| Banco BMG S.A., 9.95%, 2019 (n) | | $ | 1,539,000 | | $ | 1,619,808 |
| Banco Votorantim, 7.375%, 2020 (z) | | | 389,000 | | | 394,349 |
| Capital One Financial Corp., 10.25%, 2039 | | | 780,000 | | | 892,951 |
| Credit Acceptance Corp., 9.125%, 2017 (z) | | | 805,000 | | | 793,931 |
| LBG Capital No. 1 PLC, 7.875%, 2020 (z) | | | 1,470,000 | | | 1,293,600 |
| Woori America Bank, 7%, 2015 (n) | | | 152,000 | | | 167,353 |
| | | | | | |
| | | | | | $ | 5,161,992 |
22
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Precious Metals & Minerals - 0.7% | | | | | | |
| Teck Resources Ltd., 9.75%, 2014 | | $ | 655,000 | | $ | 748,338 |
| Teck Resources Ltd., 10.25%, 2016 | | | 350,000 | | | 399,875 |
| Teck Resources Ltd., 10.75%, 2019 | | | 2,140,000 | | | 2,519,850 |
| | | | | | |
| | | | | | $ | 3,668,063 |
| Printing & Publishing - 1.4% | | | | | | |
| American Media Operations, Inc., 9%, 2013 (p)(z) | | $ | 249,916 | | $ | 157,010 |
| American Media Operations, Inc., 14%, 2013 (p)(z) | | | 2,671,569 | | | 1,644,277 |
| Morris Publishing, 7%, 2013 (d) | | | 2,470,000 | | | 830,538 |
| Nielsen Finance LLC, 10%, 2014 | | | 1,810,000 | | | 1,882,400 |
| Nielsen Finance LLC, 11.5%, 2016 | | | 1,010,000 | | | 1,131,200 |
| Nielsen Finance LLC, 0% to 2011, 12.5% to 2016 | | | 1,456,000 | | | 1,332,240 |
| Tribune Co., 5.25%, 2015 (d) | | | 1,240,000 | | | 347,200 |
| | | | | | |
| | | | | | $ | 7,324,865 |
| Railroad & Shipping - 0.2% | | | | | | |
| Kansas City Southern Railway, 8%, 2015 | | $ | 750,000 | | $ | 771,563 |
| TFM S.A. de C.V., 9.375%, 2012 | | | 396,000 | | | 405,900 |
| | | | | | |
| | | | | | $ | 1,177,463 |
| Real Estate - 0.3% | | | | | | |
| CB Richard Ellis Group, Inc., 11.625%, 2017 | | $ | 1,205,000 | | $ | 1,355,625 |
| | |
| Retailers - 2.9% | | | | | | |
| Couche-Tard, Inc., 7.5%, 2013 | | $ | 635,000 | | $ | 642,938 |
| Dollar General Corp., 11.875%, 2017 (p) | | | 628,000 | | | 722,200 |
| Federated Retail Holdings, Inc., 5.9%, 2016 | | | 1,615,000 | | | 1,542,325 |
| General Nutrition Centers, Inc., FRN, 5.178%, 2014 (p) | | | 2,345,000 | | | 2,174,988 |
| Limited Brands, Inc., 5.25%, 2014 | | | 1,170,000 | | | 1,129,050 |
| Limited Brands, Inc., 6.95%, 2033 | | | 540,000 | | | 467,100 |
| Macy’s Retail Holdings, Inc., 5.75%, 2014 | | | 1,210,000 | | | 1,213,025 |
| Neiman Marcus Group, Inc., 10.375%, 2015 | | | 2,650,000 | | | 2,597,000 |
| Sally Beauty Holdings, Inc., 10.5%, 2016 | | | 1,590,000 | | | 1,701,300 |
| Toys “R” Us, Inc., 7.625%, 2011 | | | 550,000 | | | 567,875 |
| Toys “R” Us, Inc., 10.75%, 2017 (n) | | | 1,460,000 | | | 1,616,950 |
| Toys “R” Us, Inc., 8.5%, 2017 (n) | | | 835,000 | | | 860,050 |
| | | | | | |
| | | | | | $ | 15,234,801 |
| Specialty Stores - 0.3% | | | | | | |
| Payless ShoeSource, Inc., 8.25%, 2013 | | $ | 1,808,000 | | $ | 1,846,420 |
| | |
| Supermarkets - 0.2% | | | | | | |
| SUPERVALU, Inc., 8%, 2016 | | $ | 860,000 | | $ | 860,000 |
23
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Supranational - 0.0% | | | | | | |
| Eurasian Development Bank, 7.375%, 2014 (n) | | $ | 103,000 | | $ | 109,180 |
| | |
| Telecommunications - Wireless - 3.3% | | | | | | |
| Alestra S.A. de R.L. de C.V., 11.75%, 2014 (n) | | $ | 169,000 | | $ | 190,125 |
| Cricket Communications, Inc., 7.75%, 2016 | | | 1,000,000 | | | 1,006,250 |
| Crown Castle International Corp., 9%, 2015 | | | 855,000 | | | 926,606 |
| Crown Castle International Corp., 7.75%, 2017 (n) | | | 665,000 | | | 716,538 |
| Crown Castle International Corp., 7.125%, 2019 | | | 2,400,000 | | | 2,382,000 |
| Digicel Group Ltd., 12%, 2014 (n) | | | 362,000 | | | 401,820 |
| Digicel Group Ltd., 8.25%, 2017 (n) | | | 1,450,000 | | | 1,402,875 |
| Net Servicos de Comunicacao S.A., 7.5%, 2020 (n) | | | 722,000 | | | 732,830 |
| Nextel Communications, Inc., 6.875%, 2013 | | | 1,530,000 | | | 1,426,725 |
| NII Holdings, Inc., 10%, 2016 (n) | | | 1,200,000 | | | 1,254,000 |
| SBA Communications Corp., 8.25%, 2019 (n) | | | 405,000 | | | 425,250 |
| Sprint Nextel Corp., 8.375%, 2017 | | | 1,785,000 | | | 1,740,375 |
| Sprint Nextel Corp., 8.75%, 2032 | | | 650,000 | | | 585,000 |
| Wind Acquisition Finance S.A., 12%, 2015 (n) | | | 3,930,000 | | | 4,234,575 |
| | | | | | |
| | | | | | $ | 17,424,969 |
| Telephone Services - 0.3% | | | | | | |
| Frontier Communications Corp., 8.125%, 2018 | | $ | 1,480,000 | | $ | 1,491,100 |
| | |
| Tobacco - 0.2% | | | | | | |
| Alliance One International, Inc., 10%, 2016 (n) | | $ | 1,175,000 | | $ | 1,245,500 |
| | |
| Transportation - 0.0% | | | | | | |
| Peru Enhanced Pass-Through Trust, 0%, 2018 (n) | | $ | 310,265 | | $ | 239,679 |
| | |
| Transportation - Services - 1.4% | | | | | | |
| Commercial Barge Line Co., 12.5%, 2017 | | $ | 1,940,000 | | $ | 2,022,450 |
| Eurocar Groupe S.A., FRN, 4.214%, 2013 (n) | | EUR | 1,560,000 | | | 1,892,573 |
| Hertz Corp., 8.875%, 2014 | | $ | 2,045,000 | | | 2,060,338 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 (n) | | | 1,345,000 | | | 1,392,075 |
| | | | | | |
| | | | | | $ | 7,367,436 |
| Utilities - Electric Power - 4.5% | | | | | | |
| AES Corp., 8%, 2017 | | $ | 2,950,000 | | $ | 2,972,125 |
| Calpine Corp., 8%, 2016 (n) | | | 1,260,000 | | | 1,285,200 |
| Colbun S.A., 6%, 2020 (z) | | | 403,000 | | | 402,720 |
| Dynegy Holdings, Inc., 7.5%, 2015 | | | 1,450,000 | | | 1,297,750 |
| Dynegy Holdings, Inc., 7.5%, 2015 (n) | | | 345,000 | | | 307,050 |
| Dynegy Holdings, Inc., 7.75%, 2019 | | | 115,000 | | | 92,000 |
24
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Bonds - continued | | | | | | |
| Utilities - Electric Power - continued | | | | | | |
| Edison Mission Energy, 7%, 2017 | | $ | 2,625,000 | | $ | 2,073,750 |
| Energy Future Holdings, 10%, 2020 (z) | | | 890,000 | | | 914,475 |
| Enersis S.A., 7.375%, 2014 | | | 709,000 | | | 791,275 |
| ISA Capital do Brasil S.A., 8.8%, 2017 | | | 909,000 | | | 977,175 |
| Mirant Americas Generation LLC, 8.5%, 2021 | | | 1,250,000 | | | 1,200,000 |
| Mirant North America LLC, 7.375%, 2013 | | | 665,000 | | | 661,675 |
| NGC Corp. Capital Trust, 8.316%, 2027 | | | 1,975,000 | | | 1,185,000 |
| NRG Energy, Inc., 7.375%, 2016 | | | 4,610,000 | | | 4,586,950 |
| Texas Competitive Electric Holdings LLC, 10.25%, 2015 | | | 6,575,000 | | | 5,144,938 |
| | | | | | |
| | | | | | $ | 23,892,083 |
| Total Bonds (Identified Cost, $503,057,506) | | | | | $ | 477,169,014 |
| | |
| Floating Rate Loans (g)(r) - 4.5% | | | | | | |
| Aerospace - 0.2% | | | | | | |
| Hawker Beechcraft Acquisition Co. LLC, Term Loan B, 10.5%, 2014 | | $ | 925,809 | | $ | 869,335 |
| | |
| Automotive - 1.3% | | | | | | |
| Accuride Corp., Term Loan B, 10%, 2012 | | $ | 243,284 | | $ | 243,023 |
| Federal Mogul Corp., Term Loan B, 2.16%, 2014 | | | 2,160,043 | | | 1,827,936 |
| Ford Motor Co., Term Loan B, 3.25%, 2013 | | | 5,257,002 | | | 4,910,603 |
| | | | | | |
| | | | | | $ | 6,981,562 |
| Broadcasting - 0.6% | | | | | | |
| Gray Television, Inc., Term Loan B, 3.75%, 2014 | | $ | 881,684 | | $ | 808,945 |
| Local TV Finance LLC, Term Loan B, 2.26%, 2013 | | | 117,855 | | | 102,534 |
| Young Broadcasting, Inc., Term Loan B, 4.75%, 2012 (d) | | | 2,135,540 | | | 1,676,399 |
| Young Broadcasting, Inc., Term Loan B-1, 4.75%, 2012 (d) | | | 788,102 | | | 618,660 |
| | | | | | |
| | | | | | $ | 3,206,538 |
| Building - 0.4% | | | | | | |
| Building Materials Corp., Term Loan B, 3%, 2014 | | $ | 241,797 | | $ | 235,349 |
| Roofing Supply Group, Inc., Term Loan B, 7.24%, 2013 | | | 1,831,183 | | | 1,733,521 |
| | | | | | |
| | | | | | $ | 1,968,870 |
| Chemicals - 0.6% | | | | | | |
| LyondellBasell, Dutch Tranche Revolving Credit Loan, 3.73%, 2014 | | $ | 49,171 | | $ | 35,557 |
| LyondellBasell, Dutch Tranche Term Loan A, 3.73%, 2014 | | | 111,302 | | | 80,486 |
| LyondellBasell, German Term Loan B-1, 3.98%, 2014 | | | 141,166 | | | 102,082 |
| LyondellBasell, German Term Loan B-2, 3.98%, 2014 | | | 141,166 | | | 102,082 |
| LyondellBasell, German Term Loan B-3, 3.98%, 2014 | | | 141,166 | | | 102,082 |
| LyondellBasell, Second Priority DIP Term Loan, 5.79%, 2014 (o) | | | 928,334 | | | 970,689 |
| LyondellBasell, Super Priority DIP Term Loan, 9.16%, 2010 (q) | | | 295,941 | | | 308,296 |
25
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Floating Rate Loans (g)(r) - continued | | | | | | |
| Chemicals - continued | | | | | | |
| LyondellBasell, Term Loan B-1, 7%, 2014 | | $ | 612,560 | | $ | 442,961 |
| LyondellBasell, Term Loan B-2, 7%, 2014 | | | 612,560 | | | 442,961 |
| LyondellBasell, Term Loan B-3, 7%, 2014 | | | 612,560 | | | 442,961 |
| LyondellBasell, U.S. Tranche Revolving Credit Loan, 3.73%, 2014 | | | 184,393 | | | 133,340 |
| LyondellBasell, U.S. Tranche Term Loan A, 3.76%, 2014 | | | 351,320 | | | 254,050 |
| | | | | | |
| | | | | | $ | 3,417,547 |
| Gaming & Lodging - 0.5% | | | | | | |
| Green Valley Ranch Gaming LLC, Second Lien Term Loan, 3.5%, 2014 | | $ | 5,131,694 | | $ | 752,650 |
| MGM Mirage, Term Loan B, 6%, 2011 (o) | | | 1,085,937 | | | 1,044,128 |
| Motorcity Casino, Term Loan B, 8.5%, 2012 | | | 860,247 | | | 847,702 |
| | | | | | |
| | | | | | $ | 2,644,480 |
| Printing & Publishing - 0.4% | | | | | | |
| Tribune Co., Term Loan B, 6.5%, 2014 (d) | | $ | 3,327,162 | | $ | 1,896,483 |
| | |
| Specialty Stores - 0.3% | | | | | | |
| Michaels Stores, Inc., Term Loan B, 2.56%, 2013 | | $ | 740,463 | | $ | 667,112 |
| Michaels Stores, Inc., Term Loan B-2, 4.81%, 2016 | | | 976,354 | | | 928,350 |
| | | | | | |
| | | | | | $ | 1,595,462 |
| Utilities - Electric Power - 0.2% | | | | | | |
| TXU Corp., Term Loan B-3, 3.73%, 2014 | | $ | 1,630,518 | | $ | 1,323,664 |
| Total Floating Rate Loans (Identified Cost, $26,818,558) | | | | | $ | 23,903,941 |
| | |
| Common Stocks - 1.6% | | | | | | |
| Automotive - 0.0% | | | | | | |
| Oxford Automotive, Inc. (a) | | | 29 | | $ | 0 |
| | |
| Broadcasting - 0.0% | | | | | | |
| Supermedia, Inc. (a) | | | 2,018 | | $ | 73,274 |
| | |
| Cable TV - 0.4% | | | | | | |
| Cablevision Systems Corp. (a) | | | 60,000 | | $ | 1,254,000 |
| Comcast Corp., “A” | | | 43,600 | | | 690,188 |
| Time Warner Cable, Inc. | | | 11,066 | | | 482,367 |
| | | | | | |
| | | | | | $ | 2,426,555 |
| Construction - 0.3% | | | | | | |
| Nortek, Inc. (a) | | | 47,229 | | $ | 1,841,940 |
26
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| Common Stocks - continued | | | | | |
| Containers - 0.1% | | | | | |
| Owens-Illinois, Inc. (a) | | 12,400 | | $ | 337,528 |
| | |
| Energy - Independent - 0.0% | | | | | |
| SandRidge Energy, Inc. (a) | | 490 | | $ | 4,145 |
| | |
| Energy - Integrated - 0.2% | | | | | |
| Chevron Corp. | | 14,100 | | $ | 1,016,892 |
| | |
| Entertainment - 0.1% | | | | | |
| Madison Square Garden Inc., “A” (a) | | 15,000 | | $ | 294,000 |
| | |
| Gaming & Lodging - 0.1% | | | | | |
| Ameristar Casinos, Inc. | | 15,300 | | $ | 226,593 |
| Pinnacle Entertainment, Inc. (a) | | 63,100 | | | 514,896 |
| | | | | |
| | | | | $ | 741,489 |
| Printing & Publishing - 0.2% | | | | | |
| American Media, Inc. (a) | | 45,771 | | $ | 131,362 |
| Dex One Corp. (a) | | 17,085 | | | 573,382 |
| World Color Press, Inc. (a) | | 14,241 | | | 163,910 |
| | | | | |
| | | | | $ | 868,654 |
| Special Products & Services - 0.0% | | | | | |
| Mark IV Industries LLC, Common Units, “A” (a) | | 2,422 | | $ | 36,330 |
| | |
| Telephone Services - 0.2% | | | | | |
| Windstream Corp. | | 88,700 | | $ | 914,497 |
| Total Common Stocks (Identified Cost, $15,909,097) | | | | $ | 8,555,304 |
| | | | | |
| | |
| Preferred Stocks - 0.4% | | | | | |
| Broadcasting - 0.1% | | | | | |
| Spanish Broadcasting Systems, Inc., “B”, 10.75% | | 2,028 | | $ | 304,200 |
| | |
| Financial Institutions - 0.1% | | | | | |
| GMAC, Inc., 7% (z) | | 1,119 | | $ | 799,735 |
| | |
| Major Banks - 0.2% | | | | | |
| Bank of America Corp., 8.63% | | 44,125 | | $ | 1,082,828 |
| Total Preferred Stocks (Identified Cost, $3,907,416) | | | | $ | 2,186,763 |
27
Portfolio of Investments – continued
| | | | | | | | | | |
| Issuer | | Strike Price | | First Exercise | | Shares/Par | | Value ($) |
| | | | | | | | | | |
| Warrants - 0.0% | | | | | | | | | | |
| Printing & Publishing - 0.0% | | | | | | | | | | |
World Color Press, Inc.
(1 share for 1 warrant) (a) | | $ | 13.00 | | 8/26/09 | | 8,070 | | $ | 44,385 |
World Color Press, Inc.
(1 share for 1 warrant) (a) | | | 16.30 | | 8/26/09 | | 8,070 | | | 30,668 |
| Total Warrants (Identified Cost, $382,752) | | | | $ | 75,053 |
| | |
| Money Market Funds (v) - 1.4% | | | | | |
| MFS Institutional Money Market Portfolio, 0.14%, at Cost and Net Asset Value | | | | 7,088,209 | | $ | 7,088,209 |
| Total Investments (Identified Cost, $557,163,538) | | | | $ | 518,978,284 |
| | | |
| Other Assets, Less Liabilities - 2.4% | | | | | | | 12,905,078 |
| Net Assets - 100.0% | | | | | | | | | $ | 531,883,362 |
| (a) | Non-income producing security. |
| (d) | Non-income producing security – in default. |
| (e) | The rate shown represents a current effective yield, not a coupon rate. |
| (g) | The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated. |
| (i) | Interest only security for which the fund receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. |
| (n) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $111,557,967, representing 21.0% of net assets. |
| (o) | All or a portion of this position has not settled. Upon settlement date, interest rates for unsettled amounts will be determined. The rate shown represents the weighted average coupon rate for settled amounts. |
| (p) | Payment-in-kind security. |
| (q) | All or a portion of this position represents an unfunded loan commitment. The rate shown represents a weighted average coupon rate on the full position, including the unfunded loan commitment which has no current coupon rate. |
| (r) | Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. |
| (v) | Underlying fund that is available only to investment companies managed by MFS. The rate quoted is the annualized seven-day yield of the fund at period end. |
28
Portfolio of Investments – continued
| (z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | Current
Market
Value |
| American Media Operations, Inc., 9%, 2013 | | 1/30/09-11/02/09 | | $171,483 | | $157,010 |
| American Media Operations, Inc., 14%, 2013 | | 1/30/09-11/02/09 | | 1,594,057 | | 1,644,277 |
| Anthracite Ltd., CDO, 6%, 2037 | | 5/14/02 | | 1,299,420 | | 75,000 |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.549%, 2038 | | 12/20/05 | | 1,209,166 | | 48,367 |
| ARCap REIT, Inc., CDO, “H”, 6.08%, 2045 | | 9/21/04 | | 898,428 | | 38,462 |
| BFF International Ltd., 7.25%, 2020 | | 1/21/10 | | 321,174 | | 320,355 |
| Banc of America Commercial Mortgage, Inc., FRN, 6.21%, 2018 | | 6/19/08 | | 2,804,146 | | 986,326 |
| Banco Votorantim, 7.375%, 2020 | | 1/12/10 | | 389,000 | | 394,349 |
| Banco do Brasil (Cayman Branch), 6%, 2020 | | 1/15/10 | | 237,691 | | 237,586 |
| Bombardier, Inc., 7.45%, 2034 | | 1/25/10 | | 292,168 | | 289,012 |
| Bonten Media Acquisition Co., 9%, 2015 | | 5/22/07-12/01/09 | | 2,820,245 | | 1,022,679 |
| Colbun S.A., 6%, 2020 | | 1/14/10 | | 398,870 | | 402,720 |
| Credit Acceptance Corp., 9.125%, 2017 | | 1/25/10 | | 784,835 | | 793,931 |
| Energy Future Holdings, 10%, 2020 | | 1/07/10 | | 903,330 | | 914,475 |
| Falcon Franchise Loan LLC, FRN, 3.67%, 2025 | | 1/29/03 | | 146,504 | | 96,907 |
| GMAC, Inc., 7% (Preferred Stock) | | 12/29/08 | | 861,630 | | 799,735 |
| Grupo Posadas S.A. de C.V., 9.25%, 2015 | | 1/08/10 | | 153,497 | | 158,875 |
| Hexion Finance Escrow LLC, 8.875%, 2018 | | 1/14/10-1/26/10 | | 1,035,902 | | 1,016,756 |
| LBG Capital No. 1 PLC, 7.875%, 2020 | | 1/08/10-1/12/10 | | 1,323,405 | | 1,293,600 |
| LBI Media, Inc., 8.5%, 2017 | | 7/18/07 | | 1,400,729 | | 1,207,000 |
| Libbey Glass, Inc., 10%, 2015 | | 1/28/10 | | 225,589 | | 232,875 |
| Listrindo Capital B.V., 9.25%, 2015 | | 1/22/10 | | 141,723 | | 146,934 |
| Local TV Finance LLC, 9.25%, 2015 | | 11/09/07-12/15/09 | | 3,194,372 | | 1,735,632 |
| McJunkin Red Man Holding Corp., 9.5%, 2016 | | 1/21/10-1/22/10 | | 695,246 | | 683,288 |
| Morgan Stanley Capital I, Inc., 1.269%, 2039 | | 7/20/04 | | 117,407 | | 68,382 |
| Petroleos Mexicanos, 6%, 2020 | | 1/28/10 | | 697,443 | | 697,443 |
| Ply Gem Industries, Inc., 13.125%, 2014 | | 7/22/08-1/14/09 | | 1,034,815 | | 1,065,000 |
| Preferred Term Securities XII Ltd., CDO, 0%, 2033 | | 1/07/05 | | 1,376,758 | | 355 |
| Preferred Term Securities XVI Ltd., CDO, 0%, 2035 | | 12/08/04-1/25/05 | | 2,573,173 | | 325 |
| Preferred Term Securities XVII Ltd., CDO, 0%, 2035 | | 3/09/05 | | 1,419,521 | | 181 |
29
Portfolio of Investments – continued
| | | | | | |
| Restricted Securities - continued | | Acquisition
Date | | Cost | | Current
Market
Value |
| Qwest Communications International, Inc., 7.125%, 2018 | | 1/07/10-1/08/10 | | $1,301,151 | | $1,287,000 |
| Republic of Indonesia, 5.875%, 2020 | | 1/12/10 | | 1,038,007 | | 1,062,410 |
| Republic of Vietnam, 6.75%, 2020 | | 1/25/10 | | 187,296 | | 190,713 |
| TNK-BP Finance S.A., 6.25%, 2015 | | 1/27/10 | | 121,963 | | 122,419 |
| TNK-BP Finance S.A., 7.25%, 2020 | | 1/27/10 | | 148,377 | | 149,641 |
| USI Holdings Corp., 9.75%, 2015 | | 4/26/07-11/28/07 | | 3,922,120 | | 3,723,913 |
| Urbi Desarrollos Urbanos S.A. de C.V., 9.5%, 2020 | | 1/13/10 | | 260,833 | | 267,650 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 | | 12/16/09-1/05/10 | | 1,098,166 | | 1,107,000 |
| Total Restricted Securities | | | | | | $24,438,583 |
| % of Net Assets | | | | | | 4.6% |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt Obligation |
| CLO | | Collateralized Loan Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
Derivative Contracts at 1/31/10
Forward Foreign Currency Exchange Contracts at 1/31/10
| | | | | | | | | | | | | | |
| Type | | Currency | | Counterparty | | Contracts
to
Deliver/
Receive | | Settlement
Date Range | | In
Exchange
For | | Contracts
at Value | | Net
Unrealized
Appreciation
(Depreciation) |
| Asset Derivatives | | | | | | | | �� |
| SELL | | EUR | | Barclays Bank PLC | | 24,000 | | 3/15/10 | | $35,136 | | $33,273 | | $1,863 |
| SELL | | EUR | | HSBC Bank | | 1,220,399 | | 3/15/10 | | 1,740,752 | | 1,691,917 | | 48,835 |
| SELL | | EUR | | UBS AG | | 3,876,687 | | 3/15/10 | | 5,655,155 | | 5,374,497 | | 280,658 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $331,356 |
| | | | | | | | | | | | | | |
At January 31, 2010, the fund had sufficient cash and/or securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
30
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 1/31/10
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | |
| Assets | | | |
Investments- | | | |
Non-affiliated issuers, at value (identified cost, $550,075,329) | | $511,890,075 | |
Underlying funds, at cost and value | | 7,088,209 | |
Total investments, at value (identified cost, $557,163,538) | | $518,978,284 | |
Cash | | 1,139,842 | |
Foreign currency, at value (identified cost, $33,989) | | 28,197 | |
Receivables for | | | |
Forward foreign currency exchange contracts | | 331,356 | |
Investments sold | | 6,418,599 | |
Fund shares sold | | 1,523,641 | |
Interest | | 9,925,816 | |
Receivable from investment adviser | | 91,899 | |
Other assets | | 7,294 | |
Total assets | | $538,444,928 | |
| Liabilities | | | |
Payables for | | | |
Distributions | | $1,147,713 | |
Investments purchased | | 3,886,184 | |
Fund shares reacquired | | 1,279,657 | |
Payable to affiliates | | | |
Investment adviser | | 37,862 | |
Shareholder servicing costs | | 130,986 | |
Distribution and service fees | | 25,626 | |
Administrative services fee | | 983 | |
Payable for independent Trustees’ compensation | | 5,229 | |
Accrued expenses and other liabilities | | 47,326 | |
Total liabilities | | $6,561,566 | |
Net assets | | $531,883,362 | |
| Net assets consist of | | | |
Paid-in capital | | $676,016,460 | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | (37,861,776 | ) |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (100,883,544 | ) |
Accumulated distributions in excess of net investment income | | (5,387,778 | ) |
Net assets | | $531,883,362 | |
Shares of beneficial interest outstanding | | 88,985,856 | |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share (a) |
Class A | | $369,072,917 | | 61,750,942 | | $5.98 |
Class B | | 51,505,523 | | 8,594,467 | | 5.99 |
Class C | | 89,929,911 | | 15,071,917 | | 5.97 |
Class I | | 20,317,111 | | 3,391,609 | | 5.99 |
Class W | | 363,793 | | 60,892 | | 5.97 |
Class R1 | | 107,002 | | 17,858 | | 5.99 |
Class R2 | | 113,798 | | 18,988 | | 5.99 |
Class R3 | | 351,741 | | 58,849 | | 5.98 |
Class R4 | | 121,566 | | 20,334 | | 5.98 |
| (a) | Maximum offering price per share was equal to the net asset value per share for all share classes, except for Class A, for which the maximum offering price per share was $6.28. On sales of $50,000 or more, the maximum offering price of Class A shares is reduced. A contingent deferred sales charge may be imposed on redemptions of Class A, Class B, and Class C shares. Redemption price per share was equal to the net asset value per share for Classes I, W, R1, R2, R3, and R4. |
See Notes to Financial Statements
31
Financial Statements
STATEMENT OF OPERATIONS
Year ended 1/31/10
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | |
| Net investment income | | | |
Income | | | |
Interest | | $46,161,160 | |
Dividends | | 641,640 | |
Dividends from underlying funds | | 22,775 | |
Foreign taxes withheld | | (16,109 | ) |
Total investment income | | $46,809,466 | |
Expenses | | | |
Management fee | | $2,958,535 | |
Distribution and service fees | | 2,010,284 | |
Shareholder servicing costs | | 639,675 | |
Administrative services fee | | 86,618 | |
Independent Trustees’ compensation | | 17,652 | |
Custodian fee | | 88,242 | |
Shareholder communications | | 66,761 | |
Auditing fees | | 69,519 | |
Legal fees | | 21,224 | |
Miscellaneous | | 164,411 | |
Total expenses | | $6,122,921 | |
Fees paid indirectly | | (13,231 | ) |
Reduction of expenses by investment adviser | | (1,022,008 | ) |
Net expenses | | $5,087,682 | |
Net investment income | | $41,721,784 | |
| Realized and unrealized gain (loss) on investments and foreign currency transactions | | | |
Realized gain (loss) (identified cost basis) | | | |
Investment transactions | | $(21,499,651 | ) |
Swap transactions | | (6,287,180 | ) |
Foreign currency transactions | | (44,324 | ) |
Net realized gain (loss) on investments
and foreign currency transactions | | $(27,831,155 | ) |
Change in unrealized appreciation (depreciation) | | | |
Investments | | $161,439,010 | |
Swap transactions | | 5,277,344 | |
Translation of assets and liabilities in foreign currencies | | (198,044 | ) |
Net unrealized gain (loss) on investments
and foreign currency translation | | $166,518,310 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | $138,687,155 | |
Change in net assets from operations | | $180,408,939 | |
See Notes to Financial Statements
32
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | |
| | | Years ended 1/31 | |
| | | 2010 | | | 2009 | |
| Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $41,721,784 | | | $51,905,758 | |
Net realized gain (loss) on investments and
foreign currency transactions | | (27,831,155 | ) | | (61,404,311 | ) |
Net unrealized gain (loss) on investments and
foreign currency translation | | 166,518,310 | | | (160,957,654 | ) |
Change in net assets from operations | | $180,408,939 | | | $(170,456,207 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(44,287,124 | ) | | $(53,290,582 | ) |
From net realized gain on investments | | — | | | (448,408 | ) |
From tax return of capital | | (507,895 | ) | | — | |
Total distributions declared to shareholders | | $(44,795,019 | ) | | $(53,738,990 | ) |
Change in net assets from fund share transactions | | $9,088,682 | | | $(65,923,727 | ) |
Total change in net assets | | $144,702,602 | | | $(290,118,924 | ) |
| Net assets | | | | | | |
At beginning of period | | 387,180,760 | | | 677,299,684 | |
At end of period (including accumulated distributions in excess of net investment income of $5,387,778 and undistributed net investment income of $838,433, respectively) | | $531,883,362 | | | $387,180,760 | |
See Notes to Financial Statements
33
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years (or life of a particular share class, if shorter). Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | |
| Class A | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $4.42 | | | $6.90 | | | $7.66 | | | $7.40 | | | $7.63 | |
| Income (loss) from investment operations | | | | | | | | | | | | | |
Net investment income (d) | | $0.49 | | | $0.57 | | | $0.58 | | | $0.56 | | | $0.56 | |
Net realized and unrealized gain (loss)
on investments and foreign currency | | 1.59 | | | (2.46 | ) | | (0.70 | ) | | 0.28 | | | (0.16 | ) |
Total from investment operations | | $2.08 | | | $(1.89 | ) | | $(0.12 | ) | | $0.84 | | | $0.40 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | |
From net investment income | | $(0.51 | ) | | $(0.59 | ) | | $(0.59 | ) | | $(0.58 | ) | | $(0.59 | ) |
From net realized gain on investments | | — | | | (0.00 | )(w) | | (0.05 | ) | | — | | | (0.04 | ) |
From tax return of capital | | (0.01 | ) | | — | | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.52 | ) | | $(0.59 | ) | | $(0.64 | ) | | $(0.58 | ) | | $(0.63 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $5.98 | | | $4.42 | | | $6.90 | | | $7.66 | | | $7.40 | |
Total return (%) (r)(s)(t) | | 49.74 | | | (28.79 | ) | | (1.88 | ) | | 11.89 | | | 5.55 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.16 | | | 1.24 | | | 1.19 | | | 1.27 | | | 1.29 | |
Expenses after expense reductions (f) | | 0.93 | | | 0.85 | | | 0.85 | | | 0.85 | | | 0.85 | |
Net investment income | | 9.36 | | | 9.54 | | | 7.70 | | | 7.53 | | | 7.51 | |
Portfolio turnover | | 61 | | | 72 | | | 79 | | | 85 | | | 66 | |
Net assets at end of period (000 omitted) | | $369,073 | | | $276,917 | | | $458,651 | | | $488,673 | | | $338,568 | |
See Notes to Financial Statements
34
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class B | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $4.43 | | | $6.92 | | | $7.68 | | | $7.42 | | | $7.65 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.45 | | | $0.53 | | | $0.53 | | | $0.52 | | | $0.51 | |
Net realized and unrealized gain (loss)
on investments and foreign currency | | 1.59 | | | (2.47 | ) | | (0.70 | ) | | 0.28 | | | (0.16 | ) |
Total from investment operations | | $2.04 | | | $(1.94 | ) | | $(0.17 | ) | | $0.80 | | | $0.35 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.47 | ) | | $(0.55 | ) | | $(0.54 | ) | | $(0.54 | ) | | $(0.54 | ) |
From net realized gain on investments | | — | | | (0.00 | )(w) | | (0.05 | ) | | — | | | (0.04 | ) |
From tax return of capital | | (0.01 | ) | | — | | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.48 | ) | | $(0.55 | ) | | $(0.59 | ) | | $(0.54 | ) | | $(0.58 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $5.99 | | | $4.43 | | | $6.92 | | | $7.68 | | | $7.42 | |
Total return (%) (r)(s)(t) | | 48.59 | | | (29.31 | ) | | (2.49 | ) | | 11.17 | | | 4.87 | |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.90 | | | 1.89 | | | 1.84 | | | 1.92 | | | 1.94 | |
Expenses after expense reductions (f) | | 1.68 | | | 1.50 | | | 1.50 | | | 1.50 | | | 1.50 | |
Net investment income | | 8.64 | | | 8.82 | | | 7.03 | | | 6.91 | | | 6.88 | |
Portfolio turnover | | 61 | | | 72 | | | 79 | | | 85 | | | 66 | |
Net assets at end of period (000 omitted) | | $51,506 | | | $42,757 | | | $90,330 | | | $124,393 | | | $125,667 | |
See Notes to Financial Statements
35
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class C | | Years Ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $4.41 | | | $6.89 | | | $7.64 | | | $7.38 | | | $7.61 | |
| Income (loss) from investment operations | | | | | | | | | | | | | |
Net investment income (d) | | $0.45 | | | $0.53 | | | $0.53 | | | $0.51 | | | $0.51 | |
Net realized and unrealized gain (loss)
on investments and foreign currency | | 1.59 | | | (2.46 | ) | | (0.69 | ) | | 0.28 | | | (0.16 | ) |
Total from investment operations | | $2.04 | | | $(1.93 | ) | | $(0.16 | ) | | $0.79 | | | $0.35 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | |
From net investment income | | $(0.47 | ) | | $(0.55 | ) | | $(0.54 | ) | | $(0.53 | ) | | $(0.54 | ) |
From net realized gain on investments | | — | | | (0.00 | )(w) | | (0.05 | ) | | — | | | (0.04 | ) |
From tax return of capital | | (0.01 | ) | | — | | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.48 | ) | | $(0.55 | ) | | $(0.59 | ) | | $(0.53 | ) | | $(0.58 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $5.97 | | | $4.41 | | | $6.89 | | | $7.64 | | | $7.38 | |
Total return (%) (r)(s)(t) | | 48.77 | | | (29.32 | ) | | (2.40 | ) | | 11.19 | | | 4.86 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.90 | | | 1.90 | | | 1.84 | | | 1.92 | | | 1.94 | |
Expenses after expense reductions (f) | | 1.68 | | | 1.50 | | | 1.50 | | | 1.50 | | | 1.50 | |
Net investment income | | 8.52 | | | 8.94 | | | 7.05 | | | 6.90 | | | 6.88 | |
Portfolio turnover | | 61 | | | 72 | | | 79 | | | 85 | | | 66 | |
Net assets at end of period (000 omitted) | | $89,930 | | | $55,001 | | | $92,947 | | | $103,873 | | | $92,613 | |
See Notes to Financial Statements
36
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class I | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $4.43 | | | $6.92 | | | $7.68 | | | $7.42 | | | $7.65 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.50 | | | $0.60 | | | $0.60 | | | $0.59 | | | $0.59 | |
Net realized and unrealized gain (loss)
on investments and foreign currency | | 1.60 | | | (2.48 | ) | | (0.69 | ) | | 0.28 | | | (0.16 | ) |
Total from investment operations | | $2.10 | | | $(1.88 | ) | | $(0.09 | ) | | $0.87 | | | $0.43 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.53 | ) | | $(0.61 | ) | | $(0.62 | ) | | $(0.61 | ) | | $(0.62 | ) |
From net realized gain on investments | | — | | | (0.00 | )(w) | | (0.05 | ) | | — | | | (0.04 | ) |
From tax return of capital | | (0.01 | ) | | — | | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.54 | ) | | $(0.61 | ) | | $(0.67 | ) | | $(0.61 | ) | | $(0.66 | ) |
Redemption fees added to paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $5.99 | | | $4.43 | | | $6.92 | | | $7.68 | | | $7.42 | |
Total return (%) (r)(s) | | 50.02 | | | (28.57 | ) | | (1.51 | ) | | 12.27 | | | 5.92 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.90 | | | 0.89 | | | 0.84 | | | 0.92 | | | 0.94 | |
Expenses after expense reductions (f) | | 0.68 | | | 0.50 | | | 0.50 | | | 0.50 | | | 0.50 | |
Net investment income | | 9.45 | | | 9.81 | | | 8.01 | | | 7.89 | | | 7.86 | |
Portfolio turnover | | 61 | | | 72 | | | 79 | | | 85 | | | 66 | |
Net assets at end of period (000 omitted) | | $20,317 | | | $11,581 | | | $35,372 | | | $56,243 | | | $46,871 | |
See Notes to Financial Statements
37
Financial Highlights – continued
| | | | | | |
| Class W | | Years ended 1/31 | |
| | | 2010 | | | 2009 (i) | |
| Net asset value, beginning of period | | $4.42 | | | $6.92 | |
| Income (loss) from investment operations | | | | | | |
Net investment income (d) | | $0.48 | | | $0.38 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.60 | | | (2.47 | ) |
| Total from investment operations | | $2.08 | | | $(2.09 | ) |
| Less distributions declared to shareholders | | | | | | |
From net investment income | | $(0.52 | ) | | $(0.41 | ) |
From tax return of capital | | (0.01 | ) | | — | |
Total distributions declared to shareholders | | $(0.53 | ) | | $(0.41 | ) |
Net asset value, end of period | | $5.97 | | | $4.42 | |
| Total return (%) (r)(s) | | 49.72 | | | (30.82 | )(n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | |
| Expenses before expense reductions (f) | | 0.98 | | | 1.02 | (a) |
| Expenses after expense reductions (f) | | 0.78 | | | 0.59 | (a) |
| Net investment income | | 9.02 | | | 10.81 | (a) |
| Portfolio turnover | | 61 | | | 72 | |
Net assets at end of period (000 omitted) | | $364 | | | $129 | |
| | | | | | |
| Class R1 | | Years ended 1/31 | |
| | | 2010 | | | 2009 (i) | |
| Net asset value, beginning of period | | $4.43 | | | $6.94 | |
| Income (loss) from investment operations | | | | | | |
Net investment income (d) | | $0.45 | | | $0.35 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.59 | | | (2.48 | ) |
| Total from investment operations | | $2.04 | | | $(2.13 | ) |
| Less distributions declared to shareholders | | | | | | |
From net investment income | | $(0.47 | ) | | $(0.38 | ) |
From tax return of capital | | (0.01 | ) | | — | |
Total distributions declared to shareholders | | $(0.48 | ) | | $(0.38 | ) |
Net asset value, end of period | | $5.99 | | | $4.43 | |
| Total return (%) (r)(s) | | 48.59 | | | (31.30 | )(n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | |
| Expenses before expense reductions (f) | | 1.90 | | | 1.92 | (a) |
| Expenses after expense reductions (f) | | 1.68 | | | 1.50 | (a) |
| Net investment income | | 8.53 | | | 9.60 | (a) |
| Portfolio turnover | | 61 | | | 72 | |
Net assets at end of period (000 omitted) | | $107 | | | $71 | |
See Notes to Financial Statements
38
Financial Highlights – continued
| | | | | | |
| Class R2 | | Years ended 1/31 | |
| | | 2010 | | | 2009 (i) | |
Net asset value, beginning of period | | $4.43 | | | $6.94 | |
| Income (loss) from investment operations | | | | | | |
Net investment income (d) | | $0.47 | | | $0.37 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.60 | | | (2.48 | ) |
Total from investment operations | | $2.07 | | | $(2.11 | ) |
| Less distributions declared to shareholders | | | | | | |
From net investment income | | $(0.50 | ) | | $(0.40 | ) |
From tax return of capital | | (0.01 | ) | | — | |
Total distributions declared to shareholders | | $(0.51 | ) | | $(0.40 | ) |
Net asset value, end of period | | $5.99 | | | $4.43 | |
Total return (%) (r)(s) | | 49.30 | | | (31.05 | )(n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | |
Expenses before expense reductions (f) | | 1.40 | | | 1.42 | (a) |
Expenses after expense reductions (f) | | 1.18 | | | 1.00 | (a) |
Net investment income | | 9.03 | | | 10.11 | (a) |
Portfolio turnover | | 61 | | | 72 | |
Net assets at end of period (000 omitted) | | $114 | | | $69 | |
| | | | | | |
| Class R3 | | Years ended 1/31 | |
| | | 2010 | | | 2009 (i) | |
Net asset value, beginning of period | | $4.42 | | | $6.92 | |
| Income (loss) from investment operations | | | | | | |
Net investment income (d) | | $0.49 | | | $0.34 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.59 | | | (2.43 | ) |
Total from investment operations | | $2.08 | | | $(2.09 | ) |
| Less distributions declared to shareholders | | | | | | |
From net investment income | | $(0.51 | ) | | $(0.41 | ) |
From tax return of capital | | (0.01 | ) | | — | |
Total distributions declared to shareholders | | $(0.52 | ) | | $(0.41 | ) |
Net asset value, end of period | | $5.98 | | | $4.42 | |
Total return (%) (r)(s) | | 49.75 | | | (30.90 | )(n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | |
Expenses before expense reductions (f) | | 1.17 | | | 1.17 | (a) |
Expenses after expense reductions (f) | | 0.92 | | | 0.74 | (a) |
Net investment income | | 9.91 | | | 10.25 | (a) |
Portfolio turnover | | 61 | | | 72 | |
Net assets at end of period (000 omitted) | | $352 | | | $587 | |
See Notes to Financial Statements
39
Financial Highlights – continued
| | | | | | |
| Class R4 | | Years ended 1/31 | |
| | | 2010 | | | 2009 (i) | |
| Net asset value, beginning of period | | $4.42 | | | $6.92 | |
| Income (loss) from investment operations | | | | | | |
Net investment income (d) | | $0.50 | | | $0.39 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.59 | | | (2.47 | ) |
| Total from investment operations | | $2.09 | | | $(2.08 | ) |
| Less distributions declared to shareholders | | | | | | |
From net investment income | | $(0.52 | ) | | $(0.42 | ) |
From tax return of capital | | (0.01 | ) | | — | |
Total distributions declared to shareholders | | $(0.53 | ) | | $(0.42 | ) |
| Net asset value, end of period | | $5.98 | | | $4.42 | |
| Total return (%) (r)(s) | | 50.11 | | | (30.77 | )(n) |
| Ratios (%) (to average net assets) and Supplemental data: | | | | | | |
| Expenses before expense reductions (f) | | 0.90 | | | 0.92 | (a) |
| Expenses after expense reductions (f) | | 0.68 | | | 0.50 | (a) |
| Net investment income | | 9.49 | | | 10.64 | (a) |
| Portfolio turnover | | 61 | | | 72 | |
Net assets at end of period (000 omitted) | | $122 | | | $69 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (i) | For the period from the class’ inception, June 2, 2008 (Classes W, R1, R2, R3, and R4) through the stated period end. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (t) | Total returns do not include any applicable sales charges. |
| (w) | Per share amount was less than $0.01. |
See Notes to Financial Statements
40
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS High Yield Opportunities Fund (the fund) is a series of MFS Series Trust III (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund may invest up to 100% of its portfolio in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund can invest in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country’s legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or
41
Notes to Financial Statements – continued
exchange on which such securities are primarily traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. Swaps are generally valued at valuations provided by a third-party pricing service. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an
42
Notes to Financial Statements – continued
investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the fund’s assets or liabilities carried at market value. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures, forwards, swap contracts, and written options. The following is a summary of the levels used as of January 31, 2010 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | |
United States | | $6,891,208 | | $3,555,588 | | $131,362 | | $10,578,158 |
Canada | | 238,962 | | — | | — | | 238,962 |
| Non-U.S. Sovereign Debt | | — | | 44,468,238 | | — | | 44,468,238 |
| Corporate Bonds | | — | | 345,186,617 | | — | | 345,186,617 |
| Residential Mortgage-Backed Securities | | — | | 48,367 | | — | | 48,367 |
| Commercial Mortgage-Backed Securities | | — | | 11,335,536 | | — | | 11,335,536 |
| Asset-Backed Securities (including CDOs) | | — | | 734,336 | | — | | 734,336 |
| Foreign Bonds | | — | | 75,395,920 | | — | | 75,395,920 |
| Floating Rate Loans | | — | | 23,903,941 | | — | | 23,903,941 |
| Mutual Funds | | 7,088,209 | | — | | — | | 7,088,209 |
| Total Investments | | $14,218,379 | | $504,628,543 | | $131,362 | | $518,978,284 |
| | | | |
| Other Financial Instruments | | | | | | | | |
| Forward Currency Contracts | | $— | | $331,356 | | $— | | $331,356 |
43
Notes to Financial Statements – continued
For further information regarding security characteristics, see the Portfolio of Investments.
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value. The table presents the activity of Level 3 securities held at the beginning and the end of the period.
| | | |
| | | Equity
Securities | |
| Balance as of 1/31/09 | | $217,607 | |
Accrued discounts/premiums | | — | |
Realized gain (loss) | | — | |
Change in unrealized appreciation (depreciation) | | 217,955 | |
Net purchases (sales) | | — | |
Transfers in and/or out of Level 3 | | (304,200 | ) |
| Balance as of 1/31/10 | | $131,362 | |
The net change in unrealized appreciation (depreciation) from investments still held as Level 3 at January 31, 2010 is $33,412.
In January 2010, Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (the “Update”) was issued, and is effective for interim and annual reporting periods beginning after December 15, 2009. This Update provides for expanded disclosures about fair value measurements. Management is evaluating the application of the Update to the fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Update in the fund’s financial statements.
Foreign Currency Translation – Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions or on the reporting date for foreign denominated receivables and payables. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on receivables, payables, income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
Derivatives – The fund may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments. Derivatives may be used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and
44
Notes to Financial Statements – continued
losses from derivative instruments may be substantially greater than the derivative’s original cost.
In this reporting period the fund adopted the disclosure provisions of FASB Accounting Standard Codification 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires enhanced disclosures about the fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the fund’s results of operations and financial position. Tabular disclosure regarding derivative fair value and gain/loss by contract type (e.g., interest rate contracts, foreign exchange contracts, credit contracts, etc.) is required and derivatives accounted for as hedging instruments under ASC 815 must be disclosed separately from those that do not qualify for hedge accounting. Even though the fund may use derivatives in an attempt to achieve an economic hedge, the fund’s derivatives are not accounted for as hedging instruments under ASC 815 because investment companies account for their derivatives at fair value and record any changes in fair value in current period earnings.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract Tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at January 31, 2010, which are not accounted for as hedging instruments under ASC 815:
| | | | |
| | | | | Fair Value |
| Risk | | Derivative | | Asset Derivatives |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts | | $331,356 |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | | | | | |
| | | Swap
Transactions | | | Foreign
Currency
Transactions | |
| Foreign Exchange Contracts | | $— | | | $(64,632 | ) |
| Credit Contracts | | (6,287,180 | ) | | — | |
| Total | | $(6,287,180 | ) | | $(64,632 | ) |
45
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | | | | |
| | | Swap
Transactions | | Translation
of Assets
and
Liabilities in
Foreign
Currencies | |
| Foreign Exchange Contracts | | $— | | $(195,856 | ) |
| Credit Contracts | | 5,277,344 | | — | |
| Total | | $5,277,344 | | $(195,856 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported balance sheet assets and liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forwards, swaps and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose is noted in the Portfolio of Investments.
46
Notes to Financial Statements – continued
Forward Foreign Currency Exchange Contracts – The fund may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.
Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency transactions.
Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. The fund’s maximum risk due to counterparty credit risk is the notional amount of the contract. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
Swap Agreements – The fund may enter into swap agreements. A swap is generally an exchange of cash payments, at specified intervals or upon the occurrence of specified events, between the fund and a counterparty. The net cash payments exchanged are recorded as a realized gain or loss on swap transactions in the Statement of Operations. The value of the swap, which is adjusted daily and includes any related interest accruals to be paid or received by the fund, is recorded on the Statement of Assets and Liabilities. The daily change in value, including any related interest accruals to be paid or received, is recorded as unrealized appreciation or depreciation on swap transactions in the Statement of Operations. Amounts paid or received at the inception of the swap are reflected as premiums paid or received on the Statement of Assets and Liabilities and are amortized using the effective interest method over the term of the agreement. A liquidation payment received or made upon early termination is recorded as a realized gain or loss on swap transactions in the Statement of Operations.
47
Notes to Financial Statements – continued
Risks related to swap agreements include the possible lack of a liquid market, unfavorable market and interest rate movements of the underlying instrument and the failure of the counterparty to perform under the terms of the agreements. To address counterparty risk, swap transactions are limited to only highly-rated counterparties. The risk is further mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
The fund may enter into credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its credit risk exposure to defaults of corporate and sovereign issuers or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. In a credit default swap, the protection buyer can make an upfront payment and will make a stream of payments based on a fixed percentage applied to the contract notional amount to the protection seller in exchange for the right to receive a specified return upon the occurrence of a defined credit event on the reference obligation (which may be either a single security or a basket of securities issued by corporate or sovereign issuers) and, with respect to the rare cases where physical settlement applies, the delivery by the buyer to the seller of a defined deliverable obligation. Although contract-specific, credit events generally consist of a combination of the following: bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium, each as defined in the 2003 ISDA Credit Derivatives Definitions as amended by the relevant contract. Restructuring is generally not applicable when the reference obligation is issued by a North American corporation and obligation acceleration, obligation default, or repudiation/moratorium are generally only applicable when the reference obligation is issued by a sovereign entity or an entity in an emerging country. Upon determination of the final price for the deliverable obligation (or upon delivery of the deliverable obligation in the case of physical settlement), the difference between the value of the deliverable obligation and the swap’s notional amount is recorded as realized gain or loss on swap transactions in the Statement of Operations.
The fund’s maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk is mitigated by having an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and by the posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.
48
Notes to Financial Statements – continued
Loans and Other Direct Debt Instruments – The fund may invest in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. At January 31, 2010, the portfolio had unfunded loan commitments of $98,617, which could be extended at the option of the borrower and which are covered by sufficient cash and/or liquid securities held by the fund. The market value and obligation of the fund on these unfunded loan commitments is included in Investments, at value and Payable for investments purchased, respectively, on the Statement of Assets and Liabilities. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by
49
Notes to Financial Statements – continued
the fund. This amount, for the year ended January 31, 2010, is shown as a reduction of total expenses on the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax returns for the prior three fiscal years remain subject to examination by the Internal Revenue Service. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities, distressed securities, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 1/31/10 | | 1/31/09 |
| Ordinary income (including any short-term capital gains) | | $44,287,124 | | $53,307,729 |
| Long-term capital gain | | — | | 431,261 |
| | $44,287,124 | | $53,738,990 |
| Tax return of capital | | 507,895 | | — |
| Total distributions | | $44,795,019 | | $53,738,990 |
50
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 1/31/10 | | | |
| Cost of investments | | $560,370,111 | |
| Gross appreciation | | 29,621,049 | |
| Gross depreciation | | (71,012,876 | ) |
| Net unrealized appreciation (depreciation) | | $(41,391,827 | ) |
| |
| Capital loss carryforwards | | (96,716,939 | ) |
| Post-October capital loss deferral | | (960,032 | ) |
| Other temporary differences | | (5,064,300 | ) |
As of January 31, 2010, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 1/31/17 | | $(51,185,843 | ) |
| 1/31/18 | | (45,531,096 | ) |
| | $(96,716,939 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and service fees. The fund’s income and common expenses are allocated to shareholders based on the value of settled shares outstanding of each class. The fund’s realized and unrealized gain (loss) are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. Class B shares will convert to Class A shares approximately eight years after purchase. The fund’s distributions declared to shareholders as reported on the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | | | | | |
| | | From net investment
income | | From net realized gain on
investments | | From tax return of
capital |
| | | Year ended
1/31/10 | | Year ended
1/31/09 | | Year ended
1/31/10 | | Year ended
1/31/09 | | Year ended
1/31/10 | | Year ended
1/31/09 |
| Class A | | $31,538,061 | | $36,980,742 | | $— | | $305,040 | | $361,686 | | $— |
| Class B | | 4,416,053 | | 6,168,871 | | — | | 57,222 | | 50,644 | | — |
| Class C | | 6,498,593 | | 7,067,401 | | — | | 61,125 | | 74,527 | | — |
| Class I | | 1,722,696 | | 3,033,383 | | — | | 25,021 | | 19,756 | | — |
| Class W | | 28,003 | | 9,608 | | — | | — | | 321 | | — |
| Class R1 | | 7,936 | | 5,617 | | — | | — | | 91 | | — |
| Class R2 | | 8,720 | | 5,910 | | — | | — | | 100 | | — |
| Class R3 | | 57,955 | | 12,848 | | — | | — | | 665 | | — |
| Class R4 | | 9,107 | | 6,202 | | — | | — | | 105 | | — |
| Total | | $44,287,124 | | $53,290,582 | | $— | | $448,408 | | $507,895 | | $— |
51
Notes to Financial Statements – continued
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.65% of the fund’s average daily net assets.
As part of a settlement agreement with the New York Attorney General concerning market timing and related matters, MFS had agreed to reduce the management fee to 0.50% of the fund’s average daily net assets for the period March 1, 2004 through February 28, 2009. For the year ended January 31, 2010, this waiver amounted to $43,325 and is reflected as a reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.64% of the fund’s average daily net assets.
The investment adviser had agreed in writing to pay all of the fund’s operating expenses, exclusive of management fee, distribution and service fees, interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses. This written agreement terminated on May 31, 2009. Effective June 1, 2009, the investment advisor has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment related expenses such that total annual fund operating expenses do not exceed the following rates annually of the fund’s average daily net assets:
| | | | | | | | | | | | | | | | |
| Class A | | Class B | | Class C | | Class I | | Class W | | Class R1 | | Class R2 | | Class R3 | | Class R4 |
| 0.95% | | 1.70% | | 1.70% | | 0.70% | | 0.80% | | 1.70% | | 1.20% | | 0.95% | | 0.70% |
This written agreement will terminate on May 31, 2010. For the year ended January 31, 2010, these reductions amounted to $975,988 and are reflected as a reduction of total expenses in the Statement of Operations.
Effective June 1, 2010, the investment advisor has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment related expenses such that total annual fund operating expenses do not exceed the following rates of the fund’s average daily net assets:
| | | | | | | | | | | | | | | | |
| Class A | | Class B | | Class C | | Class I | | Class W | | Class R1 | | Class R2 | | Class R3 | | Class R4 |
| 1.05% | | 1.80% | | 1.80% | | 0.80% | | 0.90% | | 1.80% | | 1.30% | | 1.05% | | 0.80% |
This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until May 31, 2011.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, as distributor, received $135,183 for the year ended January 31, 2010, as its portion of the initial sales charge on sales of Class A shares of the fund.
52
Notes to Financial Statements – continued
The Board of Trustees has adopted a distribution plan for certain class shares pursuant to Rule 12b-1 of the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD for services provided by MFD and financial intermediaries in connection with the distribution and servicing of certain share classes. One component of the plan is a distribution fee paid to MFD and another component of the plan is a service fee paid to MFD. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Distribution Plan Fee Table:
| | | | | | | | | | |
| | | Distribution
Fee Rate (d) | | Service
Fee Rate (d) | | Total
Distribution
Plan (d) | | Annual
Effective
Rate (e) | | Distribution
and Service
Fee |
| Class A | | — | | 0.25% | | 0.25% | | 0.26% | | $814,436 |
| Class B | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 476,319 |
| Class C | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 716,538 |
| Class W | | 0.10% | | — | | 0.10% | | 0.10% | | 294 |
| Class R1 | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 870 |
| Class R2 | | 0.25% | | 0.25% | | 0.50% | | 0.50% | | 454 |
| Class R3 | | — | | 0.25% | | 0.25% | | 0.25% | | 1,373 |
| Total Distribution and Service Fees | | | | | | $2,010,284 |
| (d) | In accordance with the distribution plan for certain classes, the fund pays distribution and/or service fees equal to these annual percentage rates of each class’ average daily net assets. The distribution and service fee rates disclosed by class represent the current rates in effect at the end of the reporting period. Any rate changes, if applicable, are detailed below. |
| (e) | The annual effective rates represent actual fees incurred under the distribution plan for the year ended January 31, 2010 based on each class’ average daily net assets. Prior to March 1, 2009, a 0.10% Class A distribution fee was paid by the fund. Effective March 1, 2009, the 0.10% Class A annual distribution fee was eliminated. |
Certain Class A shares purchased prior to September 1, 2008 are subject to a contingent deferred sales charge (CDSC) in the event of a shareholder redemption within 12 months of purchase. Certain Class A shares purchased on or subsequent to September 1, 2008 are subject to a CDSC in the event of a shareholder redemption within 24 months of purchase. Class C shares are subject to a CDSC in the event of a shareholder redemption within 12 months of purchase. Class B shares are subject to a CDSC in the event of a shareholder redemption within six years of purchase. All contingent deferred sales charges are paid to MFD and during the year ended January 31, 2010, were as follows:
| | |
| | | Amount |
| Class A | | $2,030 |
| Class B | | 55,965 |
| Class C | | 10,807 |
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as
53
Notes to Financial Statements – continued
shareholder servicing agent calculated as a percentage of the average daily net assets of the fund as determined periodically under the supervision of the fund’s Board of Trustees. For the year ended January 31, 2010, the fee was $217,456, which equated to 0.0477% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses, sub-accounting and other shareholder servicing costs which may be paid to affiliated and unaffiliated service providers. For the year ended January 31, 2010, these out-of-pocket expenses, sub-accounting and other shareholder servicing costs amounted to $422,219.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.0190% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Prior to December 31, 2001, the fund had an unfunded defined benefit plan (“DB plan”) for independent Trustees. As of December 31, 2001, the Board took action to terminate the DB plan with respect to then-current and any future independent Trustees, such that the DB Plan covers only certain of those former independent Trustees who retired on or before December 31, 2001. Effective January 1, 2002, accrued benefits under the DB Plan for then current independent Trustees who continued were credited to an unfunded retirement deferral plan (the “Retirement Deferral plan”), which was established for and exists solely with respect to these credited amounts, and is not available for other deferrals by these or other independent Trustees. Although the Retirement Deferral plan is unfunded, amounts deferred under the plan are periodically adjusted for investment experience as if they had been invested in shares of the fund. The Retirement Deferral plan resulted in an expense of $2,379 and is included in independent Trustees’ compensation for the year ended January 31, 2010. The liability for deferred retirement benefits payable to certain independent Trustees under the Retirement Deferral plan amounted to $5,171 at January 31, 2010, and is included in payable for independent Trustees’ compensation on the Statement of Assets and Liabilities.
54
Notes to Financial Statements – continued
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended January 31, 2010, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $5,264 and are included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $2,695, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
The fund may invest in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks a high level of current income consistent with preservation of capital and liquidity. Income earned on this investment is included in dividends from underlying funds on the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $270,829,374 and $265,030,311, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | |
| | | Year ended
1/31/10 | | Year ended
1/31/09 (i) |
| | | Shares | | Amount | | Shares | | Amount |
| Shares sold | | | | | | | | |
Class A | | 24,747,473 | | $126,167,573 | | 26,116,292 | | $142,614,584 |
Class B | | 1,739,325 | | 8,820,851 | | 1,010,958 | | 5,647,139 |
Class C | | 4,726,763 | | 24,751,263 | | 2,471,442 | | 14,250,080 |
Class I | | 2,841,648 | | 14,686,591 | | 2,088,224 | | 12,607,140 |
Class W | | 74,801 | | 398,199 | | 27,960 | | 187,002 |
Class R1 | | 364 | | 2,369 | | 14,836 | | 101,904 |
Class R2 | | 1,720 | | 8,632 | | 14,409 | | 100,004 |
Class R3 | | 42,679 | | 199,415 | | 134,629 | | 617,424 |
Class R4 | | 2,889 | | 16,377 | | 14,451 | | 100,002 |
| | 34,177,662 | | $175,051,270 | | 31,893,201 | | $176,225,279 |
55
Notes to Financial Statements – continued
| | | | | | | | | | | | |
| | | Year ended
1/31/10 | | | Year ended
1/31/09 (i) | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Class A | | 4,380,072 | | | $22,437,303 | | | 4,720,541 | | | $26,553,491 | |
Class B | | 467,261 | | | 2,380,600 | | | 598,270 | | | 3,403,783 | |
Class C | | 686,959 | | | 3,534,628 | | | 645,582 | | | 3,606,256 | |
Class I | | 190,712 | | | 978,227 | | | 187,340 | | | 1,050,059 | |
Class W | | 3,974 | | | 21,761 | | | 1,201 | | | 6,143 | |
Class R1 | | 1,559 | | | 8,025 | | | 1,099 | | | 5,617 | |
Class R2 | | 1,710 | | | 8,820 | | | 1,154 | | | 5,910 | |
Class R3 | | 11,800 | | | 58,325 | | | 2,730 | | | 12,848 | |
Class R4 | | 1,784 | | | 9,212 | | | 1,211 | | | 6,202 | |
| | 5,745,831 | | | $29,436,901 | | | 6,159,128 | | | $34,650,309 | |
| Shares reacquired | | | | | | | | | | | | |
Class A | | (30,016,667 | ) | | $(151,097,427 | ) | | (34,648,534 | ) | | $(200,359,548 | ) |
Class B | | (3,254,241 | ) | | (16,695,769 | ) | | (5,013,327 | ) | | (29,351,496 | ) |
Class C | | (2,804,301 | ) | | (14,527,068 | ) | | (4,149,559 | ) | | (23,775,649 | ) |
Class I | | (2,254,705 | ) | | (12,128,938 | ) | | (4,770,200 | ) | | (23,294,045 | ) |
Class W | | (47,044 | ) | | (270,986 | ) | | — | | | — | |
Class R2 | | (5 | ) | | (27 | ) | | — | | | — | |
Class R3 | | (128,560 | ) | | (679,271 | ) | | (4,429 | ) | | (18,577 | ) |
Class R4 | | (1 | ) | | (3 | ) | | — | | | — | |
| | (38,505,524 | ) | | $(195,399,489 | ) | | (48,586,049 | ) | | $(276,799,315 | ) |
| Net change | | | | | | | | | | | | |
Class A | | (889,122 | ) | | $(2,492,551 | ) | | (3,811,701 | ) | | $(31,191,473 | ) |
Class B | | (1,047,655 | ) | | (5,494,318 | ) | | (3,404,099 | ) | | (20,300,574 | ) |
Class C | | 2,609,421 | | | 13,758,823 | | | (1,032,535 | ) | | (5,919,313 | ) |
Class I | | 777,655 | | | 3,535,880 | | | (2,494,636 | ) | | (9,636,846 | ) |
Class W | | 31,731 | | | 148,974 | | | 29,161 | | | 193,145 | |
Class R1 | | 1,923 | | | 10,394 | | | 15,935 | | | 107,521 | |
Class R2 | | 3,425 | | | 17,425 | | | 15,563 | | | 105,914 | |
Class R3 | | (74,081 | ) | | (421,531 | ) | | 132,930 | | | 611,695 | |
Class R4 | | 4,672 | | | 25,586 | | | 15,662 | | | 106,204 | |
| | 1,417,969 | | | $9,088,682 | | | (10,533,720 | ) | | $(65,923,727 | ) |
| (i) | For the period from the class’ inception, June 2, 2008 (Classes W, R1, R2, R3, and R4) through the stated period end. |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds
56
Notes to Financial Statements – continued
rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended January 31, 2010, the fund’s commitment fee and interest expense were $6,839 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
| (7) | | Transactions in Underlying Funds-Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be affiliated issuers:
| | | | | | | | | |
| Underlying Funds | | Beginning
Shares/Par
Amount | | Acquisitions
Shares/Par
Amount | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount |
MFS Institutional Money
Market Portfolio | | 5,539,205 | | 153,493,653 | | (151,944,649 | ) | | 7,088,209 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
MFS Institutional Money
Market Portfolio | | $— | | $— | | $22,775 | | | $7,088,209 |
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Series Trust III and the Shareholders of MFS High Yield Opportunities Fund:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS High Yield Opportunities Fund (the “Fund”) (one of the portfolios comprising MFS Series Trust III) as of January 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2010, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS High Yield Opportunities Fund as of January 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 22, 2010
58
RESULTS OF SHAREHOLDER MEETING
(unaudited)
At a special meeting of shareholders of Series Trust III, which was held on January 28, 2010, the following actions were taken:
Item 1: To elect the following individuals as Trustees:
| | | | |
| | | Number of Dollars |
Nominee | | For | | Withheld Authority |
| Robert E. Butler | | 2,529,220,334.811 | | 53,455,079.624 |
| Lawrence H. Cohn, M.D. | | 2,528,787,860.846 | | 53,887,553.589 |
| Maureen R. Goldfarb | | 2,529,336,917.346 | | 53,338,497.088 |
| David H. Gunning | | 2,529,682,589.176 | | 52,992,825.259 |
| William R. Gutow | | 2,529,034,053.902 | | 53,641,360.533 |
| Michael Hegarty | | 2,529,627,246.364 | | 53,048,168.071 |
| John P. Kavanaugh | | 2,529,463,862.073 | | 53,211,552.362 |
| Robert J. Manning | | 2,529,922,880.153 | | 52,752,534.282 |
| Robert C. Pozen | | 2,529,509,988.090 | | 53,165,426.345 |
| J. Dale Sherratt | | 2,528,912,329.793 | | 53,763,084.642 |
| Laurie J. Thomsen | | 2,529,271,338.607 | | 53,404,075.828 |
| Robert W. Uek | | 2,529,251,760.591 | | 53,423,653.843 |
59
TRUSTEES AND OFFICERS — IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of March 1, 2010, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
| INTERESTED TRUSTEES | | | | |
Robert J. Manning (k) (born 10/20/63) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chief Executive Officer, Chief Investment Officer and Director, President (until December 2009) |
Robert C. Pozen (k) (born 8/08/46) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman (since February 2004); Medtronic, Inc, (medical devices), Director (since 2004); Harvard Business School (education), Senior Lecturer (since 2008); Bell Canada Enterprises (telecommunications), Director (until February 2009); The Bank of New York, Director (finance), (March 2004 to May 2005); Telesat (satellite communications), Director (until November 2007) |
| INDEPENDENT TRUSTEES | | | | |
David H. Gunning (born 5/30/42) | | Trustee and Chair of Trustees | | January 2004 | | Retired; Cleveland-Cliffs Inc. (mining products and service provider), Vice Chairman/Director (until May 2007); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non Executive Chairman; Southwest Gas Corp. (natural gas distribution), Director (until May 2004); Portman Limited (mining), Director (until 2008) |
60
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Robert E. Butler (n) (born 11/29/41) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (until 2002) |
Lawrence H. Cohn, M.D.
(born 3/11/37) | | Trustee | | June 1989 | | Brigham and Women’s Hospital, Senior Cardiac Surgeon (since 2005); Harvard Medical School, Professor of Cardiac Surgery; Partners HealthCare, Physician Director of Medical Device Technology (since 2006); Brigham and Women’s Hospital, Chief of Cardiac Surgery (until 2005) |
Maureen R. Goldfarb
(born 4/6/55) | | Trustee | | January 2009 | | Private investor; John Hancock Financial Services, Inc., Executive Vice President (until 2004); John Hancock Mutual Funds, Trustee and Chief Executive Officer (until 2004) |
William R. Gutow
(born 9/27/41) | | Trustee | | December 1993 | | Private investor and real estate consultant ; Capital Entertainment Management Company (video franchise), Vice Chairman; Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2009) |
Michael Hegarty
(born 12/21/44) | | Trustee | | December 2004 | | Private investor; AXA Financial (financial services and insurance), Vice Chairman and Chief Operating Officer (until 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until 2001) |
John P. Kavanaugh
(born 11/4/54) | | Trustee | | January 2009 | | Private investor; The Hanover Insurance Group, Inc., Vice President and Chief Investment Officer (until 2006); Allmerica Investment Trust, Allmerica Securities Trust and Opus Investment Trust (investment companies), Chairman, President and Trustee (until 2006) |
61
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
J. Dale Sherratt
(born 9/23/38) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner |
Laurie J. Thomsen
(born 8/05/57) | | Trustee | | March 2005 | | New Profit, Inc. (venture philanthropy), Executive Partner (since 2006); Private investor; The Travelers Companies (commercial property liability insurance), Director; Prism Venture Partners (venture capital), Co-founder and General Partner (until June 2004) |
Robert W. Uek
(born 5/18/41) | | Trustee | | January 2006 | | Consultant to investment company industry; PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); TT International Funds (mutual fund complex), Trustee (until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (until 2005) |
| OFFICERS | | | | | | |
Maria F. Dwyer (k)
(born 12/01/58) | | President | | March 2004 | | Massachusetts Financial Services Company, Executive Vice President and Chief Regulatory Officer (since March 2004) Chief Compliance Officer (since December 2006); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (until March 2004) |
Christopher R. Bohane (k)
(born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
John M. Corcoran (k)
(born 04/13/65) | | Treasurer | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) |
62
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ethan D. Corey (k)
(born 11/21/63) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since 2004); Dechert LLP (law firm), Counsel (prior to December 2004) |
David L. DiLorenzo (k)
(born 8/10/68) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (until June 2005) |
Timothy M. Fagan (k)
(born 7/10/68) | | Assistant Secretary and Assistant Clerk | | September 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President, Senior Attorney and Chief Compliance Officer (until August 2005) |
Mark D. Fischer (k)
(born 10/27/70) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (until May 2005) |
Robyn L. Griffin
(born 7/04/75) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008); Liberty Mutual Group (insurance), Personal Market Assistant Controller (April 2006 – October 2006); Deloitte & Touche LLP (professional services firm), Senior Manager (prior to April 2006) |
Brian E. Langenfeld (k)
(born 3/07/73) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (until April 2006) |
63
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ellen Moynihan (k)
(born 11/13/57) | | Assistant Treasurer | | April 1997 | | Massachusetts Financial Services Company, Senior Vice President |
Susan S. Newton (k)
(born 3/07/50) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (until April 2005) |
Susan A. Pereira (k)
(born 11/05/70) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (until June 2004) |
Mark N. Polebaum (k)
(born 5/01/52) | | Secretary and Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (until January 2006) |
Frank L. Tarantino
(born 3/07/44) | | Independent Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (until June 2004) |
Richard S. Weitzel (k)
(born 7/16/70) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel (since 2004); Massachusetts Department of Business and Technology, General Counsel (until April 2004) |
James O. Yost (k)
(born 6/12/60) | | Assistant Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Messrs. Pozen and Manning served as Advisory Trustees. For the period March 2008 until October 2008, Ms. Dwyer served as Treasurer of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
64
Trustees and Officers – continued
| (n) | In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust held a shareholders’ meeting in January 2010 to elect Trustees, and will hold a shareholders’ meeting at least once every five years thereafter, to elect Trustees. Messrs. Butler, Kavanaugh, Sherratt, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2010, the Trustees served as board members of 99 funds within the MFS Family of Funds.
The Statement of Additional Information for the Fund and further information about the Trustees are available without charge upon request by calling 1-800-225-2606.
| | |
| Investment Adviser | | Custodian |
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741 | | JPMorgan Chase Bank
One Chase Manhattan Plaza, New York, NY 10081 |
| Distributor | | Independent Registered Public Accounting Firm |
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116-3741 | | Deloitte & Touche LLP
200 Berkeley Street, Boston, MA 02116 |
| Portfolio Managers | | |
John Addeo David Cole Matthew Ryan | | |
65
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The fund will notify shareholders of amounts for use in preparing 2010 income tax forms in January 2011.
66
MFS® PRIVACY NOTICE
Privacy is a concern for every investor today. At MFS Investment Management® and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include
| | Ÿ | | data from investment applications and other forms |
| | Ÿ | | share balances and transactional history with us, our affiliates, or others |
| | Ÿ | | facts from a consumer reporting agency |
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements.
Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you.
If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day.
Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours.
67
CONTACT US
Web site
mfs.com
MFS TALK
1-800-637-8255
24 hours a day
Account service and literature
Shareholders
1-800-225-2606
Investment professionals
1-800-343-2829
Retirement plan services
1-800-637-1255
Mailing address
MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Overnight mail
MFS Service Center, Inc.
c/o Boston Financial Data Services
30 Dan Road
Canton, MA 02021-2809
Save paper with eDelivery. MFS® will send you prospectuses, reports, and proxies directly via e-mail so you will get information faster with less mailbox clutter. To sign up: 1. go to mfs.com. 2. log in via MFS® Access. 3. select eDelivery. If you own your MFS fund shares through a financial institution or a retirement plan, MFS® TALK, MFS Access, and eDelivery may not be available to you.
MFS® Municipal High Income Fund
SIPC Contact Information:
You may obtain information about the Securities Investor Protection Corporation (“SIPC”), including the SIPC Brochure, by contacting SIPC either by telephone (202-371-8300) or by accessing SIPC’s website address (www.sipc.org).
The report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus.
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ
NO BANK GUARANTEE
1/31/10
MMH-ANN
LETTER FROM THE CEO
Dear Shareholders:
Most global financial markets, after suffering the biggest declines since the Great Depression, experienced an impressive resurgence during 2009. Despite this turnaround, the U.S. Federal Reserve Board and central banks around the world continued to hold interest rates at historical lows. As most asset prices rebounded in the second half of 2009 and the demand for liquidity waned, the debate over the existence of asset bubbles and the need for monetary policy changes grew louder, creating added uncertainty about the timing and amount of any future interest rate changes.
Even with the significant market gains of 2009, many analysts seem to be predicting one of two likely scenarios for the U.S. economy. More conservative pundits say the recession for large areas of the country will continue to “moderate” — meaning the economy will continue to deteriorate, but at a slower pace. The more optimistic scenario is that a broader recovery will take hold and continue to gain momentum gradually.
Regardless of which recovery scenario plays out, the approximately 15 million Americans who are currently unemployed are almost certain to feel excluded — at least until significant job creation occurs. Meanwhile, an overleveraged global financial system continues to raise doubts about a prolonged upturn. Although progress has been made in recapitalizing U.S. and European banks, financial instability remains the biggest threat to sustainable growth.
While there remains lingering skepticism among many economists, MFS® believes that worldwide markets will stabilize with potential for growth. We are also mindful of the many challenges still facing our global economy, and we want to take this opportunity to remind investors about the merits of maintaining a long-term view, adhering to basic investing principles such as asset allocation and diversification, and working closely with advisors to identify and research investment opportunities.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
March 15, 2010
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
1
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top five industries (i) | | |
| Healthcare Revenue — Hospitals | | 28.6% |
| Universities — Colleges | | 10.2% |
| Healthcare Revenue — Long-term Care | | 10.0% |
| Tobacco | | 7.1% |
| Tax Assessment | | 5.3% |
| | |
| Credit quality of long-term debt securities (a)(r) |
| AAA | | 5.8% |
| AA | | 9.7% |
| A | | 11.0% |
| BBB | | 35.9% |
| BB | | 8.2% |
| B | | 4.5% |
| CCC | | 1.5% |
| CC (o) | | 0.0% |
| C | | 0.1% |
| D | | 0.1% |
| Not Rated | | 23.2% |
| |
| Portfolio facts | | |
| Average Duration (d)(i) | | 9.7 |
| Average Effective Maturity (i)(m) | | 19.4 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a)(b) | | BBB+ |
| (a) | Includes debt securities that either have long-term public ratings or are U.S. Government-Related Securities. U.S. Government-Related Securities consist of U.S. Treasury securities, and certain securities issued by certain U.S. Government agencies or U.S. Government-Sponsored entities. U.S. Government-Related Securities are assigned a “AAA” rating. Each long-term rated security is assigned a rating in accordance with the following ratings hierarchy: If a security is rated by Moody’s, then that rating is used; if not rated by Moody’s, then a Standard & Poor’s rating is used; if not rated by S&P, then a Fitch rating is used. Securities that do not have a long-term public rating (with the exception of U.S. Government-Related Securities) are excluded from the average credit quality calculation and are included in the above credit quality of long-term debt securities table as “Not Rated”, subject to the next sentence. Convertible bonds, currencies, futures, options, swaps, cash, and cash-equivalents are excluded from both the above credit quality of long-term debt securities table and the average credit quality calculation. Average ratings are converted to the S&P scale and are subject to change. |
| (b) | The average credit quality of rated securities is a market weighted average (using a linear scale) of debt securities that either have long-term public ratings or are U.S. Government-Related securities. All securities that do not have a long-term public rating (with the exception of U.S. Government-Related securities) are excluded from the average credit quality calculation. |
| (d) | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. |
2
Portfolio Composition – continued
| (i) | For purposes of this presentation, the bond component includes accrued interest amounts and may be positively or negatively impacted by the equivalent exposure from derivative holdings, if applicable. Equivalent Exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. |
| (m) | In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity. |
| (r) | Percentages are based on the total market value of long-term debt securities as of 1/31/2010. |
Percentages are based on net assets as of 1/31/10, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
3
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended January 31, 2010, Class A shares of the MFS Municipal High Income Fund (the “fund”) provided a total return of 24.03%, at net asset value. This compares with a return of 9.49% for the fund’s benchmark, the Barclays Capital Municipal Bond Index.
Market Environment
After having suffered through one of the largest and most concentrated downturns since the 1930s, most asset markets staged a remarkable rebound during 2009. During the early stages of the period, the fallout from a series of tumultuous financial events pushed global equity and credit markets to their lowest points during the crisis. Not only did Europe and Japan fall into very deep recessions, but an increasingly powerful engine of global growth – emerging markets – also contracted almost across the board. The subsequent recovery in global activity has been similarly synchronized, led importantly by emerging Asian economies, but broadening to include most of the global economy to varying degrees. Primary drivers of the recovery included an unwinding of the inventory destocking that took place earlier, as well as massive fiscal and monetary stimulus.
During the first half of the reporting period, with the policy rate having been cut almost to 0%, the Fed continued to use its new lending facilities to alleviate ever-tightening credit markets. On the fiscal front, the U.S. Treasury designed and began implementing a massive fiscal stimulus package. As inflationary concerns diminished in the face of global deleveraging and equity and credit markets deteriorated more sharply, central banks around the world also cut interest rates dramatically. By the middle of the period, several central banks had approached their lower bound on policy rates and were examining the implementation and ramifications of quantitative easing as a means to further loosen monetary policy to offset the continuing fall in global economic activity.
However, by the end of the period, there were ever-broadening signs that the global macroeconomic deterioration had passed, which caused the subsequent rise in asset valuations. As most asset prices rebounded in the second half of the period and the demand for liquidity waned, the debate concerning the existence of asset bubbles and the need for monetary exit strategies had begun, creating added uncertainty regarding the forward path of policy rates.
The municipal bond market ended this twelve month period substantially stronger than where it began with high-grade and high-yield bond index prices sharply higher over the previous year. With low money market yields, mutual fund inflows were strong and consistent. Additionally, the Build America Bond program gained significant traction and effectively reduced new issue supply of municipals.
4
Management Review – continued
In January 2009, yields on 30 year AAA-rated municipals were 138% of comparable maturity U.S. Treasury yields. While well off from its highs of over 200%, this ratio rallied further reaching 94% by January 31, 2010. Additionally, spreads between high-grade municipals and high-yield municipals continued to tighten throughout the year. The highest returns were generally in the lower-rated securities as investors looked broadly to add risk with little opportunity to execute that strategy in the primary market due to limited high yield supply.
Factors Affecting Relative Performance
Bond selection, particularly in bonds rated B (r) or lower as well as bonds within the health care, airlines, utilities, education, and industrial sectors, was the key factor contributing to the fund’s strong performance relative to the Barclays Capital Municipal Bond Index. High-yield municipal bonds delivered strong performance over the reporting period as new issuance for these bonds remained low and large inflows of funds into the high-yield municipal space pushed demand higher.
Allocation of credit quality also played a major role in the fund’s positive relative performance. The fund’s overweighted position in “BBB” rated securities provided a boost to excess returns as this credit sector performed exceptionally well compared with the performance of the benchmark. Our greater exposure to the strong-performing health care, industrial, and tobacco sectors also aided relative results.
Respectfully,
| | |
| Gary Lasman | | Geoffrey Schechter |
| Portfolio Manager | | Portfolio Manager |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The primary source for bond quality ratings is Standard & Poor’s. If not available, ratings by Moody’s Investors Service are used, else ratings by Fitch, Inc. For securities which are not rated by any of the three agencies, the security is considered Not Rated. |
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
PERFORMANCE SUMMARY THROUGH 1/31/10
The following chart illustrates a representative class of the fund’s historical performance in comparison to its benchmark(s). Performance results include the deduction of the maximum applicable sales charge and reflect the percentage change in net asset value, including reinvestment of dividends and capital gains distributions. The performance of other share classes will be greater than or less than that of the class depicted below. Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect sales charges, commissions or expenses. (See Notes to Performance Summary.)
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your shares, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the redemption of fund shares.
Growth of a Hypothetical $10,000 Investment
6
Performance Summary – continued
Total Returns through 1/31/10
Average annual without sales charge
| | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | A | | 2/24/84 | | 24.03% | | 3.11% | | 5.06% | | |
| | | B | | 9/07/93 | | 23.25% | | 2.32% | | 4.25% | | |
| | | C | | 9/25/98 | | 22.99% | | 2.09% | | 4.02% | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays Capital Municipal Bond Index (f) | | 9.49% | | 4.23% | | 5.85% | | |
| Average annual with sales charge | | | | | | | | |
| | | A
With Initial Sales Charge (4.75%) | | 18.14% | | 2.11% | | 4.55% | | |
| | | B
With CDSC (Declining over six years
from 4% to 0%) (x) | | 19.25% | | 2.00% | | 4.25% | | |
| | | C
With CDSC (1% for 12 months) (x) | | 21.99% | | 2.09% | | 4.02% | | |
CDSC – Contingent Deferred Sales Charge.
| (f) | Source: FactSet Research Systems Inc. |
| (x) | Assuming redemption at the end of the applicable period. |
Benchmark Definition
Barclays Capital Municipal Bond Index – a market capitalization-weighted index that measures the performance of the tax-exempt bond market.
It is not possible to invest directly in an index.
Notes to Performance Summary
Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details.
A portion of income may be subject to state, federal, and/or alternative minimum tax. Capital gains, if any, are subject to a capital gains tax.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
EXPENSE TABLE
Fund expenses borne by the shareholders during the period, August 1, 2009 through January 31, 2010
As a shareholder of the fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on certain purchase or redemption payments, and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period August 1, 2009 through January 31, 2010.
Actual Expenses
The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each share class in the following table 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 the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line for each share class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
8
Expense Table – continued
| | | | | | | | | | |
Share
Class | | | | Annualized
Expense
Ratio | | Beginning
Account Value
8/01/09 | | Ending
Account Value
1/31/10 | | Expenses
Paid During
Period (p)
8/01/09-1/31/10 |
| A | | Actual | | 0.69% | | $1,000.00 | | $1,118.05 | | $3.68 |
| | Hypothetical (h) | | 0.69% | | $1,000.00 | | $1,021.73 | | $3.52 |
| B | | Actual | | 1.48% | | $1,000.00 | | $1,115.29 | | $7.89 |
| | Hypothetical (h) | | 1.48% | | $1,000.00 | | $1,017.74 | | $7.53 |
| C | | Actual | | 1.69% | | $1,000.00 | | $1,114.11 | | $9.01 |
| | Hypothetical (h) | | 1.69% | | $1,000.00 | | $1,016.69 | | $8.59 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads). If these transaction costs had been included, your costs would have been higher. |
9
PORTFOLIO OF INVESTMENTS
1/31/10
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Municipal Bonds - 100.2% | | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Airport & Port Revenue - 0.3% | | | | | | |
| Branson, MO, Regional Airport Transportation Development District Airport Rev., “B”, 6%, 2025 | | $ | 1,200,000 | | $ | 878,196 |
| Branson, MO, Regional Airport Transportation Development District Airport Rev., “B”, 6%, 2037 | | | 300,000 | | | 203,187 |
| Branson, MO, Regional Airport Transportation Development District Airport Rev., “B”, 6%, 2037 | | | 2,480,000 | | | 1,610,562 |
| Maryland Economic Development Corp. Rev. (Terminal Project), “B”, 5.375%, 2025 | | | 885,000 | | | 888,062 |
| Maryland Economic Development Corp. Rev. (Terminal Project), “B”, 5.75%, 2035 | | | 1,740,000 | | | 1,762,011 |
| | | | | | |
| | | | | | $ | 5,342,018 |
| General Obligations - General Purpose - 2.0% | | | | | | |
| Luzerne County, PA, FSA, 6.75%, 2023 | | $ | 1,230,000 | | $ | 1,318,745 |
| State of California, 5%, 2034 | | | 4,375,000 | | | 3,973,331 |
| State of California (Veterans), 5.05%, 2036 | | | 3,575,000 | | | 2,980,764 |
| Texas Department of Transportation, 7%, 2012 | | | 69,063 | | | 69,295 |
| Washington Motor Vehicle Fuel Tax, “B”, NATL, 5%, 2032 (u) | | | 25,010,000 | | | 26,077,927 |
| | | | | | |
| | | | | | $ | 34,420,062 |
| General Obligations - Improvement - 0.2% | | | | | | |
| Guam Government, “A”, 6.75%, 2029 | | $ | 1,110,000 | | $ | 1,150,848 |
| Guam Government, “A”, 7%, 2039 | | | 1,270,000 | | | 1,331,189 |
| Mississippi Development Bank Special Obligation (Greenville, MS Project), 5%, 2027 | | | 1,690,000 | | | 1,393,422 |
| | | | | | |
| | | | | | $ | 3,875,459 |
| General Obligations - Schools - 2.0% | | | | | | |
| Beverly Hills, CA, Unified School District, Capital Appreciation (Election of 2008), 0%, 2031 | | $ | 2,060,000 | | $ | 621,955 |
| Beverly Hills, CA, Unified School District, Capital Appreciation (Election of 2008), 0%, 2032 | | | 2,095,000 | | | 589,156 |
| Beverly Hills, CA, Unified School District, Capital Appreciation (Election of 2008), 0%, 2033 | | | 4,185,000 | | | 1,097,223 |
| Escondido, CA, Union High School District, Capital Appreciation (Election of 2008), “A”, ASSD GTY, 0%, 2030 | | | 4,785,000 | | | 1,307,932 |
| Escondido, CA, Union High School District, Capital Appreciation (Election of 2008), “A”, ASSD GTY, 0%, 2031 | | | 4,280,000 | | | 1,082,241 |
10
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| General Obligations - Schools - continued | | | | | | |
| Escondido, CA, Union High School District, Capital Appreciation (Election of 2008), “A”, ASSD GTY, 0%, 2032 | | $ | 3,010,000 | | $ | 703,136 |
| Escondido, CA, Union High School District, Capital Appreciation (Election of 2008), “A”, ASSD GTY, 0%, 2033 | | | 2,965,000 | | | 640,470 |
| Hartnell, CA, Community College District, Capital Appreciation (Election of 2002), “D”, 0%, 2039 | | | 10,355,000 | | | 1,281,742 |
| Kane Kendall County, IL, Community College District, Capital Appreciation, “E”, FGIC, 0%, 2023 | | | 5,945,000 | | | 2,990,394 |
| Kane Kendall County, IL, Community College District, Capital Appreciation, “E”, FGIC, 0%, 2025 | | | 6,000,000 | | | 2,665,320 |
| Kane, Cook & DuPage Counties, IL, FSA, 6.375%, 2011 (c) | | | 1,255,000 | | | 1,323,950 |
| Leander, TX, Independent School District, Capital Appreciation, PSF, 0%, 2030 | | | 6,480,000 | | | 2,023,250 |
| Los Angeles, CA, Unified School District, “B”, AMBAC, 4.5%, 2031 | | | 7,000,000 | | | 6,490,610 |
| Los Angeles, CA, Unified School District, “D”, 5%, 2034 | | | 705,000 | | | 703,019 |
| Oceanside, CA, Unified School District, Capital Appreciation, ASSD GTY, 0%, 2024 | | | 3,110,000 | | | 1,344,546 |
| Oceanside, CA, Unified School District, Capital Appreciation, ASSD GTY, 0%, 2027 | | | 2,070,000 | | | 714,957 |
| Oceanside, CA, Unified School District, Capital Appreciation, ASSD GTY, 0%, 2029 | | | 4,025,000 | | | 1,196,673 |
| Oceanside, CA, Unified School District, Capital Appreciation, ASSD GTY, 0%, 2030 | | | 4,455,000 | | | 1,229,847 |
| Royse City, TX, Independent School District, School Building, Capital Appreciation, PSF, 0%, 2027 | | | 2,960,000 | | | 1,253,175 |
| Royse City, TX, Independent School District, School Building, Capital Appreciation, PSF, 0%, 2029 | | | 2,995,000 | | | 1,129,265 |
| San Mateo County, CA, Community College District, Capital Appreciation, “B”, NATL, 0%, 2032 | | | 10,000,000 | | | 2,429,800 |
| Santa Clarita Community College District, CA, Election 2006, NATL, 0%, 2030 | | | 2,205,000 | | | 559,541 |
| West Contra Costa, CA, Unified School District, Election of 2005, Capital Appreciation, “C”, ASSD GTY, 0%, 2029 | | | 3,665,000 | | | 1,019,969 |
| Whittier, CA, Union High School District, Capital Appreciation, 0%, 2034 | | | 2,270,000 | | | 458,290 |
| | | | | | |
| | | | | | $ | 34,856,461 |
| Healthcare Revenue - Hospitals - 28.1% | | | | | | |
| | | | | | |
| Alexander City, AL, Special Care Facilities Financing Authority Medical Facilities Rev., “A” (Russell Hospital Corp.), 5.75%, 2036 | | $ | 1,900,000 | | $ | 1,604,037 |
| Allegheny County, PA, Hospital Development Authority Rev. (West Penn Allegheny Health), 9.25%, 2010 (c) | | | 6,100,000 | | | 6,645,950 |
11
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Allegheny County, PA, Hospital Development Authority Rev. (West Penn Allegheny Health), “A”, 5%, 2028 | | $ | 3,465,000 | | $ | 2,604,987 |
| Allegheny County, PA, Hospital Development Authority Rev. (West Penn Allegheny Health), “A”, 5.375%, 2040 | | | 5,785,000 | | | 4,208,183 |
| Allegheny County, PA, Hospital Development Authority Rev. (West Penn Allegheny Health), “B”, 9.25%, 2010 (c) | | | 3,360,000 | | | 3,660,720 |
| Atchison, KS, Hospital Rev. (Atchison Hospital Assn.), “A”, 6.75%, 2030 | | | 2,600,000 | | | 2,451,332 |
| Athens County, OH, Hospital Facilities Rev. (O’Bleness Memorial Hospital), “A”, 7.125%, 2033 | | | 2,500,000 | | | 2,173,700 |
| Birmingham, AL, Baptist Medical Center, Special Care Facilities Rev. (Baptist Health Systems, Inc.), “A”, 5.875%, 2024 | | | 1,375,000 | | | 1,324,276 |
| Birmingham, AL, Baptist Medical Center, Special Care Facilities Rev. (Baptist Health Systems, Inc.), “A”, 5%, 2030 | | | 11,230,000 | | | 9,356,724 |
| Brookhaven, NY, Industrial Development Agency Rev. (Memorial Hospital Medical Center, Inc.), “A”, 8.25%, 2010 (c) | | | 2,500,000 | | | 2,671,600 |
| Brunswick, GA, Hospital Authority Rev. (Glynn-Brunswick Memorial Hospital), 5.625%, 2034 | | | 1,375,000 | | | 1,405,250 |
| California Health Facilities Financing Authority Rev. (St. Joseph Health System), “A”, 5.75%, 2039 | | | 2,765,000 | | | 2,858,181 |
| California Municipal Finance Authority, COP (Community Hospitals, Central California), 5.5%, 2039 | | | 1,595,000 | | | 1,393,599 |
| California Statewide Communities Development Authority Rev. (Children’s Hospital), 5%, 2047 | | | 4,520,000 | | | 3,813,388 |
| California Statewide Communities Development Authority Rev. (Daughters of Charity Health), “A”, 5.25%, 2024 | | | 1,550,000 | | | 1,479,057 |
| California Statewide Communities Development Authority Rev. (Valleycare Health Systems), “A”, 5%, 2022 | | | 600,000 | | | 548,868 |
| California Statewide Communities Development Authority Rev. (Valleycare Health Systems), “A”, 5.125%, 2031 | | | 300,000 | | | 259,143 |
| California Valley Health Systems, COP, 6.875%, 2023 (d) | | | 1,745,000 | | | 872,500 |
| Chautauqua County, NY, Industrial Development Agency, Civic Facilities Rev. (Women’s Christian Assn.), “A”, 6.35%, 2017 | | | 835,000 | | | 833,889 |
| Chautauqua County, NY, Industrial Development Agency, Civic Facilities Rev. (Women’s Christian Assn.), “A”, 6.4%, 2029 | | | 3,250,000 | | | 2,955,323 |
Chemung County, NY, Civic Facilities Rev. (St. Joseph’s
Hospital-Elmira), “A”, 6%, 2013 | | | 1,100,000 | | | 827,959 |
Chemung County, NY, Civic Facilities Rev. (St. Joseph’s
Hospital-Elmira), “B”, 6.35%, 2013 | | | 755,000 | | | 568,266 |
| Citrus County, FL, Hospital Development Authority Rev. (Citrus Memorial Hospital), 6.25%, 2023 | | | 830,000 | | | 822,513 |
12
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Clinton County, MO, Industrial Development Agency, Health Facilities Rev. (Cameron Regional Medical Center), 5%, 2032 | | $ | 2,000,000 | | $ | 1,486,960 |
| Colorado Health Facilities Authority Rev. (Portercare Adventist Health Systems), 6.625%, 2011 (c) | | | 2,200,000 | | | 2,449,788 |
| Crittenden County, AR, Hospital Rev., Refunding & Improvement, 7.15%, 2010 (c) | | | 1,165,000 | | | 1,207,592 |
| Cullman County, AL, Health Care Authority (Cullman Regional Medical Center), “A”, 6.75%, 2029 | | | 3,890,000 | | | 3,918,592 |
| Cullman County, AL, Health Care Authority (Cullman Regional Medical Center), “A”, 7%, 2036 | | | 750,000 | | | 761,978 |
| Cuyahoga County, OH, Hospital Facilities Rev. (Canton, Inc.), 7.5%, 2030 | | | 5,020,000 | | | 5,079,537 |
| Erie County, PA, Hospital Authority Rev. (St. Vincent’s Health), “A”, 7%, 2027 | | | 3,525,000 | | | 3,530,957 |
| Fruita, CO, Rev. (Family Health West Project), 7%, 2018 | | | 1,155,000 | | | 1,203,221 |
| Fruita, CO, Rev. (Family Health West Project), 8%, 2043 | | | 4,440,000 | | | 4,727,002 |
| Garden City, MI, Hospital Finance Authority Rev. (Garden City Hospital), “A”, 4.875%, 2027 | | | 4,725,000 | | | 3,335,236 |
| Gaylord, MI, Hospital Finance Authority Rev. (Otsego Memorial Hospital), 6.2%, 2025 | | | 750,000 | | | 677,618 |
| Gaylord, MI, Hospital Finance Authority Rev. (Otsego Memorial Hospital), 6.5%, 2031 | | | 865,000 | | | 765,222 |
| Genesee County, NY, Industrial Development Agency Civic Facility Rev. (United Memorial Medical Center), 5%, 2027 | | | 1,320,000 | | | 1,057,848 |
| Glendale, AZ, Industrial Development Authority (John C. Lincoln Health), 5%, 2042 | | | 2,925,000 | | | 2,503,566 |
| Grand Forks, ND, Health Care Authority Rev. (Altru Health Systems Obligated Group), 7.125%, 2010 (c) | | | 2,250,000 | | | 2,350,980 |
| Grundy County, MO, Industrial Development Authority, Health Facilities Rev. (Wright Memorial Hospital), 6.75%, 2034 | | | 1,590,000 | | | 1,592,321 |
| Harris County, TX, Health Facilities Development Corp., Hospital Rev. (Memorial Hermann Healthcare Systems), “B”, 7.25%, 2035 | | | 2,400,000 | | | 2,695,704 |
| Hillsborough County, FL, Industrial Development Authority Rev. (University Community Hospital), “A”, 5.625%, 2029 | | | 4,700,000 | | | 3,878,769 |
| Illinois Finance Authority Rev. (Children’s Memorial Hospital), “A”, ASSD GTY, 5.25%, 2047 | | | 465,000 | | | 443,075 |
| Illinois Finance Authority Rev. (Edward Hospital), “A”, AMBAC, 5.5%, 2040 | | | 2,185,000 | | | 2,140,972 |
| Illinois Finance Authority Rev. (Kewanee Hospital), 5.1%, 2031 | | | 2,080,000 | | | 1,611,189 |
| Illinois Finance Authority Rev. (KishHealth Systems Obligated Group), 5.75%, 2028 | | | 3,770,000 | | | 3,828,737 |
13
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Illinois Finance Authority Rev. (O.S.F. Healthcare Systems) “A”, 7%, 2029 | | $ | 3,025,000 | | $ | 3,369,729 |
| Illinois Finance Authority Rev. (O.S.F. Healthcare Systems) “A”, 7.125%, 2037 | | | 2,555,000 | | | 2,837,711 |
| Illinois Finance Authority Rev. (Provena Health), “A”, 7.75%, 2034 | | | 3,865,000 | | | 4,374,562 |
| Illinois Finance Authority Rev. (Resurrection Health), 6.125%, 2025 | | | 2,620,000 | | | 2,622,463 |
| Illinois Finance Authority Rev. (Silver Cross Hospital & Medical Centers), 6.875%, 2038 | | | 1,500,000 | | | 1,550,220 |
| Illinois Finance Authority Rev. (Silver Cross Hospital & Medical Centers), 7%, 2044 | | | 2,545,000 | | | 2,633,744 |
| Illinois Finance Authority Rev. (Silver Cross Hospital & Medical Centers), “A”, 5.5%, 2030 | | | 4,000,000 | | | 3,638,360 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Clarion Hospital), “B”, 5%, 2033 | | | 2,510,000 | | | 2,292,308 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Community Foundation of Northwest Indiana), “A”, 6.375%, 2011 (c) | | | 360,000 | | | 392,519 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Community Foundation of Northwest Indiana), “A”, 6.375%, 2011 (c) | | | 6,785,000 | | | 7,397,889 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Community Foundation of Northwest Indiana), “A”, 6.375%, 2021 | | | 2,940,000 | | | 3,005,356 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Community Foundation of Northwest Indiana), “A”, 6.375%, 2031 | | | 2,165,000 | | | 2,199,532 |
| Indiana Health & Educational Facilities Authority, Hospital Rev. (Riverview Hospital), 6.125%, 2031 | | | 3,750,000 | | | 3,743,325 |
| Indiana Health & Educational Facilities Finance Authority, Hospital Rev. (Clarian Health), “A”, 5%, 2039 | | | 2,000,000 | | | 1,794,700 |
| Indiana Health & Educational Facilities Finance Authority, Hospital Rev. (Community Foundation of Northwest Indiana), 5.5%, 2037 | | | 8,150,000 | | | 7,764,261 |
| Iron River, MI, Hospital Finance Authority Rev. (Iron County Community Hospital, Inc.), 6.5%, 2033 | | | 2,000,000 | | | 1,821,820 |
| Iron River, MI, Hospital Finance Authority Rev. (Iron County Community Hospital, Inc.), 6.5%, 2040 | | | 2,000,000 | | | 1,790,000 |
| Johnson City, TN, Health & Educational Facilities Board Hospital Rev. (Mountain States Health), “A”, 5.5%, 2036 | | | 3,905,000 | | | 3,767,856 |
| Joplin, MO, Industrial Development Authority Health Facilities Rev. (Freeman Health Systems), 5.5%, 2029 | | | 1,290,000 | | | 1,221,553 |
| Joplin, MO, Industrial Development Authority Health Facilities Rev. (Freeman Health Systems), 5.75%, 2035 | | | 1,395,000 | | | 1,341,348 |
| Kentucky Economic Development Finance Authority (Norton Healthcare), “A”, 6.5%, 2010 (c) | | | 1,965,000 | | | 2,063,643 |
14
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Kentucky Economic Development Finance Authority (Norton Healthcare), “A”, 6.5%, 2020 | | $ | 3,035,000 | | $ | 3,113,182 |
| Kentucky Economic Development Finance Authority (Norton Healthcare), “A”, 6.625%, 2028 | | | 435,000 | | | 444,744 |
| Kentucky Economic Development Finance Authority, Hospital Facilities Rev. (Baptist Healthcare System), “A”, 5.625%, 2027 | | | 815,000 | | | 887,405 |
| Knox County, TN, Health, Educational, Hospital & Housing Facilities Board Rev. (Baptist Health Systems), 6.5%, 2031 | | | 7,100,000 | | | 7,471,827 |
| Knox County, TN, Health, Educational, Hospital & Housing Facilities Board Rev. (Covenant Health), “A”, 0%, 2035 | | | 3,795,000 | | | 778,355 |
| Knox County, TN, Health, Educational, Hospital & Housing Facilities Board Rev. (University Health Systems, Inc.), 5.25%, 2036 | | | 3,055,000 | | | 2,806,903 |
| Lake County, OH, Hospital Facilities Rev. (Lake Hospital), “C”, 6%, 2043 | | | 2,870,000 | | | 2,821,296 |
| Lebanon County, PA, Health Facilities Authority Rev. (Good Samaritan Hospital), 6%, 2035 | | | 5,500,000 | | | 5,073,970 |
| Louisiana Public Facilities Authority Hospital Rev. (Lake Charles Memorial Hospital), 6.375%, 2034 | | | 5,575,000 | | | 4,822,208 |
| Louisville & Jefferson County, KY, Metropolitan Government Healthcare Systems Rev. (Norton Healthcare, Inc.), 5.25%, 2036 | | | 6,485,000 | | | 6,172,164 |
| Lufkin, TX, Health Facilities Development Corp. Rev. (Memorial Health System), 5.5%, 2032 | | | 410,000 | | | 378,528 |
| Lufkin, TX, Health Facilities Development Corp. Rev. (Memorial Health System), 5.5%, 2037 | | | 5,400,000 | | | 4,753,728 |
| Macomb County, MI, Hospital Finance Authority Rev. (Mount Clemens General Hospital), 5.875%, 2013 (c) | | | 4,345,000 | | | 5,085,214 |
| Maryland Health & Higher Educational Facilities Authority Rev. (Mercy Medical Center), “A”, 5.5%, 2042 | | | 3,895,000 | | | 3,735,850 |
| Maryland Health & Higher Educational Facilities Authority Rev. (University of Maryland Medical System), 6.75%, 2010 (c) | | | 1,000,000 | | | 1,035,990 |
| Maryland Health & Higher Educational Facilities Authority Rev. (Washington County Hospital), 6%, 2043 | | | 985,000 | | | 979,336 |
| Massachusetts Health & Educational Facilities Authority Rev. (Boston Medical Center), 5.25%, 2038 | | | 4,000,000 | | | 3,487,080 |
| Massachusetts Health & Educational Facilities Authority Rev. (Caritas Christi), “A”, 5.7%, 2015 | | | 2,960,000 | | | 2,978,086 |
| Massachusetts Health & Educational Facilities Authority Rev. (Jordan Hospital), “D”, 5.25%, 2018 | | | 4,600,000 | | | 3,990,454 |
| Massachusetts Health & Educational Facilities Authority Rev. (Quincy Medical Center), “A”, 6.5%, 2038 | | | 2,305,000 | | | 2,031,950 |
| Massachusetts Health & Educational Facilities Authority Rev. (Saints Memorial Medical Center), “A”, 6%, 2023 | | | 5,430,000 | | | 4,256,740 |
15
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Massachusetts Health & Educational Facilities Authority Rev. (University of Massachusetts Memorial Hospital), “C”, 6.5%, 2021 | | $ | 500,000 | | $ | 509,115 |
| Mecosta County, MI, General Hospital Rev., 6%, 2018 | | | 1,200,000 | | | 1,179,936 |
| Miami Beach, FL, Health Facilities Authority Rev. (Mount Sinai Medical Center), 6.75%, 2029 | | | 2,490,000 | | | 2,320,431 |
| Miami Beach, FL, Health Facilities Authority Rev. (Mount Sinai Medical Center), “A”, 6.7%, 2019 | | | 3,505,000 | | | 3,452,775 |
| Michigan Hospital Finance Authority Rev. (Henry Ford Health System), 5.625%, 2029 | | | 765,000 | | | 744,031 |
| Michigan Hospital Finance Authority Rev. (Henry Ford Health System), 5.75%, 2039 | | | 4,405,000 | | | 4,288,312 |
| Monroe County, MI, Hospital Finance Authority, Hospital Rev. (Mercy Memorial Hospital Corp.), 5.375%, 2026 | | | 3,200,000 | | | 2,654,848 |
| Monroe County, MI, Hospital Finance Authority, Hospital Rev. (Mercy Memorial Hospital Corp.), 5.5%, 2035 | | | 3,340,000 | | | 2,602,495 |
| Montgomery, AL, Medical Clinic Board Health Care Facility Rev. (Jackson Hospital & Clinic), 5.25%, 2031 | | | 2,745,000 | | | 2,491,280 |
| Montgomery, AL, Medical Clinic Board Health Care Facility Rev. (Jackson Hospital & Clinic), 5.25%, 2036 | | | 2,890,000 | | | 2,588,457 |
| New Hampshire Business Finance Authority Rev. (Elliot Hospital Obligated Group), “A”, 6%, 2027 | | | 4,935,000 | | | 4,995,849 |
| New Hampshire Business Finance Authority Rev. (Huggins Hospital), 6.875%, 2039 | | | 945,000 | | | 934,851 |
| New Hampshire Health & Education Facilities Authority Rev. (Catholic Medical Center), “A”, 6.125%, 2012 (c) | | | 1,320,000 | | | 1,497,038 |
| New Hampshire Health & Education Facilities Authority Rev. (Catholic Medical Center), “A”, 6.125%, 2032 | | | 180,000 | | | 179,012 |
| New Hampshire Health & Education Facilities Authority Rev. (Covenant Health System), 6.5%, 2017 | | | 1,000,000 | | | 1,050,820 |
| New Hampshire Health & Education Facilities Authority Rev. (Memorial Hospital at Conway), 5.25%, 2036 | | | 585,000 | | | 497,876 |
| New Jersey Health Care Facilities, Financing Authority Rev. (Palisades Medical Center), 6.625%, 2031 | | | 1,115,000 | | | 963,048 |
| New Jersey Health Care Facilities, Financing Authority Rev. (St. Barnabas Health) Capital Appreciation, “B”, 0%, 2036 | | | 4,305,000 | | | 480,137 |
| New Jersey Health Care Facilities, Financing Authority Rev. (St. Barnabas Health) Capital Appreciation, “B”, 0%, 2038 | | | 22,690,000 | | | 2,131,725 |
| New Jersey Health Care Facilities, Financing Authority Rev. (St. Joseph’s Healthcare System), 6.625%, 2038 | | | 8,000,000 | | | 8,037,680 |
| New Jersey Health Care Facilities, Financing Authority Rev. (St. Peter’s University Hospital), “A”, 6.875%, 2030 | | | 4,000,000 | | | 4,017,040 |
16
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| New Mexico Hospital Equipment Loan Council, Hospital Rev. (Rehoboth McKinley Christian Hospital), “A”, 5%, 2017 | | $ | 500,000 | | $ | 440,785 |
| New Mexico Hospital Equipment Loan Council, Hospital Rev. (Rehoboth McKinley Christian Hospital), “A”, 5.25%, 2026 | | | 1,580,000 | | | 1,246,272 |
| New York Dormitory Authority Rev., Non-State Supported Debt (Bronx-Lebanon Hospital Center), LOC, 6.5%, 2030 | | | 1,570,000 | | | 1,731,066 |
| New York Dormitory Authority Rev., Non-State Supported Debt (Bronx-Lebanon Hospital Center), LOC, 6.25%, 2035 | | | 975,000 | | | 1,055,330 |
| New York Dormitory Authority Rev., Non-State Supported Debt (Long Island Jewish Medical Center), “A”, 5.5%, 2037 | | | 655,000 | | | 661,701 |
| New York, NY, Industrial Development Agency, Civic Facilities Rev. (Staten Island University Hospital), “A”, 6.375%, 2031 | | | 470,000 | | | 434,195 |
| New York, NY, Industrial Development Agency, Civic Facilities Rev. (Staten Island University Hospital), “B”, 6.375%, 2031 | | | 1,420,000 | | | 1,311,824 |
| New York, NY, Industrial Development Agency, Civic Facilities Rev. (Staten Island University Hospital), “C”, 6.45%, 2032 | | | 900,000 | | | 836,685 |
| Norman, OK, Regional Hospital Authority Rev., 5%, 2027 | | | 1,350,000 | | | 1,072,359 |
| Norman, OK, Regional Hospital Authority Rev., 5.375%, 2029 | | | 795,000 | | | 643,894 |
| Norman, OK, Regional Hospital Authority Rev., 5.375%, 2036 | | | 6,240,000 | | | 4,738,718 |
| Northampton County, PA, General Purpose Authority Hospital Rev. (St. Luke’s Hospital), “A”, 5.5%, 2035 | | | 920,000 | | | 901,444 |
| Northampton County, PA, General Purpose Authority Hospital Rev. (St. Luke’s Hospital), “A”, 5.5%, 2040 | | | 1,075,000 | | | 1,044,040 |
| Northern Hospital District, Surry County, NC, Health Care Facilities Rev., 6.25%, 2038 | | | 1,000,000 | | | 1,011,350 |
| Ohio County, WV, County Commission Health System Rev. (Ohio Valley Medical Center), 5.75%, 2013 | | | 3,155,000 | | | 2,828,205 |
| Ohio Higher Educational Facility Commission Rev. (University Hospital Health System), 6.75%, 2039 | | | 5,390,000 | | | 5,723,803 |
| Oklahoma Development Finance Authority Rev. (Comanche County Hospital), “B”, 6.6%, 2031 | | | 4,080,000 | | | 4,170,046 |
| Palomar Pomerado Health Care District, CA, COP, 6.75%, 2039 | | | 5,220,000 | | | 5,342,670 |
| Peninsula Ports Authority, VA, Hospital Facility Rev. (Whittaker Memorial), FHA, 8.7%, 2023 | | | 460,000 | | | 471,693 |
| Philadelphia, PA, Hospitals & Higher Education Facilities Authority Rev. (Temple University Health System), “A”, 6.625%, 2023 | | | 2,860,000 | | | 2,863,232 |
| Philadelphia, PA, Hospitals & Higher Education Facilities Authority Rev. (Temple University Health System), “A”, 5.5%, 2030 | | | 3,710,000 | | | 3,259,495 |
| Rhode Island Health & Educational Building Corp., Hospital Financing (Lifespan Obligated Group), 6.5%, 2012 (c) | | | 4,000,000 | | | 4,554,360 |
| Richmond, IN, Hospital Authority Rev. (Reid Hospital & Health Center Services), “A”, 6.625%, 2039 | | | 4,760,000 | | | 5,067,401 |
17
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Royal Oak, MI, Hospital Finance Authority Rev. (William Beaumont Hospital), 8.25%, 2039 | | $ | 6,945,000 | | $ | 8,205,379 |
| Royston, GA, Hospital Authority Rev. (Ty Cobb Healthcare Systems, Inc.), 6.375%, 2014 | | | 1,395,000 | | | 1,378,190 |
| Royston, GA, Hospital Authority Rev. (Ty Cobb Healthcare Systems, Inc.), 6.5%, 2027 | | | 1,855,000 | | | 1,586,507 |
| Salida, CO, Hospital District Rev., 5.25%, 2036 | | | 6,045,000 | | | 4,744,358 |
| Scioto County, OH, Hospital Facilities Rev. (Southern Ohio Medical Center), 5.625%, 2031 | | | 1,370,000 | | | 1,376,549 |
| Scioto County, OH, Hospital Facilities Rev. (Southern Ohio Medical Center), 5.75%, 2038 | | | 4,100,000 | | | 4,136,613 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6%, 2012 (c) | | | 450,000 | | | 504,661 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6%, 2012 (c) | | | 750,000 | | | 841,102 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6%, 2012 (c) | | | 745,000 | | | 835,495 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6%, 2012 (c) | | | 1,255,000 | | | 1,407,445 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6.25%, 2012 (c) | | | 750,000 | | | 845,850 |
| Shelby County, TN, Educational & Housing Facilities Board Hospital Rev. (Methodist Healthcare), 6.25%, 2012 (c) | | | 1,250,000 | | | 1,409,750 |
| Skagit County, WA, Public Hospital District No. 001 Rev. (Skagit Valley Hospital), 6%, 2023 | | | 795,000 | | | 813,706 |
| Skagit County, WA, Public Hospital District No. 001 Rev. (Skagit Valley Hospital), 5.75%, 2028 | | | 255,000 | | | 253,817 |
| Skagit County, WA, Public Hospital District No. 001 Rev. (Skagit Valley Hospital), 5.5%, 2030 | | | 2,750,000 | | | 2,647,535 |
| Skagit County, WA, Public Hospital District No. 001 Rev. (Skagit Valley Hospital), 5.75%, 2032 | | | 2,545,000 | | | 2,519,245 |
| South Carolina Jobs & Economic Development Authority, Hospital Facilities Rev. (Palmetto Health Alliance), 6.25%, 2031 | | | 2,725,000 | | | 2,751,296 |
| South Carolina Jobs & Economic Development Authority, Hospital Rev. (Palmetto Health), 5.75%, 2039 | | | 400,000 | | | 390,024 |
| South Lake County, FL, Hospital District Rev. (South Lake Hospital), “A”, 6%, 2029 | | | 1,155,000 | | | 1,167,047 |
| South Lake County, FL, Hospital District Rev. (South Lake Hospital), “A”, 6.25%, 2039 | | | 1,715,000 | | | 1,733,882 |
| Southwestern, IL, Development Authority Rev. (Anderson Hospital), 5.375%, 2015 | | | 885,000 | | | 886,071 |
18
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Southwestern, IL, Development Authority Rev. (Anderson Hospital), 5.5%, 2020 | | $ | 1,805,000 | | $ | 1,758,557 |
| Southwestern, IL, Development Authority Rev. (Anderson Hospital), 5.625%, 2029 | | | 1,330,000 | | | 1,261,332 |
| Southwestern, IL, Development Authority Rev. (Anderson Hospital), 5.125%, 2036 | | | 2,580,000 | | | 2,239,156 |
| St. Louis County, MO, Industrial Development Authority, Health Facilities Rev. (Ranken Jordan Project), 5%, 2027 | | | 1,350,000 | | | 1,097,712 |
| St. Louis County, MO, Industrial Development Authority, Health Facilities Rev. (Ranken Jordan Project), 5%, 2035 | | | 1,300,000 | | | 987,688 |
| St. Louis Park, MN, Health Care Facilities Rev. (Nicollett Health Services), 5.75%, 2039 | | | 3,535,000 | | | 3,505,059 |
| St. Paul, MN, Housing & Redevelopment Authority Healthcare Facilities Rev. (Healthpartners Obligated Group), 5.25%, 2036 | | | 3,915,000 | | | 3,576,861 |
| Sullivan County, TN, Health, Educational & Housing Facilities Board Hospital Rev. (Wellmont Health Systems Project), RADIAN, 5%, 2017 | | | 2,155,000 | | | 2,145,518 |
| Sullivan County, TN, Health, Educational & Housing Facilities Board Hospital Rev. (Wellmont Health Systems Project), “C”, 5.25%, 2036 | | | 7,330,000 | | | 6,506,255 |
| Sumner County, TN, Health, Educational & Housing Facilities Board Rev. (Sumner Regional Health), “A”, 5.5%, 2046 | | | 4,000,000 | | | 1,566,360 |
| Tallahassee, FL, Health Facilities Rev. (Tallahassee Memorial Healthcare, Inc.), 6.25%, 2020 | | | 4,500,000 | | | 4,546,980 |
| Tallahassee, FL, Health Facilities Rev. (Tallahassee Memorial Healthcare, Inc.), 6.375%, 2030 | | | 1,390,000 | | | 1,398,257 |
| Texas Metro Health Facilities Development Corp., Metro Health Facilities Development Rev. (Wilson N. Jones Memorial Hospital), 7.2%, 2021 | | | 4,300,000 | | | 4,308,944 |
| Texas Metro Health Facilities Development Corp., Metro Health Facilities Development Rev. (Wilson N. Jones Memorial Hospital), 7.25%, 2031 | | | 2,000,000 | | | 1,931,100 |
| Tom Green County, TX, Health Facilities Rev. (Shannon Health System), 6.75%, 2021 | | | 3,150,000 | | | 3,249,729 |
| Tyler, TX, Health Facilities Development Corp. (East Texas Medical Center), “A”, 5.25%, 2032 | | | 3,515,000 | | | 3,401,430 |
| Tyler, TX, Health Facilities Development Corp. (East Texas Medical Center), “A”, 5.375%, 2037 | | | 2,885,000 | | | 2,785,987 |
| Upper Illinois River Valley Development, Health Facilities Rev. (Morris Hospital), 6.625%, 2031 | | | 1,900,000 | | | 1,925,004 |
| Valley, AL, Financing Authority Rev. (Lanier Memorial Hospital), 5.45%, 2011 | | | 615,000 | | | 609,016 |
19
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Vigo County, IN, Hospital Authority Rev. (Union Hospital), 5.75%, 2042 | | $ | 780,000 | | $ | 634,429 |
| Vigo County, IN, Hospital Authority Rev. (Union Hospital), 5.8%, 2047 | | | 3,750,000 | | | 3,031,275 |
| Wapello County, IA, Hospital Authority Rev. (Ottumwa Regional Health Center), 6.25%, 2012 (c) | | | 2,000,000 | | | 2,258,080 |
| Wapello County, IA, Hospital Authority Rev. (Ottumwa Regional Health Center), 6.375%, 2012 (c) | | | 2,595,000 | | | 2,938,318 |
| Washington Health Care Facilities Authority Rev. (Central Washington Health Services), 6.75%, 2029 | | | 1,550,000 | | | 1,633,700 |
| Washington Health Care Facilities Authority Rev. (Central Washington Health Services), 7%, 2039 | | | 3,665,000 | | | 3,895,565 |
| Washington Health Care Facilities Authority Rev. (Highline Medical Center), FHA, 6.25%, 2036 | | | 5,695,000 | | | 6,005,434 |
| Washington Health Care Facilities Authority Rev. (Virginia Mason Medical Center), “A”, 6.25%, 2042 | | | 5,075,000 | | | 5,150,871 |
| Washington Health Care Facilities Authority Rev. (Virginia Mason Medical Center), “B”, ACA, 5.75%, 2037 | | | 1,000,000 | | | 973,050 |
| Weirton, WV, Municipal Hospital Building, Commission Rev. (Weirton Hospital Medical Center), 6.375%, 2031 | | | 3,885,000 | | | 3,815,031 |
| Weslaco, TX, Health Facilities Rev. (Knapp Medical Center), 6.25%, 2012 (c) | | | 4,000,000 | | | 4,410,640 |
| West Contra Costa, CA, Healthcare District, AMBAC, 5.5%, 2029 | | | 700,000 | | | 713,391 |
| West Plains, MO, Industrial Development Authority Rev. (Ozarks Medical Center), 6.75%, 2024 | | | 810,000 | | | 785,627 |
| West Shore, PA, Hospital Authority Rev. (Holy Spirit Hospital), 6.2%, 2026 | | | 4,500,000 | | | 4,519,755 |
| West Virginia Hospital Finance Authority, Hospital Rev. (Charleston Area Medical Center), “A”, 5.625%, 2032 | | | 525,000 | | | 520,663 |
| West Virginia Hospital Finance Authority, Hospital Rev. (Thomas Health System), 6.5%, 2038 | | | 3,320,000 | | | 3,058,052 |
| Wisconsin Health & Educational Facilities Authority Rev. (Aurora Health Care, Inc.), 6.875%, 2030 | | | 2,250,000 | | | 2,325,420 |
| Wisconsin Health & Educational Facilities Authority Rev. (Aurora Health Care, Inc.), “B”, 5.125%, 2027 (b) | | | 4,155,000 | | | 4,319,580 |
| Wisconsin Health & Educational Facilities Authority Rev. (Aurora Health Care, Inc.), “B”, 5.625%, 2029 | | | 1,100,000 | | | 1,094,258 |
| Wisconsin Health & Educational Facilities Authority Rev. (Wheaton Franciscan Services), 5.25%, 2031 | | | 6,570,000 | | | 5,971,144 |
| Wisconsin Health & Educational Facilities Authority Rev. (Wheaton Franciscan Services), 5.25%, 2034 | | | 4,155,000 | | | 3,737,672 |
20
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Hospitals - continued | | | | | | |
| Yonkers, NY, Industrial Development Agency, Civic Facilities Rev. (St. John’s Riverside Hospital), “B”, 6.8%, 2016 | | $ | 1,125,000 | | $ | 1,139,839 |
| Yonkers, NY, Industrial Development Agency, Civic Facilities Rev. (St. Joseph’s Hospital), “A”, 6.15%, 2015 | | | 1,800,000 | | | 807,804 |
| Yonkers, NY, Industrial Development Agency, Civic Facilities Rev. (St. Joseph’s Hospital), “C”, 6.2%, 2020 | | | 250,000 | | | 107,788 |
| | | | | | |
| | | | | | $ | 487,424,395 |
| Healthcare Revenue - Long Term Care - 9.8% | | | | | | |
| ABAG Finance Authority, Nonprofit Corps. Rev. (Casa de las Campanas), 6%, 2037 | | $ | 825,000 | | $ | 815,092 |
| Abilene, TX, Health Facilities Development Corp., Retirement Facilities Rev. (Sears Methodist Retirement), “A”, 7%, 2033 | | | 5,155,000 | | | 4,639,655 |
| Arizona Health Facilities Authority Rev. (The Terraces Project), 7.75%, 2013 (c) | | | 2,250,000 | | | 2,753,798 |
| Bell County, TX, Health Facility Development Corp. (Advanced Living Technologies, Inc.), 8%, 2036 | | | 4,760,000 | | | 3,527,636 |
| Bucks County, PA, Industrial Development Authority Retirement Community Rev. (Ann’s Choice, Inc.), “A”, 6.125%, 2025 | | | 1,320,000 | | | 1,222,082 |
| Bucks County, PA, Industrial Development Authority Retirement Community Rev. (Ann’s Choice, Inc.), “A”, 6.25%, 2035 | | | 4,140,000 | | | 3,687,208 |
| Bucks County, PA, Industrial Development Authority Rev. (Lutheran Community Telford Center), 5.75%, 2027 | | | 620,000 | | | 515,381 |
| Bucks County, PA, Industrial Development Authority Rev. (Lutheran Community Telford Center), 5.75%, 2037 | | | 800,000 | | | 615,768 |
| California Statewide Communities Development Authority Rev. (Southern California Presbyterian Homes), 7%, 2029 | | | 1,400,000 | | | 1,482,110 |
| California Statewide Communities Development Authority Rev. (Southern California Presbyterian Homes), 7.25%, 2041 | | | 560,000 | | | 596,652 |
| Cambria County, PA, Industrial Development Authority Rev. (Beverly Enterprises, Inc.), ETM, 10%, 2012 (c) | | | 330,000 | | | 357,737 |
| Chartiers Valley, PA, Industrial & Commercial Development Authority (Asbury Health Center Project), 5.75%, 2022 | | | 500,000 | | | 443,720 |
| Chester County, PA, Industrial Development Authority Rev. (RHA Nursing Home), 8.5%, 2032 | | | 990,000 | | | 885,446 |
| Colorado Health Facilities Authority Rev. (American Baptist Homes), “A”, 5.9%, 2037 | | | 2,730,000 | | | 2,120,964 |
| Colorado Health Facilities Authority Rev. (Christian Living Communities Project), “A”, 5.75%, 2037 | | | 3,355,000 | | | 2,817,898 |
| Colorado Health Facilities Authority Rev. (Covenant Retirement Communities, Inc.), “B”, 6.125%, 2033 | | | 1,500,000 | | | 1,478,595 |
21
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Long Term Care - continued | | | | | | |
| Colorado Health Facilities Authority Rev. (Evangelical Lutheran), “A”, 6.125%, 2038 | | $ | 940,000 | | $ | 939,276 |
| Cumberland County, PA, Municipal Authority Rev. (Diakon Lutheran Social Ministries), 6.125%, 2029 | | | 905,000 | | | 873,063 |
| Cumberland County, PA, Municipal Authority Rev. (Diakon Lutheran Social Ministries), 6.35%, 2029 | | | 435,000 | | | 430,254 |
| Cumberland County, PA, Municipal Authority Rev. (Diakon Lutheran Social Ministries), 6.375%, 2039 | | | 7,060,000 | | | 6,846,788 |
| Cumberland County, PA, Municipal Authority Rev. (Diakon Lutheran Social Ministries), 6.5%, 2039 | | | 325,000 | | | 320,392 |
| Cumberland County, PA, Municipal Authority, Retirement Community Rev. (Wesley), “A”, 7.25%, 2013 (c) | | | 760,000 | | | 898,001 |
| Cumberland County, PA, Municipal Authority, Retirement Community Rev. (Wesley), “A”, 7.25%, 2013 (c) | | | 1,965,000 | | | 2,321,805 |
| East Rochester, NY, Housing Authority Rev. (Woodland Village Project), 5.5%, 2033 | | | 600,000 | | | 482,346 |
| Fulton County, GA, Residential Care Facilities (Lenbrook Project), “A”, 5%, 2027 | | | 2,500,000 | | | 1,816,500 |
| Fulton County, GA, Residential Care Facilities (Lenbrook Project), “A”, 5.125%, 2042 | | | 2,750,000 | | | 1,796,960 |
| Fulton County, GA, Residential Care Facilities, Elderly Authority Rev. (Canterbury Court), “A”, 6.125%, 2034 | | | 1,020,000 | | | 886,125 |
| Georgia Medical Center Hospital Authority Rev. (Spring Harbor Green Island Project), 5.25%, 2037 | | | 4,510,000 | | | 3,494,799 |
| Hamden, CT, Facility Rev. (Whitney Center Project), “A”, 7.625%, 2030 | | | 590,000 | | | 602,343 |
| Hamden, CT, Facility Rev. (Whitney Center Project), “A”, 7.75%, 2043 | | | 3,335,000 | | | 3,394,630 |
| Hawaii Department of Budget & Finance, Special Purpose Rev. (15 Craigside Project), “A”, 8.75%, 2029 | | | 415,000 | | | 454,043 |
| Hawaii Department of Budget & Finance, Special Purpose Rev. (15 Craigside Project), “A”, 9%, 2044 | | | 1,190,000 | | | 1,296,434 |
| Hawaii Department of Budget & Finance, Special Purpose Rev. (Kahala Nui Senior Living Community), 8%, 2033 | | | 1,600,000 | | | 1,710,352 |
| HFDC of Central Texas, Inc., Retirement Facilities Rev. (Legacy at Willow Bend), “A”, 5.625%, 2026 | | | 1,500,000 | | | 1,226,700 |
| Huntsville-Redstone Village, AL, Special Care Facilities Financing Authority (Redstone Village Project), 5.5%, 2028 | | | 2,265,000 | | | 1,632,295 |
| Huntsville-Redstone Village, AL, Special Care Facilities Financing Authority (Redstone Village Project), 5.5%, 2043 | | | 1,560,000 | | | 1,005,794 |
| Illinois Finance Authority Rev. (Clare at Water Tower), “A”, 6%, 2025 (a) | | | 1,510,000 | | | 606,522 |
22
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Long Term Care - continued | | | | | | |
| Illinois Finance Authority Rev. (Franciscan Communities, Inc.), “A”, 5.5%, 2027 | | $ | 1,600,000 | | $ | 1,181,792 |
| Illinois Finance Authority Rev. (Franciscan Communities, Inc.), “A”, 5.5%, 2037 | | | 2,200,000 | | | 1,488,564 |
| Illinois Finance Authority Rev. (Friendship Village), “A”, 5.375%, 2025 | | | 4,630,000 | | | 3,964,021 |
| Illinois Finance Authority Rev. (Landing at Plymouth Place), “A”, 6%, 2037 | | | 1,510,000 | | | 1,200,284 |
| Illinois Finance Authority Rev. (Montgomery Place), “A”, 5.75%, 2038 | | | 1,730,000 | | | 1,340,127 |
| Illinois Finance Authority Rev., Bond Anticipation Notes (Tallgrass), 13%, 2012 | | | 790,000 | | | 818,859 |
| Iowa Finance Authority, Senior Housing Rev. (Bethany Life Communities), “A”, 5.55%, 2041 | | | 770,000 | | | 560,421 |
| Iowa Finance Authority, Health Care Facilities Rev. (Care Initiatives), 9.25%, 2011 (c) | | | 3,705,000 | | | 4,201,803 |
| Iowa Finance Authority, Health Care Facilities Rev. (Care Initiatives), “A”, 5.5%, 2025 | | | 2,495,000 | | | 2,004,458 |
| Iowa Finance Authority, Health Care Facilities Rev. (Care Initiatives), “B”, 5.75%, 2018 | | | 2,330,000 | | | 2,112,588 |
| James City County, VA, Economic Development (WindsorMeade Project), “A”, 5.4%, 2027 | | | 2,180,000 | | | 1,330,476 |
| James City County, VA, Economic Development (WindsorMeade Project), “A”, 5.5%, 2037 | | | 2,710,000 | | | 1,542,695 |
| Kalamazoo, MI, Economic Development Corp. Rev. (Heritage Community), 5.375%, 2027 | | | 750,000 | | | 602,505 |
| Kalamazoo, MI, Economic Development Corp. Rev. (Heritage Community), 5.5%, 2036 | | | 2,200,000 | | | 1,665,378 |
| Lenexa, KS, Health Care Facilities Rev. (Lakeview Village, Inc.), 5.375%, 2027 | | | 1,185,000 | | | 1,008,305 |
| Lenexa, KS, Health Care Facilities Rev. (Lakeview Village, Inc.), 7.125%, 2029 | | | 1,555,000 | | | 1,566,414 |
| Lenexa, KS, Health Care Facilities Rev. (Lakeview Village, Inc.), “C”, 6.875%, 2012 (c) | | | 1,250,000 | | | 1,427,563 |
| Loves Park, IL (Hoosier Care), 7.125%, 2034 | | | 1,805,000 | | | 1,522,247 |
| Massachusetts Development Finance Agency Rev. (Adventcare), “A”, 6.75%, 2037 | | | 4,640,000 | | | 3,911,706 |
| Massachusetts Development Finance Agency Rev. (Linden Ponds, Inc.), “A”, 5.5%, 2027 | | | 1,235,000 | | | 936,896 |
| Massachusetts Development Finance Agency Rev. (Linden Ponds, Inc.), “A”, 5.75%, 2035 | | | 310,000 | | | 227,701 |
23
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Long Term Care - continued | | | | | | |
| Massachusetts Development Finance Agency Rev. (The Groves in Lincoln), “A”, 7.75%, 2039 | | $ | 680,000 | | $ | 671,364 |
| Massachusetts Development Finance Agency Rev. (The Groves in Lincoln), “A”, 7.875%, 2044 | | | 1,010,000 | | | 1,005,667 |
| Massachusetts Industrial Finance Agency Rev. (GF/Revere, Inc.), 6.6%, 2025 | | | 5,985,000 | | | 5,171,758 |
| Millbrae, CA, Residential Facilities Rev. (Magnolia of Millbrae), “A”, 7.375%, 2027 | | | 5,835,000 | | | 5,747,125 |
| Montgomery County, PA, Higher Education & Health Authority Rev. (AHF/Montgomery), 6.875%, 2036 | | | 3,705,000 | | | 3,099,788 |
| Montgomery County, PA, Industrial Development Authority Rev. (Whitemarsh Continuing Care), 6.125%, 2028 | | | 750,000 | | | 594,247 |
| Montgomery County, PA, Industrial Development Authority Rev. (Whitemarsh Continuing Care), 6.25%, 2035 | | | 1,490,000 | | | 1,120,331 |
| Nassau County, NY, Industrial Development Agency Continuing Care, 6.7%, 2043 | | | 1,500,000 | | | 1,362,465 |
| Nassau County, NY, Industrial Development Agency Continuing Care (Amsterdam at Harborside), “A”, 6.5%, 2027 | | | 3,250,000 | | | 3,096,275 |
| New Jersey Economic Development Authority Rev. (Lions Gate), “A”, 5.875%, 2037 | | | 2,200,000 | | | 1,728,166 |
| New Jersey Economic Development Authority Rev. (Seabrook Village, Inc.), 5.25%, 2036 | | | 2,735,000 | | | 2,189,778 |
| New Jersey Health Care Facilities Financing Authority Rev. (Cherry Hill), 8%, 2027 | | | 4,000,000 | | | 3,013,240 |
| Norfolk, VA, Redevelopment & Housing Authority Rev. (Fort Norfolk Retirement Community), “A”, 6%, 2025 | | | 785,000 | | | 708,965 |
| Norfolk, VA, Redevelopment & Housing Authority Rev. (Fort Norfolk Retirement Community), “A”, 6.125%, 2035 | | | 3,480,000 | | | 3,002,822 |
| Olathe, KS, Senior Living Facilities Rev. (Catholic Care Campus, Inc.), “A”, 6%, 2038 | | | 1,700,000 | | | 1,387,047 |
| Orange County, FL, Health Facilities Authority Rev. (Orlando Lutheran Tower), 5.5%, 2038 | | | 1,180,000 | | | 901,862 |
| Sarasota County, FL, Health Facility Authority Rev. (Sarasota Manatee), 5.75%, 2037 | | | 1,790,000 | | | 1,412,238 |
| Sarasota County, FL, Health Facility Authority Rev. (Sarasota Manatee), 5.75%, 2045 | | | 395,000 | | | 302,969 |
| Scott County, IA, Rev. (Christian Retirement Homes, Inc.), 5.25%, 2021 | | | 2,410,000 | | | 2,106,677 |
| Scott County, IA, Rev. (Ridgecrest Village), 5.25%, 2027 | | | 2,055,000 | | | 1,635,451 |
| Shelby County, TN, Health, Educational & Housing Facilities Board Rev. (Germantown Village), “A”, 7.25%, 2034 | | | 2,470,000 | | | 2,347,389 |
24
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Healthcare Revenue - Long Term Care - continued | | | | | | |
| South Carolina Jobs & Economic Development Authority Rev. (Lutheran Homes of South Carolina), 5.5%, 2028 | | $ | 470,000 | | $ | 411,508 |
| South Carolina Jobs & Economic Development Authority Rev. (Lutheran Homes of South Carolina), 5.625%, 2042 | | | 550,000 | | | 449,482 |
| South Carolina Jobs & Economic Development Authority Rev. (Woodlands at Furman), “A”, 6%, 2027 | | | 1,840,000 | | | 1,388,869 |
| South Carolina Jobs & Economic Development Authority Rev. (Woodlands at Furman), “A”, 6%, 2042 | | | 1,690,000 | | | 1,154,000 |
| St. John’s County, FL, Industrial Development Authority (Bayview Project), “A”, 5.2%, 2027 | | | 1,590,000 | | | 1,183,501 |
| St. John’s County, FL, Industrial Development Authority (Bayview Project), “A”, 5.25%, 2041 | | | 2,800,000 | | | 1,873,704 |
| St. John’s County, FL, Industrial Development Authority (Glenmoor Project), “A”, 5.25%, 2026 | | | 1,000,000 | | | 778,910 |
| St. Joseph County, IN, Economic Development Rev. (Holy Cross Village at Notre Dame), “A”, 6%, 2038 | | | 475,000 | | | 373,901 |
| Sterling, IL (Hoosier Care), 7.125%, 2034 | | | 1,265,000 | | | 1,063,511 |
| Suffolk County, NY, Industrial Development Agency (Medford Hamlet Assisted Living), 6.375%, 2039 | | | 1,500,000 | | | 1,154,760 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp. Retirement Facility (Air Force Village), 6.125%, 2029 | | | 450,000 | | | 441,112 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp. Retirement Facility (Air Force Village), 6.375%, 2044 | | | 3,515,000 | | | 3,449,516 |
| Tarrant County, TX, Cultural Education Facilities Finance Corp. Retirement Facility (Air Force Village), 8.25%, 2044 | | | 6,750,000 | | | 6,568,357 |
| Travis County, TX, Health Facilities Development Corp., Retirement Facilities Rev. (Querencia Barton Creek), 5.5%, 2025 | | | 1,440,000 | | | 1,221,998 |
| Ulster County, NY, Industrial Development Agency (Woodland Pond), “A”, 6%, 2037 | | | 3,925,000 | | | 3,041,600 |
| Wisconsin Health & Educational Facilities Authority Rev. (All Saints Assisted Living Project), 6%, 2037 | | | 1,230,000 | | | 876,535 |
| Wisconsin Health & Educational Facilities Authority Rev. (American Eagle Nursing Home), 7.15%, 2028 | | | 3,900,000 | | | 3,840,837 |
| Wisconsin Health & Educational Facilities Authority Rev. (St. John’s Community, Inc.), “A”, 7.25%, 2029 | | | 485,000 | | | 497,076 |
| Wisconsin Health & Educational Facilities Authority Rev. (St. John’s Community, Inc.), “A”, 7.625%, 2039 | | | 1,960,000 | | | 2,040,301 |
| | | | | | |
| | | | | | $ | 170,025,069 |
| Human Services - 1.0% | | | | | | |
| Alaska Industrial Development & Export Authority Community Provider Rev. (Boys & Girls Home of Alaska, Inc.), 5.875%, 2027 | | $ | 3,790,000 | | $ | 2,803,766 |
25
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Human Services - continued | | | | | | |
| Alaska Industrial Development & Export Authority Community Provider Rev. (Boys & Girls Home of Alaska, Inc.), 6%, 2036 | | $ | 1,175,000 | | $ | 818,317 |
| Louisiana Local Government, Environmental Facilities & Community Development Authority Rev. (CDF Healthcare), “A”, 7%, 2036 | | | 1,600,000 | | | 1,444,432 |
| Louisiana Local Government, Environmental Facilities & Community Development Authority Rev. (CDF Healthcare), “C”, 7%, 2036 | | | 1,270,000 | | | 1,146,518 |
| Louisiana Local Government, Environmental Facilities & Community Development Authority Rev. (Westside Rehab Center Project), “A”, 6.85%, 2036 | | | 3,415,000 | | | 2,826,664 |
| Louisiana Local Government, Environmental Facilities & Community Development Authority Rev. (Westside Rehab Center Project), “B”, 6.5%, 2013 | | | 85,000 | | | 83,561 |
| Montgomery County, PA, Industrial Development Authority (Wordsworth Academy), 8%, 2024 | | | 2,850,000 | | | 2,747,941 |
| New York, NY, Industrial Development Agency Rev. (Special Needs Facilities Pooled Program), 6.1%, 2012 | | | 635,000 | | | 617,461 |
| Orange County, FL, Health Facilities Authority Rev. (GF/Orlando Healthcare Facilities), 8.875%, 2021 | | | 1,925,000 | | | 1,940,111 |
| Orange County, FL, Health Facilities Authority Rev. (GF/Orlando Healthcare Facilities), 9%, 2031 | | | 2,185,000 | | | 2,162,210 |
| Osceola County, FL, Industrial Development Authority Rev. (Community Provider), 7.75%, 2017 | | | 497,000 | | | 494,465 |
| Philadelphia, PA, Industrial Development Authority Rev., 6.125%, 2019 | | | 1,250,000 | | | 785,262 |
| | | | | | |
| | | | | | $ | 17,870,708 |
| Industrial Revenue - Airlines - 4.4% | | | | | | |
| Alliance Airport Authority, TX (American Airlines, Inc.), 5.25%, 2029 | | $ | 4,265,000 | | $ | 2,680,766 |
| Chicago, IL, O’Hare International Airport Special Facilities Rev. (American Airlines, Inc.), 5.5%, 2030 | | | 790,000 | | | 537,311 |
| Clayton County, GA, Development Authority Special Facilities Rev. (Delta Airlines, Inc.), “A”, 8.75%, 2029 | | | 1,740,000 | | | 1,789,607 |
| Clayton County, GA, Development Authority Special Facilities Rev. (Delta Airlines, Inc.), “B”, 9%, 2035 | | | 1,310,000 | | | 1,322,877 |
| Dallas Fort Worth, TX, International Airport Facility Improvement Corp. (American Airlines, Inc.), 5.5%, 2030 | | | 3,230,000 | | | 2,084,513 |
| Denver, CO, City & County Airport Rev. (United Airlines), 5.25%, 2032 | | | 13,545,000 | | | 9,696,459 |
| Denver, CO, City & County Airport Rev. (United Airlines), 5.75%, 2032 | | | 3,460,000 | | | 2,656,830 |
26
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Industrial Revenue - Airlines - continued | | | | | | |
| Houston, TX, Airport Systems Rev., Special Facilities (Continental, Inc.), “E”, 6.75%, 2029 | | $ | 5,045,000 | | $ | 4,754,004 |
| Los Angeles, CA, Regional Airport Lease Rev. (American Airlines, Inc.), “C”, 7%, 2012 | | | 1,315,000 | | | 1,313,159 |
| Los Angeles, CA, Regional Airport Lease Rev. (American Airlines, Inc.), “C”, 7.5%, 2024 | | | 7,015,000 | | | 6,906,268 |
| New Jersey Economic Development Authority, Special Facilities Rev. (Continental Airlines, Inc.), 6.25%, 2029 | | | 6,660,000 | | | 5,879,381 |
| New York, NY, City Industrial Development Agencies Rev. (American Airlines, Inc.), 7.5%, 2016 | | | 3,870,000 | | | 3,834,860 |
| New York, NY, City Industrial Development Agencies Rev. (American Airlines, Inc.), 7.625%, 2025 | | | 21,950,000 | | | 21,511,439 |
| New York, NY, City Industrial Development Agencies Rev. (American Airlines, Inc.), 7.75%, 2031 | | | 11,820,000 | | | 11,554,405 |
| | | | | | |
| | | | | | $ | 76,521,879 |
| Industrial Revenue - Chemicals - 1.0% | | | | | | |
| Brazos River, TX, Harbor Navigation District (Dow Chemical Co.), “B-2”, 4.95%, 2033 | | $ | 1,625,000 | | $ | 1,459,169 |
| Louisiana Environmental Facilities & Community Development Authority Rev. (Westlake Chemical), 6.75%, 2032 | | | 4,800,000 | | | 4,944,960 |
| Michigan Strategic Fund Ltd. Obligation Rev. (Dow Chemical Co.), 6.25%, 2014 | | | 5,125,000 | | | 5,796,016 |
| Red River Authority, TX, Pollution Control Rev. (Celanese Project) “A”, 6.45%, 2030 | | | 430,000 | | | 437,981 |
| Red River Authority, TX, Pollution Control Rev. (Celanese Project) “B”, 6.7%, 2030 | | | 5,380,000 | | | 5,400,982 |
| York County, SC, Industrial Rev. (Hoechst Celanese), 5.7%, 2024 | | | 130,000 | | | 118,674 |
| | | | | | |
| | | | | | $ | 18,157,782 |
| Industrial Revenue - Environmental Services - 1.7% | | | | | | |
| California Pollution Control Financing Authority, Solid Waste Disposal Rev. (Browning Ferris, Inc.), “A”, 5.8%, 2016 | | $ | 5,000,000 | | $ | 5,013,550 |
| Cobb County, GA, Development Authority, Solid Waste Disposal Rev. (Waste Management, Inc.), “A”, 5%, 2033 | | | 2,780,000 | | | 2,446,900 |
| Colorado Housing & Finance Authority, Solid Waste Rev. (Waste Management, Inc.), 5.7%, 2018 | | | 540,000 | | | 573,286 |
| Director of the State of Nevada Department of Business & Industry Rev. (Republic Services, Inc.), 5.625%, 2026 (b) | | | 2,000,000 | | | 2,071,740 |
| Gulf Coast Waste Disposal Authority (Waste Management, Inc.), 5.2%, 2028 | | | 3,260,000 | | | 3,240,733 |
| Henrico County, VA, Industrial Development Authority Rev. (Browning Ferris, Inc.), 5.45%, 2014 | | | 2,000,000 | | | 2,083,360 |
27
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Industrial Revenue - Environmental Services - continued | | | |
| Mission, TX, Economic Development Corp., Solid Waste Disposal Rev. (Allied Waste N.A., Inc.), “A”, 5.2%, 2018 | | $ | 3,060,000 | | $ | 3,041,701 |
| New Hampshire Business Finance Authority, Solid Waste Disposal Rev. (Waste Management, Inc.), 5.2%, 2027 | | | 2,890,000 | | | 2,860,580 |
| New Morgan, PA, Industrial Development Authority, Solid Waste Disposal Rev. (New Morgan Landfill Co., Inc./Browning Ferris, Inc.), 6.5%, 2019 | | | 2,500,000 | | | 2,503,675 |
| Ohio Water Development Authority, Solid Waste Rev. (Allied Waste N.A. Inc.), “A”, 5.15%, 2015 | | | 1,500,000 | | | 1,511,955 |
| Yavapai County, AZ, Industrial Development Authority Rev. (Waste Management, Inc.), 4.9%, 2028 | | | 4,615,000 | | | 4,401,787 |
| | | | | | |
| | | | | | $ | 29,749,267 |
| Industrial Revenue - Metals - 0.2% | | | | | | |
| Burns Harbor, IN, Solid Waste Disposal Facilities Rev. (Bethlehem Steel), 8%, 2024 (d) | | $ | 10,455,000 | | $ | 1,046 |
| Cambria County, PA, Industrial Development Authority Rev. (Bethlehem Steel), 7.5%, 2015 (d) | | | 3,890,000 | | | 389 |
| Jacksonville, FL, Economic Development Commission, Industrial Development Authority Rev. (Gerdau Ameristeel U.S., Inc.), 5.3%, 2037 | | | 4,605,000 | | | 3,324,027 |
| | | | | | |
| | | | | | $ | 3,325,462 |
| Industrial Revenue - Other - 2.1% | | | | | | |
| Aztalan, WI, Exempt Facility Rev. (Renew Energy LLC), 7.5%, 2018 (d) | | $ | 2,955,000 | | $ | 466,299 |
| Baker, FL, Correctional Development Corp. (Baker County Detention Center), 7.5%, 2030 | | | 1,560,000 | | | 1,325,688 |
| Bayonne, NJ, Redevelopment Agency (Royal Caribbean Project), “A”, 5.375%, 2035 | | | 2,500,000 | | | 1,863,850 |
| California Statewide Communities, Development Authority Environmental Facilities (Microgy Holdings), 9%, 2038 (d) | | | 107,091 | | | 21,150 |
| Gulf Coast, TX, Industrial Development Authority, Facilities Rev. (Microgy Holdings), 7%, 2036 (d) | | | 792,801 | | | 156,578 |
| Gulf Coast, TX, Waste Disposal Rev. (Valero Energy Corp.), 6.65%, 2032 | | | 1,500,000 | | | 1,501,305 |
| Janesville, WI, Industrial Development Rev. (Simmons Manufacturing Co.), 7%, 2017 | | | 3,900,000 | | | 3,904,992 |
| Liberty, NY, Development Corp. Rev. (Goldman Sachs Headquarters), 5.25%, 2035 | | | 2,640,000 | | | 2,650,930 |
| New Jersey Economic Development Authority Rev. (GMT Realty LLC), “B”, 6.875%, 2037 | | | 1,570,000 | | | 1,187,328 |
28
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Industrial Revenue - Other - continued | | | | | | |
| New Jersey Economic Development Authority Rev. (GMT Realty LLC), “C”, 6.5%, 2015 | | $ | 2,300,000 | | $ | 2,275,896 |
| New York, NY, City Industrial Development Agency Rev., Liberty Bonds (IAC/InterActiveCorp), 5%, 2035 | | | 1,880,000 | | | 1,420,754 |
| Park Creek Metropolitan District, CO, Rev. (Custodial Receipts), “CR-1”, 7.875%, 2032 (b)(n) | | | 4,210,000 | | | 4,294,621 |
| Park Creek Metropolitan District, CO, Rev. (Custodial Receipts), “CR-2”, 7.875%, 2032 (b)(n) | | | 1,855,000 | | | 1,892,285 |
| Peninsula Ports Authority, VA, Coal Terminal Rev. (Dominion Terminal Associates), 6%, 2033 | | | 530,000 | | | 536,747 |
| Pennsylvania Economic Development Financing Authority, Finance Authority Facilities Rev. (Amtrak), “A”, 6.25%, 2031 | | | 1,625,000 | | | 1,648,871 |
| Philadelphia, PA, Industrial Development Authority Rev. (Host Marriott LP), 7.75%, 2017 | | | 2,000,000 | | | 2,004,640 |
| St. John the Baptist Parish, LA (Marathon Oil Corp.), “A”, 5.125%, 2037 | | | 4,000,000 | | | 3,783,480 |
| Texas Midwest Public Facilities Corp. Rev. (Secure Treatment Facilities Project), 9%, 2030 | | | 1,605,000 | | | 1,662,010 |
| Tooele County, UT, Hazardous Waste Treatment Rev. (Union Pacific Corp.), 5.7%, 2026 | | | 3,130,000 | | | 3,140,736 |
| | | | | | |
| | | | | | $ | 35,738,160 |
| Industrial Revenue - Paper - 1.6% | | | | | | |
| Arkansas Development Finance Authority, Industrial Facilities Rev. (Potlatch Corp.), “A”, 7.75%, 2025 | | $ | 1,200,000 | | $ | 1,216,116 |
| Butler, AL, Industrial Development Board, Solid Waste Disposal Rev. (Georgia Pacific Corp.), 5.75%, 2028 | | | 4,010,000 | | | 3,631,977 |
| Cass County, TX, Industrial Development Corp. (International Paper Co.), “A”, 4.625%, 2027 | | | 3,750,000 | | | 2,954,550 |
| De Soto Parish, LA, Environmental Improvement Rev. (International Paper Co.), 6.35%, 2025 | | | 1,650,000 | | | 1,662,029 |
Delta County, MI, Economic Development Corp., Environmental Improvement Rev. (Mead Westvaco Escanaba), “A”,
6.25%, 2012 (c) | | | 3,100,000 | | | 3,474,201 |
Delta County, MI, Economic Development Corp., Environmental Improvement Rev. (Mead Westvaco Escanaba), “B”,
6.45%, 2012 (c) | | | 1,100,000 | | | 1,220,923 |
| Effingham County, GA, Industrial Development Authority, Pollution Control (Georgia Pacific Corp. Project), 6.5%, 2031 | | | 2,195,000 | | | 2,217,323 |
| Escambia County, FL, Environmental Improvement Rev. (International Paper Co.), “A”, 4.75%, 2030 | | | 1,940,000 | | | 1,506,817 |
29
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Industrial Revenue - Paper - continued | | | | | | |
| Hodge, LA, Utilities Rev. (Stone Container Corp.), 7.45%, 2024 (d) | | $ | 2,475,000 | | $ | 2,178,000 |
| Phenix City, AL, Industrial Development Board Environmental Improvement Rev., “A” (MeadWestvaco Coated Board Project), 6.35%, 2035 | | | 4,000,000 | | | 3,614,760 |
| Rockdale County, GA, Development Authority Project Rev. (Visy Paper Project), “A”, 6.125%, 2034 | | | 2,835,000 | | | 2,297,682 |
| Sabine River Authority Rev., Louisiana Water Facilities (International Paper Co.), 6.2%, 2025 | | | 2,250,000 | | | 2,290,050 |
| West Point, VA, Industrial Development Authority, Solid Waste Disposal Rev. (Chesapeake Corp.), “A”, 6.375%, 2019 (d) | | | 800,000 | | | 8,240 |
| West Point, VA, Industrial Development Authority, Solid Waste Disposal Rev. (Chesapeake Corp.), “B”, 6.25%, 2019 (d) | | | 6,830,000 | | | 70,349 |
| | | | | | |
| | | | | | $ | 28,343,017 |
| Miscellaneous Revenue - Entertainment & Tourism - 1.1% | | | |
| Agua Caliente Band of Cahuilla Indians, CA, Rev., 6%, 2018 (n) | | $ | 1,750,000 | | $ | 1,701,578 |
| Brooklyn, NY, Arena Local Development Corp. (Barclays Center Project), 6%, 2030 | | | 2,265,000 | | | 2,315,691 |
| Brooklyn, NY, Arena Local Development Corp. (Barclays Center Project), 6.25%, 2040 | | | 1,475,000 | | | 1,504,441 |
| Brooklyn, NY, Arena Local Development Corp. (Barclays Center Project), 6.375%, 2043 | | | 1,035,000 | | | 1,055,172 |
| Capital Trust Agency, FL, Fort Lauderdale Project (Cargo Acquisition Co. Obligated Group), 5.75%, 2032 | | | 1,000,000 | | | 829,170 |
| Harris County-Houston, TX, Sports Authority Rev., NATL, 0%, 2032 | | | 6,310,000 | | | 1,162,491 |
| Mississippi Development Bank, Special Obligation (Diamond Lakes Utilities), 6.25%, 2017 | | | 2,400,000 | | | 2,231,040 |
| New York Liberty Development Corp. Rev. (National Sports Museum), “A”, 6.125%, 2019 (d) | | | 1,157,197 | | | 3,472 |
| New York, NY, City Industrial Development Agency Rev. (Queens Baseball Stadium), ASSD GTY, 6.125%, 2029 | | | 280,000 | | | 315,717 |
| New York, NY, City Industrial Development Agency Rev. (Queens Baseball Stadium), ASSD GTY, 6.375%, 2039 | | | 210,000 | | | 233,419 |
| New York, NY, City Industrial Development Agency Rev. (Queens Baseball Stadium), ASSD GTY, 6.5%, 2046 | | | 830,000 | | | 927,459 |
| Seminole Tribe, FL, Special Obligation Rev., “A”, 5.75%, 2022 (n) | | | 4,150,000 | | | 4,033,426 |
| Seminole Tribe, FL, Special Obligation Rev., “A”, 5.25%, 2027 (n) | | | 1,840,000 | | | 1,642,918 |
| Seneca Nation Indians, NY, Capital Improvements Authority, Special Obligation, 5%, 2023 (n) | | | 1,555,000 | | | 1,318,920 |
| | | | | | |
| | | | | | $ | 19,274,914 |
30
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Miscellaneous Revenue - Other - 1.8% | | | | | | |
| Austin, TX, Convention Center (Convention Enterprises, Inc.), “A”, 6.7%, 2011 (c) | | $ | 2,000,000 | | $ | 2,116,740 |
| Austin, TX, Convention Center (Convention Enterprises, Inc.), “A”, SYNCORA, 5.25%, 2017 | | | 845,000 | | | 817,867 |
| Austin, TX, Convention Center (Convention Enterprises, Inc.), “A”, SYNCORA, 5.25%, 2024 | | | 4,640,000 | | | 4,188,714 |
| Austin, TX, Convention Center (Convention Enterprises, Inc.), “A”, SYNCORA, 5%, 2034 | | | 265,000 | | | 205,147 |
| Austin, TX, Convention Center (Convention Enterprises, Inc.), “B”, 5.75%, 2034 | | | 2,705,000 | | | 2,187,236 |
| Cleveland-Cuyahoga County, OH, Port Authority Rev. (Columbia National Group), 5%, 2020 | | | 1,340,000 | | | 1,099,323 |
| Cleveland-Cuyahoga County, OH, Port Authority Rev. (Fairmount), “B”, LOC, 5.125%, 2025 | | | 515,000 | | | 430,725 |
| Hardeman County, TN, Correctional Facilities Rev., 7.75%, 2017 | | | 4,945,000 | | | 4,951,280 |
| Madison County, FL, Rev. (Twin Oaks Project), “A”, 6%, 2025 | | | 1,525,000 | | | 1,194,106 |
| New Jersey Economic Development Authority Rev. (Kapkowski Project), “B”, 6.5%, 2018 | | | 3,540,000 | | | 3,654,838 |
| New Orleans, LA, Aviation Board Gulf Opportunity Zone CFC Rev. (Consolidated Rental Car), “A”, 6.25%, 2030 | | | 2,050,000 | | | 2,113,365 |
| Riversouth, OH, Authority Rev. (Lazarus Building), “A”, 5.75%, 2027 | | | 3,975,000 | | | 3,429,431 |
| Southwestern Illinois Development Authority Rev., Solid Waste Disposal Rev., 5.9%, 2014 | | | 990,000 | | | 961,597 |
| Summit County, OH, Port Authority Building Rev. (Seville Project), “A”, 5.1%, 2025 | | | 600,000 | | | 503,418 |
| Summit County, OH, Port Authority Building Rev. (Twinsburg Township), “D”, 5.125%, 2025 | | | 440,000 | | | 370,207 |
| Summit County, OH, Port Authority Building Rev. (Workforce Policy Board), “F”, 4.875%, 2025 | | | 2,655,000 | | | 2,162,497 |
| Toledo-Lucas County, OH, Port Authority Development Rev. (Northwest Ohio Bond Fund), “C”, 5.125%, 2025 | | | 250,000 | | | 208,127 |
| | | | | | |
| | | | | | $ | 30,594,618 |
| Multi-Family Housing Revenue - 1.0% | | | | | | |
| Bay County, FL, Housing Finance Authority, Multi-Family Rev. (Andrews Place II Apartments), FSA, 5%, 2035 | | $ | 635,000 | | $ | 594,131 |
| Bay County, FL, Housing Finance Authority, Multi-Family Rev. (Andrews Place II Apartments), FSA, 5.1%, 2046 | | | 1,155,000 | | | 1,068,860 |
| Fairfax County, VA, Economic Development Authority, Senior Living (Lewinsville Retirement Village), “A”, 5.25%, 2032 | | | 1,215,000 | | | 861,484 |
| Indianapolis, IN, Multi-Family Rev. (Cambridge Station Apartments II), FNMA, 5.25%, 2039 (b) | | | 1,345,000 | | | 1,359,015 |
31
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Multi-Family Housing Revenue - continued | | | | | | |
| Mississippi Home Corp. Rev. (Kirkwood Apartments Project), 6.8%, 2037 | | $ | 3,850,000 | | $ | 2,517,592 |
| MuniMae TE Bond Subsidiary LLC, 7.5%, 2049 (n) | | | 5,843,143 | | | 5,552,038 |
| MuniMae TE Bond Subsidiary LLC, 5.4%, 2049 (z) | | | 2,000,000 | | | 1,310,260 |
| MuniMae TE Bond Subsidiary LLC, 5.9%, 2049 (z) | | | 2,000,000 | | | 1,040,060 |
| North Charleston, SC, Housing Authority Rev. (Horizon Village), “A”, GNMA, 5.15%, 2048 | | | 1,380,000 | | | 1,309,592 |
| Seattle, WA, Housing Authority Rev., Capped Fund Program (High Rise Rehab), “I”, FSA, 5%, 2025 | | | 1,000,000 | | | 993,460 |
| | | | | | |
| | | | | | $ | 16,606,492 |
| Sales & Excise Tax Revenue - 0.5% | | | | | | |
| Desloge, MO, Tax Increment Rev. (U.S. Highway 67 Street Redevelopment), 5.2%, 2020 | | $ | 675,000 | | $ | 631,739 |
| Massachusetts Bay Transportation Authority, Sales Tax Rev., “A-1”, 5.25%, 2029 | | | 3,150,000 | | | 3,659,292 |
| Puerto Rico Sales Tax Financing Corp., Sales Tax Rev., “A”, 0%, 2033 | | | 2,655,000 | | | 1,514,863 |
| Utah Transit Authority Sales Tax Rev., “A”, NATL, 0%, 2028 | | | 6,825,000 | | | 2,457,273 |
| | | | | | |
| | | | | | $ | 8,263,167 |
| Single Family Housing - Local - 0.4% | | | | | | |
| Cook County, IL, Single Family Mortgage Rev., “A”, 0%, 2015 | | $ | 35,000 | | $ | 9,269 |
| Corpus Christi, TX, Housing Finance Corp., Single Family Mortgage Rev., 0%, 2011 | | | 1,090,000 | | | 75,657 |
| Escambia County, FL, Single Family Mortgage Rev., GNMA, 6.95%, 2024 | | | 135,000 | | | 142,740 |
| Jefferson County, TX, Housing Finance Corp., NATL, 0%, 2015 | | | 375,000 | | | 204,671 |
| Jefferson Parish, LA, Single Family Mortgage Rev., “B-1”, GNMA, 6.625%, 2023 | | | 310,000 | | | 328,423 |
| Jefferson Parish, LA, Single Family Mortgage Rev., “D-1”, GNMA, 7.5%, 2026 | | | 30,000 | | | 31,978 |
| Nortex, TX, Housing Finance Corp., Single Family Mortgage Rev., “B”, 5.5%, 2038 | | | 90,000 | | | 71,785 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A”, GNMA, 6.45%, 2029 | | | 170,000 | | | 175,148 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A”, GNMA, 5.9%, 2035 | | | 600,000 | | | 609,798 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A”, GNMA, 6.25%, 2035 | | | 295,000 | | | 313,013 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-1”, GNMA, 5.75%, 2037 | | | 180,000 | | | 183,323 |
32
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Single Family Housing - Local - continued | | | | | | |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-2”, GNMA, 5.75%, 2037 | | $ | 780,000 | | $ | 797,909 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-3”, GNMA, 6%, 2035 | | | 480,000 | | | 494,179 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-4”, GNMA, 5.625%, 2036 | | | 540,000 | | | 551,848 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-4”, GNMA, 5.85%, 2037 | | | 1,185,000 | | | 1,257,522 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “A-5”, GNMA, 5.9%, 2037 | | | 370,000 | | | 379,653 |
| Sedgwick & Shawnee Counties, KS, Single Family Housing Rev., “B-2”, GNMA, 6.45%, 2033 | | | 525,000 | | | 544,771 |
| | | | | | |
| | | | | | $ | 6,171,687 |
| Single Family Housing - State - 0.8% | | | | | | |
| Colorado Housing & Finance Authority Rev., “B-2”, 6.1%, 2023 | | $ | 220,000 | | $ | 223,650 |
| Colorado Housing & Finance Authority Rev., “B-3”, 6.55%, 2025 | | | 12,000 | | | 12,114 |
| Colorado Housing & Finance Authority Rev., “B-3”, 6.55%, 2033 | | | 240,000 | | | 251,995 |
| Colorado Housing & Finance Authority Rev., “C-2”, 5.9%, 2023 | | | 370,000 | | | 384,719 |
| Colorado Housing & Finance Authority Rev., “C-2”, FHA, 6.6%, 2032 | | | 345,000 | | | 372,014 |
| Colorado Housing & Finance Authority Rev., “C-3”, 6.75%, 2021 | | | 95,000 | | | 99,511 |
| Colorado Housing & Finance Authority Rev., “C-3”, 7.15%, 2030 | | | 40,000 | | | 40,735 |
| Iowa Finance Authority Single Family Mortgage Rev. (Mortgage Backed Securities), “A”, GNMA, 5%, 2028 | | | 1,095,000 | | | 1,115,455 |
| Iowa Finance Authority Single Family Mortgage Rev. (Mortgage Backed Securities), “A”, GNMA, 5.3%, 2033 | | | 775,000 | | | 793,755 |
| Louisiana Housing Finance Agency, Single Family Mortgage Rev., “B-2”, GNMA, 7.55%, 2031 | | | 25,000 | | | 25,788 |
| Mississippi Home Corp., Single Family Rev., “A”, GNMA, 6.1%, 2034 | | | 1,520,000 | | | 1,542,268 |
| Mississippi Home Corp., Single Family Rev., “A-2”, GNMA, 6.5%, 2032 | | | 1,395,000 | | | 1,454,036 |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), GNMA, 7.45%, 2031 | | | 65,000 | | | 67,528 |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), GNMA, 6.35%, 2032 | | | 250,000 | | | 251,637 |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), GNMA, 6.85%, 2032 | | | 195,000 | | | 201,870 |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), GNMA, 6.75%, 2034 | | | 195,000 | | | 204,175 |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), “B”, GNMA, 6.7%, 2030 | | | 405,000 | | | 407,819 |
33
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Single Family Housing - State - continued | | | | | | |
| Missouri Housing Development Commission, Single Family Mortgage Rev. (Home Loan Program), “B”, GNMA, 6.05%, 2037 | | $ | 2,470,000 | | $ | 2,562,946 |
| New Hampshire Housing Finance Authority Rev., “B”, 5.875%, 2030 | | | 135,000 | | | 136,712 |
| New Hampshire Housing Finance Authority Rev., “B”, 6.3%, 2031 | | | 95,000 | | | 98,349 |
| New Hampshire Housing Finance Authority Rev., “B”, 6.5%, 2035 | | | 1,390,000 | | | 1,468,716 |
| New Mexico Mortgage Finance Authority Rev., “B-2”, GNMA, 6.35%, 2033 | | | 380,000 | | | 390,385 |
| North Dakota Housing Finance Agency Rev., Housing Finance, “A”, 5%, 2033 | | | 210,000 | | | 210,840 |
| Oklahoma Housing Finance Agency, Single Family, 7.55%, 2028 | | | 155,000 | | | 161,088 |
| Texas Affordable Housing Corp. (Single Family Mortgage), “B”, GNMA, 5.25%, 2039 | | | 2,180,000 | | | 2,186,932 |
| | | | | | |
| | | | | | $ | 14,665,037 |
| Solid Waste Revenue - 0.6% | | | | | | |
| Delaware County, PA, Industrial Development Authority, Resource Recovery Facilities Rev. (American Ref-Fuel Co.), “A”, 6.2%, 2019 | | $ | 3,900,000 | | $ | 3,856,047 |
| Hudson County, NJ, Solid Waste System Rev., 6%, 2019 | | | 2,000,000 | | | 1,739,160 |
| Massachusetts Development Finance Agency, Resource Recovery Rev. (Ogden Haverhill Associates), “A”, 5.6%, 2019 | | | 5,425,000 | | | 5,044,111 |
| Pennsylvania Economic Development Financing Authority, Sewer Sludge Disposal Rev. (Philadelphia Biosolids Facility), 6.25%, 2032 | | | 650,000 | | | 663,422 |
| | | | | | |
| | | | | | $ | 11,302,740 |
| State & Agency - Other - 0.2% | | | | | | |
| Commonwealth of Puerto Rico (Mepsi Campus), “A”, 6.25%, 2024 | | $ | 900,000 | | $ | 860,841 |
| Commonwealth of Puerto Rico (Mepsi Campus), “A”, 6.5%, 2037 | | | 3,600,000 | | | 3,263,256 |
| | | | | | |
| | | | | | $ | 4,124,097 |
| State & Local Agencies - 1.8% | | | | | | |
| California Public Works Board Lease Rev. (Various Capital Projects), “G-1”, 5.75%, 2030 | | $ | 3,380,000 | | $ | 3,288,165 |
| Delaware Valley, PA, Regional Finance Authority, AMBAC, 5.5%, 2018 | | | 200,000 | | | 220,216 |
| Delaware Valley, PA, Regional Finance Authority, AMBAC, 5.5%, 2018 | | | 1,485,000 | | | 1,635,104 |
| Delaware Valley, PA, Regional Finance Authority, “B”, FRN, AMBAC, 0.077%, 2018 | | | 50,000 | | | 50,000 |
| Delaware Valley, PA, Regional Finance Authority, RITES, AMBAC, 10.635%, 2018 (p) | | | 150,000 | | | 180,324 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., “A”, AMBAC, 5%, 2020 | | | 250,000 | | | 243,880 |
34
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| State & Local Agencies - continued | | | | | | |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., “A-1”, AMBAC, 0% to 2010, 4.6% to 2023 | | $ | 1,185,000 | | $ | 1,018,697 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Enhanced, “A”, FGIC, 5%, 2035 | | | 1,000,000 | | | 883,950 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Enhanced, “A”, FGIC, 5%, 2038 | | | 7,540,000 | | | 6,400,480 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Enhanced, “A”, 5%, 2045 | | | 8,795,000 | | | 7,293,166 |
| Harris County, TX, 5.8%, 2014 | | | 764,486 | | | 762,422 |
| Harris County, TX, 5.625%, 2020 | | | 1,898,285 | | | 1,786,723 |
| New York Metropolitan Transportation Authority, “A”, 5.125%, 2029 | | | 4,000,000 | | | 4,082,000 |
| Northumberland County, PA (County Careers & Arts Center), 6.65%, 2020 | | | 930,000 | | | 927,814 |
| Northumberland County, PA (Mountain View Manor), 7%, 2010 (c) | | | 1,000,000 | | | 1,044,210 |
| Philadelphia, PA, Municipal Authority Rev., 6.5%, 2034 | | | 1,060,000 | | | 1,114,357 |
| | | | | | |
| | | | | | $ | 30,931,508 |
| Student Loan Revenue - 0.5% | | | | | | |
| Access to Loans for Learning, CA, Student Loan Rev., 7.95%, 2030 | | $ | 2,700,000 | | $ | 2,625,534 |
| Arizona Student Loan Acquisition Authority, Student Loan Rev., 6.15%, 2029 | | | 1,500,000 | | | 1,507,695 |
| Massachusetts Educational Financing Authority, Education Loan Rev., “H”, ASSD GTY, 6.35%, 2030 | | | 4,010,000 | | | 4,222,169 |
| | | | | | |
| | | | | | $ | 8,355,398 |
| Tax - Other - 0.3% | | | | | | |
| New York, NY, City Transitional Finance Authority Building Aid Rev., “S-3”, 5.25%, 2039 | | $ | 4,000,000 | | $ | 4,135,480 |
| Virgin Islands Public Finance Authority Rev. (Diageo Project), “A”, 6.75%, 2037 | | | 1,590,000 | | | 1,691,887 |
| | | | | | |
| | | | | | $ | 5,827,367 |
| Tax Assessment - 5.3% | | | | | | |
| Altoona, IA, Urban Renewal Tax Increment Rev., 6%, 2043 | | $ | 3,000,000 | | $ | 3,092,820 |
| Arborwood Community Development District, FL, Capital Improvement Rev. (Centex Homes Project), “A-1”, 5.5%, 2036 | | | 1,450,000 | | | 729,611 |
| Arborwood Community Development District, FL, Capital Improvement Rev. (Master Infrastructure Projects), “A”, 5.35%, 2036 | | | 1,805,000 | | | 1,025,998 |
| Arborwood Community Development District, FL, Special Assessment (Master Infrastructure Projects), “B”, 5.1%, 2014 | | | 635,000 | | | 463,474 |
| Atlanta, GA, Tax Allocation (Eastside Project), “B”, 5.6%, 2030 | | | 2,450,000 | | | 2,233,518 |
35
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Tax Assessment - continued | | | | | | |
| Atlanta, GA, Tax Allocation (Princeton Lakes Project), 5.5%, 2031 | | $ | 1,515,000 | | $ | 1,284,872 |
| Ave Maria Stewardship Community District, FL, “A”, 5.125%, 2038 | | | 2,025,000 | | | 1,434,794 |
| Baltimore, MD, Special Obligation, “A”, 7%, 2038 | | | 2,600,000 | | | 2,512,744 |
| Belmont Community Development District, FL, Capital Improvement Rev., “B”, 5.125%, 2014 (d) | | | 2,950,000 | | | 796,854 |
| Capital Region Community Development District, FL, Capital Improvement Rev., “A”, 7%, 2039 | | | 1,875,000 | | | 1,739,250 |
| Capital Region Community Development District, FL, Capital Improvement Rev., “A-2”, 6.85%, 2031 | | | 685,000 | | | 646,250 |
| Century Gardens Village Community Development District, FL, Special Assessment, 5.1%, 2037 | | | 970,000 | | | 558,827 |
| Concord Station Community Development District, FL, Special Assessment, 5%, 2015 | | | 650,000 | | | 422,539 |
| Concorde Estates Community Development District, FL, “B”, 5%, 2011 (d) | | | 385,000 | | | 123,681 |
| Creekside Community Development District, FL, Special Assessment, 5.2%, 2038 | | | 2,600,000 | | | 1,177,098 |
| Dardenne, MO, Town Square Transportation Development District, “A”, 5%, 2026 | | | 2,725,000 | | | 1,491,256 |
| Du Page County, IL, Special Service Area No. 31 Special Tax (Monarch Landing Project), 5.625%, 2036 | | | 945,000 | | | 699,848 |
| Durbin Crossing Community Development District, FL, Special Assessment, “B-1”, 4.875%, 2010 | | | 2,805,000 | | | 2,262,485 |
| Enclave at Black Point Marina Community Development District, FL, “B”, 5.2%, 2014 | | | 1,785,000 | | | 1,101,077 |
| Fishhawk Community Development District, FL, 7.04%, 2014 | | | 645,000 | | | 607,326 |
| Grand Bay at Doral Community Development District, FL, “A”, 6%, 2039 | | | 620,000 | | | 332,401 |
| Grand Bay at Doral Community Development District, FL, “B”, 6%, 2017 | | | 3,685,000 | | | 2,518,661 |
| Greyhawk Landing Community Development District, FL, Special Assessment, “B”, 7%, 2012 | | | 70,000 | | | 68,738 |
| Hawks Point Community Development District, FL, Special Assessment, “A”, 5.3%, 2039 | | | 1,430,000 | | | 903,703 |
| Heritage Harbour North Community Development District, FL, Capital Improvement Rev., 6.375%, 2038 | | | 2,040,000 | | | 1,617,781 |
| Katy, TX, Development Authority Rev., “B”, 6%, 2018 | | | 4,600,000 | | | 4,143,450 |
| Killarney Community Development District, FL, Special Assessment, “B”, 5.125%, 2010 (a) | | | 640,000 | | | 384,122 |
| Lakeshore Villages Master Community Development District, LA, Special Assessment, 5.25%, 2017 | | | 2,862,000 | | | 2,340,687 |
| Lancaster County, SC, Assessment Rev. (Sun City Carolina Lakes), 5.45%, 2037 | | | 1,620,000 | | | 1,266,678 |
36
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Tax Assessment - continued | | | | | | |
| Landmark At Doral Community Development District, FL, Special Assessment, “B”, 5.2%, 2015 (d) | | $ | 2,000,000 | | $ | 719,300 |
| Legends Bay Community Development District, FL, “A”, 5.5%, 2014 | | | 1,580,000 | | | 992,303 |
| Legends Bay Community Development District, FL, “A”, 5.875%, 2038 | | | 1,370,000 | | | 842,235 |
| Magnolia Park Community Development District, FL, Special Assessment, “A”, 6.15%, 2039 | | | 4,150,000 | | | 2,711,610 |
| Main Street Community Development District, FL, “A”, 6.8%, 2038 | | | 1,895,000 | | | 1,463,736 |
| Main Street Community Development District, FL, “B”, 6.9%, 2017 | | | 1,495,000 | | | 1,335,349 |
| Middle Village Community Development District, FL, Special Assessment, “A”, 5.8%, 2022 | | | 765,000 | | | 672,481 |
| Morgantown, WV, Tax Increment Rev., Parking Garage Project, “A”, 4.8%, 2026 | | | 1,215,000 | | | 974,394 |
| Morgantown, WV, Tax Increment Rev., Parking Garage Project, “A”, 5%, 2033 | | | 500,000 | | | 384,380 |
| Naturewalk Community Development District, FL, Capital Improvement Rev., “B”, 5.3%, 2016 | | | 2,300,000 | | | 1,242,000 |
| New Port Tampa Bay Community Development District, FL, Special Assessment, “B”, 5.3%, 2012 (d) | | | 1,360,000 | | | 434,928 |
| North Springs Improvement District, FL, Special Assessment (Parkland Golf Country Club), “B-1”, 5.125%, 2015 | | | 1,115,000 | | | 994,647 |
| North Springs Improvement District, FL, Special Assessment (Parkland Golf Country Club), “B-2”, 5.125%, 2015 | | | 200,000 | | | 178,412 |
| Ohio County, WV, Commission Tax Increment Rev. (Fort Henry Centre), “A”, 5.85%, 2034 | | | 865,000 | | | 783,958 |
| Old Palm Community Development District, FL, Special Assessment (Palm Beach Gardens), “A”, 5.9%, 2035 | | | 700,000 | | | 506,352 |
| Old Palm Community Development District, FL, Special Assessment (Palm Beach Gardens), “B”, 5.375%, 2014 | | | 740,000 | | | 668,183 |
| Osage Beach, MO, Tax Increment Rev. (Prewitts), 4.8%, 2016 | | | 1,675,000 | | | 1,452,560 |
| Osage Beach, MO, Tax Increment Rev. (Prewitts), 5%, 2023 | | | 1,500,000 | | | 1,161,990 |
| OTC Community Development District, FL, Special Assessment, “A”, 5.3%, 2038 | | | 3,945,000 | | | 2,870,974 |
| Overland Park, KS, Special Assessment (Tallgrass Creek), 4.85%, 2016 | | | 565,000 | | | 493,132 |
| Overland Park, KS, Special Assessment (Tallgrass Creek), 5.125%, 2028 | | | 1,220,000 | | | 861,613 |
| Palm Glades Community Development District, FL, Special Assessment, “A”, 5.3%, 2036 | | | 1,005,000 | | | 613,030 |
| Palm River, FL, Community Development District, Special Assessment Rev., “A”, 5.375%, 2036 (q) | | | 895,000 | | | 384,850 |
| Palm River, FL, Community Development District, Special Assessment Rev., “B”, 5.15%, 2013 (d) | | | 1,000,000 | | | 300,000 |
37
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Tax Assessment - continued | | | | | | |
| Panther Trace II, Community Development District, FL, Special Assessment, 5.125%, 2013 | | $ | 1,050,000 | | $ | 833,311 |
| Panther Trace II, Community Development District, FL, Special Assessment, “B”, 5%, 2010 | | | 745,000 | | | 700,479 |
| Parker Road Community Development District, FL, “A”, 5.6%, 2038 | | | 1,240,000 | | | 685,236 |
| Parkway Center Community Development District, FL, Special Assessment, “B”, 5.625%, 2014 | | | 3,020,000 | | | 2,150,602 |
| Paseo, FL, Community Development District Capital Improvement Rev., “B”, 4.875%, 2010 (d) | | | 2,625,000 | | | 1,077,405 |
| Prince George’s County, MD, Special Obligation (National Harbor Project), 5.2%, 2034 | | | 755,000 | | | 635,634 |
| Riverwood Estates Community Development District, FL, Special Assessment, “B”, 5%, 2013 (d) | | | 4,405,000 | | | 881,000 |
| Rolling Hills Community Development District, FL, “B”, 5.125%, 2013 | | | 470,000 | | | 344,637 |
| Sarasota National Community Development District, FL, Special Assessment Rev., 5.3%, 2039 | | | 3,215,000 | | | 1,650,485 |
| Six Mile Creek Community Development District, FL, Capital Improvement Rev., 5.875%, 2038 | | | 5,000,000 | | | 2,004,750 |
| Sterling Hill Community Development District, FL, Special Assessment, 5.5%, 2010 | | | 585,000 | | | 555,288 |
| Stone Ridge, CO, Metropolitan District No. 2, 7.25%, 2031 | | | 2,700,000 | | | 2,181,924 |
| Stonebrier Community Development District, FL, Special Assessment, 5.5%, 2037 | | | 1,795,000 | | | 1,099,204 |
| Stoneybrook South Community Development District, FL, Special Assessment, “A”, 5.8%, 2039 | | | 2,000,000 | | | 859,420 |
| Stoneybrook South Community Development District, FL, Special Assessment, “B”, 5.45%, 2015 | | | 2,000,000 | | | 882,800 |
| Sweetwater Creek Community Development District, FL, Capital Improvement Rev., 5.3%, 2017 | | | 2,000,000 | | | 1,310,900 |
| Sweetwater Creek Community Development District, FL, Capital Improvement Rev., 5.5%, 2038 | | | 1,500,000 | | | 869,865 |
| Tolomato Community Development District, FL, Special Assessment, 6.65%, 2040 | | | 3,825,000 | | | 3,028,367 |
| Tuscany Reserve Community Development District, FL, Special Assessment, “B”, 5.25%, 2016 | | | 2,540,000 | | | 1,637,970 |
| Two Creeks Community Development District, FL, Capital Improvement Rev., 5.25%, 2037 | | | 2,115,000 | | | 1,171,350 |
| Villa Portofino East Community Development District, FL, Special Assessment, 5.2%, 2037 | | | 2,170,000 | | | 1,613,720 |
| Villa Vizcaya Community Development District, FL, “A”, 5.55%, 2039 | | | 790,000 | | | 452,085 |
38
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Tax Assessment - continued | | | | | | |
| Washington County, PA, Redevelopment Authority (Victory Centre Project), “A”, 5.45%, 2035 | | $ | 625,000 | | $ | 508,131 |
| Watergrass Community Development District, FL, “A”, 5.375%, 2039 | | | 1,580,000 | | | 876,631 |
| Watergrass Community Development District, FL, Special Assessment, “B”, 4.875%, 2010 | | | 1,875,000 | | | 1,494,994 |
| Wentworth Estates Community Development District, FL, Special Assessment, “B”, 5.125%, 2012 (d) | | | 1,090,000 | | | 562,636 |
| | | | | | |
| | | | | | $ | 91,091,784 |
| Tobacco - 7.0% | | | | | | |
| Badger, WI, Tobacco Asset Securitization Corp., 6.375%, 2012 (c) | | $ | 495,000 | | $ | 556,058 |
| Badger, WI, Tobacco Asset Securitization Corp., 6.125%, 2027 (c) | | | 7,250,000 | | | 7,842,833 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 5.125%, 2024 | | | 5,510,000 | | | 5,090,358 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 5.875%, 2030 | | | 21,750,000 | | | 18,592,335 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 5.75%, 2034 | | | 2,500,000 | | | 2,049,500 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 6%, 2042 | | | 780,000 | | | 616,574 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 5.875%, 2047 | | | 10,435,000 | | | 8,006,462 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-2”, 6.5%, 2047 | | | 11,765,000 | | | 9,818,010 |
| Buckeye, OH, Tobacco Settlement Financing Authority, “A-3”, 0%, 2037 | | | 11,535,000 | | | 7,716,800 |
| California County, CA, Tobacco Securitization Corp., Tobacco Settlement, L.A. County, “A”, 0% to 2010, 5.65% to 2041 | | | 1,525,000 | | | 1,093,517 |
| California Statewide Financing Authority, Tobacco Settlement, 5.625%, 2029 | | | 3,720,000 | | | 3,565,732 |
| District of Columbia, Tobacco Settlement, 6.25%, 2024 | | | 2,880,000 | | | 2,893,248 |
| District of Columbia, Tobacco Settlement, 6.75%, 2040 | | | 885,000 | | | 847,582 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., “A-4”, 7.8%, 2013 (c) | | | 3,000,000 | | | 3,627,510 |
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Asset Backed, “A-1”, 5%, 2033 | | | 525,000 | | | 409,080 |
| Inland Empire, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Asset Backed, “C-1”, 0%, 2036 | | | 11,775,000 | | | 1,066,815 |
| Iowa Tobacco Settlement Authority, Tobacco Settlement Rev., Asset Backed, “B”, 5.6%, 2034 | | | 4,295,000 | | | 3,712,899 |
| Louisiana Tobacco Settlement Authority Rev., “2001-B”, 5.5%, 2030 | | | 4,915,000 | | | 4,921,832 |
39
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Tobacco - continued | | | | | | |
| Louisiana Tobacco Settlement Authority Rev., “2001-B”, 5.875%, 2039 | | $ | 6,940,000 | | $ | 6,468,566 |
| Michigan Tobacco Settlement Finance Authority Rev., Asset Backed, “A”, 6%, 2048 | | | 12,815,000 | | | 10,038,630 |
| New Jersey Tobacco Settlement Financing Corp., 5.75%, 2012 (c) | | | 2,155,000 | | | 2,336,171 |
| New Jersey Tobacco Settlement Financing Corp., 7%, 2013 (c) | | | 45,000 | | | 53,602 |
| New Jersey Tobacco Settlement Financing Corp., “1-A”, 5%, 2041 | | | 7,835,000 | | | 5,412,810 |
| Silicon Valley Tobacco Securitization Authority, CA, Tobacco Settlement Rev. (Santa Clara), “A”, 0%, 2036 | | | 7,265,000 | | | 711,970 |
| Silicon Valley Tobacco Securitization Authority, CA, Tobacco Settlement Rev. (Santa Clara), “A”, 0%, 2041 | | | 5,640,000 | | | 350,300 |
| South Carolina Tobacco Settlement Authority Rev., “B”, 6.375%, 2011 (c) | | | 3,725,000 | | | 4,015,885 |
| Virginia Tobacco Settlement Financing Corp., “B-1”, 5%, 2047 | | | 5,035,000 | | | 3,538,195 |
| Washington Tobacco Settlement Authority Rev., 6.5%, 2026 | | | 915,000 | | | 926,868 |
| Washington Tobacco Settlement Authority Rev., 6.625%, 2032 | | | 4,935,000 | | | 4,908,795 |
| | | | | | |
| | | | | | $ | 121,188,937 |
| Toll Roads - 1.8% | | | | | | |
| E-470 Public Highway Authority, Colorado Rev., Capital Appreciation, “B”, NATL, 0%, 2027 | | $ | 12,305,000 | | $ | 3,876,936 |
| Illinois Toll Highway Authority Rev., “B”, 5.5%, 2033 | | | 6,095,000 | | | 6,530,183 |
| Pennsylvania Turnpike Commission, Capital Appreciation, “C”, FSA, 0%, 2033 | | | 11,590,000 | | | 8,389,769 |
| San Joaquin Hills, CA, Transportation Corridor Agency, Toll Road Rev., ETM, 0%, 2011 (c)(f) | | | 13,400,000 | | | 13,311,292 |
| | | | | | |
| | | | | | $ | 32,108,180 |
| Transportation - Special Tax - 0.4% | | | | | | |
| Telluride, CO, Real Estate Transfer Assessment Rev. (Gondola Transit Co.), ETM, 11.5%, 2012 (c) | | $ | 6,000,000 | | $ | 7,084,560 |
| | |
| Universities - Colleges - 10.0% | | | | | | |
| Allegheny County, PA, Higher Education Building Authority Rev. (Robert Morris University) “A”, 5.9%, 2028 | | $ | 1,305,000 | | $ | 1,303,395 |
| Allegheny County, PA, Higher Education Building Authority Rev. (Robert Morris University), “A”, 6%, 2038 | | | 2,025,000 | | | 1,965,506 |
| Anderson, IN, Economic Development Rev. (Anderson University Project), 5%, 2028 | | | 3,530,000 | | | 3,158,468 |
| Anderson, IN, Economic Development Rev. (Anderson University Project), 5%, 2032 | | | 1,025,000 | | | 888,573 |
| Brevard County, FL, Industrial Development Rev. (TUFF Florida Tech LLC Project), 6.75%, 2039 | | | 4,720,000 | | | 4,677,473 |
40
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Universities - Colleges - continued | | | | | | |
| California Educational Facilities Authority Rev. (California Lutheran University), 5.75%, 2038 | | $ | 2,320,000 | | $ | 2,262,557 |
| California Educational Facilities Authority Rev. (University Financing Project), 5%, 2026 | | | 1,660,000 | | | 1,271,709 |
| California Educational Facilities Authority Rev. (University of La Verne), “A”, 5%, 2029 | | | 2,205,000 | | | 1,924,877 |
| California Educational Facilities Authority Rev. (University of Southern California), “A”, 5.25%, 2038 | | | 1,935,000 | | | 2,036,607 |
| California Municipal Finance Authority Rev. (Biola University), 5.8%, 2028 | | | 1,915,000 | | | 1,945,908 |
| California Statewide Communities Development Authority Rev. (California Baptist University), “A”, 5.4%, 2027 | | | 1,385,000 | | | 1,174,106 |
| California Statewide Communities Development Authority Rev. (California Baptist University), “A”, 5.5%, 2038 | | | 1,580,000 | | | 1,228,971 |
| Delaware County, PA, Authority College Rev. (Neumann College), 6%, 2025 | | | 510,000 | | | 527,692 |
| Delaware County, PA, Authority College Rev. (Neumann College), 6.125%, 2034 | | | 250,000 | | | 256,473 |
| Forest Grove, OR, Campus Improvement Rev. (Pacific University Project), 6.375%, 2039 | | | 2,500,000 | | | 2,568,225 |
| Forest Grove, OR, Student Housing Rev. (Oak Tree Foundation, Inc.), 5.5%, 2037 | | | 2,775,000 | | | 2,449,021 |
| Grand Valley, MI, State University Rev., 5.5%, 2027 | | | 1,015,000 | | | 1,077,098 |
| Grand Valley, MI, State University Rev., 5.625%, 2029 | | | 495,000 | | | 525,898 |
| Harris County, TX, Cultural Education Facilities Rev. (Baylor College of Medicine), “D”, 5.625%, 2032 | | | 4,535,000 | | | 4,192,608 |
| Houston, TX, Community College Systems, COP, NATL, 7.875%, 2012 (c) | | | 9,150,000 | | | 10,704,768 |
| Illinois Educational Facilities Authority Rev. (Augustana College), “A”, 5.625%, 2022 | | | 1,300,000 | | | 1,335,217 |
| Illinois Finance Authority Rev. (Illinois Institute of Technology), “A”, 5%, 2031 | | | 3,125,000 | | | 2,666,406 |
| Illinois Finance Authority Rev. (Illinois Institute of Technology), “A”, 5%, 2036 | | | 3,080,000 | | | 2,545,743 |
| Illinois Finance Authority Rev. (Roosevelt University Project), 6.25%, 2029 | | | 5,845,000 | | | 5,980,487 |
| Indiana Educational Facilities Authority Rev. (Manchester College), 5.75%, 2018 | | | 1,000,000 | | | 967,500 |
| Marietta, GA, Development Facilities Authority Rev. (Life University), 7%, 2030 | | | 1,330,000 | | | 1,240,025 |
| Marietta, GA, Development Facilities Authority Rev. (Life University), 7%, 2039 | | | 1,575,000 | | | 1,442,101 |
41
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Universities - Colleges - continued | | | | | | |
| Massachusetts Development Finance Agency Rev. (Curry College), “A”, ACA, 5%, 2036 | | $ | 1,135,000 | | $ | 971,673 |
| Massachusetts Development Finance Agency Rev. (Curry College), “A”, RADIAN, 5%, 2036 | | | 700,000 | | | 599,270 |
| Massachusetts Development Finance Agency Rev. (Simmons College), “H”, SYNCORA, 5.25%, 2033 | | | 430,000 | | | 408,208 |
| Massachusetts Health & Educational Facilities Authority Rev. (Harvard University), 5.5%, 2036 (u) | | | 25,000,000 | | | 27,792,000 |
| Massachusetts Health & Educational Facilities Authority Rev. (Simmons College), “I”, 8%, 2029 | | | 2,140,000 | | | 2,398,105 |
| Massachusetts Health & Educational Facilities Authority Rev. (Suffolk University), “A”, 6.25%, 2030 | | | 6,130,000 | | | 6,505,524 |
| Michigan Higher Education Facilities Authority Rev. (College for Creative Studies), 6.125%, 2037 | | | 4,315,000 | | | 3,873,964 |
| Nashville & Davidson County, TN, Metropolitan Government Health & Educational Facilities Board (Vanderbilt University), “A”, 5%, 2039 (u) | | | 10,000,000 | | | 10,459,500 |
| Nashville & Davidson County, TN, Metropolitan Government Health & Educational Facilities Board (Vanderbilt University), “B”, 5%, 2039 (u) | | | 10,000,000 | | | 10,459,500 |
| New Hampshire Health & Education Facilities Authority Rev. (Dartmouth College), 5.25%, 2039 (u) | | | 20,000,000 | | | 21,430,200 |
| New Jersey Educational Facilities Authority Rev. (University of Medicine & Dentistry), “B”, 6%, 2017 | | | 2,335,000 | | | 2,544,473 |
| New Jersey Educational Facilities Authority Rev. (University of Medicine & Dentistry), “B”, 7.5%, 2032 | | | 4,280,000 | | | 4,811,148 |
| Pennsylvania Higher Educational Facilities Authority Rev. (Lasalle University), 5.5%, 2034 | | | 2,580,000 | | | 2,576,336 |
| Pennsylvania Higher Educational Facilities Authority Rev. (Lasalle University), “A”, 5.25%, 2027 | | | 1,330,000 | | | 1,330,731 |
| San Leanna, TX, Educational Facilities Corp., Higher Education Rev. (St. Edwards University), 5%, 2014 | | | 440,000 | | | 456,773 |
| San Leanna, TX, Educational Facilities Corp., Higher Education Rev. (St. Edwards University), 4.75%, 2032 | | | 2,150,000 | | | 1,921,111 |
| San Leanna, TX, Educational Facilities Corp., Higher Education Rev. (St. Edwards University), 5.125%, 2036 | | | 1,055,000 | | | 987,712 |
| Tulsa, OK, Industrial Authority Rev. (University of Tulsa), 6%, 2027 | | | 4,795,000 | | | 5,192,889 |
| University of Southern Indiana Rev., Student Fee, “J”, ASSD GTY, 5.75%, 2028 | | | 1,445,000 | | | 1,592,303 |
| Washington Higher Education Facilities Authority Rev. (Whitworth University), 5.875%, 2034 | | | 2,435,000 | | | 2,469,723 |
42
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Universities - Colleges - continued | | | | | | |
| Wilkes-Barre, PA, Finance Authority Rev. (Wilkes University), 5%, 2037 | | $ | 3,000,000 | | $ | 2,674,050 |
| | | | | | |
| | | | | | $ | 173,772,605 |
| Universities - Dormitories - 0.4% | | | | | | |
| California Statewide Communities Development Authority Rev. (Lancer Educational Student Housing Project), 5.625%, 2033 | | $ | 2,345,000 | | $ | 1,825,418 |
| California Statewide Communities Development Authority Rev. (Student Housing, SUCI East Campus), 6%, 2040 | | | 2,125,000 | | | 2,104,260 |
| Illinois Educational Facilities Authority, Educational Advancement Fund (University Center), 6.625%, 2012 (c) | | | 1,500,000 | | | 1,703,250 |
| Maryland Economic Development Corp. Student Housing (University of Maryland - College Park), 5.875%, 2043 | | | 1,335,000 | | | 1,336,175 |
| | | | | | |
| | | | | | $ | 6,969,103 |
| Universities - Secondary Schools - 1.2% | | | | | | |
| California Statewide Communities Development Authority Rev. (Escondido Charter High School), 7.5%, 2011 (c) | | $ | 1,630,000 | | $ | 1,776,211 |
| California Statewide Communities Development Authority Rev. (Escondido Charter High School), 7.5%, 2011 (c) | | | 3,485,000 | | | 3,917,489 |
| Colorado Housing Finance Development Rev. (Evergreen Country Day School), 5.875%, 2037 | | | 815,000 | | | 558,022 |
| La Vernia, TX, Higher Education Finance Corp. Rev. (KIPP, Inc.), “A”, 6.25%, 2039 | | | 1,670,000 | | | 1,706,005 |
| Lee County, FL, Industrial Development Authority Rev. (Lee Charter Foundation), “A”, 5.25%, 2027 | | | 1,570,000 | | | 1,218,556 |
| Lee County, FL, Industrial Development Authority Rev. (Lee Charter Foundation), “A”, 5.375%, 2037 | | | 3,155,000 | | | 2,286,365 |
| Maryland Health & Higher Educational Facilities Authority Rev. (Washington Christian Academy), 5.25%, 2018 (a) | | | 985,000 | | | 492,756 |
| Maryland Health & Higher Educational Facilities Authority Rev. (Washington Christian Academy), 5.5%, 2038 (a) | | | 460,000 | | | 206,664 |
| Maryland Industrial Development Financing Authority, Economic Development Authority Rev. (Our Lady of Good Council), “A”, 6%, 2035 | | | 450,000 | | | 410,818 |
| Michigan Municipal Bond Authority Rev. (YMCA Service Learning Academy), 7.625%, 2021 | | | 550,000 | | | 549,285 |
| Michigan Municipal Bond Authority Rev. (YMCA Service Learning Academy), 7.75%, 2031 | | | 2,450,000 | | | 2,362,682 |
| Utah County, UT, Charter School Rev. (Lakeview Academy), “A”, 5.625%, 2037 | | | 1,815,000 | | | 1,412,669 |
| Utah County, UT, Charter School Rev. (Renaissance Academy), “A”, 5.625%, 2037 | | | 1,065,000 | | | 842,181 |
43
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Universities - Secondary Schools - continued | | | | | | |
| Utah County, UT, Charter School Rev. (Ronald Wilson Reagan Academy), “A”, 6%, 2038 | | $ | 2,820,000 | | $ | 2,247,963 |
| | | | | | |
| | | | | | $ | 19,987,666 |
| Utilities - Cogeneration - 0.2% | | | | | | |
| Alaska Industrial Development & Export Authority, 5.7%, 2012 | | $ | 360,000 | | $ | 360,176 |
| Alaska Industrial Development & Export Authority, 5.875%, 2032 | | | 1,495,000 | | | 1,324,570 |
| Pennsylvania Economic Development Financing Authority Rev., Resource Recovery Rev. (Colver), “G”, 5.125%, 2015 | | | 800,000 | | | 772,784 |
| Pennsylvania Economic Development Financing Authority Rev., Resource Recovery Rev. (Northampton Generating), “A”, 6.5%, 2013 | | | 1,400,000 | | | 778,176 |
| | | | | | |
| | | | | | $ | 3,235,706 |
| Utilities - Investor Owned - 4.8% | | | | | | |
| Brazos River Authority, TX, Pollution Control Rev. (TXU Electric Co. LLC), 8.25%, 2030 | | $ | 1,000,000 | | $ | 702,310 |
| Brazos River Authority, TX, Pollution Control Rev. (TXU Electric Co. LLC), “C”, 5.75%, 2036 (b) | | | 3,465,000 | | | 3,245,908 |
| Brazos River Authority, TX, Pollution Control Rev. (TXU Electric Co. LLC), “D”, 5.4%, 2029 (b) | | | 310,000 | | | 253,627 |
| Brazos River Authority, TX, Pollution Control Rev. (TXU Energy Co. LLC), 5%, 2041 | | | 3,015,000 | | | 1,381,714 |
| Chautauqua County, NY, Industrial Development Agency, Exempt Facilities Rev. (Dunkirk Power), 5.875%, 2042 | | | 270,000 | | | 273,378 |
| Chula Vista, CA, Industrial Development Rev. (San Diego Gas), 5.875%, 2034 | | | 1,940,000 | | | 2,119,605 |
| Farmington, NM, Pollution Control Rev. (Public Service New Mexico), “A”, 6.3%, 2016 | | | 3,240,000 | | | 3,257,593 |
| Farmington, NM, Pollution Control Rev. (Public Service New Mexico), “A”, 5.8%, 2022 | | | 4,500,000 | | | 4,503,600 |
| Farmington, NM, Pollution Control Rev. (Public Service New Mexico), “C”, 5.8%, 2022 | | | 1,390,000 | | | 1,391,112 |
| Hawaii Department of Budget & Finance Special Purpose Rev. (Hawaiian Electric Co. & Subsidiary), 6.5%, 2039 | | | 5,985,000 | | | 6,419,750 |
| Maricopa County, AZ, Pollution Control Rev. (El Paso Electric), “B”, 7.25%, 2040 | | | 1,790,000 | | | 2,022,521 |
| Massachusetts Development Finance Agency, Solid Waste Disposal Rev. (Dominion Energy Brayton), 5.75%, 2042 (b) | | | 685,000 | | | 725,203 |
| Matagorda County, TX, Pollution Control Rev. (Central Power & Light Co.), “A”, 6.3%, 2029 | | | 2,155,000 | | | 2,318,500 |
| Matagorda County, TX, Pollution Control Rev. (Reliant Energy), 5.95%, 2030 | | | 3,450,000 | | | 3,267,288 |
44
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Utilities - Investor Owned - continued | | | | | | |
| Mecklenburg County, VA, Industrial Development Authority Rev. (UAE Mecklenburg LP), 6.5%, 2017 | | $ | 2,800,000 | | $ | 2,817,500 |
| Michigan Strategic Fund Ltd. Obligation Rev. (Detroit Edison), 5.625%, 2020 | | | 1,050,000 | | | 1,140,006 |
| Michigan Strategic Fund Ltd. Obligation Rev. (Detroit Edison), 5.5%, 2029 (b) | | | 2,100,000 | | | 2,232,909 |
| Ohio Air Quality Development Authority Rev. (Columbus Southern Power Co.), “B”, 5.8%, 2038 | | | 1,725,000 | | | 1,815,511 |
| Ohio Air Quality Development Authority Rev. (FirstEnergy Corp.), “A”, 5.7%, 2020 | | | 4,335,000 | | | 4,664,807 |
| Ohio Air Quality Development Authority Rev. (Ohio Valley Electric Corp.), “E”, 5.625%, 2019 | | | 2,610,000 | | | 2,677,260 |
| Owen County, KY, Waterworks System Rev. (American Water Co. Project), “A”, 6.25%, 2039 | | | 1,635,000 | | | 1,743,041 |
| Owen County, KY, Waterworks System Rev. (American Water Co. Project), “B”, 5.625%, 2039 | | | 1,830,000 | | | 1,863,123 |
| Pennsylvania Economic Development Financing Authority (Allegheny Energy Supply Co. LLC), 7%, 2039 | | | 7,390,000 | | | 8,118,137 |
| Pima County, AZ, Industrial Development Authority Pollution Control Rev. (Tucson Electric Power Co.), “A”, 4.95%, 2020 | | | 2,980,000 | | | 2,948,203 |
| Pima County, AZ, Industrial Development Authority Rev. (Tucson Electric Power Co.), 5.75%, 2029 | | | 4,250,000 | | | 4,282,470 |
| Pointe Coupee Parish, LA, Pollution Control Rev. (Gulf States Utilities Co.), 6.7%, 2013 | | | 545,000 | | | 550,118 |
| Red River Authority, TX, Pollution Control Rev. (AEP Texas Central Co.), NATL, 4.45%, 2020 | | | 2,635,000 | | | 2,527,255 |
| Sabine River Authority, TX, Pollution Control Rev. (TXU Electric Co. LLC), 5.2%, 2028 | | | 1,255,000 | | | 660,168 |
| Sabine River Authority, TX, Pollution Control Rev. (TXU Electric Co. LLC), 5.75%, 2030 (b) | | | 2,250,000 | | | 2,120,917 |
| Sweetwater County, WY, Pollution Control Rev. (Idaho Power Co.), 5.25%, 2026 | | | 6,300,000 | | | 6,413,022 |
| West Feliciana Parish, LA, Pollution Control Rev. (Entergy Gulf States), 6.6%, 2028 | | | 1,805,000 | | | 1,804,838 |
| Yuma County, AZ, Industrial Development Authority (Far West Water & Sewer, Inc.), 6.375%, 2037 | | | 2,605,000 | | | 2,159,988 |
| | | | | | |
| | | | | | $ | 82,421,382 |
45
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| Municipal Bonds - continued | | | | | | |
| Utilities - Municipal Owned - 0.3% | | | | | | |
| Harris County, TX, Cultural Education Facilities Financial Corp., Thermal Utilities Rev. (Teco Project), “A”, 5.25%, 2035 | | $ | 1,665,000 | | $ | 1,742,689 |
| Mississippi Business Finance Corp., Gulf Opportunity Zone Rev., “A”, 5%, 2037 | | | 3,000,000 | | | 2,895,930 |
| | | | | | |
| | | | | | $ | 4,638,619 |
| Utilities - Other - 2.8% | | | | | | |
| California M-S-R Energy Authority Gas Rev., “A”, 7%, 2034 | | $ | 1,135,000 | | $ | 1,259,782 |
| California M-S-R Energy Authority Gas Rev., “A”, 6.5%, 2039 | | | 5,110,000 | | | 5,366,624 |
| Indiana Bond Bank Special Program, Gas Rev., “A”, 5.25%, 2018 | | | 1,760,000 | | | 1,827,074 |
| Main Street Natural Gas, Inc., GA, Gas Project Rev., “A”, 5.5%, 2028 | | | 2,245,000 | | | 2,168,782 |
| Public Authority for Colorado Energy Natural Gas Purchase Rev., 6.25%, 2028 | | | 4,000,000 | | | 4,323,680 |
| Public Authority for Colorado Energy Natural Gas Purchase Rev., 6.5%, 2038 | | | 4,515,000 | | | 4,954,309 |
| SA Energy Acquisition Public Facility Corp. (Tex Gas Supply), 5.5%, 2027 | | | 4,000,000 | | | 4,160,160 |
| Salt Verde Financial Corp., AZ, Senior Gas Rev., 5%, 2032 | | | 6,670,000 | | | 5,886,142 |
| Salt Verde Financial Corp., AZ, Senior Gas Rev., 5%, 2037 | | | 4,910,000 | | | 4,170,554 |
| Tennessee Energy Acquisition Corp., Gas Rev., “A”, 5.25%, 2019 | | | 2,000,000 | | | 2,014,880 |
| Tennessee Energy Acquisition Corp., Gas Rev., “A”, 5.25%, 2022 | | | 5,555,000 | | | 5,524,447 |
| Tennessee Energy Acquisition Corp., Gas Rev., “A”, 5.25%, 2024 | | | 2,225,000 | | | 2,180,522 |
| Tennessee Energy Acquisition Corp., Gas Rev., “A”, 5.25%, 2026 | | | 3,215,000 | | | 3,111,188 |
| Tennessee Energy Acquisition Corp., Gas Rev., “C”, 5%, 2025 | | | 1,665,000 | | | 1,602,096 |
| | | | | | |
| | | | | | $ | 48,550,240 |
| Water & Sewer Utility Revenue - 2.6% | | | | | | |
| Alabama Drinking Water Finance Authority, “A”, AMBAC, 4%, 2028 | | $ | 5,000,000 | | $ | 4,552,700 |
| Atlanta, GA, Water & Wastewater Rev., “A”, 6%, 2022 | | | 2,895,000 | | | 3,141,480 |
| Commonwealth of Puerto Rico Aqueduct & Sewer Authority Rev., “A”, 6%, 2038 | | | 4,410,000 | | | 4,500,096 |
| Commonwealth of Puerto Rico Aqueduct & Sewer Authority Rev., “A”, 6%, 2044 | | | 1,215,000 | | | 1,239,008 |
| Los Angeles County, CA, Sanitation Districts Financing Authority Rev., AMBAC, 4.5%, 2038 | | | 8,660,000 | | | 7,249,373 |
| Massachusetts Water Pollution Abatement, 5.25%, 2028 | | | 4,000,000 | | | 4,753,680 |
| New York, NY, Municipal Water & Sewer Finance Authority Rev., AMBAC, 5%, 2039 | | | 5,000,000 | | | 5,110,600 |
| New York, NY, Municipal Water & Sewer Finance Authority Rev., “A”, 5%, 2035 | | | 5,520,000 | | | 5,677,982 |
46
Portfolio of Investments – continued
| | | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | | |
| Municipal Bonds - continued | | | | | | | |
| Water & Sewer Utility Revenue - continued | | | | | | | |
| New York, NY, Municipal Water Finance Authority, Water & Sewer Systems Rev. “DD”, 4.75%, 2035 | | $ | 700,000 | | $ | 702,989 | |
| Seattle, WA, Water System Rev., Refunding & Improvement, 5.25%, 2033 | | | 5,000,000 | | | 5,311,500 | |
| Tallahassee, FL, Consolidated Utility Systems Rev., 5%, 2037 | | | 1,995,000 | | | 2,021,474 | |
| | | | | | $ | 44,260,882 | |
| Total Municipal Bonds (Identified Cost, $1,842,260,546) | | | | | $ | 1,737,076,428 | |
| | |
| Money Market Funds (v) - 1.2% | | | | | | | |
MFS Institutional Money Market Portfolio, 0.14%,
at Cost and Net Asset Value | | | 21,097,654 | | $ | 21,097,654 | |
| Total Investments (Identified Cost, $1,863,358,200) | | | | | $ | 1,758,174,082 | |
| | |
| Other Assets, Less Liabilities - (1.4)% | | | | | | (24,533,765 | ) |
| Net Assets - 100.0% | | | | | $ | 1,733,640,317 | |
| (a) | Non-income producing security. |
| (b) | Mandatory tender date is earlier than stated maturity date. |
| (d) | Non-income producing security–in default. |
| (f) | All or a portion of the security has been segregated as collateral for open futures contracts. |
| (n) | Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $20,435,786, representing 1.2% of net assets. |
| (p) | Primary inverse floater. |
| (q) | Interest received was less than stated coupon rate. |
| (u) | Underlying security deposited into special purpose trust (“the trust”) by investment banker upon creation of self-deposited inverse floaters. |
| (v) | Underlying fund that is available only to investment companies managed by MFS. The rate quoted is the annualized seven-day yield of the fund at period end. |
| (z) | Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities: |
| | | | | | |
| Restricted Securities | | Acquisition
Date | | Cost | | Current
Market
Value |
| MuniMae TE Bond Subsidiary LLC, 5.4%, 2049 | | 10/14/04 | | $2,000,000 | | $1,310,260 |
| MuniMae TE Bond Subsidiary LLC, 5.9%, 2049 | | 11/02/05 | | 2,000,000 | | 1,040,060 |
| Total Restricted Securities | | | | | | $2,350,320 |
| % of Net Assets | | | | | | 0.1% |
47
Portfolio of Investments – continued
The following abbreviations are used in this report and are defined:
| COP | | Certificate of Participation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| | | | | | |
| Insurers | | Inverse Floaters |
| ACA | | ACA Financial Guaranty Corp. | | RITES | | Residual Interest Tax-Exempt Security |
| AMBAC | | AMBAC Indemnity Corp. | | | | |
| ASSD GTY | | Assured Guaranty Insurance Co. | | | | |
| FGIC | | Financial Guaranty Insurance Co. | | | | |
| FHA | | Federal Housing Administration | | | | |
| FNMA | | Federal National Mortgage Assn. | | | | |
| FSA | | Financial Security Assurance, Inc. | | | | |
| GNMA | | Government National Mortgage Assn. | | | | |
| NATL | | National Public Finance Guarantee Corp. | | | | |
| PSF | | Permanent School Fund | | | | |
| RADIAN | | Radian Asset Assurance, Inc. | | | | |
| SYNCORA | | Syncora Guarantee Inc. | | | | |
Derivative Contracts at 1/31/10
Futures Contracts Outstanding at 1/31/10
| | | | | | | | | | |
| Description | | Currency | | Contracts | | Value | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) |
| Asset Derivatives |
| Interest Rate Futures |
| U.S. Treasury Bond 30 yr (Short) | | USD | | 321 | | $38,138,813 | | Mar-10 | | $482,886 |
| | | | | | | | | | |
At January 31, 2010, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
48
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 1/31/10
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | |
| Assets | | | |
Investments- | | | |
Non-affiliated issuers, at value (identified cost, $1,842,260,546) | | $1,737,076,428 | |
Underlying funds, at cost and value | | 21,097,654 | |
Total investments, at value (identified cost, $1,863,358,200) | | $1,758,174,082 | |
Cash | | 166,336 | |
Receivables for | | | |
Investments sold | | 4,871,707 | |
Fund shares sold | | 6,050,931 | |
Interest and dividends | | 26,729,784 | |
Receivable from investment adviser | | 97,112 | |
Other assets | | 21,926 | |
Total assets | | $1,796,111,878 | |
| Liabilities | | | |
Payables for | | | |
Distributions | | $3,499,484 | |
Daily variation margin on open futures contracts | | 210,656 | |
Investments purchased | | 9,431,080 | |
Fund shares reacquired | | 3,597,150 | |
Payable to the holder of the floating rate certificate from trust assets | | 45,039,901 | |
Payable for interest expense and fees | | 79,775 | |
Payable to affiliates | | | |
Investment adviser | | 104,426 | |
Shareholder servicing costs | | 260,395 | |
Distribution and service fees | | 37,189 | |
Administrative services fee | | 2,958 | |
Payable for independent Trustees’ compensation | | 32,688 | |
Accrued expenses and other liabilities | | 175,859 | |
Total liabilities | | $62,471,561 | |
Net assets | | $1,733,640,317 | |
| Net assets consist of | | | |
Paid-in capital | | $1,923,146,863 | |
Unrealized appreciation (depreciation) on investments | | (104,701,232 | ) |
Accumulated net realized gain (loss) on investments | | (89,807,928 | ) |
Undistributed net investment income | | 5,002,614 | |
Net assets | | $1,733,640,317 | |
Shares of beneficial interest outstanding | | 234,498,844 | |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share (a) |
Class A | | $1,452,126,154 | | 196,453,350 | | $7.39 |
Class B | | 68,348,013 | | 9,237,318 | | 7.40 |
Class C | | 213,166,150 | | 28,808,176 | | 7.40 |
| (a) | Maximum offering price per share was equal to the net asset value per share for all share classes, except for Class A, for which the maximum offering price per share was $7.76. On sales of $50,000 or more, the maximum offering price of Class A shares is reduced. A contingent deferred sales charge may be imposed on redemptions of Class A, Class B, and Class C shares. |
See Notes to Financial Statements
49
Financial Statements
STATEMENT OF OPERATIONS
Year ended 1/31/10
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| | | |
| Net investment income | | | |
Income | | | |
Interest | | $103,713,898 | |
Dividends from underlying funds | | 56,407 | |
Total investment income | | $103,770,305 | |
Expenses | | | |
Management fee | | $8,315,846 | |
Distribution and service fees | | 2,426,849 | |
Shareholder servicing costs | | 1,207,153 | |
Administrative services fee | | 267,988 | |
Independent Trustees’ compensation | | 47,481 | |
Custodian fee | | 207,216 | |
Shareholder communications | | 76,433 | |
Auditing fees | | 53,003 | |
Legal fees | | 78,208 | |
Interest expense and fees | | 276,959 | |
Miscellaneous | | 329,358 | |
Total expenses | | $13,286,494 | |
Fees paid indirectly | | (32,677 | ) |
Reduction of expenses by investment adviser | | (435,068 | ) |
Net expenses | | $12,818,749 | |
Net investment income | | $90,951,556 | |
| Realized and unrealized gain (loss) on investments | | | |
Realized gain (loss) (identified cost basis) | | | |
Investment transactions | | $(16,883,040 | ) |
Futures contracts | | (651,843 | ) |
Net realized gain (loss) on investments | | $(17,534,883 | ) |
Change in unrealized appreciation (depreciation) | | | |
Investments | | $243,647,178 | |
Futures contracts | | 1,210,891 | |
Net unrealized gain (loss) on investments | | $244,858,069 | |
Net realized and unrealized gain (loss) on investments | | $227,323,186 | |
Change in net assets from operations | | $318,274,742 | |
See Notes to Financial Statements
50
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| | | | | | |
| | | Year ended 1/31 | |
| | | 2010 | | | 2009 | |
| Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $90,951,556 | | | $85,114,282 | |
Net realized gain (loss) on investments | | (17,534,883 | ) | | (29,597,830 | ) |
Net unrealized gain (loss) on investments | | 244,858,069 | | | (321,770,132 | ) |
Change in net assets from operations | | $318,274,742 | | | $(266,253,680 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(89,035,468 | ) | | $(86,045,396 | ) |
Change in net assets from fund share transactions | | $233,970,263 | | | $55,333,284 | |
Total change in net assets | | $463,209,537 | | | $(296,965,792 | ) |
| Net assets | | | | | | |
At beginning of period | | 1,270,430,780 | | | 1,567,396,572 | |
At end of period (including undistributed net investment income of $5,002,614 and $4,286,201, respectively) | | $1,733,640,317 | | | $1,270,430,780 | |
See Notes to Financial Statements
51
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| | | | | | | | | | | | | | | |
| Class A | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $6.33 | | | $8.06 | | | $8.49 | | | $8.41 | | | $8.39 | |
Income (loss) from investment
operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.43 | | | $0.44 | | | $0.47 | | | $0.45 | | | $0.46 | |
Net realized and unrealized gain (loss) on investments | | 1.05 | | | (1.73 | ) | | (0.47 | ) | | 0.07 | | | 0.02 | |
Total from investment operations | | $1.48 | | | $(1.29 | ) | | $(0.00 | )(w) | | $0.52 | | | $0.48 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.42 | ) | | $(0.44 | ) | | $(0.43 | ) | | $(0.44 | ) | | $(0.46 | ) |
Redemption fees added to
paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $7.39 | | | $6.33 | | | $8.06 | | | $8.49 | | | $8.41 | |
Total return (%) (r)(s)(t) | | 24.03 | | | (16.50 | ) | | 0.04 | | | 6.32 | | | 5.81 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.72 | | | 0.80 | | | 0.86 | | | 0.97 | | | 0.94 | (z) |
Expenses after expense reductions (f) | | 0.69 | | | 0.70 | | | 0.76 | | | 0.87 | | | 0.84 | (z) |
Expenses after expense reductions and excluding interest expense and fees (f)(l) | | 0.67 | | | 0.64 | | | 0.63 | | | 0.72 | | | 0.72 | |
Net investment income | | 6.17 | | | 5.97 | | | 5.60 | | | 5.32 | | | 5.47 | |
Portfolio turnover | | 17 | | | 38 | | | 38 | | | 13 | | | 20 | |
Net assets at end of period (000 omitted) | | $1,452,126 | | | $1,039,232 | | | $1,267,514 | | | $1,335,269 | | | $1,080,805 | |
See Notes to Financial Statements
52
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class B | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $6.33 | | | $8.06 | | | $8.50 | | | $8.41 | | | $8.40 | |
Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.38 | | | $0.38 | | | $0.40 | | | $0.39 | | | $0.40 | |
Net realized and unrealized gain
(loss) on investments | | 1.06 | | | (1.73 | ) | | (0.47 | ) | | 0.07 | | | 0.00 | (w) |
Total from investment operations | | $1.44 | | | $(1.35 | ) | | $(0.07 | ) | | $0.46 | | | $0.40 | |
Less distributions declared to
shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.37 | ) | | $(0.38 | ) | | $(0.37 | ) | | $(0.37 | ) | | $(0.39 | ) |
Redemption fees added to
paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $7.40 | | | $6.33 | | | $8.06 | | | $8.50 | | | $8.41 | |
Total return (%) (r)(s)(t) | | 23.25 | | | (17.16 | ) | | (0.85 | ) | | 5.64 | | | 4.88 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense
reductions (f) | | 1.50 | | | 1.56 | | | 1.63 | | | 1.74 | | | 1.70 | (z) |
Expenses after expense
reductions (f) | | 1.47 | | | 1.47 | | | 1.53 | | | 1.64 | | | 1.60 | (z) |
Expenses after expense reductions
and excluding interest expense
and fees (f)(l) | | 1.45 | | | 1.41 | | | 1.40 | | | 1.50 | | | 1.48 | |
Net investment income | | 5.45 | | | 5.18 | | | 4.83 | | | 4.60 | | | 4.73 | |
Portfolio turnover | | 17 | | | 38 | | | 38 | | | 13 | | | 20 | |
Net assets at end of period
(000 omitted) | | $68,348 | | | $75,791 | | | $127,599 | | | $178,566 | | | $220,854 | |
See Notes to Financial Statements
53
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Class C | | Years ended 1/31 | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Net asset value, beginning of period | | $6.33 | | | $8.06 | | | $8.50 | | | $8.42 | | | $8.40 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.36 | | | $0.36 | | | $0.38 | | | $0.36 | | | $0.37 | |
Net realized and unrealized gain
(loss) on investments | | 1.06 | | | (1.72 | ) | | (0.47 | ) | | 0.08 | | | 0.02 | |
Total from investment operations | | $1.42 | | | $(1.36 | ) | | $(0.09 | ) | | $0.44 | | | $0.39 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.35 | ) | | $(0.37 | ) | | $(0.35 | ) | | $(0.36 | ) | | $(0.37 | ) |
Redemption fees added to
paid-in capital (d) | | $— | | | $— | | | $— | | | $0.00 | (w) | | $0.00 | (w) |
Net asset value, end of period | | $7.40 | | | $6.33 | | | $8.06 | | | $8.50 | | | $8.42 | |
Total return (%) (r)(s)(t) | | 22.99 | | | (17.36 | ) | | (1.08 | ) | | 5.27 | | | 4.76 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense
reductions (f) | | 1.72 | | | 1.80 | | | 1.86 | | | 1.97 | | | 1.94 | (z) |
Expenses after expense
reductions (f) | | 1.69 | | | 1.70 | | | 1.76 | | | 1.87 | | | 1.84 | (z) |
Expenses after expense reductions
and excluding interest expense
and fees (f)(l) | | 1.67 | | | 1.64 | | | 1.63 | | | 1.72 | | | 1.72 | |
Net investment income | | 5.17 | | | 4.96 | | | 4.60 | | | 4.30 | | | 4.44 | |
Portfolio turnover | | 17 | | | 38 | | | 38 | | | 13 | | | 20 | |
Net assets at end of period
(000 omitted) | | $213,166 | | | $155,407 | | | $172,283 | | | $170,047 | | | $119,952 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (l) | Interest expense and fees relate to payments made to the holder of the floating rate certificate from trust assets. |
| (r) | Certain expenses have been reduced without which performance would have been lower. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (t) | Total returns do not include any applicable sales charges. |
| (w) | Per share amount was less than $0.01. |
| (z) | After the fund issued its January 31, 2006 financial statements, the fund determined that the criteria for sale accounting in FASB Statement No. 140 had not been met for certain transfers of municipal bonds during the fiscal year ended January 31, 2006 and that its transfers of municipal bonds in connection with self-deposited inverse floaters should have been accounted for as secured borrowings rather than as sales. Accordingly, the expense ratio has been restated to reflect interest expense and fees related to payments made to the holder of the floating rate certificate from trust assets in connection with self-deposited inverse floater transactions. The impact of the restatement was to increase the expense ratio by 0.12%. |
See Notes to Financial Statements
54
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Municipal High Income Fund (the fund) is a series of MFS Series Trust III which is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
| (2) | | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The value of municipal instruments can be affected by changes in their actual or perceived credit quality. The credit quality of municipal instruments can be affected by, among other things, the financial condition of the issuer or guarantor, the issuer’s future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, political or economic developments in the region where the instrument is issued and the liquidity of the security. Municipal instruments generally trade in the over-the-counter market. Municipal instruments backed by current and anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance of the taxation supporting the projects or assets or the inability to collect revenues for the project or from the assets. If the Internal Revenue Service determines an issuer of a municipal instrument has not complied with the applicable tax requirements, the security could decline in value, interest from the security could become taxable and the funds may be required to issue Forms 1099-DIV. The fund may invest up to 100% of its portfolio in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value.
55
Notes to Financial Statements – continued
Futures contracts are generally valued at last posted settlement price as provided by a third-party pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund’s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
56
Notes to Financial Statements – continued
Various inputs are used in determining the value of the fund’s assets or liabilities carried at market value. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures, forwards, swap contracts, and written options. The following is a summary of the levels used as of January 31, 2010 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Municipal Bonds | | $— | | $1,737,076,428 | | $— | | $1,737,076,428 |
| Mutual Funds | | 21,097,654 | | — | | — | | 21,097,654 |
| Total Investments | | $21,097,654 | | $1,737,076,428 | | $— | | $1,758,174,082 |
| | | | |
| Other Financial Instruments | | | | | | | | |
| Futures | | $482,886 | | $— | | $— | | $482,886 |
For further information regarding security characteristics, see the Portfolio of Investments.
In January 2010, Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (the “Update”) was issued, and is effective for interim and annual reporting periods beginning after December 15, 2009. This Update provides for expanded disclosures about fair value measurements. Management is evaluating the application of the Update to the fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Update in the fund’s financial statements.
Derivatives – The fund may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments. Derivatives may be used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
57
Notes to Financial Statements – continued
In this reporting period the fund adopted the disclosure provisions of FASB Accounting Standard Codification 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires enhanced disclosures about the fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the fund’s results of operations and financial position. Tabular disclosure regarding derivative fair value and gain/loss by contract type (e.g., interest rate contracts, foreign exchange contracts, credit contracts, etc.) is required and derivatives accounted for as hedging instruments under ASC 815 must be disclosed separately from those that do not qualify for hedge accounting. Even though the fund may use derivatives in an attempt to achieve an economic hedge, the fund’s derivatives are not accounted for as hedging instruments under ASC 815 because investment companies account for their derivatives at fair value and record any changes in fair value in current period earnings.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract Tables, generally are indicative of the volume of its derivative activity during the period.
The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at January 31, 2010, which are not accounted for as hedging instruments under ASC 815:
| | | | |
| | | | | Fair Value (a) |
| Risk | | Derivative | | Asset Derivatives |
| Interest Rate Contracts | | Interest Rate Futures | | $482,886 |
| (a) | All derivative valuations are specifically referenced within the fund’s Statement of Assets and Liabilities except for futures contracts. The value of futures contracts outstanding includes cumulative appreciation/depreciation as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | | |
| | | Futures Contracts | |
| Interest Rate Contracts | | $(651,843 | ) |
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended January 31, 2010 as reported in the Statement of Operations:
| | |
| | | Futures Contracts |
| Interest Rate Contracts | | $1,210,891 |
58
Notes to Financial Statements – continued
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported balance sheet assets and liabilities across transactions between the fund and the applicable counterparty.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forwards, swaps and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose is noted in the Portfolio of Investments.
Futures Contracts – The fund may use futures contracts to gain or to hedge against broad market, interest rate or currency exposure. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the notional amount of the contract. Subsequent payments (variation margin) are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are
59
Notes to Financial Statements – continued
recorded for financial statement purposes as unrealized gain or loss by the fund until the contract is closed or expires at which point the gain or loss on futures is realized.
The fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. While futures may present less counterparty risk to the fund since the contracts are exchange traded and the exchange’s clearinghouse guarantees payments to the broker, there is still counterparty credit risk due to the insolvency of the broker. The fund’s maximum risk of loss due to counterparty credit risk is equal to the margin posted by the fund to the broker plus any gains or minus any losses on the outstanding futures contracts.
Inverse Floaters – The fund invests in municipal inverse floating rate securities which are structured by the issuer (known as primary market inverse floating rate securities) or by an investment banker utilizing municipal bonds which have already been issued (known as secondary market inverse floating rate securities) to have variable rates of interest which typically move in the opposite direction of short term interest rates. A secondary market inverse floating rate security is created when an investment banker transfers a fixed rate municipal bond to a special purpose trust, and causes the trust to (a) issue floating rate certificates to third parties, in an amount equal to a fraction of the par amount of the deposited bonds (these certificates usually pay tax-exempt interest at short-term interest rates that typically reset weekly; and the certificate holders typically, on seven days notice, have the option to tender their certificates to the investment banker or another party for redemption at par plus accrued interest), and (b) issue inverse floating rate certificates (sometimes referred to as “inverse floaters”). If the holder of the inverse floater transfers the municipal bonds to an investment banker for the purpose of depositing the municipal bonds into the special purpose trust, the inverse floating rate certificates that are issued by the trust are referred to as “self-deposited inverse floaters.” If the bonds held by the trust are purchased by the investment banker for deposit into the trust from someone other than the purchasers of the inverse floaters, the inverse floating rate certificates that are issued by the trust are referred to as “externally deposited inverse floaters.” Such self-deposited inverse floaters held by the fund are accounted for as secured borrowings, with the municipal bonds reflected in the investments of the fund and amounts owed to the holder of the floating rate certificate under the provisions of the trust, which amounts are paid solely from the assets of the trust, reflected as liabilities of the fund in the Statement of Assets and Liabilities under the caption, “Payable to the holder of the floating rate certificate from trust assets”. The carrying value of the fund’s payable to the holder of the floating rate certificate from trust assets as reported on the fund’s
60
Notes to Financial Statements – continued
Statement of Assets and Liabilities approximates its fair value. At January 31, 2010, the fund’s payable to the holder of the floating rate certificate from trust assets was $45,039,901 and the interest rate on these floating rate certificates issued by the trust was 1.72%. For the year ended January 31, 2010, the average payable to the holder of the floating rate certificate from trust assets was $ 31,413,110 at a weighted average interest rate of 0.88%. Interest expense and fees relate to interest payments made to the holder of certain floating rate certificates and associated fees, both of which are made from trust assets. Interest expense and fees are recorded as incurred. For the year ended January 31, 2010, interest expense and fees in connection with self-deposited inverse floaters was $276,959. Primary and externally deposited inverse floaters held by the fund are not accounted for as secured borrowings.
Indemnifications – Under the fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. Dividends received in cash are recorded on the ex-dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
Legal fees and other related expenses incurred to preserve and protect the value of a security owned are added to the cost of the security; other legal fees are expensed. Capital infusions made directly to the security issuer, which are generally non-recurring, incurred to protect or enhance the value of high-yield debt securities, are reported as additions to the cost basis of the security. Costs that are incurred to negotiate the terms or conditions of capital infusions or that are expected to result in a plan of reorganization are reported as realized losses. Ongoing costs incurred to protect or enhance an investment, or costs incurred to pursue other claims or legal actions, are expensed.
61
Notes to Financial Statements – continued
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended January 31, 2010, is shown as a reduction of total expenses on the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable and tax-exempt income, including realized capital gains. As a result, no provision for federal income tax is required. The fund’s federal tax return for the prior three fiscal years remains subject to examination by the Internal Revenue Service.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to expiration of capital loss carryforwards and amortization and accretion of debt securities.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 1/31/10 | | 1/31/09 |
| Ordinary income (including any short-term capital gains) | | $1,213,500 | | $1,311,178 |
| Tax-exempt income | | 87,821,968 | | 84,734,218 |
| Total distributions | | $89,035,468 | | $86,045,396 |
62
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 1/31/10 | | | |
| Cost of investments | | $1,811,593,829 | |
| Gross appreciation | | 70,976,350 | |
| Gross depreciation | | (169,435,998 | ) |
| Net unrealized appreciation (depreciation) | | $(98,459,648 | ) |
| |
| Undistributed ordinary income | | 178,296 | |
| Undistributed tax-exempt income | | 13,209,909 | |
| Capital loss carryforwards | | (95,553,734 | ) |
| Post-October capital loss deferral | | (495,778 | ) |
| Other temporary differences | | (8,385,591 | ) |
As of January 31, 2010, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 1/31/11 | | $(18,364,839 | ) |
| 1/31/12 | | (15,537,212 | ) |
| 1/31/13 | | (3,190,630 | ) |
| 1/31/14 | | (10,798,317 | ) |
| 1/31/15 | | (230,213 | ) |
| 1/31/17 | | (18,935,036 | ) |
| 1/31/18 | | (28,497,487 | ) |
| | $(95,553,734 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and service fees. The fund’s income and common expenses are allocated to shareholders based on the value of settled shares outstanding of each class. The fund’s realized and unrealized gain (loss) are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. Class B shares will convert to Class A shares approximately eight years after purchase. The fund’s distributions declared to shareholders as reported on the Statements of Changes in Net Assets are presented by class as follows:
| | | | |
| | | From net investment income |
| | | Year ended
1/31/10 | | Year ended
1/31/09 |
| Class A | | $75,732,551 | | $71,815,251 |
| Class B | | 3,907,116 | | 5,415,911 |
| Class C | | 9,395,801 | | 8,814,234 |
| Total | | $89,035,468 | | $86,045,396 |
63
Notes to Financial Statements – continued
| (3) | | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.55% of the fund’s average daily net assets.
As part of a settlement agreement with the New York Attorney General concerning market timing and related matters, MFS had agreed to reduce the management fee to 0.50% of the fund’s average daily net assets for the period March 1, 2004 through February 28, 2009. For the year ended January 31, 2010, this waiver amounted to $49,530 and is reflected as a reduction of total expenses in the Statement of Operations.
The management fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.55% of the fund’s average daily net assets.
Effective March 1, 2009, the investment adviser has agreed in writing to pay a portion of the fund’s operating expenses, exclusive of management fee, distribution and service fees, interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses (including interest expenses and fees associated with investments in inverse floating rate instruments), such that operating expenses do not exceed 0.12% annually of the fund’s average daily net assets. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until May 31, 2011. For the year ended January 31, 2010, this reduction amounted to $376,492 and is reflected as a reduction of total expenses in the Statement of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, as distributor, received $408,716 for the year ended January 31, 2010, as its portion of the initial sales charge on sales of Class A shares of the fund.
The Board of Trustees has adopted a distribution plan for certain class shares pursuant to Rule 12b-1 of the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD for services provided by MFD and financial intermediaries in connection with the distribution and servicing of certain share classes. One component of the plan is a distribution fee paid to MFD and another component of the plan is a service fee paid to MFD. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
64
Notes to Financial Statements – continued
Distribution Plan Fee Table:
| | | | | | | | | | |
| | | Distribution
Fee Rate (d) | | Service
Fee Rate (d) | | Total
Distribution
Plan (d) | | Annual
Effective
Rate (e) | | Distribution
and Service
Fee |
| Class B | | 0.75% | | 0.25% | | 1.00% | | 0.78% | | 569,728 |
| Class C | | 0.75% | | 0.25% | | 1.00% | | 1.00% | | 1,857,121 |
| Total Distribution and Service Fees | | | | | | $2,426,849 |
| (d) | In accordance with the distribution plan for certain classes, the fund pays distribution and/or service fees equal to these annual percentage rates of each class’ average daily net assets. The distribution and service fee rates disclosed by class represent the current rates in effect at the end of the reporting period. Any rate changes, if applicable, are detailed below. |
| (e) | The annual effective rates represent actual fees incurred under the distribution plan for the year ended January 31, 2010 based on each class’ average daily net assets. For one year from the date of sale of Class B shares, assets attributable to such Class B shares are subject to the 0.25% annual Class B service fee. On assets attributable to all other Class B shares, the service fee is not currently in effect. This agreement will terminate on May 31, 2010. Effective June 1, 2010, for one year from the date of sale of Class B shares, assets attributable to such Class B shares are subject to the 0.25% annual Class B service fee. On assets attributable to all other Class B shares, MFD has agreed in writing to waive the service fee. This agreement will continue until modified be the fund’s Board of Trustees, but such agreement will continue at least until May 31, 2011. |
Certain Class A shares purchased prior to September 1, 2008 are subject to a contingent deferred sales charge (CDSC) in the event of a shareholder redemption within 12 months of purchase. Certain Class A shares purchased on or subsequent to September 1, 2008 are subject to a CDSC in the event of a shareholder redemption within 24 months of purchase. Class C shares are subject to a CDSC in the event of a shareholder redemption within 12 months of purchase. Class B shares are subject to a CDSC in the event of a shareholder redemption within six years of purchase. All contingent deferred sales charges are paid to MFD and during the year ended January 31, 2010, were as follows:
| | |
| | | Amount |
| Class A | | $91,547 |
| Class B | | 76,470 |
| Class C | | 33,490 |
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent calculated as a percentage of the average daily net assets of the fund as determined periodically under the supervision of the fund’s Board of Trustees. For the year ended January 31, 2010, the fee was $529,064, which equated to 0.0350% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses, sub-accounting and other shareholder servicing costs which may be paid to affiliated and unaffiliated service providers. For the year ended January 31, 2010, these out-of-pocket expenses, sub-accounting and other shareholder servicing costs amounted to $678,089.
65
Notes to Financial Statements – continued
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended January 31, 2010 was equivalent to an annual effective rate of 0.0177% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Prior to December 31, 2001, the fund had an unfunded defined benefit plan (“DB plan”) for independent Trustees. As of December 31, 2001, the Board took action to terminate the DB plan with respect to then-current and any future independent Trustees, such that the DB Plan covers only certain of those former independent Trustees who retired on or before December 31, 2001. The DB Plan resulted in a pension expense of $5,302 and is included in independent Trustees’ compensation for the year ended January 31, 2010. The liability for deferred retirement benefits payable to certain independent Trustees under the DB plan amounted to $32,641 at January 31, 2010, and is included in payable for independent Trustees’ compensation on the Statement of Assets and Liabilities.
Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended January 31, 2010, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $17,516 and are included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $9,046, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.
66
Notes to Financial Statements – continued
The fund may invest in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks a high level of current income consistent with preservation of capital and liquidity. Income earned on this investment is included in dividends from underlying funds on the Statement of Operations. This money market fund does not pay a management fee to MFS.
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $522,537,176 and $252,665,887, respectively.
| (5) | | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows:
| | | | | | | | | | | | |
| | | Year ended
1/31/10 | | | Year ended
1/31/09 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Class A | | 60,508,240 | | | $421,695,693 | | | 48,701,663 | | | $353,437,071 | |
Class B | | 1,369,071 | | | 9,430,360 | | | 1,742,984 | | | 12,923,292 | |
Class C | | 8,402,586 | | | 58,740,151 | | | 9,306,964 | | | 69,148,665 | |
| | 70,279,897 | | | $489,866,204 | | | 59,751,611 | | | $435,509,028 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Class A | | 6,022,048 | | | $41,932,979 | | | 5,363,584 | | | $38,362,862 | |
Class B | | 253,856 | | | 1,757,208 | | | 318,940 | | | 2,297,602 | |
Class C | | 689,694 | | | 4,801,171 | | | 637,430 | | | 4,560,708 | |
| | 6,965,598 | | | $48,491,358 | | | 6,319,954 | | | $45,221,172 | |
| Shares reacquired | | | | | | | | | | | | |
Class A | | (34,372,782 | ) | | $(240,476,322 | ) | | (47,114,222 | ) | | $(334,748,987 | ) |
Class B | | (4,354,771 | ) | | (30,133,352 | ) | | (5,916,931 | ) | | (42,885,130 | ) |
Class C | | (4,822,547 | ) | | (33,777,625 | ) | | (6,768,875 | ) | | (47,762,799 | ) |
| | (43,550,100 | ) | | $(304,387,299 | ) | | (59,800,028 | ) | | $(425,396,916 | ) |
| Net change | | | | | | | | | | | | |
Class A | | 32,157,506 | | | $223,152,350 | | | 6,951,025 | | | $57,050,946 | |
Class B | | (2,731,844 | ) | | (18,945,784 | ) | | (3,855,007 | ) | | (27,664,236 | ) |
Class C | | 4,269,733 | | | 29,763,697 | | | 3,175,519 | | | 25,946,574 | |
| | 33,695,395 | | | $233,970,263 | | | 6,271,537 | | | $55,333,284 | |
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made
67
Notes to Financial Statements – continued
for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended January 31, 2010, the fund’s commitment fee and interest expense were $23,252 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
| (7) | | Transactions in Underlying Funds-Affiliated Issuers |
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be affiliated issuers:
| | | | | | | | | |
| Underlying Funds | | Beginning
Shares/Par
Amount | | Acquisitions
Shares/Par
Amount | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount |
MFS Institutional Money
Market Portfolio | | 13,555,130 | | 316,690,227 | | (309,147,703 | ) | | 21,097,654 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
MFS Institutional Money
Market Portfolio | | $— | | $— | | $56,407 | | | $21,097,654 |
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of MFS Municipal High Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS Municipal High Income Fund (the Fund), including the portfolio of investments, as of January 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of January 31, 2010, by correspondence with the Fund’s custodian and brokers or by other appropriate auditing procedures when replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Municipal High Income Fund at January 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
March 22, 2010
69
RESULTS OF SHAREHOLDER MEETING
(unaudited)
At a special meeting of shareholders of Series Trust III, which was held on January 28, 2010, the following actions were taken:
Item 1. To elect the following individuals as Trustees:
| | | | |
| | | Number of Dollars |
Nominee | | For | | Withheld Authority |
| Robert E. Butler | | 2,529,220,334.811 | | 53,455,079.624 |
| Lawrence H. Cohn, M.D. | | 2,528,787,860.846 | | 53,887,553.589 |
| Maureen R. Goldfarb | | 2,529,336,917.346 | | 53,338,497.088 |
| David H. Gunning | | 2,529,682,589.176 | | 52,992,825.259 |
| William R. Gutow | | 2,529,034,053.902 | | 53,641,360.533 |
| Michael Hegarty | | 2,529,627,246.364 | | 53,048,168.071 |
| John P. Kavanaugh | | 2,529,463,862.073 | | 53,211,552.362 |
| Robert J. Manning | | 2,529,922,880.153 | | 52,752,534.282 |
| Robert C. Pozen | | 2,529,509,988.090 | | 53,165,426.345 |
| J. Dale Sherratt | | 2,528,912,329.793 | | 53,763,084.642 |
| Laurie J. Thomsen | | 2,529,271,338.607 | | 53,404,075.828 |
| Robert W. Uek | | 2,529,251,760.591 | | 53,423,653.843 |
70
TRUSTEES AND OFFICERS — IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of March 1, 2010, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
| INTERESTED TRUSTEES | | | | |
Robert J. Manning (k) (born 10/20/63) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chief Executive Officer, Chief Investment Officer and Director, President (until December 2009) |
Robert C. Pozen (k) (born 8/08/46) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman (since February 2004); Medtronic, Inc, (medical devices), Director (since 2004); Harvard Business School (education), Senior Lecturer (since 2008); Bell Canada Enterprises (telecommunications), Director (until February 2009); The Bank of New York, Director (finance), (March 2004 to May 2005); Telesat (satellite communications), Director (until November 2007) |
| INDEPENDENT TRUSTEES | | | | |
David H. Gunning (born 5/30/42) | | Trustee and Chair of Trustees | | January 2004 | | Retired; Cleveland-Cliffs Inc. (mining products and service provider), Vice Chairman/Director (until May 2007); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non Executive Chairman; Southwest Gas Corp. (natural gas distribution), Director (until May 2004); Portman Limited (mining), Director (until 2008) |
71
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Robert E. Butler (n) (born 11/29/41) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (until 2002) |
Lawrence H. Cohn, M.D.
(born 3/11/37) | | Trustee | | June 1989 | | Brigham and Women’s Hospital, Senior Cardiac Surgeon (since 2005); Harvard Medical School, Professor of Cardiac Surgery; Partners HealthCare, Physician Director of Medical Device Technology (since 2006); Brigham and Women’s Hospital, Chief of Cardiac Surgery (until 2005) |
Maureen R. Goldfarb
(born 4/6/55) | | Trustee | | January 2009 | | Private investor; John Hancock Financial Services, Inc., Executive Vice President (until 2004); John Hancock Mutual Funds, Trustee and Chief Executive Officer (until 2004) |
William R. Gutow
(born 9/27/41) | | Trustee | | December 1993 | | Private investor and real estate consultant ; Capital Entertainment Management Company (video franchise), Vice Chairman; Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007); Texas Donuts (donut franchise), Vice Chairman (until 2009) |
Michael Hegarty
(born 12/21/44) | | Trustee | | December 2004 | | Private investor; AXA Financial (financial services and insurance), Vice Chairman and Chief Operating Officer (until 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until 2001) |
John P. Kavanaugh
(born 11/4/54) | | Trustee | | January 2009 | | Private investor; The Hanover Insurance Group, Inc., Vice President and Chief Investment Officer (until 2006); Allmerica Investment Trust, Allmerica Securities Trust and Opus Investment Trust (investment companies), Chairman, President and Trustee (until 2006) |
72
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
J. Dale Sherratt
(born 9/23/38) | | Trustee | | June 1989 | | Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner |
Laurie J. Thomsen
(born 8/05/57) | | Trustee | | March 2005 | | New Profit, Inc. (venture philanthropy), Executive Partner (since 2006); Private investor; The Travelers Companies (commercial property liability insurance), Director; Prism Venture Partners (venture capital), Co-founder and General Partner (until June 2004) |
Robert W. Uek
(born 5/18/41) | | Trustee | | January 2006 | | Consultant to investment company industry; PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); TT International Funds (mutual fund complex), Trustee (until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (until 2005) |
| OFFICERS | | | | | | |
Maria F. Dwyer (k)
(born 12/01/58) | | President | | March 2004 | | Massachusetts Financial Services Company, Executive Vice President and Chief Regulatory Officer (since March 2004) Chief Compliance Officer (since December 2006); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (until March 2004) |
Christopher R. Bohane (k)
(born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
John M. Corcoran (k)
(born 04/13/65) | | Treasurer | | October 2008 | | Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008) |
73
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ethan D. Corey (k)
(born 11/21/63) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since 2004); Dechert LLP (law firm), Counsel (prior to December 2004) |
David L. DiLorenzo (k)
(born 8/10/68) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (until June 2005) |
Timothy M. Fagan (k)
(born 7/10/68) | | Assistant Secretary and Assistant Clerk | | September 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President, Senior Attorney and Chief Compliance Officer (until August 2005) |
Mark D. Fischer (k)
(born 10/27/70) | | Assistant Treasurer | | July 2005 | | Massachusetts Financial Services Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (until May 2005) |
Robyn L. Griffin
(born 7/04/75) | | Assistant Independent Chief Compliance Officer | | August 2008 | | Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008); Liberty Mutual Group (insurance), Personal Market Assistant Controller (April 2006 – October 2006); Deloitte & Touche LLP (professional services firm), Senior Manager (prior to April 2006) |
Brian E. Langenfeld (k)
(born 3/07/73) | | Assistant Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (until April 2006) |
74
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (h) | | Principal Occupations During
the Past Five Years & Other
Directorships (j) |
Ellen Moynihan (k)
(born 11/13/57) | | Assistant Treasurer | | April 1997 | | Massachusetts Financial Services Company, Senior Vice President |
Susan S. Newton (k)
(born 3/07/50) | | Assistant Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (until April 2005) |
Susan A. Pereira (k)
(born 11/05/70) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (until June 2004) |
Mark N. Polebaum (k)
(born 5/01/52) | | Secretary and Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (until January 2006) |
Frank L. Tarantino
(born 3/07/44) | | Independent Chief Compliance Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (until June 2004) |
Richard S. Weitzel (k)
(born 7/16/70) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel (since 2004); Massachusetts Department of Business and Technology, General Counsel (until April 2004) |
James O. Yost (k)
(born 6/12/60) | | Assistant Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President |
| (h) | Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Messrs. Pozen and Manning served as Advisory Trustees. For the period March 2008 until October 2008, Ms. Dwyer served as Treasurer of the Funds. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
75
Trustees and Officers – continued
| (n) | In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. |
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust held a shareholders’ meeting in January 2010 to elect Trustees, and will hold a shareholders’ meeting at least once every five years thereafter, to elect Trustees. Messrs. Butler, Kavanaugh, Sherratt, Uek and Ms. Thomsen are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2010, the Trustees served as board members of 99 funds within the MFS Family of Funds.
The Statement of Additional Information for the Fund and further information about the Trustees are available without charge upon request by calling 1-800-225-2606.
| | |
| Investment Adviser | | Custodian |
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116-3741 | | JPMorgan Chase Bank One Chase Manhattan Plaza, New York, NY 10081 |
| Distributor | | Independent Registered Public Accounting Firm |
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116-3741 | | Ernst & Young LLP 200 Clarendon Street, Boston, MA 02116 |
| Portfolio Managers | | |
Gary Lasman Geoffrey Schechter | | |
76
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Mutual Funds” in the “Products and Performance” section of mfs.com.
77
FEDERAL TAX INFORMATION (unaudited)
The fund will notify shareholders of amounts for use in preparing 2010 income tax forms in January 2011. The following information is provided pursuant to provisions of the Internal Revenue Code.
Of the dividends paid from net investment income during the fiscal year, 98.64% is designated as exempt interest dividends for federal income tax purposes. If the fund has earned income on private activity bonds, a portion of the dividends paid may be considered a tax preference item for purposes of computing a shareholder’s alternative minimum tax.
78
MFS® PRIVACY NOTICE
Privacy is a concern for every investor today. At MFS Investment Management® and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include
| | Ÿ | | data from investment applications and other forms |
| | Ÿ | | share balances and transactional history with us, our affiliates, or others |
| | Ÿ | | facts from a consumer reporting agency |
We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements.
Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you.
If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day.
Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours.
79
CONTACT US
Web site
mfs.com
MFS TALK
1-800-637-8255
24 hours a day
Account service and literature
Shareholders
1-800-225-2606
Investment professionals
1-800-343-2829
Retirement plan services
1-800-637-1255
Mailing address
MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Overnight mail
MFS Service Center, Inc.
c/o Boston Financial Data Services
30 Dan Road
Canton, MA 02021-2809
Save paper with eDelivery. MFS® will send you prospectuses, reports, and proxies directly via e-mail so you will get information faster with less mailbox clutter. To sign up: 1. go to mfs.com. 2. log in via MFS® Access. 3. select eDelivery. If you own your MFS fund shares through a financial institution or a retirement plan, MFS® TALK, MFS Access, and eDelivery may not be available to you.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant’s principal executive officer and principal financial and accounting officer. The Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to an element of the Code’s definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR.
A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Messrs. Robert E. Butler, John P. Kavanaugh and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Butler, Kavanaugh and Uek and Ms. Thomsen are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Items 4(a) through 4(d) and 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP (“Deloitte”) to serve as independent accountants to certain series of the Registrant and Ernst & Young LLP (“E&Y”) to serve in the same capacity to certain other series of the Registrant (the series referred to collectively as the “Funds” and singularly as a “Fund”). The tables below set forth the audit fees billed to the Funds as well as fees for non-audit services provided to the Funds and/or to the Funds’ investment adviser, Massachusetts Financial Services Company (“MFS”), and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Funds (“MFS Related Entities”).
For the fiscal years ended January 31, 2010 and 2009, audit fees billed to the Funds by Deloitte and E&Y were as follows:
| | | | |
| | | Audit Fees |
| | | 2010 | | 2009 |
Fees billed by Deloitte: | | | | |
MFS High Income Fund | | 58,163 | | 57,038 |
MFS High Yield Opportunities Fund | | 62,807 | | 61,591 |
Total | | 120,970 | | 118,629 |
| |
| | | Audit Fees |
| | | 2010 | | 2009 |
Fees billed by E&Y: | | | | |
MFS Municipal High Income Fund | | 42,976 | | 42,933 |
For the fiscal years ended January 31, 2010 and 2009, fees billed by Deloitte and E&Y for audit-related, tax and other services provided to the Funds and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
| | | | | | | | | | | | |
| | | Audit-Related Fees1 | | Tax Fees2 | | All Other Fees3 |
| | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Fees billed by Deloitte: | | | | | | | | | | | | |
To MFS High Income Fund | | 0 | | 0 | | 7,595 | | 7,446 | | 1,447 | | 3,875 |
To MFS High Yield Opportunities Fund | | 0 | | 0 | | 5,871 | | 5,756 | | 1,447 | | 3,875 |
Total fees billed by Deloitte To above Funds | | 0 | | 0 | | 13,466 | | 13,202 | | 2,894 | | 7,750 |
To MFS and MFS Related Entities of MFS High Income Fund* | | 1,138,090 | | 1,267,804 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS High Yield Opportunities Fund* | | 1,138,090 | | 1,267,804 | | 0 | | 0 | | 59,174 | | 223,140 |
| | | | | | |
| | | 2010 | | | | 2009 | | | | | | |
Aggregate fees for non-audit services: | | | | | | | | | | | | |
To MFS High Income Fund, MFS and MFS Related Entities# | | 1,304,431 | | | | 1,552,090 | | | | | | |
To MFS High Yield Opportunities Fund, MFS and MFS Related Entities# | | 1,302,707 | | | | 1,550,400 | | | | | | |
| | | | | | | | | | | | |
| | | Audit-Related Fees1 | | Tax Fees2 | | All Other Fees4 |
| | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Fees billed by E&Y: | | | | | | | | | | | | |
To MFS Municipal High Income Fund | | 0 | | 0 | | 8,387 | | 8,223 | | 0 | | 0 |
To MFS and MFS Related Entities of MFS Municipal High Income Fund* | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 |
| | | | | | |
| | | 2010 | | | | 2009 | | | | | | |
Aggregate fees for non-audit services: | | | | | | | | | | | | |
To MFS Municipal High Income Fund, MFS and MFS Related Entities# | | 248,640 | | | | 533,017 | | | | | | |
| * | This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Funds (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). |
| # | This amount reflects the aggregate fees billed by Deloitte or E&Y, as the case may be, for non-audit services rendered to the Funds and for non-audit services rendered to MFS and the MFS Related Entities. |
| 1 | The fees included under “Audit-Related Fees” are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under “Audit Fees,” including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. |
| 2 | The fees included under “Tax Fees” are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. |
| 3 | The fees included under “All Other Fees” are fees for products and services provided by Deloitte other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” including fees for services related to analysis of certain portfolio holdings, review of internal controls and review of Rule 38a-1 compliance program. |
| 4 | The fees under “All Other Fees” are fees for products and services provided by E&Y other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees”. |
Item 4(e)(1):
Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services:
To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Funds and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 in each period between regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting.
Item 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied).
Item 4(f): Not applicable.
Item 4(h): The Registrant’s Audit Committee has considered whether the provision by a Registrant’s independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant’s principal auditors.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable to the Registrant.
A schedule of investments of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable to the Registrant.
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable to the Registrant.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | Based upon their evaluation of the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report 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 controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| (a) | File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated. |
| | (1) | Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. |
| | (2) | A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. |
| (b) | If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. |
Notice
A copy of the Amended and Restated Declaration of Trust, as amended, of the Registrant is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.
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) MFS SERIES TRUST IIII
| | |
| By (Signature and Title)* | | MARIA F. DWYER |
| | Maria F. Dwyer, President |
Date: March 22, 2010
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)* | | MARIA F. DWYER |
| | Maria F. Dwyer, President (Principal Executive Officer) |
Date: March 22, 2010
| | |
| By (Signature and Title)* | | JOHN M. CORCORAN |
| | John M. Corcoran, Treasurer (Principal Financial Officer and Accounting Officer) |
Date: March 22, 2010
| * | Print name and title of each signing officer under his or her signature. |
