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 811-3732
MFS VARIABLE INSURANCE TRUST II
(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: December 31
Date of reporting period: December 31, 2009*
| * | MFS Capital Appreciation Portfolio was reorganized into the MFS Massachusetts Investors Growth Stock Portfolio, as of December 4, 2009. MFS Mid Cap Value Portfolio was reorganized into the MFS Value Portfolio, as of December 4, 2009. MFS Strategic Value Portfolio was reorganized into the MFS Value Portfolio, as of June 26, 2009. |
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
A report for each of the MFS Capital Appreciation Portfolio, the MFS Strategic Value Portfolio and the MFS Mid Cap Value Portfolio is not included because the series did not have any shareholders at period end. Please see note above.
MFS® INTERNATIONAL GROWTH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Growth Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS International Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Nestle S.A. | | 3.4% |
| BHP Billiton PLC | | 2.9% |
| LVMH Moet Hennessy Louis Vuitton S.A. | | 2.6% |
| Roche Holding AG | | 2.2% |
| Reckitt Benckiser Group PLC | | 2.0% |
| Housing Development Finance Corp. Ltd. | | 1.9% |
| Accenture Ltd., “A” | | 1.8% |
| Synthes, Inc. | | 1.8% |
| TOTAL S.A. | | 1.7% |
| INPEX Corp. | | 1.7% |
| | |
| Equity sectors | | |
| Financial Services | | 15.6% |
| Consumer Staples | | 14.3% |
| Health Care | | 12.5% |
| Technology | | 10.6% |
| Retailing | | 9.9% |
| Basic Materials | | 9.6% |
| Energy | | 8.1% |
| Utilities & Communications | | 5.9% |
| Leisure | | 4.5% |
| Special Products & Services | | 4.3% |
| Industrial Goods & Services | | 2.2% |
| |
| Country weightings (w) | | |
| United Kingdom | | 15.7% |
| Switzerland | | 13.0% |
| Japan | | 12.1% |
| France | | 10.1% |
| Germany | | 9.7% |
| Hong Kong | | 3.2% |
| Brazil | | 3.0% |
| China | | 2.9% |
| India | | 2.8% |
| Other Countries | | 27.5% |
| (w) | Country weightings are based on the valuation currency of each security. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS International Growth Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS International Growth Portfolio (the “fund”) provided a total return of 38.06%, while Service Class shares of the fund provided a total return of 37.69%. These compare with a return of 39.21% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World (ex-US) Growth 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
A combination of stock selection and an underweighted position in the basic materials sector was the primary factor holding back relative performance. Not owning strong-performing iron ore miner Companhia Vale Do Rio Doce (Brazil), and the timing of our ownership in shares of mining company Rio Tinto (h) (U.K.) and pallets and container manufacturer Brambles (h) (Australia), had a negative impact on relative results. We have consistently been underweight mining companies, because many of these companies are average-growth, capital-intensive, commodotized businesses, and therefore do not meet our buy criteria.
The energy sector was another top relative detractor and here the principal factor was our currency exposure to Japanese Yen. In addition, our overweighted position in oil and gas exploration company INPEX (Japan) was a significant negative. Shares of INPEX fell as its profit declined after the recession sapped demand for crude oil and natural gas.
Elsewhere, holdings of banking firm Erste Group Bank (b)(h) (Austria), pharmaceutical company Hisamitsu Pharmaceutical (Japan), and mobile phone maker Nokia (Finland) dampened relative performance. Shares of Nokia underperformed the benchmark after the company announced its first net loss since it began reporting quarterly results in 1996. The company was hurt by weaker demand, particularly for its N97 smartphone, and by losses from a joint venture with Siemens. Additionally, credit-rating agency Fitch lowered the company’s credit rating and issued a bearish forecast for the overall industry. The timing of our ownership in shares of financial services firm Daiwa Securities (Japan) and wireless services provider China Unicom (Hong Kong) also detracted from relative results.
During the reporting period, the fund’s currency exposure overall detracted from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposures than the benchmark.
The fund’s cash position was also a detractor. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in the retailing sector was a positive factor for relative performance. Strong-performing export trading company Li & Fung (Hong Kong) and luxury goods maker LVMH Moet Hennessy Louis Vuitton (France) boosted relative results. The
3
MFS International Growth Portfolio
Management Review – continued
stock price of Li & Fung, a major supplier of toys and clothing products to large discount retailers such as Wal-Mart and Target, climbed as the company benefited from significant market share gains at mid-tier and discount retailers. Management also accelerated efforts to add customers, buy smaller rivals and sign outsourcing deals amid the global recession. Shares of LVMH performed well during the period. While sales of more discretionary items like champagne, jewelry and watches suffered, sales of Louis Vuitton products increased significantly, highlighting the resilience of its brand.
A combination of stock selection and an underweighted position in the utilities and communications sector contributed to relative results. However, no individual stocks within this sector were among the fund’s top contributors.
Stock selection in the special products and services and consumer staples sectors also bolstered relative returns. In the special products and services sector, the timing of our ownership in shares of technology consulting firm Infosys Technologies (India) aided results. In the consumer staples sector, beverage company Companhia de Bebidas das Americas (Brazil) and personal hygiene products maker Hengan International Group (h) (Hong Kong) were among the top contributors.
Stocks in other sectors that aided relative returns included energy-related contractor Saipem (Italy), marketing firm WPP Group (b) (U.K.), and housing financier Housing Development Finance Group (India). Not owning poor-performing automobile manufacturer Volkswagen (Germany) and video game console maker Nintendo (Japan) also helped relative results.
Respectfully,
David Antonelli
Portfolio Manager
Note to Contract Owners: Effective January 12, 2010, David Antonelli became the portfolio manager of the fund. Previously, the fund was managed by Barry Dargan.
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS International Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 6/03/96 | | 38.06% | | 7.00% | | 4.69% | | N/A | | |
| | | Service Class | | 8/24/01 | | 37.69% | | 6.74% | | N/A | | 8.14% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | MSCI All Country World (ex-US) Growth Index (f) | | 39.21% | | 6.01% | | 0.37% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
MSCI All Country World (ex-US) Growth Index – a market capitalization-weighted index that is designed to measure equity market performance for growth securities in the global developed and emerging markets, excluding the U.S.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS International Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.18% | | $1,000.00 | | $1,247.94 | | $6.69 |
| | Hypothetical (h) | | 1.18% | | $1,000.00 | | $1,019.26 | | $6.01 |
| Service Class | | Actual | | 1.43% | | $1,000.00 | | $1,245.87 | | $8.09 |
| | Hypothetical (h) | | 1.43% | | $1,000.00 | | $1,018.00 | | $7.27 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS International Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 97.5% | | | | | |
| Alcoholic Beverages – 2.5% | | | | | |
| Companhia de Bebidas das Americas, ADR | | 29,630 | | $ | 2,995,297 |
| Pernod Ricard S.A. | | 24,784 | | | 2,128,548 |
| | | | | |
| | | | $ | 5,123,845 |
| | | | | |
| Apparel Manufacturers – 5.6% | | | | | |
| Compagnie Financiere Richemont S.A. | | 58,009 | | $ | 1,941,044 |
| Li & Fung Ltd. | | 654,600 | | | 2,693,993 |
| LVMH Moet Hennessy Louis Vuitton S.A. | | 47,040 | | | 5,285,492 |
| Swatch Group Ltd. | | 7,146 | | | 1,798,650 |
| | | | | |
| | | | $ | 11,719,179 |
| | | | | |
| Broadcasting – 2.6% | | | | | |
| Grupo Televisa S.A., ADR | | 109,720 | | $ | 2,277,787 |
| WPP Group PLC | | 311,835 | | | 3,045,028 |
| | | | | |
| | | | $ | 5,322,815 |
| | | | | |
| Brokerage & Asset Managers – 4.2% | | | | | |
| Aberdeen Asset Management PLC | | 531,720 | | $ | 1,150,838 |
| Daiwa Securities Group, Inc. | | 408,000 | | | 2,045,395 |
| Deutsche Boerse AG | | 36,700 | | | 3,051,454 |
| ICAP PLC | | 164,410 | | | 1,139,378 |
| IG Group Holdings PLC | | 205,710 | | | 1,252,151 |
| | | | | |
| | | | $ | 8,639,216 |
| | | | | |
| Business Services – 4.3% | | | | | |
| Accenture Ltd., “A” (s) | | 92,380 | | $ | 3,833,770 |
| Capita Group PLC | | 75,002 | | | 904,660 |
| Infosys Technologies Ltd., ADR | | 33,190 | | | 1,834,411 |
| Intertek Group PLC | | 114,050 | | | 2,296,399 |
| | | | | |
| | | | $ | 8,869,240 |
| | | | | |
| Computer Software – 0.9% | | | | | |
| SAP AG | | 40,150 | | $ | 1,893,632 |
| | | | | |
| Computer Software – Systems – 3.0% | | | | | |
| Acer, Inc. | | 906,300 | | $ | 2,707,527 |
| Canon, Inc. | | 54,600 | | | 2,308,218 |
| NICE Systems Ltd., ADR (a) | | 41,720 | | | 1,294,989 |
| | | | | |
| | | | $ | 6,310,734 |
| | | | | |
| Consumer Products – 6.7% | | | | | |
| AmorePacific Corp. (a) | | 1,670 | | $ | 1,339,471 |
| Beiersdorf AG | | 40,460 | | | 2,659,096 |
| Henkel KGaA, IPS | | 42,520 | | | 2,213,704 |
| Reckitt Benckiser Group PLC | | 75,830 | | | 4,110,452 |
| Shiseido Co. Ltd. | | 90,100 | | | 1,726,918 |
| Uni-Charm Corp. | | 20,000 | | | 1,872,335 |
| | | | | |
| | | | $ | 13,921,976 |
| | | | | |
| Electrical Equipment – 2.2% | | | | | |
| Keyence Corp. | | 5,800 | | $ | 1,195,684 |
| Schneider Electric S.A. | | 29,677 | | | 3,438,136 |
| | | | | |
| | | | $ | 4,633,820 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Electronics – 5.1% | | | | | |
| ARM Holdings PLC | | 721,420 | | $ | 2,062,894 |
| Hoya Corp. | | 70,000 | | | 1,855,753 |
| Samsung Electronics Co. Ltd. | | 3,310 | | | 2,260,674 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 248,900 | | | 2,847,416 |
| Tokyo Electron Ltd. | | 24,300 | | | 1,553,818 |
| | | | | |
| | | | $ | 10,580,555 |
| | | | | |
| Energy – Independent – 1.7% | | | | | |
| INPEX Corp. | | 466 | | $ | 3,497,552 |
| | | | | |
| Energy – Integrated – 4.7% | | | | | |
| OAO Gazprom, ADR | | 139,690 | | $ | 3,482,133 |
| Petroleo Brasileiro S.A., ADR | | 54,970 | | | 2,620,970 |
| TOTAL S.A. | | 55,530 | | | 3,558,449 |
| | | | | |
| | | | $ | 9,661,552 |
| | | | | |
| Food & Beverages – 5.1% | | | | | |
| Coca-Cola Hellenic Bottling Co. S.A. | | 45,861 | | $ | 1,044,801 |
| Groupe Danone | | 43,183 | | | 2,629,813 |
| Nestle S.A. | | 143,273 | | | 6,960,603 |
| | | | | |
| | | | $ | 10,635,217 |
| | | | | |
| Food & Drug Stores – 2.4% | | | | | |
| Dairy Farm International Holdings Ltd. | | 266,400 | | $ | 1,591,617 |
| Lawson, Inc. | | 27,400 | | | 1,206,206 |
| Tesco PLC | | 304,948 | | | 2,095,241 |
| | | | | |
| | | | $ | 4,893,064 |
| | | | | |
| Insurance – 0.4% | | | | | |
| China Pacific Insurance Co. Ltd. (a) | | 189,600 | | $ | 755,622 |
| | | | | |
| Leisure & Toys – 0.7% | | | | | |
| Shimano, Inc. | | 37,500 | | $ | 1,500,898 |
| | | | | |
| Major Banks – 3.6% | | | | | |
| HSBC Holdings PLC | | 267,530 | | $ | 3,053,141 |
| Julius Baer Group Ltd. | | 80,737 | | | 2,819,786 |
| Standard Chartered PLC | | 66,549 | | | 1,666,559 |
| | | | | |
| | | | $ | 7,539,486 |
| | | | | |
| Medical & Health Technology & Services – 0.9% | | | |
| Fleury S.A. (a) | | 64,600 | | $ | 682,363 |
| SSL International PLC | | 94,010 | | | 1,186,323 |
| | | | | |
| | | | $ | 1,868,686 |
| | | | | |
| Medical Equipment – 3.5% | | | | | |
| Essilor International S.A. | | 23,150 | | $ | 1,378,205 |
| Sonova Holding AG | | 18,186 | | | 2,199,043 |
| Synthes, Inc. | | 28,320 | | | 3,709,024 |
| | | | | |
| | | | $ | 7,286,272 |
| | | | | |
| Metals & Mining – 3.4% | | | | | |
| BHP Billiton PLC | | 188,810 | | $ | 6,031,106 |
| Iluka Resources Ltd. (a) | | 298,810 | | | 950,943 |
| | | | | |
| | | | $ | 6,982,049 |
| | | | | |
7
MFS International Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Network & Telecom – 1.6% | | | | | |
| Nokia Oyj | | 263,510 | | $ | 3,382,899 |
| | | | | |
| Oil Services – 1.7% | | | | | |
| Saipem S.p.A. | | 101,630 | | $ | 3,491,272 |
| | | | | |
| Other Banks & Diversified Financials – 7.4% | | | |
| Aeon Credit Service Co. Ltd. | | 175,500 | | $ | 1,686,503 |
| Bank of Cyprus Public Co. Ltd. | | 227,930 | | | 1,588,776 |
| Bank Rakyat Indonesia | | 2,362,000 | | | 1,908,543 |
| China Construction Bank | | 1,974,000 | | | 1,680,234 |
| Credicorp Ltd. | | 21,320 | | | 1,642,066 |
| Housing Development Finance Corp. Ltd. | | 67,459 | | | 3,878,947 |
| UBS AG (a) | | 195,015 | | | 2,995,805 |
| | | | | |
| | | | $ | 15,380,874 |
| | | | | |
| Pharmaceuticals – 8.1% | | | | | |
| Bayer AG | | 36,289 | | $ | 2,900,403 |
| Hisamitsu Pharmaceutical Co., Inc. | | 32,900 | | | 1,059,752 |
| Merck KGaA | | 24,200 | | | 2,260,525 |
| Novo Nordisk A/S, “B” | | 29,690 | | | 1,898,934 |
| Roche Holding AG | | 26,870 | | | 4,571,022 |
| Santen, Inc. | | 42,000 | | | 1,343,856 |
| Teva Pharmaceutical Industries Ltd., ADR | | 50,550 | | | 2,839,899 |
| | | | | |
| | | | $ | 16,874,391 |
| | | | | |
| Printing & Publishing – 1.2% | | | | | |
| Reed Elsevier PLC | | 308,750 | | $ | 2,535,384 |
| | | | | |
| Specialty Chemicals – 6.2% | | | | | |
| Akzo Nobel N.V. | | 47,000 | | $ | 3,097,896 |
| L’Air Liquide S.A. | | 20,314 | | | 2,397,934 |
| Linde AG | | 26,310 | | | 3,166,803 |
| Shin-Etsu Chemical Co. Ltd. | | 38,200 | | | 2,153,163 |
| Symrise AG | | 91,800 | | | 1,971,366 |
| | | | | |
| | | | $ | 12,787,162 |
| | | | | |
| Specialty Stores – 1.9% | | | | | |
| Esprit Holdings Ltd. | | 345,969 | | $ | 2,276,993 |
| Industria de Diseno Textil S.A. | | 26,060 | | | 1,614,774 |
| | | | | |
| | | | $ | 3,891,767 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Telecommunications – Wireless – 2.0% | | | | | |
| MTN Group Ltd. | | 115,670 | | $ | 1,840,235 |
| Philippine Long Distance Telephone Co. | | 40,170 | | | 2,276,561 |
| | | | | |
| | | | $ | 4,116,796 |
| | | | | |
| Telephone Services – 3.3% | | | | | |
| China Unicom Ltd. | | 2,638,000 | | $ | 3,467,257 |
| Telefonica S.A. | | 121,810 | | | 3,395,034 |
| | | | | |
| | | | $ | 6,862,291 |
| | | | | |
| Utilities – Electric Power – 0.6% | | | | | |
| CEZ AS | | 25,130 | | $ | 1,181,555 |
| | | | | |
Total Common Stocks
(Identified Cost, $176,304,448) | | | | $ | 202,139,801 |
| | | | | |
|
| MONEY MARKET FUNDS (v) – 2.0% |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 4,001,551 | | $ | 4,001,551 |
| | | | | |
Total Investments
(Identified Cost, $180,305,999) | | | | $ | 206,141,352 |
OTHER ASSETS,
LESS LIABILITIES – 0.5% | | | | | 1,121,311 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 207,262,663 |
| | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $172,640. At December 31, 2009, the fund had no short sales outstanding. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS International Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $176,304,448) | | $202,139,801 | | | |
Underlying funds, at cost and value | | 4,001,551 | | | |
Total investments, at value (identified cost, $180,305,999) | | $206,141,352 | | | |
Cash | | $9,531 | | | |
Foreign currency, at value (identified cost, $23,703) | | 23,690 | | | |
Receivables for | | | | | |
Investments sold | | 1,015,685 | | | |
Fund shares sold | | 261,559 | | | |
Interest and dividends | | 231,747 | | | |
Other assets | | 7,315 | | | |
Total assets | | | | | $207,690,879 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $135,090 | | | |
Fund shares reacquired | | 106,920 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 10,234 | | | |
Shareholder servicing costs | | 78 | | | |
Distribution and/or service fees | | 375 | | | |
Administrative services fee | | 397 | | | |
Payable for Trustees’ compensation | | 215 | | | |
Deferred country tax expense payable | | 41,774 | | | |
Accrued expenses and other liabilities | | 133,133 | | | |
Total liabilities | | | | | $428,216 |
Net assets | | | | | $207,262,663 |
Net assets consist of | | | | | |
Paid-in capital | | $187,950,954 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $41,774 deferred country tax) | | 25,801,573 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (8,421,510 | ) | | |
Undistributed net investment income | | 1,931,646 | | | |
Net assets | | | | | $207,262,663 |
Shares of beneficial interest outstanding | | | | | 17,099,356 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $179,924,836 | | 14,832,656 | | $12.13 |
Service Class | | 27,337,827 | | 2,266,700 | | 12.06 |
See Notes to Financial Statements
9
MFS International Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
| Year ended 12/31/09 | | | | | |
| Net investment income | | | | | |
Income | | | | | |
Dividends | | $4,127,178 | | | |
Interest | | 59,776 | | | |
Dividends from underlying funds | | 7,640 | | | |
Foreign taxes withheld | | (379,616 | ) | | |
Total investment income | | | | | $3,814,978 |
Expenses | | | | | |
Management fee | | $1,297,337 | | | |
Distribution and/or service fees | | 50,911 | | | |
Shareholder servicing costs | | 20,342 | | | |
Administrative services fee | | 56,733 | | | |
Trustees’ compensation | | 17,003 | | | |
Custodian fee | | 297,304 | | | |
Shareholder communications | | 13,116 | | | |
Auditing fees | | 68,380 | | | |
Legal fees | | 8,177 | | | |
Miscellaneous | | 21,249 | | | |
Total expenses | | | | | $1,850,552 |
Fees paid indirectly | | (1 | ) | | |
Net expenses | | | | | $1,850,551 |
Net investment income | | | | | $1,964,427 |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | |
Realized gain (loss) (identified cost basis) | | | | | |
Investment transactions | | $4,054,042 | | | |
Foreign currency transactions | | (27,237 | ) | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $4,026,805 |
Change in unrealized appreciation (depreciation) | | | | | |
Investments (net of $41,774 increase in deferred country tax) | | $44,693,565 | | | |
Translation of assets and liabilities in foreign currencies | | 9,677 | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $44,703,242 |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $48,730,047 |
Change in net assets from operations | | | | | $50,694,474 |
See Notes to Financial Statements
10
MFS International Growth Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $1,964,427 | | | $1,625,622 | |
Net realized gain (loss) on investments and foreign currency transactions | | 4,026,805 | | | (12,287,149 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 44,703,242 | | | (54,930,205 | ) |
Change in net assets from operations | | $50,694,474 | | | $(65,591,732 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(1,417,238 | ) | | $(1,665,009 | ) |
From net realized gain on investments | | — | | | (23,814,853 | ) |
Total distributions declared to shareholders | | $(1,417,238 | ) | | $(25,479,862 | ) |
Change in net assets from fund share transactions | | $52,895,067 | | | $27,839,758 | |
Total change in net assets | | $102,172,303 | | | $(63,231,836 | ) |
Net assets | | | | | | |
At beginning of period | | 105,090,360 | | | 168,322,196 | |
At end of period (including undistributed net investment income of $1,931,646 and
$1,411,694, respectively) | | $207,262,663 | | | $105,090,360 | |
See Notes to Financial Statements
11
MFS International Growth Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.90 | | | $17.63 | | | $17.93 | | | $15.42 | | | $13.55 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.14 | | | $0.16 | | | $0.21 | | | $0.23 | | | $0.12 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 3.20 | | | (6.04 | ) | | 2.57 | | | 3.70 | | | 1.88 | |
Total from investment operations | | $3.34 | | | $(5.88 | ) | | $2.78 | | | $3.93 | | | $2.00 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.11 | ) | | $(0.19 | ) | | $(0.27 | ) | | $(0.11 | ) | | $(0.13 | ) |
From net realized gain on investments | | — | | | (2.66 | ) | | (2.81 | ) | | (1.31 | ) | | — | |
Total distributions declared to shareholders | | $(0.11 | ) | | $(2.85 | ) | | $(3.08 | ) | | $(1.42 | ) | | $(0.13 | ) |
Net asset value, end of period | | $12.13 | | | $8.90 | | | $17.63 | | | $17.93 | | | $15.42 | |
Total return (%) (k)(s) | | 38.06 | | | (39.82 | ) | | 16.58 | | | 26.04 | | | 14.91 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | �� | | | | | | | | | |
Expenses (f) | | 1.25 | | | 1.22 | | | 1.11 | | | 1.12 | | | 1.14 | |
Net investment income | | 1.39 | | | 1.25 | | | 1.16 | | | 1.40 | | | 0.85 | |
Portfolio turnover | | 56 | | | 73 | | | 56 | | | 86 | | | 80 | |
Net assets at end of period (000 omitted) | | $179,925 | | | $87,034 | | | $139,633 | | | $140,242 | | | $121,147 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.84 | | | $17.53 | | | $17.85 | | | $15.36 | | | $13.50 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.12 | | | $0.13 | | | $0.15 | | | $0.19 | | | $0.08 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 3.18 | | | (6.00 | ) | | 2.56 | | | 3.69 | | | 1.88 | |
Total from investment operations | | $3.30 | | | $(5.87 | ) | | $2.71 | | | $3.88 | | | $1.96 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.08 | ) | | $(0.16 | ) | | $(0.22 | ) | | $(0.08 | ) | | $(0.10 | ) |
From net realized gain on investments | | — | | | (2.66 | ) | | (2.81 | ) | | (1.31 | ) | | — | |
Total distributions declared to shareholders | | $(0.08 | ) | | $(2.82 | ) | | $(3.03 | ) | | $(1.39 | ) | | $(0.10 | ) |
Net asset value, end of period | | $12.06 | | | $8.84 | | | $17.53 | | | $17.85 | | | $15.36 | |
Total return (%) (k)(s) | | 37.69 | | | (39.96 | ) | | 16.26 | | | 25.75 | | | 14.62 | |
Ratios (%) (to average net assets) and
Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.50 | | | 1.46 | | | 1.37 | | | 1.37 | | | 1.39 | |
Net investment income | | 1.17 | | | 1.04 | | | 0.85 | | | 1.15 | | | 0.59 | |
Portfolio turnover | | 56 | | | 73 | | | 56 | | | 86 | | | 80 | |
Net assets at end of period (000 omitted) | | $27,338 | | | $18,056 | | | $28,689 | | | $22,979 | | | $19,289 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
12
MFS International Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS International Growth Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
13
MFS International Growth Portfolio
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 December 31, 2009 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 Kingdom | | $5,261,291 | | $27,268,263 | | $— | | $32,529,554 |
Switzerland | | — | | 26,994,977 | | — | | 26,994,977 |
Japan | | 6,492,001 | | 18,514,050 | | — | | 25,006,051 |
France | | 7,414,040 | | 13,402,537 | | — | | 20,816,577 |
Germany | | 7,283,345 | | 12,833,638 | | — | | 20,116,983 |
Hong Kong | | — | | 6,562,604 | | — | | 6,562,604 |
Brazil | | 6,298,629 | | — | | — | | 6,298,629 |
China | | 755,622 | | 5,147,491 | | — | | 5,903,113 |
India | | 5,713,358 | | — | | — | | 5,713,358 |
Other Countries | | 21,432,448 | | 30,765,507 | | — | | 52,197,955 |
Mutual Funds | | 4,001,551 | | — | | — | | 4,001,551 |
| Total Investments | | $64,652,285 | | $141,489,067 | | $— | | $206,141,352 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. The fund segregates cash or marketable securities in an amount that, when combined with the
14
MFS International Growth Portfolio
Notes to Financial Statements – continued
amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund has yet to enter into such transactions.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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 December 31, 2009, 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 wash sale loss deferrals and foreign taxes.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $1,417,238 | | $ 6,081,577 |
| Long-term capital gain | | — | | 19,398,285 |
| Total distributions | | $1,417,238 | | $25,479,862 |
15
MFS International Growth Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $182,520,445 | |
| Gross appreciation | | 29,829,978 | |
| Gross depreciation | | (6,209,071 | ) |
| Net unrealized appreciation (depreciation) | | $23,620,907 | |
| Undistributed ordinary income | | 1,934,813 | |
| Capital loss carryforwards | | (6,207,064 | ) |
| Other temporary differences | | (36,947 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,263,603 | | $1,388,984 | | $— | | $19,144,773 |
| Service Class | | 153,635 | | 276,025 | | — | | 4,670,080 |
| Total | | $1,417,238 | | $1,665,009 | | $— | | $23,814,853 |
| (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 billion of average daily net assets | | 0.90% |
| Next $1 billion of average daily net assets | | 0.80% |
| Average daily net assets in excess of $2 billion | | 0.70% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
Effective August 1, 2009, the investment adviser 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 operating expenses do not exceed 1.35% of average daily net assets for the Initial Class shares and 1.60% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
16
MFS International Growth Portfolio
Notes to Financial Statements – continued
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. For the year ended December 31, 2009, the fee was $20,342, which equated to 0.0141% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0393% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,554 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $128,296,150 and $78,301,619, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 6,779,227 | | | $67,075,450 | | | 2,955,692 | | | $33,019,673 | |
Service Class | | 615,094 | | | 6,459,951 | | | 512,349 | | | 6,524,407 | |
| | 7,394,321 | | | $73,535,401 | | | 3,468,041 | | | $39,544,080 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 148,834 | | | $1,263,603 | | | 1,382,745 | | | $20,533,757 | |
Service Class | | 18,182 | | | 153,635 | | | 334,875 | | | 4,946,105 | |
| | 167,016 | | | $1,417,238 | | | 1,717,620 | | | $25,479,862 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,869,251 | ) | | $(18,228,127 | ) | | (2,485,117 | ) | | $(32,252,847 | ) |
Service Class | | (408,327 | ) | | (3,829,445 | ) | | (441,944 | ) | | (4,931,337 | ) |
| | (2,277,578 | ) | | $(22,057,572 | ) | | (2,927,061 | ) | | $(37,184,184 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 5,058,810 | | | $50,110,926 | | | 1,853,320 | | | $21,300,583 | |
Service Class | | 224,949 | | | 2,784,141 | | | 405,280 | | | 6,539,175 | |
| | 5,283,759 | | | $52,895,067 | | | 2,258,600 | | | $27,839,758 | |
17
MFS International Growth Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the fund’s commitment fee and interest expense were $2,074 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 | | — | | 58,088,259 | | (54,086,708 | ) | | 4,001,551 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $7,640 | | | $4,001,551 |
18
MFS International Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS International Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS International Growth Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 International Growth Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
19
MFS International Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
20
MFS International Growth Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
21
MFS International Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager David Antonelli | | |
22
MFS International Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
23
24
MFS International Growth Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate was approximately at the median and total expense ratio was above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to observe an expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
MFS International Growth Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $3,802,490. The fund intends to pass through foreign tax credits of $334,404 for the fiscal year.
25
26
MFS International Growth Portfolio
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.
MFS® BLENDED RESEARCH® CORE EQUITY PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Blended Research Core Equity Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Blended Research Core Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Exxon Mobil Corp. | | 4.1% |
| Chevron Corp. | | 2.6% |
| Procter & Gamble Co. | | 2.4% |
| Apple, Inc. | | 2.2% |
| Intel Corp. | | 2.2% |
| JPMorgan Chase & Co. | | 2.0% |
| Goldman Sachs Group, Inc. | | 1.9% |
| Google, Inc., “A” | | 1.9% |
| Oracle Corp. | | 1.9% |
| Pfizer, Inc. | | 1.8% |
| | |
| Equity sectors | | |
| Technology | | 15.0% |
| Financial Services | | 14.3% |
| Health Care | | 12.3% |
| Energy | | 11.3% |
| Consumer Staples | | 9.4% |
| Industrial Goods & Services | | 7.1% |
| Utilities & Communications | | 6.5% |
| Leisure | | 5.9% |
| Basic Materials | | 5.1% |
| Retailing | | 5.0% |
| Special Products & Services | | 3.5% |
| Autos & Housing | | 2.1% |
| Transportation | | 1.6% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Blended Research Core Equity Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Blended Research Core Equity Portfolio (the “fund”) provided a total return of 25.26%, while Service Class shares of the fund provided a total return of 25.00%. These compare with a return of 26.46% for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (S&P 500 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
Stock selection in the retailing sector detracted from performance relative to the S&P 500 Index. Holdings of retail food chain Kroger (h) were among the fund’s top relative detractors for the reporting period. Shares of Kroger declined in the latter part of the reporting period after the company announced an earnings disappointment, citing deflation, heavy price discounting by peers, and weak consumer demand trends. Not owning strong-performing internet retailer Amazon.com also held back relative performance.
Several individual securities in other sectors that hindered relative results included financial services firm Bank of America, for-profit education company Apollo Group, defense contractor Lockheed Martin, airline operator AMR Corp. (b)(h), and bearings manufacturer Timken (b)(h). An overweight position in Lockheed Martin held back relative returns as the company reported uncharacteristically weaker-than-expected second quarter results due to project delays and lower award fees in its information systems business. Increased worries about the prospects for future defense budget cuts in the face of increasingly large and growing U.S. budget deficits appears to have also put pressure on the stock’s price.
Elsewhere, the timing of our ownership in shares of financial services firm Morgan Stanley (h) and power generation and distribution company American Electric Power (h) had a negative impact on relative returns. Not holding auto maker Ford Motor, a standout benchmark performer, also hurt relative performance.
Contributors to Performance
Stock selection in the basic materials sector boosted results relative to the benchmark. Our holdings of strong-performing fertilizer products maker Terra Nitrogen Company (b)(h) and global chemical company PPG Industries were among the fund’s top relative contributors. Shares of PPG rose as significant cost cutting and restructuring actions drove earnings and cash flows higher.
Security selection in the consumer staples sector also benefited relative returns. Beverage distributor Pepsi Bottling Group (h) was a strong relative contributor within this sector. The stock price of Pepsi Bottling Group appreciated during the reporting period after the company announced merger agreement with PepsiCo.
3
MFS Blended Research Core Equity Portfolio
Management Review – continued
Individual standout performers in other sectors that bolstered relative results included insurance company Prudential Financial (h), investment banking firm Goldman Sachs, metal parts manufacturer Precision Cast Parts, and independent hard-drive maker Seagate Technology (b). Shares of Goldman Sachs climbed as the environment for fixed income trading improved and mergers and acquisitions activity increased. Elsewhere, the timing of our ownership in shares of electronic components manufacturer Tyco Electronics, and not holding weaking-performing financial services firm Citigroup and fast-food giant McDonald’s, also aided relative performance.
Respectfully,
Matthew Krummell
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS Blended Research Core Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 11/14/86 | | 25.26% | | 1.05% | | (0.38)% | | N/A | | |
| | | Service Class | | 8/24/01 | | 25.00% | | 0.80% | | N/A | | 1.13% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 26.46% | | 0.42% | | (0.95)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary). |
Benchmark Definition
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
5
MFS Blended Research Core Equity Portfolio
Performance Summary – continued
Prior to June 22, 2007, the fund’s investments were primarily selected based on fundamental analysis. Beginning June 22, 2007, the fund’s investments are selected based on fundamental and quantitative analysis.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Blended Research Core Equity Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.60% | | $1,000.00 | | $1,219.45 | | $3.36 |
| | Hypothetical (h) | | 0.60% | | $1,000.00 | | $1,022.18 | | $3.06 |
| Service Class | | Actual | | 0.85% | | $1,000.00 | | $1,217.97 | | $4.75 |
| | Hypothetical (h) | | 0.85% | | $1,000.00 | | $1,020.92 | | $4.33 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Blended Research Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.1% | | | | | |
| Aerospace – 3.8% | | | | | |
| Lockheed Martin Corp. | | 78,690 | | $ | 5,929,285 |
| Northrop Grumman Corp. | | 126,720 | | | 7,077,312 |
| Precision Castparts Corp. | | 42,110 | | | 4,646,839 |
| United Technologies Corp. | | 51,470 | | | 3,572,533 |
| | | | | |
| | | | $ | 21,225,969 |
| | | | | |
| Automotive – 1.2% | | | | | |
| Johnson Controls, Inc. | | 252,440 | | $ | 6,876,466 |
| | | | | |
| Biotechnology – 1.6% | | | | | |
| Amgen, Inc. (a) | | 157,820 | | $ | 8,927,877 |
| | | | | |
| Brokerage & Asset Managers – 0.4% | | | | | |
| CME Group, Inc. | | 6,880 | | $ | 2,311,336 |
| | | | | |
| Business Services – 2.3% | | | | | |
Cognizant Technology Solutions
Corp., “A” (a) | | 180,410 | | $ | 8,172,573 |
| Visa, Inc., “A” | | 52,610 | | | 4,601,271 |
| | | | | |
| | | | $ | 12,773,844 |
| | | | | |
| Cable TV – 1.7% | | | | | |
| Comcast Corp., “A” | | 274,370 | | $ | 4,625,878 |
| Time Warner Cable, Inc. | | 124,613 | | | 5,157,732 |
| | | | | |
| | | | $ | 9,783,610 |
| | | | | |
| Chemicals – 3.9% | | | | | |
| 3M Co. | | 90,320 | | $ | 7,466,754 |
| Celanese Corp. | | 209,260 | | | 6,717,246 |
| Dow Chemical Co. | | 66,990 | | | 1,850,934 |
| PPG Industries, Inc. | | 101,820 | | | 5,960,543 |
| | | | | |
| | | | $ | 21,995,477 |
| | | | | |
| Computer Software – 4.3% | | | | | |
| Adobe Systems, Inc. (a) | | 175,760 | | $ | 6,464,453 |
| Microsoft Corp. | | 232,500 | | | 7,088,925 |
| Oracle Corp. | | 423,390 | | | 10,389,991 |
| | | | | |
| | | | $ | 23,943,369 |
| | | | | |
| Computer Software – Systems – 4.1% | | | | | |
| Apple, Inc. (a) | | 58,020 | | $ | 12,234,097 |
| Dell, Inc. (a) | | 253,830 | | | 3,644,999 |
| Hewlett-Packard Co. | | 62,810 | | | 3,235,343 |
| International Business Machines Corp. | | 30,970 | | | 4,053,973 |
| | | | | |
| | | | $ | 23,168,412 |
| | | | | |
| Construction – 0.9% | | | | | |
| NVR, Inc. (a) | | 7,100 | | $ | 5,046,041 |
| | | | | |
| Consumer Products – 2.8% | | | | | |
| Kimberly-Clark Corp. | | 30,900 | | $ | 1,968,639 |
| Procter & Gamble Co. | �� | 225,320 | | | 13,661,152 |
| | | | | |
| | | | $ | 15,629,791 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Consumer Services – 1.2% | | | | | |
| Apollo Group, Inc., “A” (a) | | 74,150 | | $ | 4,492,007 |
| Priceline.com, Inc. (a) | | 10,540 | | | 2,302,990 |
| | | | | |
| | | | $ | 6,794,997 |
| | | | | |
| Containers – 0.8% | | | | | |
| Owens-Illinois, Inc. (a) | | 128,390 | | $ | 4,220,179 |
| | | | | |
| Electrical Equipment – 1.9% | | | | | |
| General Electric Co. | | 326,070 | | $ | 4,933,439 |
| Tyco Electronics Ltd. | | 143,040 | | | 3,511,632 |
| WESCO International, Inc. (a) | | 76,960 | | | 2,078,690 |
| | | | | |
| | | | $ | 10,523,761 |
| | | | | |
| Electronics – 3.1% | | | | | |
| Intel Corp. | | 591,350 | | $ | 12,063,540 |
| Marvell Technology Group Ltd. (a) | | 259,870 | | | 5,392,303 |
| | | | | |
| | | | $ | 17,455,843 |
| | | | | |
| Energy – Independent – 1.1% | | | | | |
| Apache Corp. | | 61,960 | | $ | 6,392,413 |
| | | | | |
| Energy – Integrated – 9.0% | | | | | |
| Chevron Corp. | | 186,740 | | $ | 14,377,113 |
| Exxon Mobil Corp. | | 340,640 | | | 23,228,242 |
| Hess Corp. | | 114,410 | | | 6,921,805 |
| Marathon Oil Corp. | | 193,140 | | | 6,029,831 |
| | | | | |
| | | | $ | 50,556,991 |
| | | | | |
| Food & Beverages – 4.4% | | | | | |
| Archer Daniels Midland Co. | | 164,070 | | $ | 5,137,032 |
| Coca-Cola Co. | | 33,740 | | | 1,923,180 |
| Coca-Cola Enterprises, Inc. | | 158,380 | | | 3,357,656 |
| General Mills, Inc. | | 106,080 | | | 7,511,525 |
| PepsiCo, Inc. | | 108,550 | | | 6,599,840 |
| | | | | |
| | | | $ | 24,529,233 |
| | | | | |
| Food & Drug Stores – 0.5% | | | | | |
| Walgreen Co. | | 77,260 | | $ | 2,836,987 |
| | | | | |
| Gaming & Lodging – 1.1% | | | | | |
| Las Vegas Sands Corp. (a) | | 127,430 | | $ | 1,903,804 |
| Royal Caribbean Cruises Ltd. (a) | | 179,020 | | | 4,525,626 |
| | | | | |
| | | | $ | 6,429,430 |
| | | | | |
| General Merchandise – 2.3% | | | | | |
| Macy’s, Inc. | | 409,970 | | $ | 6,871,097 |
| Wal-Mart Stores, Inc. | | 113,190 | | | 6,050,006 |
| | | | | |
| | | | $ | 12,921,103 |
| | | | | |
| Health Maintenance Organizations – 1.1% | | | |
| WellPoint, Inc. (a) | | 101,330 | | $ | 5,906,526 |
| | | | | |
| Insurance – 2.5% | | | | | |
| MetLife, Inc. | | 186,760 | | $ | 6,601,966 |
| Travelers Cos., Inc. | | 143,040 | | | 7,131,974 |
| | | | | |
| | | | $ | 13,733,940 |
| | | | | |
8
MFS Blended Research Core Equity Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Internet – 1.9% | | | | | |
| Google, Inc., “A” (a) | | 16,850 | | $ | 10,446,663 |
| | | | | |
| Leisure & Toys – 2.0% | | | | | |
| Activision Blizzard, Inc. (a) | | 507,960 | | $ | 5,643,436 |
| Hasbro, Inc. | | 166,870 | | | 5,349,852 |
| | | | | |
| | | | $ | 10,993,288 |
| | | | | |
| Machinery & Tools – 1.4% | | | | | |
| Caterpillar, Inc. | | 46,440 | | $ | 2,646,616 |
| Eaton Corp. | | 79,350 | | | 5,048,247 |
| | | | | |
| | | | $ | 7,694,863 |
| | | | | |
| Major Banks – 8.5% | | | | | |
| Bank of America Corp. | | 407,800 | | $ | 6,141,468 |
| Bank of New York Mellon Corp. | | 172,208 | | | 4,816,658 |
| Goldman Sachs Group, Inc. | | 64,520 | | | 10,893,557 |
| JPMorgan Chase & Co. | | 270,160 | | | 11,257,567 |
| PNC Financial Services Group, Inc. | | 125,980 | | | 6,650,484 |
| Wells Fargo & Co. | | 288,340 | | | 7,782,297 |
| | | | | |
| | | | $ | 47,542,031 |
| | | | | |
| Medical & Health Technology & Services – 2.1% | | | |
| McKesson Corp. | | 103,830 | | $ | 6,489,375 |
| Medco Health Solutions, Inc. (a) | | 86,590 | | | 5,533,967 |
| | | | | |
| | | | $ | 12,023,342 |
| | | | | |
| Medical Equipment – 2.5% | | | | | |
| Medtronic, Inc. | | 194,200 | | $ | 8,540,916 |
| Thermo Fisher Scientific, Inc. (a) | | 49,410 | | | 2,356,363 |
| Waters Corp. (a) | | 51,900 | | | 3,215,724 |
| | | | | |
| | | | $ | 14,113,003 |
| | | | | |
| Metals & Mining – 0.4% | | | | | |
| Steel Dynamics, Inc. | | 115,250 | | $ | 2,042,230 |
| | | | | |
| Natural Gas – Distribution – 0.6% | | | | | |
| NiSource, Inc. | | 223,510 | | $ | 3,437,584 |
| | | | | |
| Network & Telecom – 0.7% | | | | | |
| Cisco Systems, Inc. (a) | | 156,970 | | $ | 3,757,862 |
| | | | | |
| Oil Services – 1.2% | | | | | |
| Halliburton Co. | | 130,330 | | $ | 3,921,630 |
| Smith International, Inc. | | 110,310 | | | 2,997,123 |
| | | | | |
| | | | $ | 6,918,753 |
| | | | | |
| Other Banks & Diversified Financials – 2.4% |
| American Express Co. | | 214,620 | | $ | 8,696,402 |
| Discover Financial Services | | 158,010 | | | 2,324,327 |
| People’s United Financial, Inc. | | 151,750 | | | 2,534,225 |
| | | | | |
| | | | $ | 13,554,954 |
| | | | | |
| Personal Computers & Peripherals – 0.9% | | | |
| Seagate Technology LLC | | 267,280 | | $ | 4,861,823 |
| | | | | |
| Pharmaceuticals – 5.0% | | | | | |
| Abbott Laboratories | | 95,790 | | $ | 5,171,702 |
| Eli Lilly & Co. | | 62,950 | | | 2,247,945 |
| Johnson & Johnson | | 150,890 | | | 9,718,825 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Pharmaceuticals – continued | | | | | |
| Merck & Co., Inc. | | 25,910 | | $ | 946,751 |
| Pfizer, Inc. | | 560,160 | | | 10,189,310 |
| | | | | |
| | | | $ | 28,274,533 |
| | | | | |
| Railroad & Shipping – 0.9% | | | | | |
| Union Pacific Corp. | | 80,510 | | $ | 5,144,589 |
| | | | | |
| Real Estate – 0.5% | | | | | |
| Annaly Mortgage Management, Inc., REIT | | 173,390 | | $ | 3,008,317 |
| | | | | |
| Restaurants – 1.1% | | | | | |
| Darden Restaurants, Inc. | | 175,300 | | $ | 6,147,771 |
| | | | | |
| Specialty Stores – 2.2% | | | | | |
| Home Depot, Inc. | | 235,300 | | $ | 6,807,229 |
| J. Crew Group, Inc. (a) | | 119,650 | | | 5,353,141 |
| | | | | |
| | | | $ | 12,160,370 |
| | | | | |
| Telephone Services – 2.9% | | | | | |
| AT&T, Inc. | | 349,700 | | $ | 9,802,091 |
| CenturyTel, Inc. | | 179,130 | | | 6,486,297 |
| | | | | |
| | | | $ | 16,288,388 |
| | | | | |
| Tobacco – 2.2% | | | | | |
| Altria Group, Inc. | | 324,590 | | $ | 6,371,702 |
| Philip Morris International, Inc. | | 121,590 | | | 5,859,422 |
| | | | | |
| | | | $ | 12,231,124 |
| | | | | |
| Trucking – 0.7% | | | | | |
| United Parcel Service, Inc., “B” | | 66,980 | | $ | 3,842,643 |
| | | | | |
| Utilities – Electric Power – 3.0% | | | | | |
| Constellation Energy Group, Inc. | | 170,420 | | $ | 5,993,671 |
| DPL, Inc. | | 69,950 | | | 1,930,620 |
| PG&E Corp. | | 141,230 | | | 6,305,920 |
| Public Service Enterprise Group, Inc. | | 81,270 | | | 2,702,228 |
| | | | | |
| | | | $ | 16,932,439 |
| | | | | |
Total Common Stocks
(Identified Cost, $554,278,573) | | | | $ | 555,400,165 |
| | | | | |
| MONEY MARKET FUNDS (v) – 0.2% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 1,252,331 | | $ | 1,252,331 |
| | | | | |
Total Investments
(Identified Cost, $555,530,904) | | | | $ | 556,652,496 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.7% | | | 3,800,363 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 560,452,859 |
| | | | | |
| (a) | | Non-income producing security. |
| (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. |
The following abbreviations are used in this report and are defined:
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Blended Research Core Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $554,278,573) | | $555,400,165 | | | |
Underlying funds, at cost and value | | 1,252,331 | | | |
Total investments, at value (identified cost, $555,530,904) | | $556,652,496 | | | |
Receivables for | | | | | |
Investments sold | | $3,919,003 | | | |
Fund shares sold | | 14,355 | | | |
Dividends | | 763,034 | | | |
Receivable from investment adviser | | 3,142 | | | |
Other assets | | 20,173 | | | |
Total assets | | | | | $561,372,203 |
Liabilities | | | | | |
Payables for | | | | | |
Fund shares reacquired | | $756,102 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 17,077 | | | |
Shareholder servicing costs | | 214 | | | |
Distribution and/or service fees | | 2,761 | | | |
Administrative services fee | | 1,052 | | | |
Payable for Trustees’ compensation | | 613 | | | |
Accrued expenses and other liabilities | | 141,525 | | | |
Total liabilities | | | | | $919,344 |
Net assets | | | | | $560,452,859 |
Net assets consist of | | | | | |
Paid-in capital | | $729,167,785 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 1,121,592 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (178,312,619 | ) | | |
Undistributed net investment income | | 8,476,101 | | | |
Net assets | | | | | $560,452,859 |
Shares of beneficial interest outstanding | | | | | 20,178,002 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $361,104,591 | | 12,969,632 | | $27.84 |
Service Class | | 199,348,268 | | 7,208,370 | | 27.66 |
See Notes to Financial Statements
10
MFS Blended Research Core Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $12,429,610 | | | | |
Interest | | 100,151 | | | | |
Dividends from underlying funds | | 5,072 | | | | |
Total investment income | | | | | $12,534,833 | |
Expenses | | | | | | |
Management fee | | $2,854,213 | | | | |
Distribution and/or service fees | | 474,604 | | | | |
Shareholder servicing costs | | 78,985 | | | | |
Administrative services fee | | 208,273 | | | | |
Trustees’ compensation | | 84,667 | | | | |
Custodian fee | | 56,833 | | | | |
Shareholder communications | | 40,776 | | | | |
Auditing fees | | 42,047 | | | | |
Legal fees | | 7,237 | | | | |
Miscellaneous | | 52,903 | | | | |
Total expenses | | | | | $3,900,538 | |
Fees paid indirectly | | (1 | ) | | | |
Reduction of expenses by investment adviser | | (305,171 | ) | | | |
Net expenses | | | | | $3,595,366 | |
Net investment income | | | | | $8,939,467 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(67,667,608 | ) | | | |
Foreign currency transactions | | 16 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(67,667,592 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $179,009,146 | | | | |
Translation of assets and liabilities in foreign currencies | | (8 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $179,009,138 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $111,341,546 | |
Change in net assets from operations | | | | | $120,281,013 | |
See Notes to Financial Statements
11
MFS Blended Research Core Equity Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $8,939,467 | | | $11,748,145 | |
Net realized gain (loss) on investments and foreign currency transactions | | (67,667,592 | ) | | (106,210,555 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 179,009,138 | | | (215,866,986 | ) |
Change in net assets from operations | | $120,281,013 | | | $(310,329,396 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(11,711,698 | ) | | $(11,096,074 | ) |
Change in net assets from fund share transactions | | $(84,015,359 | ) | | $(154,331,243 | ) |
Total change in net assets | | $24,553,956 | | | $(475,756,713 | ) |
Net assets | | | | | | |
At beginning of period | | 535,898,903 | | | 1,011,655,616 | |
At end of period (including undistributed net investment income of $8,476,101 and
$11,710,717, respectively) | | $560,452,859 | | | $535,898,903 | |
See Notes to Financial Statements
12
MFS Blended Research Core Equity Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $22.80 | | | $35.51 | | | $33.89 | | | $30.15 | | | $28.27 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.43 | | | $0.48 | | | $0.38 | | | $0.37 | | | $0.23 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.16 | | | (12.74 | ) | | 1.64 | | | 3.62 | | | 1.92 | |
Total from investment operations | | $5.59 | | | $(12.26 | ) | | $2.02 | | | $3.99 | | | $2.15 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.55 | ) | | $(0.45 | ) | | $(0.40 | ) | | $(0.25 | ) | | $(0.27 | ) |
Net asset value, end of period | | $27.84 | | | $22.80 | | | $35.51 | | | $33.89 | | | $30.15 | |
Total return (%) (k)(r)(s) | | 25.26 | | | (34.95 | ) | | 5.95 | | | 13.30 | | | 7.70 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.66 | | | 0.64 | | | 0.62 | | | 0.61 | | | 0.63 | |
Expenses after expense reductions (f) | | 0.60 | | | 0.60 | | | 0.61 | | | N/A | | | N/A | |
Net investment income | | 1.81 | | | 1.60 | | | 1.07 | | | 1.18 | | | 0.79 | |
Portfolio turnover | | 74 | | | 76 | | | 102 | | | 35 | | | 49 | |
Net assets at end of period (000 omitted) | | $361,105 | | | $342,241 | | | $673,008 | | | $826,937 | | | $929,794 | |
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $22.62 | | | $35.23 | | | $33.65 | | | $29.96 | | | $28.13 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.37 | | | $0.41 | | | $0.29 | | | $0.28 | | | $0.16 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.14 | | | (12.66 | ) | | 1.63 | | | 3.61 | | | 1.90 | |
Total from investment operations | | $5.51 | | | $(12.25 | ) | | $1.92 | | | $3.89 | | | $2.06 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.47 | ) | | $(0.36 | ) | | $(0.34 | ) | | $(0.20 | ) | | $(0.23 | ) |
Net asset value, end of period | | $27.66 | | | $22.62 | | | $35.23 | | | $33.65 | | | $29.96 | |
Total return (%) (k)(r)(s) | | 25.00 | | | (35.12 | ) | | 5.69 | | | 13.04 | | | 7.42 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.91 | | | 0.90 | | | 0.87 | | | 0.86 | | | 0.88 | |
Expenses after expense reductions (f) | | 0.85 | | | 0.85 | | | 0.86 | | | N/A | | | N/A | |
Net investment income | | 1.57 | | | 1.35 | | | 0.84 | | | 0.88 | | | 0.54 | |
Portfolio turnover | | 74 | | | 76 | | | 102 | | | 35 | | | 49 | |
Net assets at end of period (000 omitted) | | $199,348 | | | $193,658 | | | $338,647 | | | $319,869 | | | $198,705 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
13
MFS Blended Research Core Equity Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Blended Research Core Equity Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. The fund can invest in foreign securities. 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.
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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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
14
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Equity Securities | | $555,400,165 | | $— | | $— | | $555,400,165 |
| Mutual Funds | | 1,252,331 | | — | | — | | 1,252,331 |
| Total Investments | | $556,652,496 | | $— | | $— | | $556,652,496 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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.
15
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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. 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 December 31, 2009, 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 wash sale loss deferrals and partnerships.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $11,711,698 | | $11,096,074 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $556,002,493 | |
| Gross appreciation | | 45,176,984 | |
| Gross depreciation | | (44,526,981 | ) |
| Net unrealized appreciation (depreciation) | | $650,003 | |
| Undistributed ordinary income | | 8,476,101 | |
| Capital loss carryforwards | | (177,841,030 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/11 | | $(3,630,846 | ) |
| 12/31/16 | | (102,750,299 | ) |
| 12/31/17 | | (71,459,885 | ) |
| | $(177,841,030 | ) |
16
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $7,740,496 | | $7,779,968 |
| Service Class | | 3,971,202 | | 3,316,106 |
| Total distributions | | $11,711,698 | | $11,096,074 |
| (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.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, and brokerage commissions, such that the total annual operating expenses of the fund do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s operating expenses is contained
in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval. In addition, the investment adviser 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 the total annual operating expenses of the fund do not exceed 0.60% of average daily net assets for the Initial Class shares and 0.85% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $305,171 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $78,985, which equated to 0.0152% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0401% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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
17
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $9,284 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $381,350,522 and $464,154,253, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 181,724 | | | $3,472,695 | | | 303,713 | | | $7,906,299 | |
Service Class | | 521,406 | | | 9,059,324 | | | 1,031,457 | | | 25,940,649 | |
| | 703,130 | | | $12,532,019 | | | 1,335,170 | | | $33,846,948 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 365,118 | | | $7,740,496 | | | 225,965 | | | $7,779,968 | |
Service Class | | 188,298 | | | 3,971,202 | | | 96,934 | | | 3,316,106 | |
| | 553,416 | | | $11,711,698 | | | 322,899 | | | $11,096,074 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (2,589,673 | ) | | $(59,635,833 | ) | | (4,471,633 | ) | | $(135,201,637 | ) |
Service Class | | (2,062,531 | ) | | (48,623,243 | ) | | (2,180,485 | ) | | (64,072,628 | ) |
| | (4,652,204 | ) | | $(108,259,076 | ) | | (6,652,118 | ) | | $(199,274,265 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (2,042,831 | ) | | $(48,422,642 | ) | | (3,941,955 | ) | | $(119,515,370 | ) |
Service Class | | (1,352,827 | ) | | (35,592,717 | ) | | (1,052,094 | ) | | (34,815,873 | ) |
| | (3,395,658 | ) | | $(84,015,359 | ) | | (4,994,049 | ) | | $(154,331,243 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $7,816 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
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MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 83,509,291 | | (82,256,960 | ) | | 1,252,331 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $5,072 | | | $1,252,331 |
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MFS Blended Research Core Equity Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Blended Research Core Equity Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Blended Research Core Equity Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers. 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 Blended Research Core Equity Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
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MFS Blended Research Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
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MFS Blended Research Core Equity Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS Blended Research Core Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Matthew Krummell | | |
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MFS Blended Research Core Equity Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 2nd quintile for the three-year period and the 1st quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
MFS Blended Research Core Equity Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each below the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. They noted that the Fund’s advisory fee rate schedule is not currently subject to any breakpoints. However, the Trustees concluded that the fees were reasonable in light of the nature and quality of services provided by MFS, and determined not to recommend any advisory fee breakpoints for the Fund at
this time.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
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MFS Blended Research Core Equity Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
MFS Blended Research Core Equity Portfolio
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.
27
MFS® GLOBAL RESEARCH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Research Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Global Research Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Chevron Corp. | | 2.2% |
| Apple, Inc. | | 2.0% |
| Royal Dutch Shell PLC, “A” | | 1.9% |
| Nestle S.A. | | 1.8% |
| Google, Inc., “A” | | 1.7% |
| Procter & Gamble Co. | | 1.6% |
| TOTAL S.A. | | 1.6% |
| Vodafone Group PLC | | 1.5% |
| BHP Billiton PLC | | 1.4% |
| Intel Corp. | | 1.4% |
| | |
| Global equity sectors | | |
| Financial Services | | 20.7% |
| Capital Goods | | 18.7% |
| Energy | | 16.0% |
| Technology | | 13.7% |
| Health Care | | 9.1% |
| Consumer Cyclicals | | 8.1% |
| Consumer Staples | | 7.4% |
| Telecom/Cable Television | | 5.6% |
| |
| Country weightings (w) | | |
| United States | | 49.4% |
| United Kingdom | | 9.3% |
| Switzerland | | 6.3% |
| France | | 5.4% |
| Germany | | 5.2% |
| Japan | | 4.2% |
| Netherlands | | 3.2% |
| Canada | | 2.3% |
| China | | 2.0% |
| Other Countries | | 12.7% |
| (w) | Country weightings are based on the valuation currency of each security. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Global Research Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Global Research Portfolio (the “fund”) provided a total return of 32.44%, while Service Class shares of the fund provided a total return of 32.03%. These compare with a return of 35.41% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World 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
Security selection in the financial services sector detracted from the fund’s performance relative to the MSCI All Country World Index. The fund’s overweighted position in financial services firms, Sumitomo Mitsui Financial Group (Japan) and State Street Corporation, and insurance company MetLife, hindered relative results as all three stocks significantly underperformed the benchmark during the reporting period. The timing of our ownership in shares of insurance giant AXA (France) (h) and financial services company Barclays (United Kingdom) (h) also held back relative returns.
Stock selection in the capital goods sector dampened relative performance. Train operator East Japan Railway Company (Japan) was among the fund’s top relative detractors within this sector. Shares of East Japan Railway depreciated due to lower revenue caused by reduced passenger traffic. In addition, the timing of our ownership in shares of pallets and container manufacturer Brambles Ltd.(Australia) (h) also had a negative effect on relative results.
Elsewhere, our overweighted position in global biotech company Genzyme, integrated energy company Chevron, and energy and environmental services giant GDF Suez (France) hurt relative returns. Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down due to a viral infection in one of its bioreactors.
During the reporting period, the fund’s currency exposure was also a detractor from relative performance. All of our investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
Contributors to Performance
Strong stock selection in the technology sector boosted relative performance over the reporting period. Standout performers within this sector included computer and personal electronics maker Apple and computer manufacturer Acer (Taiwan). Shares of Apple climbed as revenues and earnings increased year-over-year due to strong sales of its popular iPhone and Mac computers.
Favorable security selection in the consumer cyclicals sector also contributed to the fund’s relative returns. Holdings of strong-performing luxury retailer Nordstrom (h) were among the fund’s top relative contributors. Shares of Nordstrom performed well
3
MFS Global Research Portfolio
Management Review – continued
as the company reported earnings that met analyst expectations due, in part, to the company’s tight inventory management and lowering of its prices in an effort to offset slumping sales during the reporting period.
Stock selection in the telecom/cable television sector was another positive area of relative performance. Telecommunications company Virgin Media (United Kingdom) was a standout performer within this sector as this stock significantly outperformed the benchmark during the reporting period. Stock of Virgin Media had impressive performance due to increased revenue in its U.K. broadband internet business.
Strong performers in other sectors that had a positive effect on relative results included shipyard operator Keppel Corp. (Singapore), financial services firm HSBC Holdings (United Kingdom), industrial machinery manufacturer Bucyrus International (b), oil and gas exploration company Tullow Oil (United Kingdom), and drilling and construction services provider Saipem (Italy). Elsewhere, not owning weak-performing integrated oil and gas company Exxon Mobil also helped.
Respectfully,
| | |
| Michael Cantara | | Jose Luis Garcia |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Global Research Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 11/07/94 | | 32.44% | | 2.63% | | (0.69)% | | N/A | | |
| | | Service Class | | 8/24/01 | | 32.03% | | 2.37% | | N/A | | 2.17% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | MSCI All Country World Index (f) | | 35.41% | | 3.64% | | 0.89% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
MSCI All Country World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed and emerging markets.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
5
MFS Global Research Portfolio
Performance Summary – continued
Prior to October 6, 2008, MFS primarily invested the fund’s assets in U.S. equity securities. Effective October 6, 2008, MFS primarily invests the fund’s assets in U.S. and foreign equity securities, including emerging market equity securities.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Global Research Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.99% | | $1,000.00 | | $1,244.78 | | $5.60 |
| | Hypothetical (h) | | 0.99% | | $1,000.00 | | $1,020.21 | | $5.04 |
| Service Class | | Actual | | 1.24% | | $1,000.00 | | $1,243.13 | | $7.01 |
| | Hypothetical (h) | | 1.24% | | $1,000.00 | | $1,018.95 | | $6.31 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Global Research Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.3% | | | |
| Aerospace – 0.8% | | | | | |
| Goodrich Corp. | | 10,700 | | $ | 687,475 |
| Lockheed Martin Corp. | | 7,900 | | | 595,265 |
| | | | | |
| | | | $ | 1,282,740 |
| | | | | |
| Apparel Manufacturers – 1.8% | | | | | |
| Li & Fung Ltd. | | 84,000 | | $ | 345,700 |
| LVMH Moet Hennessy Louis Vuitton S.A. (l) | | 9,900 | | | 1,112,380 |
| NIKE, Inc., “B” | | 23,240 | | | 1,535,467 |
| | | | | |
| | | | $ | 2,993,547 |
| | | | | |
| Automotive – 0.4% | | | | | |
| Bridgestone Corp. | | 40,300 | | $ | 706,230 |
| | | | | |
| Biotechnology – 1.1% | | | | | |
| Actelion Ltd. (a) | | 12,905 | | $ | 688,633 |
| Genzyme Corp. (a) | | 22,030 | | | 1,079,690 |
| | | | | |
| | | | $ | 1,768,323 |
| | | | | |
| Broadcasting – 0.9% | | | | | |
| WPP Group PLC | | 146,893 | | $ | 1,434,391 |
| | | | | |
| Brokerage & Asset Managers – 2.5% | | | | | |
| Affiliated Managers Group, Inc. (a) | | 6,940 | | $ | 467,409 |
| Charles Schwab Corp. | | 23,660 | | | 445,281 |
| CME Group, Inc. | | 1,340 | | | 450,173 |
| Deutsche Boerse AG | | 15,770 | | | 1,311,211 |
| Franklin Resources, Inc. | | 6,250 | | | 658,438 |
| Nomura Holdings, Inc. | | 55,700 | | | 410,485 |
| Van Lanschot N.V. | | 7,300 | | | 383,699 |
| | | | | |
| | | | $ | 4,126,696 |
| | | | | |
| Business Services – 1.5% | | | | | |
| Accenture Ltd., “A” | | 22,960 | | $ | 952,840 |
| MasterCard, Inc., “A” | | 4,080 | | | 1,044,398 |
| Mitsubishi Corp. | | 21,700 | | | 539,524 |
| | | | | |
| | | | $ | 2,536,762 |
| | | | | |
| Chemicals – 1.2% | | | | | |
| Monsanto Co. | | 24,980 | | $ | 2,042,115 |
| | | | | |
| Computer Software – 1.8% | | | | | |
| Adobe Systems, Inc. (a) | | 25,540 | | $ | 939,361 |
| Oracle Corp. | | 88,160 | | | 2,163,446 |
| | | | | |
| | | | $ | 3,102,807 |
| | | | | |
| Computer Software – Systems – 3.9% | | | | | |
| Acer, Inc. | | 471,120 | | $ | 1,407,448 |
| Apple, Inc. (a)(s) | | 15,550 | | | 3,278,873 |
| Hewlett-Packard Co. | | 37,050 | | | 1,908,446 |
| | | | | |
| | | | $ | 6,594,767 |
| | | | | |
| Conglomerates – 2.6% | | | | | |
| Hutchison Whampoa Ltd. | | 96,000 | | $ | 656,518 |
| Keppel Corp. Ltd. | | 287,000 | | | 1,669,968 |
| Siemens AG | | 21,590 | | | 1,980,298 |
| Tomkins PLC | | 45,770 | | | 141,304 |
| | | | | |
| | | | $ | 4,448,088 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Construction – 0.8% | | | | | |
| Lennar Corp., “A” | | 74,410 | | $ | 950,216 |
| Sherwin-Williams Co. | | 6,910 | | | 426,002 |
| | | | | |
| | | | $ | 1,376,218 |
| | | | | |
| Consumer Products – 3.2% | | | | | |
| Kimberly-Clark de Mexico S.A. de C.V., “A” | | 226,320 | | $ | 1,013,094 |
| Procter & Gamble Co. | | 43,520 | | | 2,638,618 |
| Reckitt Benckiser Group PLC | | 30,200 | | | 1,637,026 |
| | | | | |
| | | | $ | 5,288,738 |
| | | | | |
| Electrical Equipment – 2.2% | | | | | |
| Danaher Corp. (s) | | 28,930 | | $ | 2,175,536 |
| Rockwell Automation, Inc. | | 16,750 | | | 786,915 |
| Tyco Electronics Ltd. | | 27,430 | | | 673,407 |
| | | | | |
| | | | $ | 3,635,858 |
| | | | | |
| Electronics – 3.4% | | | | | |
| Intel Corp. | | 116,700 | | $ | 2,380,680 |
| Samsung Electronics Co. Ltd. | | 2,082 | | | 1,421,971 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 165,628 | | | 1,894,784 |
| | | | | |
| | | | $ | 5,697,435 |
| | | | | |
| Energy – Independent – 3.4% | | | | | |
| Anadarko Petroleum Corp. | | 7,290 | | $ | 455,042 |
| Apache Corp. | | 12,910 | | | 1,331,925 |
| Galp Energia SGPS S.A., “B” | | 40,700 | | | 700,637 |
| Occidental Petroleum Corp. | | 14,210 | | | 1,155,984 |
| Southwestern Energy Co. (a) | | 10,380 | | | 500,316 |
| Tullow Oil PLC | | 75,693 | | | 1,578,497 |
| | | | | |
| | | | $ | 5,722,401 |
| | | | | |
| Energy – Integrated – 6.9% | | | | | |
| Chevron Corp. (s) | | 48,090 | | $ | 3,702,449 |
| Hess Corp. | | 7,940 | | | 480,370 |
| Marathon Oil Corp. | | 26,250 | | | 819,525 |
| Royal Dutch Shell PLC, “A” | | 102,930 | | | 3,107,733 |
| Suncor Energy, Inc. | | 11,100 | | | 391,941 |
| Suncor Energy, Inc. | | 11,340 | | | 403,463 |
| TOTAL S.A. | | 40,720 | | | 2,609,401 |
| | | | | |
| | | | $ | 11,514,882 |
| | | | | |
| Engineering – Construction – 1.5% | | | | | |
| Fluor Corp. | | 36,130 | | $ | 1,627,295 |
| JGC Corp. | | 44,000 | | | 810,001 |
| | | | | |
| | | | $ | 2,437,296 |
| | | | | |
| Food & Beverages – 3.7% | | | | | |
| General Mills, Inc. | | 17,820 | | $ | 1,261,834 |
| Nestle S.A. | | 62,171 | | | 3,020,441 |
| PepsiCo, Inc. | | 31,600 | | | 1,921,280 |
| | | | | |
| | | | $ | 6,203,555 |
| | | | | |
8
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Food & Drug Stores – 0.9% | | | | | |
| Lawson, Inc. | | 13,300 | | $ | 585,494 |
| Walgreen Co. | | 24,800 | | | 910,656 |
| | | | | |
| | | | $ | 1,496,150 |
| | | | | |
| Gaming & Lodging – 0.2% | | | | | |
| Sands China Ltd. (a) | | 302,800 | | $ | 369,449 |
| | | | | |
| General Merchandise – 2.5% | | | | | |
| Dollar General Corp. (a) | | 13,760 | | $ | 308,637 |
| Target Corp. | | 45,280 | | | 2,190,194 |
| Wal-Mart Stores, Inc. | | 30,370 | | | 1,623,277 |
| | | | | |
| | | | $ | 4,122,108 |
| | | | | |
| Insurance – 4.7% | | | | | |
| ACE Ltd. | | 8,600 | | $ | 433,440 |
| Aflac, Inc. | | 18,120 | | | 838,050 |
| China Pacific Insurance Co. Ltd. (a) | | 129,400 | | | 515,704 |
| ING Groep N.V. (a) | | 95,182 | | | 920,141 |
| MetLife, Inc. | | 18,940 | | | 669,529 |
| Prudential Financial, Inc. | | 6,500 | | | 323,440 |
| QBE Insurance Group Ltd. | | 56,400 | | | 1,287,303 |
| Samsung Fire & Marine Insurance Co. Ltd. | | 2,507 | | | 428,155 |
| Storebrand A.S.A. (a) | | 82,770 | | | 561,572 |
| Swiss Reinsurance Co. | | 12,580 | | | 602,719 |
| Travelers Cos., Inc. | | 9,390 | | | 468,185 |
| Zurich Financial Services Ltd. | | 3,840 | | | 834,918 |
| | | | | |
| | | | $ | 7,883,156 |
| | | | | |
| Internet – 1.7% | | | | | |
| Google, Inc., “A” (a) | | 4,650 | | $ | 2,882,907 |
| | | | | |
| Machinery & Tools – 0.7% | | | | | |
| Beml Ltd. | | 14,700 | | $ | 352,019 |
| Bucyrus International, Inc. | | 6,190 | | | 348,930 |
| Glory Ltd. | | 23,000 | | | 508,724 |
| | | | | |
| | | | $ | 1,209,673 |
| | | | | |
| Major Banks – 9.6% | | | | | |
| Bank of America Corp. | | 139,460 | | $ | 2,100,268 |
| Bank of New York Mellon Corp. | | 31,276 | | | 874,790 |
| BNP Paribas | | 29,311 | | | 2,313,037 |
| Goldman Sachs Group, Inc. | | 8,540 | | | 1,441,894 |
| HSBC Holdings PLC | | 183,017 | | | 2,088,651 |
| Intesa Sanpaolo S.p.A. (a) | | 245,812 | | | 1,101,393 |
| JPMorgan Chase & Co. | | 54,650 | | | 2,277,266 |
| Julius Baer Group Ltd. | | 13,871 | | | 484,453 |
| KBC Group N.V. (a) | | 19,380 | | | 839,270 |
| State Street Corp. | | 25,270 | | | 1,100,256 |
| Sumitomo Mitsui Financial Group, Inc. | | 31,600 | | | 900,903 |
| SunTrust Banks, Inc. | | 31,010 | | | 629,193 |
| | | | | |
| | | | $ | 16,151,374 |
| | | | | |
| Medical & Health Technology & Services – 0.5% | | | |
| Patterson Cos., Inc. (a) | | 30,620 | | $ | 856,748 |
| | | | | |
| Medical Equipment – 3.7% | | | | | |
| Medtronic, Inc. | | 39,390 | | $ | 1,732,372 |
| Smith & Nephew PLC | | 70,131 | | | 720,113 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Medical Equipment – continued | | | |
| St. Jude Medical, Inc. (a) | | 40,150 | | $ | 1,476,717 |
| Synthes, Inc. | | 12,130 | | | 1,588,646 |
| Waters Corp. (a) | | 12,140 | | | 752,194 |
| | | | | |
| | | | $ | 6,270,042 |
| | | | | |
| Metals & Mining – 3.0% | | | | | |
| BHP Billiton PLC | | 75,680 | | $ | 2,417,425 |
| Cameco Corp. | | 27,900 | | | 897,543 |
| Iluka Resources Ltd. (a) | | 260,860 | | | 830,170 |
| United States Steel Corp. | | 17,590 | | | 969,561 |
| | | | | |
| | | | $ | 5,114,699 |
| | | | | |
| Natural Gas – Distribution – 1.1% | | | | | |
| GDF Suez | | 41,576 | | $ | 1,805,025 |
| | | | | |
| Network & Telecom – 1.4% | | | | | |
| Cisco Systems, Inc. (a) | | 95,350 | | $ | 2,282,679 |
| Nortel Networks Corp. (a) | | 11,112 | | | 256 |
| | | | | |
| | | | $ | 2,282,935 |
| | | | | |
| Oil Services – 1.5% | | | | | |
| Saipem S.p.A. | | 34,830 | | $ | 1,196,507 |
| Schlumberger Ltd. | | 20,200 | | | 1,314,818 |
| | | | | |
| | | | $ | 2,511,325 |
| | | | | |
| Other Banks & Diversified Financials – 3.9% | | | |
| Banco Santander, S.A., IEU | | 57,600 | | $ | 786,204 |
| Bank of Cyprus Public Co. Ltd. | | 64,510 | | | 449,664 |
| China Construction Bank | | 2,632,000 | | | 2,240,312 |
| Komercni Banka A.S. | | 3,313 | | | 708,356 |
| UBS AG (a) | | 86,862 | | | 1,334,367 |
| Unione di Banche Italiane ScpA | | 73,722 | | | 1,056,016 |
| | | | | |
| | | | $ | 6,574,919 |
| | | | | |
| Pharmaceuticals – 3.8% | | | | | |
| Johnson & Johnson | | 25,490 | | $ | 1,641,811 |
| Merck KGaA | | 15,690 | | | 1,465,605 |
| Roche Holding AG | | 12,080 | | | 2,055,003 |
| Sanofi-Aventis | | 14,530 | | | 1,138,959 |
| | | | | |
| | | | $ | 6,301,378 |
| | | | | |
| Precious Metals & Minerals – 1.3% | | | | | |
| Agnico-Eagle Mines Ltd. | | 9,790 | | $ | 532,817 |
| Teck Resources Ltd., “B” (a) | | 45,290 | | | 1,594,471 |
| | | | | |
| | | | $ | 2,127,288 |
| | | | | |
| Railroad & Shipping – 0.6% | | | | | |
| East Japan Railway Co. | | 17,200 | | $ | 1,084,061 |
| | | | | |
| Specialty Chemicals – 2.3% | | | | | |
| Akzo Nobel N.V. | | 18,280 | | $ | 1,204,884 |
| Linde AG | | 13,310 | | | 1,602,058 |
| Praxair, Inc. | | 5,720 | | | 459,373 |
| Symrise AG | | 28,637 | | | 614,967 |
| | | | | |
| | | | $ | 3,881,282 |
| | | | | |
| Specialty Stores – 1.8% | | | | | |
| Abercrombie & Fitch Co., “A” | | 26,430 | | $ | 921,086 |
| Esprit Holdings Ltd. | | 142,522 | | | 938,000 |
9
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Speciality Stores – continued | | | | | |
| Limited Brands, Inc. | | 28,690 | | $ | 551,996 |
| Staples, Inc. | | 27,120 | | | 666,881 |
| | | | | |
| | | | $ | 3,077,963 |
| | | | | |
| Telecommunications – Wireless – 2.0% | | | | | |
| America Movil S.A.B. de C.V., “L”, ADR | | 16,920 | | $ | 794,902 |
| Vodafone Group PLC | | 1,076,250 | | | 2,492,273 |
| | | | | |
| | | | $ | 3,287,175 |
| | | | | |
| Telephone Services – 3.6% | | | | | |
| American Tower Corp., “A” (a) | | 15,470 | | $ | 668,459 |
| AT&T, Inc. | | 65,870 | | | 1,846,336 |
| China Unicom Ltd. | | 490,000 | | | 644,032 |
| Royal KPN N.V. | | 122,990 | | | 2,087,538 |
| Virgin Media, Inc. | | 50,850 | | | 855,806 |
| | | | | |
| | | | $ | 6,102,171 |
| | | | | |
| Tobacco – 0.5% | | | | | |
| Japan Tobacco, Inc. | | 253 | | $ | 853,662 |
| | | | | |
| Trucking – 1.3% | | | | | |
| Expeditors International of Washington, Inc. | | 21,570 | | $ | 749,126 |
| TNT N.V. | | 25,317 | | | 774,924 |
| Yamato Holdings Co. Ltd. | | 49,500 | | | 684,555 |
| | | | | |
| | | | $ | 2,208,605 |
| | | | | |
| Utilities – Electric Power – 3.1% | | | | | |
| E.ON AG | | 43,434 | | $ | 1,813,268 |
| PG&E Corp. | | 31,350 | | | 1,399,778 |
| PPL Corp. | | 38,590 | | | 1,246,843 |
| Progress Energy, Inc. | | 9,270 | | | 380,163 |
| Wisconsin Energy Corp. | | 6,360 | | | 316,919 |
| | | | | |
| | | | $ | 5,156,971 |
| | | | | |
Total Common Stocks
(Identified Cost, $151,423,356) | | | | $ | 166,523,915 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| MONEY MARKET FUNDS (v) – 0.0% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 100 | | $ | 100 |
| | | | | |
| COLLATERAL FOR SECURITIES LOANED – 0.5% |
| Navigator Securities Lending Prime Portfolio, at Cost and Net Asset Value | | 824,950 | | $ | 824,950 |
| | | | | |
Total Investments
(Identified Cost, $152,248,406) | | | | $ | 167,348,965 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.2% | | | | | 310,518 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 167,659,483 |
| | | | | |
| (a) | Non-income producing security. |
| (l) | All or a portion of this security is on loan. |
| (s) | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $177,513. At December 31, 2009, the fund had no short sales outstanding. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| IEU | | International Equity Unit |
| PLC | | Public Limited Company |
See Notes to Financial Statements
10
MFS Global Research Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $152,248,306) | | $167,348,865 | | | |
Underlying funds, at cost and value | | 100 | | | |
Total investments, at value, including $786,532 of securities on loan (identified cost, $152,248,406) | | $167,348,965 | | | |
Foreign currency, at value (identified cost, $932) | | $937 | | | |
Receivables for | | | | | |
Investments sold | | 1,549,261 | | | |
Fund shares sold | | 112 | | | |
Interest and dividends | | 235,849 | | | |
Other assets | | 6,569 | | | |
Total assets | | | | | $169,141,693 |
Liabilities | | | | | |
Payable to custodian | | $317,484 | | | |
Payables for | | | | | |
Fund shares reacquired | | 233,803 | | | |
Collateral for securities loaned, at value | | 824,950 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 6,942 | | | |
Shareholder servicing costs | | 64 | | | |
Distribution and/or service fees | | 247 | | | |
Administrative services fee | | 327 | | | |
Payable for Trustees’ compensation | | 183 | | | |
Accrued expenses and other liabilities | | 98,210 | | | |
Total liabilities | | | | | $1,482,210 |
Net assets | | | | | $167,659,483 |
Net assets consist of | | | | | |
Paid-in capital | | $349,676,636 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in
foreign currencies (net of $8,180 deferred country tax) | | 15,095,795 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (199,226,486 | ) | | |
Undistributed net investment income | | 2,113,538 | | | |
Net assets | | | | | $167,659,483 |
Shares of beneficial interest outstanding | | | | | 9,705,660 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $149,758,325 | | 8,663,702 | | $17.29 |
Service Class | | 17,901,158 | | 1,041,958 | | 17.18 |
See Notes to Financial Statements
11
MFS Global Research Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
Year ended 12/31/09 | | | | | | |
Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $3,750,879 | | | | |
Interest | | 126,683 | | | | |
Dividends from underlying funds | | 1,276 | | | | |
Foreign taxes withheld | | (251,304 | ) | | | |
Total investment income | | | | | $3,627,534 | |
Expenses | | | | | | |
Management fee | | $1,131,681 | | | | |
Distribution and/or service fees | | 43,011 | | | | |
Shareholder servicing costs | | 22,745 | | | | |
Administrative services fee | | 60,908 | | | | |
Trustees’ compensation | | 24,155 | | | | |
Custodian fee | | 142,446 | | | | |
Shareholder communications | | 10,495 | | | | |
Auditing fees | | 54,166 | | | | |
Legal fees | | 8,183 | | | | |
Dividend and interest expense on securities sold short | | 837 | | | | |
Miscellaneous | | 24,090 | | | | |
Total expenses | | | | | $1,522,717 | |
Net investment income | | | | | $2,104,817 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions (net of $1,145 country tax) | | $(17,957,785 | ) | | | |
Swap transactions | | 90,952 | | | | |
Securities sold short | | (92,335 | ) | | | |
Foreign currency transactions | | 10,381 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(17,948,787 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments (net of $8,180 increase in deferred country tax) | | $58,672,860 | | | | |
Translation of assets and liabilities in foreign currencies | | 5,859 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $58,678,719 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $40,729,932 | |
Change in net assets from operations | | | | | $42,834,749 | |
See Notes to Financial Statements
12
MFS Global Research Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $2,104,817 | | | $2,350,937 | |
Net realized gain (loss) on investments and foreign currency transactions | | (17,948,787 | ) | | (34,940,905 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 58,678,719 | | | (63,345,052 | ) |
Change in net assets from operations | | $42,834,749 | | | $(95,935,020 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(2,477,434 | ) | | $(1,473,376 | ) |
Change in net assets from fund share transactions | | $(25,568,497 | ) | | $(46,769,926 | ) |
Total change in net assets | | $14,788,818 | | | $(144,178,322 | ) |
| Net assets | | | | | | |
At beginning of period | | 152,870,665 | | | 297,048,987 | |
At end of period (including undistributed net investment income of $2,113,538 and
$2,476,919, respectively) | | $167,659,483 | | | $152,870,665 | |
See Notes to Financial Statements
13
MFS Global Research Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.30 | | | $21.04 | | | $18.73 | | | $17.04 | | | $15.88 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.20 | | | $0.19 | | | $0.10 | | | $0.13 | | | $0.09 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 4.03 | | | (7.81 | ) | | 2.37 | | | 1.67 | | | 1.16 | |
Total from investment operations | | $4.23 | | | $(7.62 | ) | | $2.47 | | | $1.80 | | | $1.25 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.24 | ) | | $(0.12 | ) | | $(0.16 | ) | | $(0.11 | ) | | $(0.09 | ) |
Net asset value, end of period | | $17.29 | | | $13.30 | | | $21.04 | | | $18.73 | | | $17.04 | |
Total return (%) (k)(s) | | 32.44 | | | (36.43 | )(t) | | 13.24 | | | 10.62 | | | 7.94 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.98 | | | 0.87 | | | 0.83 | | | 0.82 | | | 0.83 | |
Expenses excluding short sale dividend and interest expense (f) | | 0.98 | | | N/A | | | N/A | | | N/A | | | N/A | |
Net investment income | | 1.42 | | | 1.06 | | | 0.48 | | | 0.76 | | | 0.57 | |
Portfolio turnover | | 63 | | | 144 | | | 84 | | | 87 | | | 92 | |
Net assets at end of period (000 omitted) | | $149,758 | | | $134,672 | | | $268,217 | | | $309,757 | | | $366,831 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.21 | | | $20.89 | | | $18.60 | | | $16.93 | | | $15.78 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.17 | | | $0.14 | | | $0.05 | | | $0.09 | | | $0.05 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 3.99 | | | (7.76 | ) | | 2.36 | | | 1.65 | | | 1.16 | |
Total from investment operations | | $4.16 | | | $(7.62 | ) | | $2.41 | | | $1.74 | | | $1.21 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.19 | ) | | $(0.06 | ) | | $(0.12 | ) | | $(0.07 | ) | | $(0.06 | ) |
Net asset value, end of period | | $17.18 | | | $13.21 | | | $20.89 | | | $18.60 | | | $16.93 | |
Total return (%) (k)(s) | | 32.03 | | | (36.57 | )(t) | | 12.97 | | | 10.32 | | | 7.71 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.23 | | | 1.12 | | | 1.08 | | | 1.07 | | | 1.09 | |
Expenses excluding short sale dividend and interest expense (f) | | 1.23 | | | N/A | | | N/A | | | N/A | | | N/A | |
Net investment income | | 1.21 | | | 0.81 | | | 0.23 | | | 0.54 | | | 0.33 | |
Portfolio turnover | | 63 | | | 144 | | | 84 | | | 87 | | | 92 | |
Net assets at end of period (000 omitted) | | $17,901 | | | $18,199 | | | $28,832 | | | $29,316 | | | $28,039 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (t) | | Excluding the effect of the proceeds received from a non-recurring litigation settlement against Enron Corp., the Initial Class and Service Class total returns for the year ended December 31, 2008 would have each been lower by approximately 0.86%. |
See Notes to Financial Statements
14
MFS Global Research Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Research Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
15
MFS Global Research Portfolio
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 December 31, 2009 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 | | $82,046,642 | | $— | | $— | | $82,046,642 |
United Kingdom | | 1,637,026 | | 13,980,387 | | — | | 15,617,413 |
Switzerland | | 688,633 | | 9,920,547 | | — | | 10,609,180 |
France | | 2,917,405 | | 6,061,397 | | — | | 8,978,802 |
Germany | | 3,391,783 | | 5,395,625 | | — | | 8,787,408 |
Japan | | 2,862,833 | | 4,220,806 | | — | | 7,083,639 |
Netherlands | | 2,087,538 | | 3,283,647 | | — | | 5,371,185 |
Canada | | 3,820,490 | | — | | — | | 3,820,490 |
China | | 515,704 | | 2,884,344 | | — | | 3,400,048 |
Other Countries | | 4,780,585 | | 16,028,523 | | — | | 20,809,108 |
| Mutual Funds | | 825,050 | | — | | — | | 825,050 |
| Total Investments | | $105,573,689 | | $61,775,276 | | $— | | $167,348,965 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
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.
16
MFS Global Research Portfolio
Notes to Financial Statements – continued
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. At December 31, 2009, the fund did not have any outstanding derivative instruments.
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | |
| | | Investment
Transactions
(i.e.,
Purchased
Options) | | | Swap
Transactions | | Total | |
| Equity Contracts | | $(37,131 | ) | | $— | | $(37,131 | ) |
| Total Return Contracts | | — | | | 90,952 | | 90,952 | |
Total | | $(37,131 | ) | | $90,952 | | $53,821 | |
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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
17
MFS Global Research Portfolio
Notes to Financial Statements – continued
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.
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 hold total return swaps which involve commitments to pay interest in exchange for a market-linked return based on a notional amount. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty, respectively. The fund may enter into total return swaps on a particular security, or a basket or index of securities, in order to gain exposure to the underlying security or securities.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2009, this expense amounted to $837. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund had no short sales outstanding.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. 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.
18
MFS Global Research Portfolio
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. For the year ended December 31, 2009, custody fees were not reduced.
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 wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $2,477,434 | | $1,473,376 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $152,714,792 | |
| Gross appreciation | | 25,604,275 | |
| Gross depreciation | | (10,970,102 | ) |
| Net unrealized appreciation (depreciation) | | $14,634,173 | |
| Undistributed ordinary income | | 2,113,538 | |
| Capital loss carryforwards | | (198,723,339 | ) |
| Other temporary differences | | (41,525 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(145,735,638 | ) |
| 12/31/16 | | (34,265,726 | ) |
| 12/31/17 | | (18,721,975 | ) |
| | $(198,723,339 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $2,227,418 | | $1,382,002 |
| Service Class | | 250,016 | | 91,374 |
| Total | | $2,477,434 | | $1,473,376 |
19
MFS Global Research Portfolio
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 the following annual rates:
| | |
| First $300 million of average daily net assets | | 0.75% |
| Average daily net assets in excess of $300 million | | 0.675% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75 % of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $22,745, which equated to 0.0151% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0403% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,712 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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, short sales, and short-term obligations, aggregated $94,023,002 and $ 117,778,082, respectively.
20
MFS Global Research Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 18,709 | | | $238,415 | | | 67,768 | | | $1,131,700 | |
Service Class | | 150,965 | | | 1,652,653 | | | 277,614 | | | 4,343,879 | |
| | 169,674 | | | $1,891,068 | | | 345,382 | | | $5,475,579 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 177,767 | | | $2,227,418 | | | 66,506 | | | $1,382,002 | |
Service Class | | 20,049 | | | 250,016 | | | 4,421 | | | 91,374 | |
| | 197,816 | | | $2,477,434 | | | 70,927 | | | $1,473,376 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,657,341 | ) | | $(22,985,827 | ) | | (2,756,413 | ) | | $(48,915,273 | ) |
Service Class | | (507,104 | ) | | (6,951,172 | ) | | (284,061 | ) | | (4,803,608 | ) |
| | (2,164,445 | ) | | $(29,936,999 | ) | | (3,040,474 | ) | | $(53,718,881 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,460,865 | ) | | $(20,519,994 | ) | | (2,622,139 | ) | | $(46,401,571 | ) |
Service Class | | (336,090 | ) | | (5,048,503 | ) | | (2,026 | ) | | (368,355 | ) |
| | (1,796,955 | ) | | $(25,568,497 | ) | | (2,624,165 | ) | | $(46,769,926 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $2,237 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 | | — | | 29,272,741 | | (29,272,641 | ) | | 100 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $1,276 | | | $100 |
21
MFS Global Research Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Global Research Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Research Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Global Research Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
22
MFS Global Research Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
23
MFS Global Research Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
24
MFS Global Research Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Michael Cantara
Jose Luis Garcia | | |
25
MFS Global Research Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 2nd quintile for the three-year period and the 1st quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
26
MFS Global Research Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
27
MFS Global Research Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100.00% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
28
MFS Global Research Portfolio
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.
29
MFS® TECHNOLOGY PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Technology Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS Technology Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top ten holdings (i) | | |
| Samsung Electronics Co. Ltd., GDR | | 6.2% |
| Oracle Corp. | | 5.5% |
| Google, Inc., “A” | | 5.4% |
| Hewlett-Packard Co. | | 4.9% |
| Apple, Inc. | | 4.4% |
| Accenture Ltd., “A” | | 3.7% |
| Cisco Systems, Inc. | | 3.7% |
| Dell, Inc. | | 3.5% |
| THQ, Inc. | | 3.1% |
| Parametric Technology Corp. | | 3.0% |
| | |
| Top five industries (i) | | |
| Computer Software-Systems | | 18.9% |
| Computer Software | | 18.1% |
| Electronics | | 17.3% |
| Network & Telecom (s) | | 9.7% |
| Business Services | | 7.3% |
| (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 any derivative holdings, if applicable. |
| (s) | Top Five Industry includes both common stocks and securities sold short. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Technology Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Technology Portfolio (the “fund”) provided a total return of 76.64%, while Service Class shares of the fund provided a total return of 76.43%. These compare with a return of 26.46% for the fund’s benchmark, the Standard & Poor’s 500 Stock Index. The fund’s other benchmark, the Standard & Poor’s North American Technology Sector Index, generated a return of 63.19%.
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 to almost 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.
Contributors to Performance
Stock selection in the electronics industry was a key driver for positive performance relative to the Standard & Poor’s North American Technology Sector Index. Holdings of electronics designer and manufacturer Flextronics (b) (Singapore), networking chip maker Marvell Technology Group (b), and electronics maker Samsung Electronics (b) were among the fund’s top contributors. The fund’s ownership in the convertible security of electronic device maker RF Microdevices (h) and the timing of its ownership in put and call options on flash memory storage products maker Sandisk (h) also aided relative results.
Stock selection and, to a lesser extent, an underweighted position in the network and telecom industry boosted relative performance. The fund’s holdings of wireless solutions provider Research In Motion (h) (Canada) and shares of communications networking company Ciena were among the top contributors. Exposure to Research In Motion was achieved through both direct ownership and via call options on the stock. The value of these holdings soared after the wireless-device maker reported strong earnings growth based on solid demand for Blackberry mobile devices.
Stock selection in the computer software industry also bolstered relative results. Business intelligence software maker MicroStrategy and internet software services company Akamai Technologies (h) benefited relative returns over the reporting period. Shares of MicroStrategy climbed as the business intelligence software market remained attractive. The immediate visualization of company performance and associated efficiency improvements led to strong demand for MicroStrategy’s software.
Elsewhere, the debt security of satellite radio services provider Sirius XM Radio (b)(h) also helped relative performance.
Detractors from Performance
Stock selection in the computer systems industry was a detractor from relative returns. Holdings of video game console maker Nintendo (b) (Japan) had a negative impact on relative performance. The share price of Nintendo declined as video game sales, including those of Nintendo’s Wii gaming console, appeared to be slowing more than expected during the weak economy. The fund’s positioning in some call options on network computing infrastructure solutions provider Sun Microsystems (h) also held back relative returns.
3
MFS Technology Portfolio
Management Review – continued
Allocation to the special products industry, which is not represented in the benchmark, negatively affected relative performance. Here, a principal detractor was the fund’s positioning in put options on Semiconductor HOLDRS Trust (b).
Stock selection in the specialty stores industry also hurt relative performance. The timing of our ownership in shares of online retailer Amazon.com and holdings of poor-performing video game retailer Gamestop (b) were among the fund’s top detractors.
Securities in other industries that detracted from relative performance included solar electric power modules manufacturer First Solar (b), mobile phone maker Nokia (b)(h) (Finland), and packaged software company MSC Software (b)(h). The fund’s timing of ownership in shares of silicon wafers maker MEMC Electronic Materials (h) and flash memory products maker STEC (h) also dampened relative results.
Respectfully,
Telis Bertsekas
Portfolio Manager
| (b) | | Security is not a benchmark constituent. |
| (h) | | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS Technology Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment (t)
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | Life(t) | | |
| | | Initial Class | | 6/16/00 | | 76.64% | | 6.19% | | (5.77)% | | |
| | | Service Class | | 8/24/01 | | 76.43% | | 5.95% | | 1.23% | | |
Comparative benchmarks
| | | | | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 26.46% | | 0.42% | | (1.11)% | | |
| | | Standard & Poor’s North American Technology Sector Index (f) | | 63.19% | | 3.75% | | (7.39)% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from class inception date through the stated period end. The comparative benchmark information provided for “life” periods is from the inception date of the Initial Class. (See Notes to Performance Summary.) |
Benchmark Definitions
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
Standard & Poor’s North American Technology Sector Index – a modified market capitalization-weighted index that measures the performance of selected technology stocks.
It is not possible to invest directly in an index.
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.
5
MFS Technology Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Technology Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
Initial Class
| | Actual | | 1.02% | | $1,000.00 | | $1,274.16 | | $5.85 |
| | Hypothetical (h) | | 1.02% | | $1,000.00 | | $1,020.06 | | $5.19 |
Service Class
| | Actual | | 1.27% | | $1,000.00 | | $1,273.56 | | $7.28 |
| | Hypothetical (h) | | 1.27% | | $1,000.00 | | $1,018.80 | | $6.46 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Technology Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 96.2% | | | | | |
| Business Services – 7.3% | | | | | |
| Accenture Ltd., “A” | | 14,600 | | $ | 605,900 |
| Cognizant Technology Solutions Corp., “A” (a) | | 3,640 | | | 164,892 |
| MasterCard, Inc., “A” | | 1,650 | | | 422,367 |
| | | | | |
| | | | $ | 1,193,159 |
| | | | | |
| Computer Software – 17.0% | | | | | |
| Adobe Systems, Inc. (a) | | 9,650 | | $ | 354,927 |
| Blue Coat Systems, Inc. (a) | | 10,200 | | | 291,108 |
| Cadence Design Systems, Inc. (a) | | 31,700 | | | 189,883 |
| MicroStrategy, Inc., “A” (a)(s) | | 4,140 | | | 389,243 |
| Oracle Corp. (s) | | 36,700 | | | 900,618 |
| Parametric Technology Corp. (a) | | 29,760 | | | 486,278 |
| VeriSign, Inc. (a) | | 6,900 | | | 167,256 |
| | | | | |
| | | | $ | 2,779,313 |
| | | | | |
| Computer Software – Systems – 18.9% | | | | | |
| 3Par, Inc. (a) | | 11,100 | | $ | 131,535 |
| Apple, Inc. (a) | | 3,400 | | | 716,924 |
| Compellent Technologies, Inc. (a) | | 12,340 | | | 279,871 |
| Dell, Inc. (a) | | 39,640 | | | 569,230 |
| EMC Corp. (a) | | 9,600 | | | 167,712 |
| Hewlett-Packard Co. (s) | | 15,630 | | | 805,101 |
| Nintendo Co. Ltd. | | 670 | | | 158,834 |
| OpenTable, Inc. (a) | | 10,260 | | | 261,220 |
| | | | | |
| | | | $ | 3,090,427 |
| | | | | |
| Consumer Services – 1.7% | | | | | |
| Priceline.com, Inc. (a) | | 1,250 | | $ | 273,125 |
| | | | | |
| Electrical Equipment – 4.0% | | | | | |
| Nitto Denko Corp. | | 4,800 | | $ | 171,107 |
| Tyco Electronics Ltd. | | 19,660 | | | 482,653 |
| | | | | |
| | | | $ | 653,760 |
| | | | | |
| Electronics – 17.3% | | | | | |
| First Solar, Inc. (a) | | 1,300 | | $ | 176,020 |
| Flextronics International Ltd. (a) | | 51,710 | | | 378,000 |
| Intel Corp. | | 23,300 | | | 475,320 |
| National Semiconductor Corp. | | 21,010 | | | 322,714 |
| PMC-Sierra, Inc. (a) | | 25,800 | | | 223,428 |
| Samsung Electronics Co. Ltd., GDR | | 2,914 | | | 1,004,767 |
| Silicon Laboratories, Inc. (a) | | 5,100 | | | 246,534 |
| | | | | |
| | | | $ | 2,826,783 |
| | | | | |
| Entertainment – 1.2% | | | | | |
| TiVo, Inc. (a) | | 18,460 | | $ | 187,923 |
| | | | | |
| Internet – 6.6% | | | | | |
| Google, Inc., “A” (a) | | 1,410 | | $ | 874,172 |
| Tencent Holdings Ltd. | | 9,100 | | | 196,127 |
| | | | | |
| | | | $ | 1,070,299 |
| | | | | |
| Leisure & Toys – 2.1% | | | | | |
| THQ, Inc. (a) | | 68,600 | | $ | 345,744 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMON STOCKS – continued |
| Medical & Health Technology & Services – 2.5% | | | |
| athenahealth, Inc. (a) | | | 3,600 | | $ | 162,864 |
| Medassets, Inc. (a) | | | 11,400 | | | 241,794 |
| | | | | | |
| | | | | $ | 404,658 |
| | | | | | |
| Network & Telecom – 10.2% | | | | | | |
| Ciena Corp. (a) | | | 19,000 | | $ | 205,960 |
| Cisco Systems, Inc. (a) | | | 25,010 | | | 598,739 |
| Fortinet, Inc. (a) | | | 6,720 | | | 118,070 |
| Juniper Networks, Inc. (a) | | | 15,400 | | | 410,718 |
| Palm, Inc. (a) | | | 15,400 | | | 154,616 |
| Tellabs, Inc. (a) | | | 31,600 | | | 179,488 |
| | | | | | |
| | | | | $ | 1,667,591 |
| | | | | | |
| Specialty Stores – 5.2% | | | | | | |
| Amazon.com, Inc. (a) | | | 2,000 | | $ | 269,040 |
| Ctrip.com International Ltd., ADR (a) | | | 3,610 | | | 259,415 |
| GameStop Corp., “A” (a) | | | 14,700 | | | 322,518 |
| | | | | | |
| | | | | $ | 850,973 |
| | | | | | |
| Telephone Services – 2.2% | | | | | | |
| American Tower Corp., “A” (a) | | | 8,100 | | $ | 350,001 |
| | | | | | |
Total Common Stocks
(Identified Cost, $15,331,280) | | | | | $ | 15,693,756 |
| | | | | | |
|
| CONVERTIBLE BONDS – 3.5% |
| Computer Software – 1.1% | | | | | | |
| Verisign, Inc., 3.25%, 2037 | | $ | 210,000 | | $ | 186,638 |
| | | | | | |
| Leisure & Toys – 2.4% | | | | | | |
Take-Two Interactive Software, Inc.,
4.375%, 2014 | | $ | 191,000 | | $ | 224,425 |
| THQ, Inc., 5%, 2014 (z) | | | 174,000 | | | 163,125 |
| | | | | | |
| | | | | $ | 387,550 |
| | | | | | |
Total Convertible Bonds
(Identified Cost, $522,539) | | | | | $ | 574,188 |
| | | | | | |
| | |
| MONEY MARKET FUNDS (v) – 0.9% | | | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | | 150,561 | | $ | 150,561 |
| | | | | | |
| Issuer/Expiration Date/ Strike Price | | Number of
Contracts | | |
|
| CALL OPTIONS PURCHASED – 0.0% |
| Palm, Inc. – January 2010 @ $12.50 (Premiums Paid, $17,155) (a) | | | 235 | | $ | 1,410 |
| | | | | | |
|
| PUT OPTIONS PURCHASED – 0.0% |
| Broadcom Corp. – January 2010 @ $26 (a) | | | 314 | | $ | 942 |
| Semiconductor HOLDRS Trust – January 2010 @ $26 (a) | | | 251 | | | 3,012 |
| | | | | | |
Total Put Options Purchased
(Premiums Paid, $100,271) | | | | | $ | 3,954 |
| | | | | | |
Total Investments
(Identified Cost, $16,121,806) | | | | | $ | 16,423,869 |
| | | | | | |
8
MFS Technology Portfolio
Portfolio of Investments – continued
| | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | |
| SECURITIES SOLD SHORT – (0.5)% | | | | | | | |
| Network & Telecom – (0.5)% | | | | | | | |
Motorola, Inc.
(Proceeds Received, $92,826) (a) | | (11,500 | ) | | $ | (89,240 | ) |
| | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | (16,211 | ) |
| | | | | | | |
| Net Assets – 100.0% | | | | | $ | 16,318,418 | |
| | | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $191,117. |
| (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 security: |
| | | | | | |
| Restricted Security | | Acquisition Date | | Cost | | Current
Market Value |
| THQ, Inc., 5%, 2014 | | 7/30/09-12/08/09 | | $173,633 | | $163,125 |
| % of Net Assets | | | | | | 1.0% |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| GDR | | Global Depository Receipt |
See Notes to Financial Statements
9
MFS Technology Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $15,971,245) | | $16,273,308 | | | |
Underlying funds, at cost and value | | 150,561 | | | |
Total investments, at value (identified cost, $16,121,806) | | $16,423,869 | | | |
Deposits with brokers for securities sold short | | $75,180 | | | |
Receivables for | | | | | |
Investments sold | | 42,046 | | | |
Interest and dividends | | 9,679 | | | |
Receivable from investment adviser | | 8,349 | | | |
Other assets | | 890 | | | |
Total assets | | | | | $16,560,013 |
Liabilities | | | | | |
Payables for | | | | | |
Securities sold short, at value (proceeds received, $92,826) | | $89,240 | | | |
Investments purchased | | 88,531 | | | |
Fund shares reacquired | | 20,889 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 676 | | | |
Distribution and/or service fees | | 25 | | | |
Administrative services fee | | 55 | | | |
Payable for Trustees’ compensation | | 18 | | | |
Accrued expenses and other liabilities | | 42,161 | | | |
Total liabilities | | | | | $241,595 |
Net assets | | | | | $16,318,418 |
Net assets consist of | | | | | |
Paid-in capital | | $36,666,382 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 305,649 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (20,653,613 | ) | | |
Net assets | | | | | $16,318,418 |
Shares of beneficial interest outstanding | | | | | 2,884,326 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $14,542,052 | | 2,563,793 | | $5.67 |
Service Class | | 1,776,366 | | 320,533 | | 5.54 |
See Notes to Financial Statements
10
MFS Technology Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net Investment loss | | | | | | |
Income | | | | | | |
Interest | | $66,655 | | | | |
Dividends | | 64,917 | | | | |
Dividends from underlying funds | | 337 | | | | |
Foreign taxes withheld | | (2,714 | ) | | | |
Total investment income | | | | | $129,195 | |
Expenses | | | | | | |
Management fee | | $98,116 | | | | |
Distribution and/or service fees | | 3,609 | | | | |
Administrative services fee | | 10,000 | | | | |
Trustees' compensation | | 1,453 | | | | |
Custodian fee | | 10,989 | | | | |
Shareholder communications | | 9,268 | | | | |
Auditing fees | | 54,764 | | | | |
Legal fees | | 8,163 | | | | |
Dividend and interest expense on securities sold short | | 5,392 | | | | |
Miscellaneous | | 11,364 | | | | |
Total expenses | | | | | $213,118 | |
Fees paid indirectly | | (1 | ) | | | |
Reduction of expenses by investment adviser | | (73,077 | ) | | | |
Net expenses | | | | | $140,040 | |
Net investment loss | | | | | $(10,845 | ) |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(892,751 | ) | | | |
Written option transactions | | 10,637 | | | | |
Securities sold short | | (28,731 | ) | | | |
Foreign currency transactions | | (573 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(911,418 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $7,887,637 | | | | |
Written options | | 8,786 | | | | |
Securities sold short | | 21,131 | | | | |
Translation of assets and liabilities in foreign currencies | | (902 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $7,916,652 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $7,005,234 | |
Change in net assets from operations | | | | | $6,994,389 | |
See Notes to Financial Statements
11
MFS Technology Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment loss | | $(10,845 | ) | | $(7,210 | ) |
Net realized gain (loss) on investments and foreign currency transactions | | (911,418 | ) | | (3,147,737 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 7,916,652 | | | (7,422,362 | ) |
Change in net assets from operations | | $6,994,389 | | | $(10,577,309 | ) |
Change in net assets from fund share transactions | | $283,359 | | | $(5,120,880 | ) |
Total change in net assets | | $7,277,748 | | | $(15,698,189 | ) |
Net assets | | | | | | |
At beginning of period | | 9,040,670 | | | 24,738,859 | |
At end of period | | $16,318,418 | | | $9,040,670 | |
See Notes to Financial Statements
12
MFS Technology Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $3.21 | | | $6.54 | | | $5.44 | | | $4.46 | | | $4.20 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.00 | )(w) | | $(0.00 | )(w) | | $(0.02 | ) | | $(0.03 | ) | | $(0.03 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.46 | | | (3.33 | ) | | 1.12 | | | 1.01 | | | 0.29 | |
Total from investment operations | | $2.46 | | | $(3.33 | ) | | $1.10 | | | $0.98 | | | $0.26 | |
Net asset value, end of period | | $5.67 | | | $3.21 | | | $6.54 | | | $5.44 | | | $4.46 | |
Total return (%) (k)(r)(s) | | 76.64 | | | (50.92 | )(x) | | 20.22 | | | 21.97 | | | 6.19 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.60 | | | 1.39 | | | 1.21 | | | 1.34 | | | 1.18 | |
Expenses after expense reductions (f) | | 1.04 | | | 1.02 | | | 1.00 | | | 1.00 | | | 1.00 | |
Expenses after expense reductions excluding short sale
dividend and interest expense (f) | | 1.00 | | | 1.00 | | | N/A | | | N/A | | | N/A | |
Net investment loss | | (0.05 | ) | | (0.00 | )(w) | | (0.31 | ) | | (0.55 | ) | | (0.66 | ) |
Portfolio turnover | | 227 | | | 244 | | | 249 | | | 234 | | | 196 | |
Net assets at end of period (000 omitted) | | $14,542 | | | $8,051 | | | $21,184 | | | $18,813 | | | $18,978 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $3.14 | | | $6.42 | | | $5.35 | | | $4.40 | | | $4.15 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.01 | ) | | $(0.02 | ) | | $(0.03 | ) | | $(0.04 | ) | | $(0.04 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.41 | | | (3.26 | ) | | 1.10 | | | 0.99 | | | 0.29 | |
Total from investment operations | | $2.40 | | | $(3.28 | ) | | $1.07 | | | $0.95 | | | $0.25 | |
Net asset value, end of period | | $5.54 | | | $3.14 | | | $6.42 | | | $5.35 | | | $4.40 | |
Total return (%) (k)(r)(s) | | 76.43 | | | (51.09 | )(x) | | 20.00 | | | 21.59 | | | 6.02 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.85 | | | 1.62 | | | 1.46 | | | 1.59 | | | 1.43 | |
Expenses after expense reductions (f) | | 1.29 | | | 1.27 | | | 1.25 | | | 1.25 | | | 1.25 | |
Expenses after expense reductions excluding short sale
dividend and interest expense (f) | | 1.25 | | | 1.25 | | | N/A | | | N/A | | | N/A | |
Net investment loss | | (0.32 | ) | | (0.29 | ) | | (0.56 | ) | | (0.80 | ) | | (0.92 | ) |
Portfolio turnover | | 227 | | | 244 | | | 249 | | | 234 | | | 196 | |
Net assets at end of period (000 omitted) | | $1,776 | | | $990 | | | $3,555 | | | $3,148 | | | $3,375 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (w) | | Per share amount and ratio was less than 0.01. |
| (x) | | Excluding the effect of the proceeds received from a non-recurring litigation settlement against Nortel Networks Corp., the total returns for the year ended December 31, 2008 would have been lower by approximately 0.58%. |
See Notes to Financial Statements
13
MFS Technology Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Technology Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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 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. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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 affect 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
14
MFS Technology Portfolio
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 December 31, 2009 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 | | $13,907,929 | | | $942 | | $— | | $13,908,871 | |
South Korea | | — | | | 1,004,767 | | — | | 1,004,767 | |
China | | 259,415 | | | 196,127 | | — | | 455,542 | |
Japan | | 171,106 | | | 158,834 | | — | | 329,940 | |
| Corporate Bonds | | — | | | 574,188 | | — | | 574,188 | |
| Mutual Funds | | 150,561 | | | — | | — | | 150,561 | |
| Total Investments | | $14,489,011 | | | $1,934,858 | | $— | | $16,423,869 | |
| Short Sales | | $(89,240 | ) | | $— | | $— | | $(89,240 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
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.
15
MFS Technology Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | |
| | | | | Asset Derivatives |
| | | | | Location on Statement
of Assets andLiabilities | | Fair Value |
| Equity Contracts | | Equity Options Purchased | | Total investments,
at value | | $5,364 |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | |
| | | Written Option
Transactions | | Investment Transactions
(i.e., Purchased Options) |
| | Total | |
| Equity Contracts | | $10,637 | | $(66,664 | ) | | $(56,027 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | |
| | | Written Option
Transactions | | Investments
(i.e., Purchased Options) |
| | Total | |
| Equity Contracts | | $8,786 | | $(35,279 | ) | | $(26,493 | ) |
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.
Written Options – In exchange for a premium, the fund writes call or put options on securities for which it believes the premium received exceeds the potential loss that would result from adverse price changes in the options’ underlying securities. In a written option, the fund as the option writer grants the buyer the right to purchase from, or sell to, the fund a specified number of shares or units of a particular security, currency or index at a specified price within a specified period of time.
The premium received is initially recorded as a liability on the Statement of Assets and Liabilities. The option is subsequently marked-to-market daily with the difference between the premium received and the market value of the written option being recorded as unrealized appreciation or depreciation. When a written option expires, the fund realizes a gain equal to the
16
MFS Technology Portfolio
Notes to Financial Statements – continued
amount of the premium received. The difference between the premium received and the amount paid on effecting a closing transaction is considered a realized gain or loss. When a written call option is exercised, the premium received is offset against the proceeds to determine the realized gain or loss. When a written put option is exercised, the premium reduces the cost basis of the security purchased by the fund.
At the initiation of the written option contract, for exchange traded options, the fund is required to deposit securities or cash as collateral with the custodian for the benefit of the broker. For over-the-counter options, the fund may post collateral subject to the terms of an ISDA Master Agreement as generally described above if the market value of the options contract moves against it. The fund, as writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities underlying the written option. Although the fund’s market risk may be significant, the maximum counterparty credit risk to the fund is equal to the market value of any collateral posted to the broker. For over-the-counter options, 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.
Written Option Transactions
| | | | | | |
| | | Number of
contracts | | | Premiums
received | |
| Outstanding, beginning of period | | 145 | | | $14,414 | |
| Options written | | 462 | | | 35,160 | |
| Options closed | | (452 | ) | | (42,429 | ) |
| Options expired | | (155 | ) | | (7,145 | ) |
| Outstanding, end of period | | — | | | $— | |
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2009, this expense amounted to $5,392. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of
17
MFS Technology Portfolio
Notes to Financial Statements – continued
the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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 December 31, 2009, 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, wash sale loss deferrals and straddle loss deferrals.
The fund declared no distributions for the years ended December 31, 2009 and December 31, 2008.
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $16,214,803 | |
| Gross appreciation | | 1,400,008 | |
| Gross depreciation | | (1,190,942 | ) |
| Net unrealized appreciation (depreciation) | | $209,066 | |
| Capital loss carryforwards | | (20,518,221 | ) |
| Other temporary differences | | (38,809 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(16,502,070 | ) |
| 12/31/16 | | (2,853,626 | ) |
| 12/31/17 | | (1,162,525 | ) |
| | $(20,518,221 | ) |
18
MFS Technology Portfolio
Notes to Financial Statements – continued
The availability of a portion of the capital loss carryforwards, which were acquired on September 5, 2003, in connection with the Global Telecommunications Series 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 and/or service fees. The fund's income, realized and unrealized gain (loss), and common expenses 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.
| (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 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $1 billion | | 0.70% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 1.00% of average daily net assets for the Initial Class shares and 1.25% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $73,078 and is reflected as a reduction of total expenses in the Statements of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0764% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund
19
MFS Technology Portfolio
Notes to Financial Statements – continued
to Tarantino LLC and Griffin Compliance LLC were $231 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $29,237,730 and $29,062,651, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 645,666 | | | $3,025,207 | | | 351,513 | | | $1,843,162 | |
Service Class | | 96,890 | | | 427,795 | | | 76,290 | | | 414,007 | |
| | 742,556 | | | $3,453,002 | | | 427,803 | | | $2,257,169 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (592,122 | ) | | $(2,766,428 | ) | | (1,078,381 | ) | | $(5,843,498 | ) |
Service Class | | (91,390 | ) | | (403,215 | ) | | (314,656 | ) | | (1,534,551 | ) |
| | (683,512 | ) | | $(3,169,643 | ) | | (1,393,037 | ) | | $(7,378,049 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 53,544 | | | $258,779 | | | (726,868 | ) | | $(4,000,336 | ) |
Service Class | | 5,500 | | | 24,580 | | | (238,366 | ) | | (1,120,544 | ) |
| | 59,044 | | | $283,359 | | | (965,234 | ) | | $(5,120,880 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $190 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 | | — | | 6,499,246 | | (6,348,685 | ) | | 150,561 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $337 | | | $150,561 |
20
MFS Technology Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Technology Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Technology Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Technology Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
21
MFS Technology Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
22
MFS Technology Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
23
MFS Technology Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager
Telis Bertsekas | | |
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MFS Technology Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 2nd quintile for the three-year period and in the 3rd quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services historically provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
25
MFS Technology Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate was below the median and total expense ratio was approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
26
MFS Technology Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
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MFS Technology Portfolio
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.
28
MFS® INTERNATIONAL VALUE PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Value Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS International Value Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Sanofi-Aventis | | 3.6% |
| Nestle S.A. | | 3.6% |
| Vodafone Group PLC | | 3.3% |
| Roche Holding AG | | 3.1% |
| GlaxoSmithKline PLC | | 2.8% |
| TOTAL S.A. | | 2.7% |
| Kao Corp. | | 2.5% |
| Heineken N.V. | | 2.5% |
| HSBC Holdings PLC | | 2.1% |
| British American Tobacco PLC | | 2.1% |
| | |
| Equity sectors | | |
| Consumer Staples | | 17.0% |
| Financial Services | | 16.3% |
| Health Care | | 14.1% |
| Utilities & Communications | | 9.8% |
| Industrial Goods & Services | | 7.8% |
| Technology | | 6.1% |
| Leisure | | 5.6% |
| Energy | | 5.1% |
| Special Products & Services | | 4.3% |
| Transportation | | 3.1% |
| Basic Materials | | 2.9% |
| Retailing | | 2.2% |
| Autos & Housing | | 1.3% |
| |
| Country weightings (w) | | |
| United Kingdom | | 23.2% |
| Japan | | 22.0% |
| Switzerland | | 12.1% |
| France | | 11.4% |
| Netherlands | | 8.4% |
| Germany | | 6.9% |
| United States | | 4.4% |
| South Korea | | 2.0% |
| Sweden | | 1.5% |
| Other Countries | | 8.1% |
| (w) | Country weightings are based on the valuation currency of each security. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS International Value Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS International Value Portfolio (the “fund”) provided a total return of 25.37%, while Service Class shares of the fund provided a total return of 25.11%. These compare with a return of 35.06% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Value Index. The fund’s other benchmark, the MSCI EAFE Index, generated a return of 32.46%.
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 to almost 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
Stock selection and an underweighted position in the financial services sector were the primary detractors from performance relative to the MSCI EAFE Value Index. Not holding strong-performing financial services firms Banco Santander (Spain), Commonwealth Bank of Australia (Australia), BNP Paribas (France), and Credit Suisse (Switzerland) were key factors to underperformance. Holdings of banking and financial services firm Sumitomo Mitsui Financial Group (Japan) were among the fund’s top detractors during the reporting period.
An overweighted position in the consumer staples sector was another negative factor for relative performance. Holdings of household and industrial products manufacturer Kao (b) (Japan) and cosmetics manufacturer KOSE (b) (Japan) dampened relative results as both stocks underperformed the benchmark. Shares of Kao fell after the firm reduced its guidance for forecasted annual profit, as Japan’s economic recession worsened and demand for consumer products weakened. The company also announced disappointing earnings results due to slowing sales of cosmetics and industrial chemicals.
Stock selection in the special products and services sector also held back relative results. No individual stocks within this sector were among the fund’s top detractors.
Elsewhere, the fund’s holdings of telecommunications company KDDI Corp. (Japan) and pharmaceutical and diagnostic company Roche Holding (b) (Switzerland) hurt relative returns. Shares of Roche dropped after a setback to its Avastin drug in a clinical trial to treat early-stage colon cancer. A successful trial would have helped expand the market for the drug, which is already the best-selling cancer drug.
During the reporting period, the fund’s currency exposure was a detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
The fund’s cash position also held back relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
3
MFS International Value Portfolio
Management Review – continued
Contributors to Performance
Stock selection and an underweighted position in the utilities and communications sector were primary contributors to relative performance. Not holding poor-performing benchmark constituents mobile telecommunications provider NTT DoCoMo (Japan) and voice, data, and internet company France Telecom (France) aided relative returns.
A combination of stock selection and an overweighted position in the technology sector also helped relative returns. Holdings of microchip and electronics manufacturer Samsung Electronics (b) (South Korea) bolstered relative performance as this stock outperformed the benchmark during the reporting period. Shares of Samsung climbed as the company announced it was implementing cost cutting measures to improve earnings.
Stocks in other sectors that were among the fund’s top relative contributors included financial services group DNB Holding (Norway), lock manufacturer ASSA ABLOY (Sweden), paper based packaging company Smurfit Kappa Group (b) (Ireland), banking firm Siam City Bank Public (b) (Thailand), and brewer Heineken (the Netherlands). Shares of Smurfit Kappa rose on early signs of economic improvement and improving conditions in the credit markets, which could enable the company to refinance its debt on more favorable terms. Not holding poor-performing pharmaceutical company Takeda Chemical Industries (Japan) and diversified financial services firm Mitsubishi UFJ Financial Group (Japan) also helped.
Respectfully,
| | |
| Benjamin Stone | | Barnaby Wiener |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
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.
4
MFS International Value Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 10/02/95 | | 25.37% | | 6.57% | | 6.32% | | N/A | | |
| | | Service Class | | 8/24/01 | | 25.11% | | 6.30% | | N/A | | 8.99% | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | MSCI EAFE Value Index (f) | | 35.06% | | 3.96% | | 4.03% | | N/A | | |
| | | MSCI EAFE Index (f) | | 32.46% | | 4.02% | | 1.58% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definitions
MSCI EAFE (Europe, Australasia, Far East) Index – a market capitalization-weighted index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
MSCI EAFE (Europe, Australasia, Far East) Value Index – a market capitalization-weighted index that is designed to measure equity market performance for value securities in the developed markets, excluding the U.S. and Canada.
It is not possible to invest directly in an index.
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.
5
MFS International Value Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS International Value Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.07% | | $1,000.00 | | $1,201.16 | | $5.94 |
| | Hypothetical (h) | | 1.07% | | $1,000.00 | | $1,019.81 | | $5.45 |
| Service Class | | Actual | | 1.32% | | $1,000.00 | | $1,200.33 | | $7.32 |
| | Hypothetical (h) | | 1.32% | | $1,000.00 | | $1,018.55 | | $6.72 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS International Value Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 95.6% | | | |
| Aerospace – 1.6% | | | | | |
| Cobham PLC | | 1,086,500 | | $ | 4,379,558 |
| | | | | |
| Alcoholic Beverages – 2.5% | | | | | |
| Heineken N.V. | | 141,880 | | $ | 6,722,772 |
| | | | | |
| Apparel Manufacturers – 0.9% | | | | | |
| Compagnie Financiere Richemont S.A. | | 55,509 | | $ | 1,857,392 |
| Sanyo Shokai Ltd. (l) | | 199,400 | | | 586,628 |
| | | | | |
| | | | $ | 2,444,020 |
| | | | | |
| Broadcasting – 3.4% | | | | | |
| Fuji Television Network, Inc. | | 1,061 | | $ | 1,463,800 |
| Nippon Television Network Corp. | | 11,160 | | | 1,439,111 |
| Vivendi S.A. | | 153,631 | | | 4,535,446 |
| WPP Group PLC | | 179,330 | | | 1,751,134 |
| | | | | |
| | | | $ | 9,189,491 |
| | | | | |
| Brokerage & Asset Managers – 1.4% | | | | | |
| Daiwa Securities Group, Inc. | | 606,000 | | $ | 3,038,013 |
| Van Lanschot N.V. | | 12,570 | | | 660,697 |
| | | | | |
| | | | $ | 3,698,710 |
| | | | | |
| Business Services – 2.8% | | | | | |
| Bunzl PLC | | 188,930 | | $ | 2,048,183 |
| Nomura Research, Inc. | | 94,300 | | | 1,847,064 |
| USS Co. Ltd. | | 58,240 | | | 3,539,361 |
| | | | | |
| | | | $ | 7,434,608 |
| | | | | |
| Chemicals – 1.4% | | | | | |
| Givaudan S.A. | | 4,614 | | $ | 3,672,051 |
| | | | | |
| Computer Software – Systems – 1.8% | | | | | |
| Konica Minolta Holdings, Inc. | | 274,000 | | $ | 2,810,176 |
| Venture Corp. Ltd. | | 333,000 | | | 2,088,200 |
| | | | | |
| | | | $ | 4,898,376 |
| | | | | |
| Conglomerates – 0.8% | | | | | |
| Tomkins PLC | | 688,120 | | $ | 2,124,412 |
| | | | | |
| Construction – 1.3% | | | | | |
| Geberit AG | | 19,164 | | $ | 3,394,634 |
| | | | | |
| Consumer Products – 6.3% | | | | | |
| Henkel KGaA, IPS | | 85,610 | | $ | 4,457,083 |
| Kao Corp. | | 288,000 | | | 6,725,721 |
| KOSE Corp. | | 115,200 | | | 2,325,927 |
| Reckitt Benckiser Group PLC | | 62,770 | | | 3,402,520 |
| | | | | |
| | | | $ | 16,911,251 |
| | | | | |
| Consumer Services – 0.7% | | | | | |
| Benesse Corp. | | 46,600 | | $ | 1,946,358 |
| | | | | |
| Containers – 0.4% | | | | | |
| Smurfit Kappa Group PLC (a) | | 126,638 | | $ | 1,125,560 |
| | | | | |
| Electrical Equipment – 2.6% | | | | | |
| Legrand S.A. | | 84,270 | | $ | 2,352,682 |
| OMRON Corp. | | 109,200 | | | 1,948,681 |
| Spectris PLC | | 227,960 | | | 2,685,614 |
| | | | | |
| | | | $ | 6,986,977 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Electronics – 2.9% | | | | | |
| Halma PLC | | 397,167 | | $ | 1,546,302 |
| Samsung Electronics Co. Ltd. | | 4,805 | | | 3,281,733 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 251,598 | | | 2,878,281 |
| | | | | |
| | | | $ | 7,706,316 |
| | | | | |
| Energy – Independent – 0.5% | | | | | |
| INPEX Corp. | | 167 | | $ | 1,253,414 |
| | | | | |
| Energy – Integrated – 4.6% | | | | | |
| Royal Dutch Shell PLC, “A” | | 170,730 | | $ | 5,154,797 |
| TOTAL S.A. | | 113,220 | | | 7,255,314 |
| | | | | |
| | | | $ | 12,410,111 |
| | | | | |
| Food & Beverages – 4.3% | | | | | |
| Binggrae Co. Ltd. (a) | | 11,560 | | $ | 511,252 |
| Nestle S.A. | | 198,233 | | | 9,630,714 |
| Nong Shim Co. Ltd. (a) | | 7,054 | | | 1,506,422 |
| | | | | |
| | | | $ | 11,648,388 |
| | | | | |
| Food & Drug Stores – 0.7% | | | | | |
| Lawson, Inc. | | 43,000 | | $ | 1,892,951 |
| | | | | |
| General Merchandise – 0.2% | | | | | |
| Daiei, Inc. (a) | | 152,700 | | $ | 524,552 |
| | | | | |
| Insurance – 6.1% | | | | | |
| Allianz SE | | 10,020 | | $ | 1,247,218 |
| Catlin Group Ltd. | | 316,406 | | | 1,737,602 |
| Euler Hermes | | 12,512 | | | 929,557 |
| Hiscox Ltd. | | 374,349 | | | 1,913,998 |
| ING Groep N.V. (a) | | 271,586 | | | 2,625,470 |
| Jardine Lloyd Thompson Group PLC | | 289,940 | | | 2,264,754 |
| Muenchener Ruckvers AG | | 19,890 | | | 3,098,541 |
| SNS REAAL Groep N.V. (a) | | 136,610 | | | 825,939 |
| Zurich Financial Services Ltd. | | 8,420 | | | 1,830,732 |
| | | | | |
| | | | $ | 16,473,811 |
| | | | | |
| Leisure & Toys – 0.7% | | | | | |
| NAMCO BANDAI Holdings, Inc. | | 87,100 | | $ | 828,747 |
| Sankyo Co. Ltd. | | 18,700 | | | 931,637 |
| | | | | |
| | | | $ | 1,760,384 |
| | | | | |
| Machinery & Tools – 3.6% | | | | | |
| ASSA ABLOY AB, “B” | | 159,030 | | $ | 3,045,286 |
| Glory Ltd. | | 81,100 | | | 1,793,805 |
| Neopost S.A. (l) | | 44,490 | | | 3,678,114 |
| Schindler Holding AG | | 17,300 | | | 1,327,190 |
| | | | | |
| | | | $ | 9,844,395 |
| | | | | |
| Major Banks – 4.4% | | | | | |
| Credit Agricole S.A. | | 136,868 | | $ | 2,386,109 |
| HSBC Holdings PLC | | 496,251 | | | 5,663,382 |
| Sumitomo Mitsui Financial Group, Inc. | | 79,600 | | | 2,269,364 |
| UniCredito Italiano S.p.A. (a) | | 504,905 | | | 1,679,506 |
| | | | | |
| | | | $ | 11,998,361 |
| | | | | |
8
MFS International Value Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Medical Equipment – 2.2% | | | | | |
| Smith & Nephew PLC | | 334,253 | | $ | 3,432,148 |
| Synthes, Inc. | | 19,780 | | | 2,590,554 |
| | | | | |
| | | | $ | 6,022,702 |
| | | | | |
| Network & Telecom – 1.4% | | | | | |
| Nokia Oyj | | 300,500 | | $ | 3,857,771 |
| | | | | |
| Other Banks & Diversified Financials – 3.8% | | | |
| Anglo Irish Bank Corp. PLC (a) | | 249,800 | | $ | 0 |
| Bangkok Bank Public Co. Ltd. | | 330,100 | | | 1,153,469 |
| Chiba Bank Ltd. | | 166,000 | | | 990,624 |
| Dah Sing Financial Holdings Ltd. (a) | | 197,200 | | | 1,087,311 |
| DNB Holding A.S.A. (a) | | 188,760 | | | 2,045,786 |
| Hachijuni Bank Ltd. | | 169,000 | | | 983,141 |
| Joyo Bank Ltd. | | 169,000 | | | 675,020 |
| Sapporo Hokuyo Holdings, Inc. | | 189,000 | | | 683,878 |
| Siam City Bank Public Co. Ltd. | | 1,319,300 | | | 1,157,454 |
| Unione di Banche Italiane ScpA | | 108,172 | | | 1,549,489 |
| | | | | |
| | | | $ | 10,326,172 |
| | | | | |
| Pharmaceuticals – 11.9% | | | | | |
| Daiichi Sankyo Co. Ltd. | | 88,700 | | $ | 1,856,190 |
| GlaxoSmithKline PLC | | 355,740 | | | 7,535,700 |
| Hisamitsu Pharmaceutical Co., Inc. | | 15,300 | | | 492,833 |
| Merck KGaA | | 36,590 | | | 3,417,876 |
| Roche Holding AG | | 48,910 | | | 8,320,382 |
| Sanofi-Aventis | | 122,880 | | | 9,632,159 |
| Santen, Inc. | | 31,200 | | | 998,293 |
| | | | | |
| | | | $ | 32,253,433 |
| | | | | |
| Printing & Publishing – 1.5% | | | | | |
| Reed Elsevier PLC | | 281,343 | | $ | 2,310,324 |
| Wolters Kluwer N.V. | | 83,400 | | | 1,829,238 |
| | | | | |
| | | | $ | 4,139,562 |
| | | | | |
| Real Estate – 0.6% | | | | | |
| Deutsche Wohnen AG (a) | | 162,397 | | $ | 1,559,788 |
| | | | | |
| Specialty Chemicals – 1.1% | | | | | |
| Shin-Etsu Chemical Co. Ltd. | | 27,400 | | $ | 1,544,415 |
| Symrise AG | | 69,891 | | | 1,500,880 |
| | | | | |
| | | | $ | 3,045,295 |
| | | | | |
| Specialty Stores – 0.4% | | | | | |
| Esprit Holdings Ltd. | | 159,872 | | $ | 1,052,197 |
| | | | | |
| Telecommunications – Wireless – 5.6% | | | | | |
| KDDI Corp. | | 1,058 | | $ | 5,579,239 |
| SmarTone Telecommunications Holdings Ltd. | | 642,000 | | | 529,935 |
| Vodafone Group PLC | | 3,873,710 | | | 8,970,353 |
| | | | | |
| | | | $ | 15,079,527 |
| | | | | |
| Telephone Services – 3.0% | | | | | |
| China Unicom Ltd. | | 788,000 | | $ | 1,035,708 |
| Royal KPN N.V. | | 331,710 | | | 5,630,191 |
| Virgin Media, Inc. | | 88,480 | | | 1,489,118 |
| | | | | |
| | | | $ | 8,155,017 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Tobacco – 3.9% | | | | | |
| British American Tobacco PLC | | 173,860 | | $ | 5,640,123 |
| Japan Tobacco, Inc. | | 1,145 | | | 3,863,412 |
| Swedish Match AB | | 40,860 | | | 893,203 |
| | | | | |
| | | | $ | 10,396,738 |
| | | | | |
| Trucking – 3.1% | | | | | |
| TNT N.V. | | 145,930 | | $ | 4,466,748 |
| Yamato Holdings Co. Ltd. | | 278,500 | | | 3,851,484 |
| | | | | |
| | | | $ | 8,318,232 |
| | | | | |
| Utilities – Electric Power – 1.2% | | | | | |
| E.ON AG | | 80,565 | | $ | 3,363,401 |
| | | | | |
Total Common Stocks
(Identified Cost, $280,272,919) | | | | $ | 258,011,296 |
| | | | | |
| |
| MONEY MARKET FUNDS (v) – 3.5% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 9,462,583 | | $ | 9,462,583 |
| | | | | |
| Issuer/Expiration Date/ Strike Price | | Number of
Contracts | | |
| |
| CALL OPTIONS PURCHASED – 0.1% | | | |
| JPY Currency – November 2010 @ $146.3 (Premiums Paid, $272,366) | | 7,900,000 | | $ | 227,552 |
| | | | | |
| |
| PUT OPTIONS PURCHASED – 0.1% | | | |
| JPY Currency – November 2010 @ $97.5 (Premiums Paid, $252,978) | | 1,145,625,000 | | $ | 425,027 |
| | | | | |
| | | Shares/Par | | |
| |
| COLLATERAL FOR SECURITIES LOANED – 0.3% | | | |
| Navigator Securities Lending Prime Portfolio, at Cost and Net Asset Value | | 882,069 | | $ | 882,069 |
| | | | | |
Total Investments
(Identified Cost, $291,142,915) | | | | $ | 269,008,527 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.4% | | | | | 975,718 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 269,984,245 |
| | | | | |
| (a) | | Non-income producing security. |
| (l) | | All or a portion of this security is on loan. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
See Notes to Financial Statements
9
10
MFS International Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $281,680,332) | | $259,545,944 | | | |
Underlying funds, at cost and value | | 9,462,583 | | | |
Total investments, at value, including $839,258 of securities on loan (identified cost, $291,142,915) | | $269,008,527 | | | |
Foreign currency, at value (identified cost, $13) | | $13 | | | |
Receivables for | | | | | |
Fund shares sold | | 1,609,063 | | | |
Interest and dividends | | 639,491 | | | |
Other assets | | 9,979 | | | |
Total assets | | | | | $271,267,073 |
Liabilities | | | | | |
Payables for | | | | | |
Fund shares reacquired | | $209,662 | | | |
Collateral for securities loaned, at value | | 882,069 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 13,315 | | | |
Shareholder servicing costs | | 102 | | | |
Distribution and/or service fees | | 2,832 | | | |
Administrative services fee | | 511 | | | |
Payable for Trustees’ compensation | | 288 | | | |
Deferred country tax expense payable | | 73,910 | | | |
Accrued expenses and other liabilities | | 100,139 | | | |
Total liabilities | | | | | $1,282,828 |
Net assets | | | | | $269,984,245 |
Net assets consist of | | | | | |
Paid-in capital | | $314,625,989 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities
in foreign currencies (net of $73,910 deferred country tax) | | (22,201,122 | ) | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (26,846,021 | ) | | |
Undistributed net investment income | | 4,405,399 | | | |
Net assets | | | | | $269,984,245 |
Shares of beneficial interest outstanding | | | | | 18,738,879 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $63,978,135 | | 4,409,323 | | $14.51 |
Service Class | | 206,006,110 | | 14,329,556 | | 14.38 |
See Notes to Financial Statements
MFS International Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $8,094,399 | | | | |
Interest | | 121,893 | | | | |
Dividends from underlying funds | | 7,411 | | | | |
Foreign taxes withheld | | (775,317 | ) | | | |
Total investment income | | | | | $7,448,386 | |
Expenses | | | | | | |
Management fee | | $2,128,006 | | | | |
Distribution and/or service fees | | 452,620 | | | | |
Shareholder servicing costs | | 35,459 | | | | |
Administrative services fee | | 94,936 | | | | |
Trustees’ compensation | | 37,769 | | | | |
Custodian fee | | 156,324 | | | | |
Shareholder communications | | 18,764 | | | | |
Auditing fees | | 57,576 | | | | |
Legal fees | | 8,195 | | | | |
Miscellaneous | | 31,459 | | | | |
Total expenses | | | | | $3,021,108 | |
Fees paid indirectly | | (1 | ) | | | |
Net expenses | | | | | $3,021,107 | |
Net investment income | | | | | $4,427,279 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions (net of $64,824 country tax) | | $(16,944,148 | ) | | | |
Foreign currency transactions | | 46,136 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(16,898,012 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments (net of $73,910 increase in deferred country tax) | | $69,682,800 | | | | |
Translation of assets and liabilities in foreign currencies | | 42,272 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $69,725,072 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $52,827,060 | |
Change in net assets from operations | | | | | $57,254,339 | |
See Notes to Financial Statements
11
MFS International Value Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $4,427,279 | | | $8,045,706 | |
Net realized gain (loss) on investments and foreign currency transactions | | (16,898,012 | ) | | (9,533,675 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 69,725,072 | | | (111,660,634 | ) |
Change in net assets from operations | | $57,254,339 | | | $(113,148,603 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(7,654,372 | ) | | $(2,993,638 | ) |
From net realized gain on investments | | — | | | (19,344,498 | ) |
Total distributions declared to shareholders | | $(7,654,372 | ) | | $(22,338,136 | ) |
Change in net assets from fund share transactions | | $(16,651,005 | ) | | $31,082,596 | |
Total change in net assets | | $32,948,962 | | | $(104,404,143 | ) |
Net assets | | | | | | |
At beginning of period | | 237,035,283 | | | 341,439,426 | |
At end of period (including undistributed net investment income of $4,405,399 and
$7,651,180, respectively) | | $269,984,245 | | | $237,035,283 | |
See Notes to Financial Statements
12
MFS International Value Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $12.03 | | | $18.68 | | | $20.02 | | | $17.39 | | | $15.58 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.25 | | | $0.44 | | | $0.33 | | | $0.39 | | | $0.27 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.64 | | | (5.94 | ) | | 1.13 | | | 4.54 | | | 2.03 | |
Total from investment operations | | $2.89 | | | $(5.50 | ) | | $1.46 | | | $4.93 | | | $2.30 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.41 | ) | | $(0.16 | ) | | $(0.33 | ) | | $(0.24 | ) | | $(0.18 | ) |
From net realized gain on investments | | — | | | (0.99 | ) | | (2.47 | ) | | (2.06 | ) | | (0.31 | ) |
Total distributions declared to shareholders | | $(0.41 | ) | | $(1.15 | ) | | $(2.80 | ) | | $(2.30 | ) | | $(0.49 | ) |
Net asset value, end of period | | $14.51 | | | $12.03 | | | $18.68 | | | $20.02 | | | $17.39 | |
Total return (%) (k)(s) | | 25.37 | | | (31.41 | ) | | 7.35 | | | 29.23 | | | 15.22 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.09 | | | 1.05 | | | 1.05 | | | 1.11 | | | 1.13 | |
Net investment income | | 2.00 | | | 2.82 | | | 1.67 | | | 2.09 | | | 1.67 | |
Portfolio turnover | | 49 | | | 44 | | | 44 | | | 55 | | | 46 | |
Net assets at end of period (000 omitted) | | $63,978 | | | $57,968 | | | $117,100 | | | $134,008 | | | $108,418 | |
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $11.91 | | | $18.53 | | | $19.92 | | | $17.32 | | | $15.54 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.23 | | | $0.39 | | | $0.16 | | | $0.34 | | | $0.22 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.62 | | | (5.87 | ) | | 1.24 | | | 4.53 | | | 2.02 | |
Total from investment operations | | $2.85 | | | $(5.48 | ) | | $1.40 | | | $4.87 | | | $2.24 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.38 | ) | | $(0.15 | ) | | $(0.32 | ) | | $(0.21 | ) | | $(0.15 | ) |
From net realized gain on investments | | — | | | (0.99 | ) | | (2.47 | ) | | (2.06 | ) | | (0.31 | ) |
Total distributions declared to shareholders | | $(0.38 | ) | | $(1.14 | ) | | $(2.79 | ) | | $(2.27 | ) | | $(0.46 | ) |
Net asset value, end of period | | $14.38 | | | $11.91 | | | $18.53 | | | $19.92 | | | $17.32 | |
Total return (%) (k)(s) | | 25.11 | | | (31.58 | ) | | 7.04 | | | 28.95 | | | 14.86 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.34 | | | 1.30 | | | 1.30 | | | 1.36 | | | 1.39 | |
Net investment income | | 1.83 | | | 2.52 | | | 0.87 | | | 1.84 | | | 1.37 | |
Portfolio turnover | | 49 | | | 44 | | | 44 | | | 55 | | | 46 | |
Net assets at end of period (000 omitted) | | $206,006 | | | $179,067 | | | $224,339 | | | $14,973 | | | $10,994 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
13
MFS International Value Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS International Value Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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 affect 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 investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the
14
MFS International Value Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 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 Kingdom | | $7,404,875 | | $55,156,027 | | $— | | $62,560,902 |
Japan | | 29,361,951 | | 29,974,467 | | — | | 59,336,418 |
Switzerland | | — | | 32,623,648 | | — | | 32,623,648 |
France | | 6,030,797 | | 24,738,585 | | — | | 30,769,382 |
Netherlands | | 7,459,429 | | 15,301,627 | | — | | 22,761,056 |
Germany | | 9,577,085 | | 9,067,702 | | — | | 18,644,787 |
South Korea | | 511,252 | | 4,788,155 | | — | | 5,299,407 |
Sweden | | — | | 3,938,489 | | — | | 3,938,489 |
Finland | | — | | 3,857,771 | | — | | 3,857,771 |
Other Countries | | 9,222,149 | | 9,649,866 | | — | | 18,872,015 |
| Mutual Funds | | 10,344,652 | | — | | — | | 10,344,652 |
| Total Investments | | $79,912,190 | | $189,096,337 | | $— | | $269,008,527 |
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 12/31/08 | | $— | |
Accrued discounts/premiums | | — | |
Realized gain (loss) | | — | |
Change in unrealized appreciation (depreciation) | | (59,992 | ) |
Net purchases (sales) | | — | |
Transfers in and/or out of Level 3 | | 59,992 | |
| Balance as of 12/31/09 | | $— | |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
15
MFS International Value Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009:
| | | | | | |
| | | | | Asset Derivatives |
| | | | | Location on Statement of Assets and Liabilities | | Fair Value |
| Foreign Exchange Contracts | | Currency Options Purchased | | Total investments, at value | | $652,579 |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | |
| | | | | Investments
(i.e., Purchased Options) |
| Foreign Exchange Contracts | | Currency Options
Purchased | | $127,235 |
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.
16
MFS International Value Portfolio
Notes to Financial Statements – continued
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. 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 December 31, 2009, 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.
17
MFS International Value Portfolio
Notes to Financial Statements – continued
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 wash sale loss deferrals and foreign taxes.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $7,654,372 | | $7,394,194 |
| Long-term capital gain | | — | | 14,943,942 |
| Total distributions | | $7,654,372 | | $22,338,136 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $292,316,528 | |
| Gross appreciation | | 17,698,687 | |
| Gross depreciation | | (41,006,688 | ) |
| Net unrealized appreciation (depreciation) | | $(23,308,001 | ) |
| Undistributed ordinary income | | 4,423,531 | |
| Capital loss carryforwards | | (25,672,408 | ) |
| Other temporary differences | | (84,866 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(7,444,841 | ) |
| 12/31/17 | | (18,227,567 | ) |
| | $(25,672,408 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,823,810 | | $918,018 | | $— | | $5,480,998 |
| Service Class | | 5,830,562 | | 2,075,620 | | — | | 13,863,500 |
| Total | | $7,654,372 | | $2,993,638 | | $— | | $19,344,498 |
| (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 billion of average daily net assets | | 0.90% |
| Next $1 billion of average daily net assets | | 0.80% |
| Average daily net assets in excess of $2 billion | | 0.70% |
18
MFS International Value Portfolio
Notes to Financial Statements – continued
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $35,459, which equated to 0.0150% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0402% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $4,260 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $113,559,412 and $137,825,312, respectively.
19
MFS International Value Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 290,600 | | | $4,072,824 | | | 26,115 | | | $403,755 | |
Service Class | | 2,568,502 | | | 29,145,117 | | | 3,341,977 | | | 55,071,189 | |
| | 2,859,102 | | | $33,217,941 | | | 3,368,092 | | | $55,474,944 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 173,366 | | | $1,823,810 | | | 360,711 | | | $6,399,016 | |
Service Class | | 557,948 | | | 5,830,562 | | | 905,632 | | | 15,939,120 | |
| | 731,314 | | | $7,654,372 | | | 1,266,343 | | | $22,338,136 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (874,433 | ) | | $(10,178,448 | ) | | (1,836,376 | ) | | $(28,618,120 | ) |
Service Class | | (3,832,506 | ) | | (47,344,870 | ) | | (1,316,816 | ) | | (18,112,364 | ) |
| | (4,706,939 | ) | | $(57,523,318 | ) | | (3,153,192 | ) | | $(46,730,484 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (410,467 | ) | | $(4,281,814 | ) | | (1,449,550 | ) | | $(21,815,349 | ) |
Service Class | | (706,056 | ) | | (12,369,191 | ) | | 2,930,793 | | | 52,897,945 | |
| | (1,116,523 | ) | | $(16,651,005 | ) | | 1,481,243 | | | $31,082,596 | |
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 December 31, 2009, the fund’s commitment fee and interest expense were $3,601 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 | | — | | 85,961,608 | | (76,499,025 | ) | | 9,462,583 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $7,411 | | | $9,462,583 |
20
MFS International Value Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS International Value Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS International Value Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 International Value Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
21
MFS International Value Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
22
MFS International Value Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
23
MFS International Value Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Benjamin Stone Barnaby Wiener | | |
24
MFS International Value Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
25
MFS International Value Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
26
MFS International Value Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $6,771,116. The fund intends to pass through foreign tax credits of $624,387 for the fiscal year.
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MFS International Value Portfolio
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.
28
MFS® BLENDED RESEARCH® GROWTH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Blended Research Growth Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS Blended Research Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Apple, Inc. | | 4.1% |
| Google, Inc., “A” | | 3.2% |
| Microsoft Corp. | | 3.0% |
| Oracle Corp. | | 2.6% |
| International Business Machines Corp. | | 2.3% |
| Philip Morris International, Inc. | | 2.3% |
| Intel Corp. | | 2.2% |
| Hewlett-Packard Co. | | 2.2% |
| PepsiCo, Inc. | | 2.2% |
| Johnson & Johnson | | 2.1% |
| | |
| Equity sectors | | |
| Technology | | 27.0% |
| Health Care | | 15.0% |
| Consumer Staples | | 11.7% |
| Retailing | | 8.9% |
| Special Products & Services | | 5.8% |
| Industrial Goods & Services | | 5.8% |
| Basic Materials | | 5.7% |
| Financial Services | | 5.1% |
| Leisure | | 4.3% |
| Energy | | 3.5% |
| Autos & Housing | | 2.8% |
| Transportation | | 2.2% |
| Utilities & Communications | | 1.3% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Blended Research Growth Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Blended Research Growth Portfolio (the “fund”) provided a total return of 38.42%, while Service Class shares of the fund provided a total return of 38.07%. These compare with a return of 37.21% for the fund’s benchmark, the Russell 1000 Growth 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.
Contributors to Performance
Favorable stock selection in the health care sector contributed to the fund’s performance relative to the Russell 1000 Growth Index. The fund’s ownership of strong-performing eye care medical products maker Advanced Medical Optics (h) was a top relative contributor within this sector. Shares of Advanced Medical Optics jumped early in the year on news that Abbott Labs had an interest in acquiring the company.
Strong security selection in the basic materials sector also boosted results relative to the benchmark. Our holdings of commodity chemicals manufacturer Celanese Corp. and agrichemical products company Monsanto (h) had a positive impact on relative performance during the reporting period.
Security selection in the technology sector bolstered relative returns. Standout performers within this sector included computer and personal electronics maker Apple and integrated circuits maker Silicon Laboratories. Shares of Apple climbed as revenues and earnings increased year over year due to strong sales of its popular iPhone and Mac computers.
Individual strong performers in other sectors included online travel agent Priceline.com, casual-dining operator Brinker International (h), custom IT consulting and technology services provider Cognizant Technology Solutions, and engineering, design, construction and maintenance company Shaw Group (h). The timing of our ownership in shares of supplemental health and life insurance provider Aflac Inc. (h) also helped.
Detractors from Performance
A combination of stock selection and an underweighted position in the energy sector detracted from the fund’s relative results. Global integrated energy company Hess was among the fund’s top relative detractors for the reporting period.
Stock selection in the retailing sector was another negative area of relative performance. Not owning strong-performing internet retailer Amazon.com was a key factor in this result.
Several individual securities in other sectors that hindered relative results included for-profit education company Apollo Group, global biotech company Genzyme, defense contractor Lockheed Martin, and electricity provider Allegheny Energy (h). Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down due to a viral infection in one of its bioreactors. The timing of our ownership in shares of employer-sponsored retirement plan administrator Principal Financial Group (h), industrial manufacturer Caterpillar (h), and education services company ITT Educational Services (h) also hurt relative performance.
3
MFS Blended Research Growth Portfolio
Management Review – continued
The fund’s cash position held back from relative returns. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
Matthew Krummell
Portfolio Manager
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS Blended Research Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment (t)
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | Life (t) | | |
| | | Initial Class | | 12/18/07 | | 38.42% | | (8.08)% | | |
| | | Service Class | | 12/18/07 | | 38.07% | | (8.29)% | | |
Comparative benchmark
| | | | | | | | | | |
| | | Russell 1000 Growth Index (f) | | 37.21% | | (7.12)% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from the class inception date through the stated period end. (See Notes to Performance Summary.) |
Benchmark Definition
Russell 1000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
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.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Blended Research Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.60% | | $1,000.00 | | $1,225.22 | | $3.37 |
| | Hypothetical (h) | | 0.60% | | $1,000.00 | | $1,022.18 | | $3.06 |
| Service Class | | Actual | | 0.85% | | $1,000.00 | | $1,224.17 | | $4.77 |
| | Hypothetical (h) | | 0.85% | | $1,000.00 | | $1,020.92 | | $4.33 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Blended Research Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.1% | | | | | |
| Aerospace – 3.7% | | | |
| Lockheed Martin Corp. | | 652 | | $ | 49,128 |
| Northrop Grumman Corp. | | 787 | | | 43,954 |
| Precision Castparts Corp. | | 210 | | | 23,174 |
| United Technologies Corp. | | 573 | | | 39,772 |
| | | | | |
| | | | $ | 156,028 |
| | | | | |
| Apparel Manufacturers – 0.8% | | | |
| Phillips-Van Heusen Corp. | | 783 | | $ | 31,852 |
| | | | | |
| Automotive – 1.0% | | | |
| Johnson Controls, Inc. | | 1,550 | | $ | 42,222 |
| | | | | |
| Biotechnology – 3.6% | | | |
| Amgen, Inc. (a) | | 1,475 | | $ | 83,441 |
| Genzyme Corp. (a) | | 630 | | | 30,876 |
| Gilead Sciences, Inc. (a) | | 849 | | | 36,745 |
| | | | | |
| | | | $ | 151,062 |
| | | | | |
| Brokerage & Asset Managers – 0.3% | | | |
| TD AMERITRADE Holding Corp. (a) | | 706 | | $ | 13,682 |
| | | | | |
| Business Services – 3.2% | | | |
| Cognizant Technology Solutions Corp., “A” (a) | | 1,392 | | $ | 63,058 |
| Computer Sciences Corp. (a) | | 167 | | | 9,608 |
| MasterCard, Inc., “A” | | 121 | | | 30,974 |
| Visa, Inc., “A” | | 364 | | | 31,835 |
| | | | | |
| | | | $ | 135,475 |
| | | | | |
| Cable TV – 0.5% | | | |
| Time Warner Cable, Inc. | | 509 | | $ | 21,068 |
| | | | | |
| Chemicals – 3.5% | | | |
| 3M Co. | | 717 | | $ | 59,274 |
| Celanese Corp. | | 1,566 | | | 50,269 |
| Dow Chemical Co. | | 309 | | | 8,538 |
| Ecolab, Inc. | | 626 | | | 27,907 |
| | | | | |
| | | | $ | 145,988 |
| | | | | |
| Computer Software – 7.7% | | | |
| Adobe Systems, Inc. (a) | | 1,528 | | $ | 56,200 |
| Microsoft Corp. | | 4,162 | | | 126,899 |
| Oracle Corp. | | 4,399 | | | 107,951 |
| Rovi Corp. (a) | | 952 | | | 30,340 |
| | | | | |
| | | | $ | 321,390 |
| | | | | |
| Computer Software – Systems – 9.2% | | | |
| Apple, Inc. (a) | | 817 | | $ | 172,273 |
| Avnet, Inc. (a) | | 787 | | | 23,736 |
| Hewlett-Packard Co. | | 1,803 | | | 92,873 |
| International Business Machines Corp. | | 745 | | | 97,521 |
| | | | | |
| | | | $ | 386,403 |
| | | | | |
| Construction – 1.8% | | | |
| Lennox International, Inc. | | 806 | | $ | 31,466 |
| NVR, Inc. (a) | | 60 | | | 42,643 |
| | | | | |
| | | | $ | 74,109 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Consumer Products – 3.4% | | | |
| Kimberly-Clark Corp. | | 894 | | $ | 56,957 |
| Procter & Gamble Co. | | 1,426 | | | 86,458 |
| | | | | |
| | | | $ | 143,415 |
| | | | | |
| Consumer Services – 2.6% | | | |
| Apollo Group, Inc., “A” (a) | | 832 | | $ | 50,403 |
| Priceline.com, Inc. (a) | | 276 | | | 60,306 |
| | | | | |
| | | | $ | 110,709 |
| | | | | |
| Containers – 0.9% | | | |
| Owens-Illinois, Inc. (a) | | 1,158 | | $ | 38,063 |
| | | | | |
| Electrical Equipment – 1.1% | | | | | |
| Cooper Industries PLC | | 297 | | $ | 12,664 |
| Danaher Corp. | | 419 | | | 31,509 |
| | | | | |
| | | | $ | 44,173 |
| | | | | |
| Electronics – 4.4% | | | |
| Intel Corp. | | 4,554 | | $ | 92,902 |
| Jabil Circuit, Inc. | | 600 | | | 10,422 |
| Marvell Technology Group Ltd. (a) | | 1,448 | | | 30,046 |
| National Semiconductor Corp. | | 1,406 | | | 21,596 |
| Silicon Laboratories, Inc. (a) | | 595 | | | 28,762 |
| | | | | |
| | | | $ | 183,728 |
| | | | | |
| Energy – Integrated – 2.6% | | | |
| Exxon Mobil Corp. | | 685 | | $ | 46,710 |
| Hess Corp. | | 696 | | | 42,108 |
| Marathon Oil Corp. | | 687 | | | 21,448 |
| | | | | |
| | | | $ | 110,266 |
| | | | | |
| Food & Beverages – 5.1% | | | |
| Archer Daniels Midland Co. | | 1,250 | | $ | 39,138 |
| Coca-Cola Co. | | 655 | | | 37,335 |
| General Mills, Inc. | | 656 | | | 46,451 |
| PepsiCo, Inc. | | 1,512 | | | 91,930 |
| | | | | |
| | | | $ | 214,854 |
| | | | | |
| Food & Drug Stores – 0.6% | | | |
| Kroger Co. | | 1,239 | | $ | 25,437 |
| | | | | |
| Gaming & Lodging – 1.1% | | | |
| Las Vegas Sands Corp. (a) | | 909 | | $ | 13,580 |
| Royal Caribbean Cruises Ltd. (a) | | 1,316 | | | 33,268 |
| | | | | |
| | | | $ | 46,848 |
| | | | | |
| General Merchandise – 3.5% | | | |
| Macy’s, Inc. | | 2,348 | | $ | 39,352 |
| Target Corp. | | 692 | | | 33,472 |
| Wal-Mart Stores, Inc. | | 1,420 | | | 75,899 |
| | | | | |
| | | | $ | 148,723 |
| | | | | |
| Health Maintenance Organizations – 0.5% | | | |
| WellPoint, Inc. (a) | | 385 | | $ | 22,442 |
| | | | | |
7
MFS Blended Research Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Insurance – 2.2% | | | |
| Allied World Assurance Co. Holdings Ltd. | | 319 | | $ | 14,696 |
| MetLife, Inc. | | 1,064 | | | 37,612 |
| Prudential Financial, Inc. | | 814 | | | 40,505 |
| | | | | |
| | | | $ | 92,813 |
| | | | | |
| Internet – 3.2% | | | |
| Google, Inc., “A” (a) | | 218 | | $ | 135,156 |
| | | | | |
| Leisure & Toys – 1.2% | | | |
| Activision Blizzard, Inc. (a) | | 3,392 | | $ | 37,685 |
| Hasbro, Inc. | | 380 | | | 12,183 |
| | | | | |
| | | | $ | 49,868 |
| | | | | |
| Machinery & Tools – 1.0% | | | |
| Eaton Corp. | | 669 | | $ | 42,562 |
| | | | | |
| Major Banks – 1.6% | | | |
| Bank of New York Mellon Corp. | | 563 | | $ | 15,747 |
| Goldman Sachs Group, Inc. | | 294 | | | 49,639 |
| | | | | |
| | | | $ | 65,386 |
| | | | | |
| Medical & Health Technology & Services – 2.1% | | | |
| McKesson Corp. | | 750 | | $ | 46,875 |
| Medco Health Solutions, Inc. (a) | | 640 | | | 40,902 |
| | | | | |
| | | | $ | 87,777 |
| | | | | |
| Medical Equipment – 4.4% | | | |
| Medtronic, Inc. | | 1,844 | | $ | 81,099 |
| St. Jude Medical, Inc. (a) | | 467 | | | 17,176 |
| Thermo Fisher Scientific, Inc. (a) | | 842 | | | 40,155 |
| Waters Corp. (a) | | 754 | | | 46,718 |
| | | | | |
| | | | $ | 185,148 |
| | | | | |
| Network & Telecom – 1.9% | | | |
| Cisco Systems, Inc. (a) | | 2,629 | | $ | 62,938 |
| QUALCOMM, Inc. | | 338 | | | 15,636 |
| | | | | |
| | | | $ | 78,574 |
| | | | | |
| Oil Services – 0.9% | | | |
| Noble Corp. | | 414 | | $ | 16,850 |
| Transocean, Inc. (a) | | 246 | | | 20,369 |
| | | | | |
| | | | $ | 37,219 |
| | | | | |
| Other Banks & Diversified Financials – 1.0% | | | |
| American Express Co. | | 459 | | $ | 18,599 |
| People’s United Financial, Inc. | | 1,523 | | | 25,434 |
| | | | | |
| | | | $ | 44,033 |
| | | | | |
| Personal Computers & Peripherals – 0.6% | | | |
| NetApp, Inc. (a) | | 768 | | $ | 26,412 |
| | | | | |
| Pharmaceuticals – 4.4% | | | |
| Abbott Laboratories | | 1,469 | | $ | 79,311 |
| Johnson & Johnson | | 1,380 | | | 88,886 |
| Merck & Co., Inc. | | 471 | | | 17,210 |
| | | | | |
| | | | $ | 185,407 |
| | | | | |
| Railroad & Shipping – 1.0% | | | |
| Union Pacific Corp. | | 640 | | $ | 40,896 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| COMMON STOCKS – continued | |
| Restaurants – 1.5% | | | | |
| Darden Restaurants, Inc. | | 1,245 | | $ | 43,662 | |
| McDonald’s Corp. | | 300 | | | 18,732 | |
| | | | | | |
| | | | $ | 62,394 | |
| | | | | | |
| Specialty Chemicals – 1.3% | | | | |
| Air Products & Chemicals, Inc. | | 303 | | $ | 24,561 | |
| Praxair, Inc. | | 382 | | | 30,678 | |
| | | | | | |
| | | | $ | 55,239 | |
| | | | | | |
| Specialty Stores – 4.0% | | | | |
| Advance Auto Parts, Inc. | | 592 | | $ | 23,964 | |
| Limited Brands, Inc. | | 1,497 | | | 28,802 | |
| Nordstrom, Inc. | | 1,311 | | | 49,267 | |
| Staples, Inc. | | 1,276 | | | 31,377 | |
| Tiffany & Co. | | 771 | | | 33,153 | |
| | | | | | |
| | | | $ | 166,563 | |
| | | | | | |
| Tobacco – 3.2% | | | | |
| Altria Group, Inc. | | 1,902 | | $ | 37,336 | |
| Philip Morris International, Inc. | | 1,975 | | | 95,175 | |
| | | | | | |
| | | | $ | 132,511 | |
| | | | | | |
| Trucking – 1.2% | | | | |
| United Parcel Service, Inc., “B” | | 894 | | $ | 51,289 | |
| | | | | | |
| Utilities – Electric Power – 1.3% | | | | |
| PPL Corp. | | 983 | | $ | 31,761 | |
| Public Service Enterprise Group, Inc. | | 629 | | | 20,914 | |
| | | | | | |
| | | | $ | 52,675 | |
| | | | | | |
Total Common Stocks
(Identified Cost, $3,910,309) | | | | $ | 4,159,859 | |
| | | | | | |
|
| MONEY MARKET FUNDS (v) – 1.5% | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 64,225 | | $ | 64,225 | |
| | | | | | |
Total Investments
(Identified Cost, $3,974,534) | | | | $ | 4,224,084 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.6)% | | | | | (23,619 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 4,200,465 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (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. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS Blended Research Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $3,910,309) | | $4,159,859 | | | |
Underlying funds, at cost and value | | 64,225 | | | |
Total investments, at value (identified cost, $3,974,534) | | $4,224,084 | | | |
Receivables for | | | | | |
Dividends | | $5,577 | | | |
Receivable from investment adviser | | 1,719 | | | |
Other assets | | 325 | | | |
Total assets | | | | | $4,231,705 |
Liabilities | | | | | |
Payable to affiliates | | | | | |
Investment adviser | | $140 | | | |
Shareholder servicing costs | | 2 | | | |
Distribution and/or service fees | | 29 | | | |
Administrative services fee | | 55 | | | |
Payable for Trustees’ compensation | | 4 | | | |
Accrued expenses and other liabilities | | 31,010 | | | |
Total liabilities | | | | | $31,240 |
Net assets | | | | | $4,200,465 |
Net assets consist of | | | | | |
Paid-in capital | | $5,071,795 | | | |
Unrealized appreciation (depreciation) on investments | | 249,550 | | | |
Accumulated net realized gain (loss) on investments | | (1,120,880 | ) | | |
Net assets | | | | | $4,200,465 |
Shares of beneficial interest outstanding | | | | | 510,174 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $2,105,573 | | 255,817 | | $8.23 |
Service Class | | 2,094,892 | | 254,357 | | 8.24 |
See Notes to Financial Statements
9
MFS Blended Research Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
| Year ended 12/31/09 | | | | | |
Net investment income | | | | | |
Income | | | | | |
Dividends | | $66,391 | | | |
Interest | | 8 | | | |
Dividends from underlying funds | | 92 | | | |
Total investment income | | | | | $66,491 |
Expenses | | | | | |
Management fee | | $20,975 | | | |
Distribution and/or service fees | | 4,362 | | | |
Shareholder servicing costs | | 520 | | | |
Administrative services fee | | 10,000 | | | |
Trustees’ compensation | | 488 | | | |
Custodian fee | | 3,140 | | | |
Shareholder communications | | 5,811 | | | |
Auditing fees | | 42,481 | | | |
Legal fees | | 8,163 | | | |
Miscellaneous | | 8,238 | | | |
Total expenses | | | | | $104,178 |
Reduction of expenses by investment adviser | | (78,789 | ) | | |
Net expenses | | | | | $25,389 |
Net investment income | | | | | $41,102 |
Realized and unrealized gain (loss) on investments | | | | | |
Realized gain (loss) on investment transactions (identified cost basis) | | $(541,369 | ) | | |
Change in unrealized appreciation (depreciation) on investments | | $1,662,199 | | | |
Net realized and unrealized gain (loss) on investments | | | | | $1,120,830 |
Change in net assets from operations | | | | | $1,161,932 |
See Notes to Financial Statements
10
MFS Blended Research Growth Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $41,102 | | | $29,447 | |
Net realized gain (loss) on investments | | (541,369 | ) | | (579,511 | ) |
Net unrealized gain (loss) on investments | | 1,662,199 | | | (1,466,978 | ) |
Change in net assets from operations | | $1,161,932 | | | $(2,017,042 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(41,102 | ) | | $(29,447 | ) |
From tax return of capital | | (102 | ) | | (42 | ) |
Total distributions declared to shareholders | | $(41,204 | ) | | $(29,489 | ) |
Change in net assets from fund share transactions | | $41,204 | | | $29,489 | |
Total change in net assets | | $1,161,932 | | | $(2,017,042 | ) |
Net assets | | | | | | |
At beginning of period | | 3,038,533 | | | 5,055,575 | |
At end of period | | $4,200,465 | | | $3,038,533 | |
See Notes to Financial Statements
11
MFS Blended Research Growth Portfolio
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.
| | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 (c) | |
Net asset value, beginning of period | | $6.01 | | | $10.11 | | | $10.00 | |
| Income (loss) from investment operations | | | | | | | | | |
Net investment income (d) | | $0.09 | | | $0.07 | | | $0.00 | (w) |
Net realized and unrealized gain (loss) on investments | | 2.22 | | | (4.10 | ) | | 0.11 | |
Total from investment operations | | $2.31 | | | $(4.03 | ) | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | |
From net investment income | | $(0.09 | ) | | $(0.07 | ) | | $(0.00 | )(w) |
From tax return of capital | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) |
Total distributions declared to shareholders | | $(0.09 | ) | | $(0.07 | ) | | $(0.00 | )(w) |
Net asset value, end of period | | $8.23 | | | $6.01 | | | $10.11 | |
Total return (%) (k)(r)(s) | | 38.42 | | | (39.84 | ) | | 1.13 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | |
Expenses before expense reductions (f) | | 2.85 | | | 2.87 | | | 10.74 | (a) |
Expenses after expense reductions (f) | | 0.60 | | | 0.60 | | | 0.60 | (a) |
Net investment income | | 1.30 | | | 0.83 | | | 0.81 | (a) |
Portfolio turnover | | 74 | | | 50 | | | 0 | |
Net assets at end of period (000 omitted) | | $2,106 | | | $1,521 | | | $2,528 | |
See Notes to Financial Statements
12
MFS Blended Research Growth Portfolio
Financial Highlights – continued
| | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 (c) | |
Net asset value, beginning of period | | $6.02 | | | $10.11 | | | $10.00 | |
| Income (loss) from investment operations | | | | | | | | | |
Net investment income (d) | | $0.07 | | | $0.05 | | | $0.00 | (w) |
Net realized and unrealized gain (loss) on investments | | 2.22 | | | (4.09 | ) | | 0.11 | |
Total from investment operations | | $2.29 | | | $(4.04 | ) | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | |
From net investment income | | $(0.07 | ) | | $(0.05 | ) | | $(0.00 | )(w) |
From tax return of capital | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) |
Total distributions declared to shareholders | | $(0.07 | ) | | $(0.05 | ) | | $(0.00 | )(w) |
Net asset value, end of period | | $8.24 | | | $6.02 | | | $10.11 | |
Total return (%) (k)(r)(s) | | 38.07 | | | (39.96 | ) | | 1.13 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | |
Expenses before expense reductions (f) | | 3.10 | | | 3.12 | | | 10.99 | (a) |
Expenses after expense reductions (f) | | 0.85 | | | 0.85 | | | 0.85 | (a) |
Net investment income | | 1.05 | | | 0.58 | | | 0.56 | (a) |
Portfolio turnover | | 74 | | | 50 | | | 0 | |
Net assets at end of period (000 omitted) | | $2,095 | | | $1,517 | | | $2,528 | |
| (c) | | For the period from the commencement of the fund’s investment operations, December 18, 2007, through the stated period end. |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (w) | | Per share amount was less than $0.01. |
See Notes to Financial Statements
13
MFS Blended Research Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Blended Research Growth Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. The fund can invest in foreign securities. 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.
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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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. 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 affect 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 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
14
MFS Blended Research Growth Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities | | $4,159,859 | | $— | | $— | | $4,159,859 |
| Mutual Funds | | 64,225 | | — | | — | | 64,225 |
| Total Investments | | $4,224,084 | | $— | | $— | | $4,224,084 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 two 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.
15
MFS Blended Research Growth Portfolio
Notes to Financial Statements – continued
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.
During the year ended December 31, 2009, there were no significant adjustments due to differences between book and tax accounting.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $41,102 | | $29,447 |
| Tax return of capital (b) | | 102 | | 42 |
| Total distributions | | $41,204 | | $29,489 |
| | (b) | 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 12/31/09 | | | |
| Cost of investments | | $3,974,534 | |
| Gross appreciation | | 482,026 | |
| Gross depreciation | | (232,476 | ) |
| Net unrealized appreciation (depreciation) | | $249,550 | |
| Capital loss carryforwards | | (1,098,438 | ) |
| Post-October capital loss deferral | | (22,442 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $ (255,285 | ) |
| 12/31/17 | | (843,153 | ) |
| | $(1,098,438 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $22,774 | | $17,352 | | $51 | | $11 |
| Service Class | | 18,328 | | 12,095 | | 51 | | 31 |
| Total | | $41,102 | | $29,447 | | $102 | | $42 |
| (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 0.60% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 0.60% of average daily net assets for the Initial Class shares and 0.85% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009 this reduction amounted to $78,789 and is reflected as a reduction of total expenses in the Statements of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
16
MFS Blended Research Growth Portfolio
Notes to Financial Statements – continued
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $520, which equated to 0.0149% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.2858% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $62 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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.
On December 18, 2007, MFS purchased 250,000 shares of both the Initial Class and Service Class for an aggregate amount of $5,000,000. At December 31, 2009, MFS was the sole shareholder of both classes.
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $2,631,094 and $2,547,026, 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 12/31/09 | | Year ended 12/31/08 |
| | | Shares | | Amount | | Shares | | Amount |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | |
Initial Class | | 2,743 | | $22,825 | | 2,989 | | $17,363 |
Service Class | | 2,207 | | 18,379 | | 2,087 | | 12,126 |
| | 4,950 | | $41,204 | | 5,076 | | $29,489 |
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
17
MFS Blended Research Growth Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the fund’s commitment fee and interest expense were $50 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 | | — | | 201,427 | | (137,202 | ) | | 64,225 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $92 | | | $64,225 |
18
MFS Blended Research Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholder of MFS Blended Research Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Blended Research Growth Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, 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 periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers. 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 Blended Research Growth Portfolio as of December 31, 2009, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
19
MFS Blended Research Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
20
MFS Blended Research Growth Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
21
MFS Blended Research Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Matthew Krummell | | |
22
MFS Blended Research Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for the one-year period ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over the one year period ended December 31, 2008. (The Fund commenced operations in December 2007.) The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-year period. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
23
MFS Blended Research Growth Portfolio
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each below the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. They noted that the Fund’s advisory fee rate schedule is not currently subject to any breakpoints. However, the Trustees concluded that the Fund was still too small to achieve economies of scale and that the fees were reasonable in light of the nature and quality of services provided by MFS.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
24
MFS Blended Research Growth Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
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MFS Blended Research Growth Portfolio
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.
26
MFS® BLENDED RESEARCH® VALUE PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Blended Research Value Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS Blended Research Value Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Exxon Mobil Corp. | | 4.9% |
| JPMorgan Chase & Co. | | 3.5% |
| AT&T, Inc. | | 3.1% |
| Chevron Corp. | | 2.9% |
| Pfizer, Inc. | | 2.6% |
| Wells Fargo & Co. | | 2.5% |
| Bank of America Corp. | | 2.5% |
| General Electric Co. | | 2.0% |
| American Express Co. | | 1.9% |
| Goldman Sachs Group, Inc. | | 1.8% |
| | |
| Equity sectors | | |
| Financial Services | | 24.3% |
| Energy | | 16.1% |
| Utilities & Communications | | 15.6% |
| Health Care | | 8.5% |
| Industrial Goods & Services | | 7.7% |
| Leisure | | 6.8% |
| Basic Materials | | 4.8% |
| Consumer Staples | | 4.4% |
| Retailing | | 3.2% |
| Autos & Housing | | 2.8% |
| Technology | | 2.1% |
| Transportation | | 1.7% |
| Special Products & Services | | 1.1% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
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MFS Blended Research Value Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Blended Research Value Portfolio (the “fund”) provided a total return of 20.90%, while Service Class shares of the fund provided a total return of 20.64%. These compare with a return of 19.69% for the fund’s benchmark, the Russell 1000 Value 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 to almost 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.
Contributors to Performance
Strong stock selection in the utilities and communications sector boosted performance relative to the Russell 1000 Value Index. Our overweighted position in strong-performing entertainment and communications company Virgin Media was the principal driver in this sector.
Stock selection in the consumer staples sector was another positive factor for relative performance. Holdings of soft-drink company The Pepsi Bottling Group, Inc. (h) were among the fund’s top contributors during the reporting period.
Stock selection in the financial services sector also boosted relative results. Our underweighted position and the timing of our transactions in financial services firm Citigroup benefited relative performance since, unlike the benchmark, we avoided much of the negative impact of the stock’s price decline. The timing of our ownership in financial services firm Wells Fargo, and our overweighted positions in investment banking firm Goldman Sachs and real estate firm Mack-Cali Realty, also helped. Shares of Goldman Sachs climbed as the environment for fixed income trading improved and mergers and acquisitions activity increased.
Stocks in other sectors that were among the fund’s top contributors included computer hard drive maker Western Digital, cruise line operator Royal Caribbean Cruises, and packing solutions provider MeadWestvaco. During the early part of the reporting period, holdings of pharmaceutical company Schering-Plough (h) bolstered relative performance. Shares of Schering-Plough rose after rival Merck announced plans to merge the company in a stock and cash deal that further consolidated the pharmaceutical industry.
Detractors from Performance
Stock selection in the energy sector was the primary detractor from relative performance. An overweighted position in integrated gas and oil company Exxon Mobil held back results as this stock underperformed the benchmark during the reporting period.
Elsewhere, holdings of financial services firm Bank of America, health insurance company UnitedHealth Group (h), grocery retailer SUPERVALU (h), banking firm Sun Trust Bank (h), and electric power generator American Electric Power (h) were among the fund’s top detractors. The timing of our transactions in financial services firm Morgan Stanley and wireless services provider Sprint Nextel also dampened relative performance as the fund missed much of the stock’s positive price gains during the reporting
3
MFS Blended Research Value Portfolio
Management Review – continued
period. Not holding auto maker Ford Motor Company and precious metals company Freeport-McMoRan Copper & Gold, both strong-performing benchmark constituents, also hurt relative returns.
Respectfully,
Jonathan Sage
Portfolio Manager
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
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MFS Blended Research Value Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment (t)
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | Life (t) | | |
| | | Initial Class | | 12/18/07 | | 20.90% | | (10.43)% | | |
| | | Service Class | | 12/18/07 | | 20.64% | | (10.67)% | | |
|
| Comparative benchmark |
| | | Russell 1000 Value Index (f) | | 19.69% | | (12.08)% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from the commencement of the class inception date through the stated period end. (See Notes to Performance Summary.) |
Benchmark Definition
Russell 1000 Value Index – constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values.
It is not possible to invest directly in an index.
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.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
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MFS Blended Research Value Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized Expense Ratio | | Beginning Account Value 7/01/09 | �� | Ending Account Value 12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.60% | | $1,000.00 | | $1,220.39 | | $3.36 |
| | Hypothetical (h) | | 0.60% | | $1,000.00 | | $1,022.18 | | $3.06 |
| Service Class | | Actual | | 0.85% | | $1,000.00 | | $1,219.73 | | $4.76 |
| | Hypothetical (h) | | 0.85% | | $1,000.00 | | $1,020.92 | | $4.33 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
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MFS Blended Research Value Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.1% | | | |
| Aerospace – 2.4% | | | | | |
| Lockheed Martin Corp. | | 400 | | $ | 30,133 |
| Northrop Grumman Corp. | | 1,160 | | | 64,786 |
| | | | | |
| | | | $ | 94,919 |
| | | | | |
| Airlines – 0.4% | | | | | |
| Copa Holdings S.A., “A” | | 320 | | $ | 17,430 |
| | | | | |
| Apparel Manufacturers – 0.4% | | | | | |
| Phillips-Van Heusen Corp. | | 350 | | $ | 14,238 |
| | | | | |
| Automotive – 1.1% | | | | | |
| Johnson Controls, Inc. | | 1,020 | | $ | 27,785 |
| TRW Automotive Holdings Corp. (a) | | 620 | | | 14,806 |
| | | | | |
| | | | $ | 42,591 |
| | | | | |
| Biotechnology – 0.2% | | | | | |
| Amgen, Inc. (a) | | 170 | | $ | 9,617 |
| | | | | |
| Broadcasting – 1.6% | | | | | |
| Time Warner, Inc. | | 1,793 | | $ | 52,248 |
| Walt Disney Co. | | 350 | | | 11,288 |
| | | | | |
| | | | $ | 63,536 |
| | | | | |
| Business Services – 0.3% | | | | | |
| Western Union Co. | | 700 | | $ | 13,195 |
| | | | | |
| Cable TV – 1.4% | | | | | |
| Comcast Corp., “A” | | 1,110 | | $ | 18,715 |
| Time Warner Cable, Inc. | | 909 | | | 37,624 |
| | | | | |
| | | | $ | 56,339 |
| | | | | |
| Chemicals – 2.8% | | | | | |
| 3M Co. | | 380 | | $ | 31,415 |
| Celanese Corp. | | 720 | | | 23,112 |
| Dow Chemical Co. | | 830 | | | 22,933 |
| PPG Industries, Inc. | | 590 | | | 34,539 |
| | | | | |
| | | | $ | 111,999 |
| | | | | |
| Computer Software – Systems – 0.3% | | | |
| Avnet, Inc. (a) | | 400 | | $ | 12,064 |
| | | | | |
| Construction – 1.7% | | | | | |
| Lennox International, Inc. | | 620 | | $ | 24,205 |
| Mohawk Industries, Inc. (a) | | 220 | | | 10,472 |
| NVR, Inc. (a) | | 46 | | | 32,693 |
| | | | | |
| | | | $ | 67,370 |
| | | | | |
| Consumer Products – 1.2% | | | | | |
| Kimberly-Clark Corp. | | 320 | | $ | 20,387 |
| Newell Rubbermaid, Inc. | | 1,280 | | | 19,213 |
| Procter & Gamble Co. | | 110 | | | 6,669 |
| | | | | |
| | | | $ | 46,269 |
| | | | | |
| Consumer Services – 0.8% | | | | | |
| Apollo Group, Inc., “A” (a) | | 400 | | $ | 24,232 |
| Service Corp. International | | 1,130 | | | 9,255 |
| | | | | |
| | | | $ | 33,487 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Containers – 0.3% | | | | | |
| Owens-Illinois, Inc. (a) | | 430 | | $ | 14,134 |
| | | | | |
| Electrical Equipment – 3.3% | | | | | |
| General Electric Co. | | 5,270 | | $ | 79,735 |
| Tyco Electronics Ltd. | | 1,290 | | | 31,670 |
| WESCO International, Inc. (a) | | 760 | | | 20,528 |
| | | | | |
| | | | $ | 131,933 |
| | | | | |
| Electronics – 1.2% | | | | | |
| Marvell Technology Group Ltd. (a) | | 790 | | $ | 16,393 |
| Micron Technology, Inc. (a) | | 1,640 | | | 17,318 |
| National Semiconductor Corp. | | 1,000 | | | 15,360 |
| | | | | |
| | | | $ | 49,071 |
| | | | | |
| Energy – Independent – 2.6% | | | | | |
| Anadarko Petroleum Corp. | | 320 | | $ | 19,974 |
| Apache Corp. | | 390 | | | 40,236 |
| Occidental Petroleum Corp. | | 120 | | | 9,762 |
| XTO Energy, Inc. | | 740 | | | 34,432 |
| | | | | |
| | | | $ | 104,404 |
| | | | | |
| Energy – Integrated – 11.5% | | | | | |
| Chevron Corp. | | 1,500 | | $ | 115,485 |
| ConocoPhillips | | 580 | | | 29,621 |
| Exxon Mobil Corp. | | 2,860 | | | 195,023 |
| Hess Corp. | | 1,090 | | | 65,945 |
| Marathon Oil Corp. | | 1,610 | | | 50,264 |
| | | | | |
| | | | $ | 456,338 |
| | | | | |
| Engineering – Construction – 0.2% | | | |
| Fluor Corp. | | 170 | | $ | 7,657 |
| | | | | |
| Food & Beverages – 2.5% | | | | | |
| Archer Daniels Midland Co. | | 1,200 | | $ | 37,572 |
| Coca-Cola Co. | | 200 | | | 11,400 |
| General Mills, Inc. | | 390 | | | 27,616 |
| Kraft Foods, Inc.,”A” | | 810 | | | 22,016 |
| | | | | |
| | | | $ | 98,604 |
| | | | | |
| Forest & Paper Products – 0.6% | | | | | |
| MeadWestvaco Corp. | | 860 | | $ | 24,622 |
| | | | | |
| Gaming & Lodging – 1.1% | | | | | |
| Las Vegas Sands Corp. (a) | | 830 | | $ | 12,400 |
| Royal Caribbean Cruises Ltd. (a) | | 1,200 | | | 30,336 |
| | | | | |
| | | | $ | 42,736 |
| | | | | |
| General Merchandise – 0.9% | | | | | |
| Macy’s, Inc. | | 2,190 | | $ | 36,704 |
| | | | | |
| Health Maintenance Organizations – 1.1% | | | |
| Coventry Health Care, Inc. (a) | | 460 | | $ | 11,173 |
| WellPoint, Inc. (a) | | 550 | | | 32,060 |
| | | | | |
| | | | $ | 43,233 |
| | | | | |
7
MFS Blended Research Value Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Insurance – 5.8% | | | | | |
| Aflac, Inc. | | 330 | | $ | 15,263 |
| Allied World Assurance Co. Holdings Ltd. | | 360 | | | 16,585 |
| Chubb Corp. | | 570 | | | 28,033 |
| Endurance Specialty Holdings Ltd. | | 640 | | | 23,827 |
| MetLife, Inc. | | 1,310 | | | 46,309 |
| Prudential Financial, Inc. | | 990 | | | 49,262 |
| Travelers Cos., Inc. | | 1,010 | | | 50,359 |
| | | | | |
| | | | $ | 229,638 |
| | | | | |
| Leisure & Toys – 1.2% | | | | | |
| Activision Blizzard, Inc. (a) | | 2,690 | | $ | 29,886 |
| Hasbro, Inc. | | 560 | | | 17,954 |
| | | | | |
| | | | $ | 47,840 |
| | | | | |
| Machinery & Tools – 1.4% | | | | | |
| Eaton Corp. | | 430 | | $ | 27,357 |
| Timken Co. | | 1,170 | | | 27,741 |
| | | | | |
| | | | $ | 55,098 |
| | | | | |
| Major Banks – 13.4% | | | | | |
| Bank of America Corp. | | 6,552 | | $ | 98,673 |
| Bank of New York Mellon Corp. | | 1,100 | | | 30,767 |
| Goldman Sachs Group, Inc. | | 420 | | | 70,913 |
| JPMorgan Chase & Co. | | 3,330 | | | 138,761 |
| Morgan Stanley | | 950 | | | 28,120 |
| PNC Financial Services Group, Inc. | | 700 | | | 36,953 |
| Regions Financial Corp. | | 3,350 | | | 17,722 |
| State Street Corp. | | 270 | | | 11,756 |
| Wells Fargo & Co. | | 3,760 | | | 101,482 |
| | | | | |
| | | | $ | 535,147 |
| | | | | |
| Medical & Health Technology & Services – 2.1% | | | |
| AmerisourceBergen Corp. | | 620 | | $ | 16,163 |
| Lincare Holdings, Inc. (a) | | 840 | | | 31,181 |
| McKesson Corp. | | 580 | | | 36,250 |
| | | | | |
| | | | $ | 83,594 |
| | | | | |
| Metals & Mining – 0.5% | | | | | |
| Cliffs Natural Resources, Inc. | | 480 | | $ | 22,123 |
| | | | | |
| Natural Gas – Distribution – 1.8% | | | | | |
| Questar Corp. | | 870 | | $ | 36,166 |
| Sempra Energy | | 610 | | | 34,148 |
| | | | | |
| | | | $ | 70,314 |
| | | | | |
| Natural Gas – Pipeline – 1.7% | | | | | |
| El Paso Corp. | | 1,970 | | $ | 19,365 |
| Williams Cos., Inc. | | 2,210 | | | 46,587 |
| | | | | |
| | | | $ | 65,952 |
| | | | | |
| Oil Services – 2.0% | | | | | |
| Halliburton Co. | | 1,590 | | $ | 47,843 |
| Schlumberger Ltd. | | 130 | | | 8,462 |
| Smith International, Inc. | | 800 | | | 21,736 |
| | | | | |
| | | | $ | 78,041 |
| | | | | |
| Other Banks & Diversified Financials – 2.9% | | | |
| American Express Co. | | 1,830 | | $ | 74,152 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Other Banks & Diversified Financials – continued | | | |
| Citigroup, Inc. | | 2,540 | | $ | 8,407 |
| New York Community Bancorp, Inc. | | 2,180 | | | 31,632 |
| | | | | |
| | | | $ | 114,191 |
| | | | | |
| Personal Computers & Peripherals – 0.6% | | | |
| Western Digital Corp. (a) | | 510 | | $ | 22,517 |
| | | | | |
| Pharmaceuticals – 5.1% | | | | | |
| Eli Lilly & Co. | | 520 | | $ | 18,569 |
| Johnson & Johnson | | 1,100 | | | 70,851 |
| Merck & Co., Inc. | | 290 | | | 10,597 |
| Pfizer, Inc. | | 5,700 | | | 103,683 |
| | | | | |
| | | | $ | 203,700 |
| | | | | |
| Pollution Control – 0.4% | | | | | |
| Republic Services, Inc. | | 562 | | $ | 15,910 |
| | | | | |
| Printing & Publishing – 0.9% | | | | | |
| Lamar Advertising Co., “A” (a) | | 1,110 | | $ | 34,510 |
| | | | | |
| Railroad & Shipping – 0.9% | | | | | |
| CSX Corp. | | 730 | | $ | 35,398 |
| | | | | |
| Real Estate – 2.2% | | | | | |
| Annaly Mortgage Management, Inc., REIT | | 1,200 | | $ | 20,820 |
| Equity Residential, REIT | | 850 | | | 28,713 |
| Mack-Cali Realty Corp., REIT | | 1,110 | | | 38,373 |
| | | | | |
| | | | $ | 87,906 |
| | | | | |
| Restaurants – 0.6% | | | | | |
| Darden Restaurants, Inc. | | 700 | | $ | 24,549 |
| | | | | |
| Specialty Chemicals – 0.6% | | | | | |
| Cytec Industries, Inc. | | 660 | | $ | 24,037 |
| | | | | |
| Specialty Stores – 1.9% | | | | | |
| Home Depot, Inc. | | 1,410 | | $ | 40,791 |
| Limited Brands, Inc. | | 1,050 | | | 20,202 |
| Staples, Inc. | | 560 | | | 13,770 |
| | | | | |
| | | | $ | 74,763 |
| | | | | |
| Telecommunications – Wireless – 0.4% | | | |
| Sprint Nextel Corp. (a) | | 4,530 | | $ | 16,580 |
| | | | | |
| Telephone Services – 6.1% | | | | | |
| AT&T, Inc. | | 4,380 | | $ | 122,771 |
| CenturyTel, Inc. | | 1,297 | | | 46,964 |
| Verizon Communications, Inc. | | 850 | | | 28,161 |
| Virgin Media, Inc. | | 2,690 | | | 45,273 |
| | | | | |
| | | | $ | 243,169 |
| | | | | |
| Tobacco – 0.7% | | | | | |
| Philip Morris International, Inc. | | 240 | | $ | 11,566 |
| Reynolds American, Inc. | | 320 | | | 16,950 |
| | | | | |
| | | | $ | 28,516 |
| | | | | |
| Trucking – 0.4% | | | | | |
| FedEx Corp. | | 210 | | $ | 17,525 |
| | | | | |
| Utilities – Electric Power – 5.6% | | | |
| AES Corp. (a) | | 2,410 | | $ | 32,077 |
| American Electric Power Co., Inc. | | 720 | | | 25,049 |
8
MFS Blended Research Value Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Utilities – Electric Power – continued | | | |
| Constellation Energy Group, Inc. | | 1,190 | | $ | 41,852 |
| Dominion Resources, Inc. | | 800 | | | 31,136 |
| Edison International | | 520 | | | 18,086 |
| PG&E Corp. | | 1,210 | | | 54,027 |
| Public Service Enterprise Group, Inc. | | 680 | | | 22,610 |
| | | | | |
| | | | $ | 224,837 |
| | | | | |
Total Common Stocks
(Identified Cost, $4,169,693) | | | | $ | 3,948,345 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| MONEY MARKET FUNDS (v) – 1.5% | | | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 57,659 | | $ | 57,659 | |
| | | | | | |
Total Investments
(Identified Cost, $4,227,352) | | | | $ | 4,006,004 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.6)% | | | | | (22,878 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 3,983,126 | |
| | | | | | |
| (a) | Non-income producing security. |
| (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. |
The following abbreviations are used in this report and are defined:
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Blended Research Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $4,169,693) | | $3,948,345 | | | |
Underlying funds, at cost and value | | 57,659 | | | |
Total investments, at value (identified cost, $4,227,352) | | $4,006,004 | | | |
Receivables for | | | | | |
Dividends | | $4,759 | | | |
Receivable from investment adviser | | 3,023 | | | |
Other assets | | 320 | | | |
Total assets | | | | | $4,014,106 |
Liabilities | | | | | |
Payable to affiliates | | | | | |
Investment adviser | | $132 | | | |
Shareholder servicing costs | | 2 | | | |
Distribution and/or service fees | | 27 | | | |
Administrative services fee | | 56 | | | |
Payable for Trustees’ compensation | | 5 | | | |
Accrued expenses and other liabilities | | 30,758 | | | |
Total liabilities | | | | | $30,980 |
Net assets | | | | | $3,983,126 |
Net assets consist of | | | | | |
Paid-in capital | | $5,157,668 | | | |
Unrealized appreciation (depreciation) on investments | | (221,348 | ) | | |
Accumulated net realized gain (loss) on investments | | (953,194 | ) | | |
Net assets | | | | | $3,983,126 |
Shares of beneficial interest outstanding | | | | | 524,867 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $1,996,629 | | 263,169 | | $7.59 |
Service Class | | 1,986,497 | | 261,698 | | 7.59 |
See Notes to Financial Statements
10
MFS Blended Research Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
Year ended 12/31/09 | | | | | | |
Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $93,940 | | | | |
Interest | | 29 | | | | |
Dividends from underlying funds | | 94 | | | | |
Total investment income | | | | | $94,063 | |
Expenses | | | | | | |
Management fee | | $20,251 | | | | |
Distribution and/or service fees | | 4,212 | | | | |
Shareholder servicing costs | | 503 | | | | |
Administrative services fee | | 10,000 | | | | |
Trustees’ compensation | | 526 | | | | |
Custodian fee | | 3,116 | | | | |
Shareholder communications | | 5,817 | | | | |
Auditing fees | | 42,481 | | | | |
Legal fees | | 8,163 | | | | |
Miscellaneous | | 8,997 | | | | |
Total expenses | | | | | $104,066 | |
Fees paid indirectly | | (2 | ) | | | |
Reduction of expenses by investment adviser | | (79,547 | ) | | | |
Net expenses | | | | | $24,517 | |
Net investment income | | | | | $69,546 | |
Realized and unrealized gain (loss) on investments | | | | | | |
Realized gain (loss) on investment transactions (identified cost basis) | | | | | $(400,738 | ) |
Change in unrealized appreciation (depreciation) on investments | | | | | $1,015,945 | |
Net realized and unrealized gain (loss) on investments | | | | | $615,207 | |
Change in net assets from operations | | | | | $684,753 | |
See Notes to Financial Statements
11
MFS Blended Research Value Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $69,546 | | | $83,563 | |
Net realized gain (loss) on investments | | (400,738 | ) | | (552,456 | ) |
Net unrealized gain (loss) on investments | | 1,015,945 | | | (1,270,704 | ) |
Change in net assets from operations | | $684,753 | | | $(1,739,597 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(69,546 | ) | | $(83,563 | ) |
From tax return of capital | | (2,958 | ) | | (7,840 | ) |
Total distributions declared to shareholders | | $(72,504 | ) | | $(91,403 | ) |
Change in net assets from fund share transactions | | $72,504 | | | $91,403 | |
Total change in net assets | | $684,753 | | | $(1,739,597 | ) |
| Net assets | | | | | | |
At beginning of period | | 3,298,373 | | | 5,037,970 | |
At end of period | | $3,983,126 | | | $3,298,373 | |
See Notes to Financial Statements
12
MFS Blended Research Value Portfolio
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.
| | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 (c) | |
Net asset value, beginning of period | | $6.40 | | | $10.07 | | | $10.00 | |
| Income (loss) from investment operations | | | | | | | | | |
Net investment income (d) | | $0.14 | | | $0.18 | | | $0.01 | |
Net realized and unrealized gain (loss) on investments | | 1.20 | | | (3.66 | ) | | 0.07 | |
Total from investment operations | | $1.34 | | | $(3.48 | ) | | $0.08 | |
| Less distributions declared to shareholders | | | | | | | | | |
From net investment income | | $(0.14 | ) | | $(0.17 | ) | | $(0.01 | ) |
From net realized gain on investments | | — | | | — | | | (0.00 | )(w) |
From tax return of capital | | (0.01 | ) | | (0.02 | ) | | (0.00 | )(w) |
Total distributions declared to shareholders | | $(0.15 | ) | | $(0.19 | ) | | $(0.01 | ) |
Net asset value, end of period | | $7.59 | | | $6.40 | | | $10.07 | |
Total return (%) (k)(r)(s) | | 20.90 | | | (34.44 | ) | | 0.80 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | |
Expenses before expense reductions (f) | | 2.96 | | | 2.79 | | | 10.80 | (a) |
Expenses after expense reductions (f) | | 0.60 | | | 0.60 | | | 0.60 | (a) |
Net investment income | | 2.17 | | | 2.10 | | | 2.22 | (a) |
Portfolio turnover | | 50 | | | 49 | | | 0 | |
Net assets at end of period (000 omitted) | | $1,997 | | | $1,651 | | | $2,519 | |
See Notes to Financial Statements
13
MFS Blended Research Value Portfolio
Financial Highlights – continued
| | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 (c) | |
| | | | | | | | | |
Net asset value, beginning of period | | $6.40 | | | $10.07 | | | $10.00 | |
| Income (loss) from investment operations | | | | | | | | | |
Net investment income (d) | | $0.13 | | | $0.16 | | | $0.01 | |
Net realized and unrealized gain (loss) on investments | | 1.19 | | | (3.66 | ) | | 0.07 | |
Total from investment operations | | $1.32 | | | $(3.50 | ) | | $0.08 | |
| Less distributions declared to shareholders | | | | | | | | | |
From net investment income | | $(0.13 | ) | | $(0.16 | ) | | $(0.01 | ) |
From net realized gain on investments | | — | | | — | | | (0.00 | )(w) |
From tax return of capital | | (0.00 | )(w) | | (0.01 | ) | | (0.00 | )(w) |
Total distributions declared to shareholders | | $(0.13 | ) | | $(0.17 | ) | | $(0.01 | ) |
Net asset value, end of period | | $7.59 | | | $6.40 | | | $10.07 | |
Total return (%) (k)(r)(s) | | 20.64 | | | (34.66 | ) | | 0.80 | (n) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | |
Expenses before expense reductions (f) | | 3.21 | | | 3.04 | | | 11.05 | (a) |
Expenses after expense reductions (f) | | 0.85 | | | 0.85 | | | 0.85 | (a) |
Net investment income | | 1.95 | | | 1.85 | | | 1.97 | (a) |
Portfolio turnover | | 50 | | | 49 | | | 0 | |
Net assets at end of period (000 omitted) | | $1,986 | | | $1,647 | | | $2,519 | |
| (c) | | For the period from the commencement of the fund’s investment operations, December 18, 2007, through the stated period end. |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (w) | | Per share amount was less than $0.01. |
See Notes to Financial Statements
14
MFS Blended Research Value Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Blended Research Value Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
15
MFS Blended Research Value Portfolio
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities | | $3,948,345 | | $— | | $— | | $3,948,345 |
| Mutual Funds | | 57,659 | | — | | — | | 57,659 |
| Total Investments | | $4,006,004 | | $— | | $— | | $4,006,004 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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. Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
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. 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 December 31, 2009, 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
16
MFS Blended Research Value Portfolio
Notes to Financial Statements – continued
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 wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $69,546 | | $83,563 |
| Tax return of capital (a) | | 2,958 | | 7,840 |
| Total distributions | | $72,504 | | $91,403 |
| | (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 12/31/09 | | | |
| Cost of investments | | $4,231,657 | |
| Gross appreciation | | 316,624 | |
| Gross depreciation | | (542,277 | ) |
| Net unrealized appreciation (depreciation) | | $(225,653 | ) |
| Capital loss carryforwards | | (946,638 | ) |
| Post-October capital loss deferral | | (2,251 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(387,449 | ) |
12/31/17 | | (559,189 | ) |
| | $(946,638 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $36,943 | | $44,203 | | $1,482 | | $4,147 |
| Service Class | | 32,603 | | 39,360 | | 1,476 | | 3,693 |
| Total distributions | | $69,546 | | $83,563 | | $2,958 | | $7,840 |
| (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 0.60% of the fund’s average daily net assets.
17
MFS Blended Research Value Portfolio
Notes to Financial Statements – continued
The investment adviser 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 the total annual operating expenses of the fund do not exceed 0.60% of average daily net assets for the Initial Class shares and 0.85% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $79,547 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $503, which equated to 0.0149% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.2961% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $60 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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.
On December 18, 2007, MFS purchased 250,000 shares of both the Initial Class and Service Class for an aggregate amount of $5,000,000. At December 31, 2009, MFS was the sole shareholder of both classes.
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $1,780,675 and $1,666,993, respectively.
18
MFS Blended Research Value Portfolio
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 12/31/09 | | Year ended 12/31/08 |
| | | Shares | | Amount | | Shares | | Amount |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | |
| Initial Class | | 5,009 | | $38,425 | | 7,901 | | $48,350 |
| Service Class | | 4,438 | | 34,079 | | 7,023 | | 43,053 |
| | 9,447 | | $72,504 | | 14,924 | | $91,403 |
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 December 31, 2009, the fund’s commitment fee and interest expense were $49 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 | | — | | 245,454 | | (187,795 | ) | | 57,659 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $94 | | | $57,659 |
19
MFS Blended Research Value Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholder of
MFS Blended Research Value Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Blended Research Value Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, 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 periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers. 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 Blended Research Value Portfolio as of December 31, 2009, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
20
MFS Blended Research Value Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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 (4) (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) |
21
MFS Blended Research Value Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| | | |
Mark D. Fischer (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS Blended Research Value Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Jonathan Sage | | |
23
MFS Blended Research Value Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for the one-year period ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over the one year period ended December 31, 2008. (The Fund commenced operations in December 2007.) The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-year period. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
24
MFS Blended Research Value Portfolio
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily
cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each below the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. They noted that the Fund’s advisory fee rate schedule is not currently subject to any breakpoints. However, the Trustees concluded that the Fund was still too small to achieve economies of scale and that the fees were reasonable in light of the nature and quality of services provided by MFS.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
25
MFS Blended Research Value Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (Unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
26
MFS Blended Research Value Portfolio
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.
27
MFS® GLOBAL GROWTH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Growth Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Global Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Nestle S.A. | | 2.4% |
| Oracle Corp. | | 1.8% |
| Google, Inc., “A” | | 1.8% |
| Accenture Ltd., “A” | | 1.7% |
| MasterCard, Inc., “A” | | 1.6% |
| Cisco Systems, Inc. | | 1.6% |
| Johnson & Johnson | | 1.5% |
| Procter & Gamble Co. | | 1.5% |
| TOTAL S.A. | | 1.5% |
| Halliburton Co. | | 1.5% |
| | |
| Equity sectors | | |
| Health Care | | 16.5% |
| Financial Services | | 14.0% |
| Technology | | 13.6% |
| Consumer Staples | | 13.0% |
| Retailing | | 8.1% |
| Energy | | 7.4% |
| Special Products & Services | | 7.2% |
| Basic Materials | | 6.8% |
| Industrial Goods & Services | | 4.3% |
| Leisure | | 4.0% |
| Utilities & Communications | | 3.8% |
| |
| Country weightings (w) | | |
| United States | | 42.9% |
| Switzerland | | 9.6% |
| United Kingdom | | 8.7% |
| France | | 7.4% |
| Japan | | 6.4% |
| Germany | | 5.4% |
| China | | 2.0% |
| Taiwan | | 1.8% |
| Brazil | | 1.8% |
| Other Countries | | 14.0% |
| (w) | Country weightings are based on the valuation currency of each security. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Global Growth Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Global Growth Portfolio (the “fund”) provided a total return of 39.81%, while Service Class shares of the fund provided a total return of 39.43%. These returns compare with a return of 38.10% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) All Country World Growth Index. The fund’s other benchmark, the MSCI World Growth Index, generated a return of 33.85%.
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 to almost 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.
Contributors to Performance
Stock selection in the retailing sector was the primary contributor to performance relative to the MSCI All Country World Growth Index. Overweighted positions in export trading company Li & Fung (Hong Kong) and luxury goods company LVMH Moët Hennessy Louis Vuitton (France) aided relative results as these stocks outperformed the benchmark during the reporting period. The stock price of Li & Fung, a major supplier of toys and clothing products to large discount retailers such as Wal-Mart and Target, climbed as the company benefited from significant market share gains as the recession pressured consumers to shop for less expensive goods. Shares of Louis Vuitton rose due to increased sales of its fashion division, highlighting the resilience of the brand. Sales of its handbags and leather goods were strong in emerging market countries during the period. Not owning retail giant Wal-Mart also helped.
Stock selection in the special products and services sector aided relative performance. Holdings of technology consulting firm Infosys (India) and shipyard operator Keppel (h) (Singapore) were among the fund’s top relative contributors during the reporting period. We believe that shares of Keppel rose as investors anticipated that customer demand for deepwater oil rigs would increase amid improving economic conditions.
Stock selection in the consumer staples sector was another positive factor for relative results. Holdings of brewer Companhia de Bebidas das Americas (Brazil) and personal hygiene products maker Hengan International Group (h) (Hong Kong) benefited relative performance as both stocks significantly outperformed the benchmark. Shares of Hengan gained as key input costs (pulp and petrochemicals) declined and the market responded favorably to the company’s announced acquisition of snack food manufacturer Qin Qin.
Elsewhere, holdings of wireless solutions provider Research In Motion (h) (Canada), advertising and marketing firm WPP Group (b) (United Kingdom), and oil and gas exploration and production company Petroleo Brasileiro (Brazil) were among the fund’s top relative contributors.
Detractors from Performance
Stock selection in the energy sector was the primary detractor from relative performance. The fund’s overweighted position in poor-performing oil and gas exploration company INPEX (Japan) held back relative results. Shares of INPEX fell as the recession sapped demand for crude oil and natural gas leading to a decline in profits.
3
MFS Global Growth Portfolio
Management Review – continued
Stock selection in the basic materials sector was another negative factor for relative results. Holdings of pallets and container manufacturer Brambles (h) (Australia) and not holding strong-performing iron ore miner Companhia Vale do Rio Doce (Brazil) dampened relative performance.
Stocks in other sectors that were among the fund’s top detractors included financial services company Erste Group Bank (b)(h) (Austria), global biotech company Genzyme, and mobile phone makers Nokia (Finland) and NTT DoCoMo (h) (Japan). Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down the facility to mitigate a viral infection in one of its bioreactors. The timing of our transactions in financial services firms, State Street (h) and Daiwa Securities, also detracted from relative performance as we did not participate significantly in the stock price increases these benchmark constituents enjoyed later in the reporting period.
During the reporting period, the fund’s currency exposure was a detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
The fund’s cash position also held back relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| David Antonelli | | Jeffrey Constantino |
| Portfolio Manager | | Portfolio Manager |
Note to Contract Owners: Effective January 12, 2010, David Antonelli became a co-manager of the fund. Previously, the fund was co-managed by Barry Dargan.
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the fund at period end. |
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.
4
MFS Global Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 11/16/93 | | 39.81% | | 4.55% | | 0.97% | | N/A | | |
| | | Service Class | | 8/24/01 | | 39.43% | | 4.28% | | N/A | | 5.17% | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | MSCI All Country World Growth Index (f) | | 38.10% | | 3.75% | | (1.63)% | | N/A | | |
| | | MSCI World Growth Index (f) | | 33.85% | | 2.90% | | (2.23)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definitions
MSCI All Country World Growth Index – a market capitalization-weighted index that is designed to measure equity market performance for growth securities in the global developed and emerging markets.
MSCI World Growth Index – a market capitalization-weighted index that is designed to measure equity market performance for growth securities in the global developed markets.
It is not possible to invest directly in an index.
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.
5
MFS Global Growth Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Global Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.23% | | $1,000.00 | | $1,262.93 | | $7.02 |
| | Hypothetical (h) | | 1.23% | | $1,000.00 | | $1,019.00 | | $6.26 |
| Service Class | | Actual | | 1.48% | | $1,000.00 | | $1,261.25 | | $8.44 |
| | Hypothetical (h) | | 1.48% | | $1,000.00 | | $1,017.74 | | $7.53 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Global Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 98.7% | | | |
| Aerospace – 0.9% | | | |
| United Technologies Corp. | | 11,090 | | $ | 769,760 |
| | | | | |
| Alcoholic Beverages – 1.8% | | | |
| Companhia de Bebidas das Americas, ADR | | 6,500 | | $ | 657,085 |
| Pernod Ricard S.A. | | 9,468 | | | 813,149 |
| | | | | |
| | | | $ | 1,470,234 |
| | | | | |
| Apparel Manufacturers – 4.6% | | | |
| Compagnie Financiere Richemont S.A. | | 20,649 | | $ | 690,938 |
| Li & Fung Ltd. | | 169,800 | | | 698,808 |
| LVMH Moet Hennessy Louis Vuitton S.A. (l) | | 6,710 | | | 753,947 |
| NIKE, Inc., “B” | | 15,940 | | | 1,053,156 |
| Swatch Group Ltd. | | 2,121 | | | 533,856 |
| | | | | |
| | | | $ | 3,730,705 |
| | | | | |
| Biotechnology – 0.8% | | | |
| Genzyme Corp. (a) | | 13,090 | | $ | 641,541 |
| | | | | |
| Broadcasting – 2.4% | | | |
| Grupo Televisa S.A., ADR | | 19,950 | | $ | 414,162 |
| Walt Disney Co. | | 21,310 | | | 687,248 |
| WPP Group PLC | | 81,211 | | | 793,015 |
| | | | | |
| | | | $ | 1,894,425 |
| | | | | |
| Brokerage & Asset Managers – 5.1% | | | |
| Charles Schwab Corp. | | 49,730 | | $ | 935,919 |
| CME Group, Inc. | | 1,810 | | | 608,070 |
| Daiwa Securities Group, Inc. | | 115,000 | | | 576,521 |
| Deutsche Boerse AG | | 13,820 | | | 1,149,076 |
| Franklin Resources, Inc. | | 4,180 | | | 440,363 |
| ICAP PLC | | 58,110 | | | 402,708 |
| | | | | |
| | | | $ | 4,112,657 |
| | | | | |
| Business Services – 7.2% | | | |
| Accenture Ltd., “A” | | 32,810 | | $ | 1,361,615 |
| Dun & Bradstreet Corp. | | 11,290 | | | 952,537 |
| Infosys Technologies Ltd., ADR | | 10,160 | | | 561,543 |
| Intertek Group PLC | | 25,870 | | | 520,893 |
| MasterCard, Inc., “A” | | 5,130 | | | 1,313,177 |
| Visa, Inc., “A” | | 7,100 | | | 620,966 |
| Western Union Co. | | 22,140 | | | 417,339 |
| | | | | |
| | | | $ | 5,748,070 |
| | | | | |
| Cable TV – 0.6% | | | |
| DIRECTV Group, Inc., “A” (a) | | 13,900 | | $ | 463,565 |
| | | | | |
| Chemicals – 1.3% | | | |
| 3M Co. | | 5,040 | | $ | 416,657 |
| Monsanto Co. | | 7,980 | | | 652,365 |
| | | | | |
| | | | $ | 1,069,022 |
| | | | | |
| Computer Software – 1.8% | | | |
| Oracle Corp. | | 59,940 | | $ | 1,470,928 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Computer Software – Systems – 3.1% | | | |
| Acer, Inc. | | 260,860 | | $ | 779,307 |
| Apple, Inc. (a) | | 4,390 | | | 925,675 |
| Canon, Inc. | | 17,900 | | | 756,724 |
| | | | | |
| | | | $ | 2,461,706 |
| | | | | |
| Consumer Products – 5.6% | | | |
| Beiersdorf AG | | 6,600 | | $ | 433,763 |
| Church & Dwight Co., Inc. | | 12,640 | | | 764,088 |
| Colgate-Palmolive Co. | | 8,170 | | | 671,166 |
| Henkel KGaA, IPS | | 12,220 | | | 636,205 |
| Procter & Gamble Co. | | 19,650 | | | 1,191,380 |
| Reckitt Benckiser Group PLC | | 14,170 | | | 768,101 |
| | | | | |
| | | | $ | 4,464,703 |
| | | | | |
| Electrical Equipment – 3.4% | | | |
| Danaher Corp. | | 15,100 | | $ | 1,135,520 |
| Keyence Corp. | | 2,100 | | | 432,920 |
| Schneider Electric S.A. | | 9,745 | | | 1,128,976 |
| | | | | |
| | | | $ | 2,697,416 |
| | | | | |
| Electronics – 4.1% | | | |
| ARM Holdings PLC | | 273,350 | | $ | 781,642 |
| Hoya Corp. | | 15,900 | | | 421,521 |
| Samsung Electronics Co. Ltd. | | 1,221 | | | 833,922 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 60,638 | | | 693,699 |
| Tokyo Electron Ltd. | | 9,200 | | | 588,277 |
| | | | | |
| | | | $ | 3,319,061 |
| | | | | |
| Energy – Independent – 1.5% | | | |
| INPEX Corp. | | 156 | | $ | 1,170,854 |
| | | | | |
| Energy – Integrated – 4.4% | | | |
| Hess Corp. | | 9,890 | | $ | 598,345 |
| OAO Gazprom, ADR | | 37,550 | | | 936,030 |
| Petroleo Brasileiro S.A., ADR | | 16,490 | | | 786,243 |
| TOTAL S.A. | | 18,550 | | | 1,188,713 |
| | | | | |
| | | | $ | 3,509,331 |
| | | | | |
| Food & Beverages – 5.6% | | | |
| Groupe Danone | | 15,593 | | $ | 949,602 |
| Mead Johnson Nutrition Co., “A” | | 18,780 | | | 820,686 |
| Nestle S.A. | | 39,971 | | | 1,941,903 |
| PepsiCo, Inc. | | 13,170 | | | 800,736 |
| | | | | |
| | | | $ | 4,512,927 |
| | | | | |
| Food & Drug Stores – 1.5% | | | |
| CVS Caremark Corp. | | 15,040 | | $ | 484,438 |
| Tesco PLC | | 101,559 | | | 697,793 |
| | | | | |
| | | | $ | 1,182,231 |
| | | | | |
| Insurance – 0.8% | | | |
| Verisk Analytics, Inc., “A” (a) | | 20,880 | | $ | 632,246 |
| | | | | |
8
MFS Global Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Internet – 1.8% | | | |
| Google, Inc., “A” (a) | | 2,300 | | $ | 1,425,954 |
| | | | | |
| Major Banks – 4.1% | | | |
| Bank of New York Mellon Corp. | | 36,550 | | $ | 1,022,304 |
| HSBC Holdings PLC | | 64,349 | | | 734,372 |
| Julius Baer Group Ltd. | | 28,713 | | | 1,002,818 |
| Standard Chartered PLC | | 22,424 | | | 561,555 |
| | | | | |
| | | | $ | 3,321,049 |
| | | | | |
| Medical Equipment – 7.9% | | | |
| Becton, Dickinson & Co. | | 5,430 | | $ | 428,210 |
| DENTSPLY International, Inc. | | 18,590 | | | 653,810 |
| Essilor International S.A. | | 8,130 | | | 484,009 |
| Medtronic, Inc. | | 18,090 | | | 795,598 |
| Sonova Holding AG | | 4,165 | | | 503,630 |
| St. Jude Medical, Inc. (a) | | 21,260 | | | 781,943 |
| Synthes, Inc. | | 8,930 | | | 1,169,547 |
| Thermo Fisher Scientific, Inc. (a) | | 12,990 | | | 619,493 |
| Waters Corp. (a) | | 14,270 | | | 884,169 |
| | | | | |
| | | | $ | 6,320,409 |
| | | | | |
| Metals & Mining – 1.1% | | | |
| BHP Billiton PLC | | 26,880 | | $ | 858,620 |
| | | | | |
| Network & Telecom – 2.8% | | | |
| Cisco Systems, Inc. (a) | | 52,630 | | $ | 1,259,962 |
| Nokia Oyj | | 74,390 | | | 955,007 |
| | | | | |
| | | | $ | 2,214,969 |
| | | | | |
| Oil Services – 1.5% | | | |
| Halliburton Co. | | 39,410 | | $ | 1,185,847 |
| | | | | |
| Other Banks & Diversified Financials – 4.0% | | | |
| Aeon Credit Service Co. Ltd. | | 50,800 | | $ | 488,173 |
| China Construction Bank | | 679,000 | | | 577,953 |
| Credicorp Ltd. | | 7,600 | | | 585,352 |
| Housing Development Finance Corp. Ltd. | | 12,788 | | | 735,320 |
| UBS AG (a) | | 52,578 | | | 807,699 |
| | | | | |
| | | | $ | 3,194,497 |
| | | | | |
| Pharmaceuticals – 7.8% | | | |
| Abbott Laboratories | | 14,660 | | $ | 791,493 |
| Allergan, Inc. | | 9,740 | | | 613,717 |
| Bayer AG | | 11,494 | | | 918,659 |
| Johnson & Johnson | | 18,540 | | | 1,194,161 |
| Novo Nordisk A/S, “B” | | 10,870 | | | 695,231 |
| Roche Holding AG | | 6,010 | | | 1,022,398 |
| Teva Pharmaceutical Industries Ltd., ADR | | 18,360 | | | 1,031,465 |
| | | | | |
| | | | $ | 6,267,124 |
| | | | | |
| Printing & Publishing – 1.0% | | | |
| Reed Elsevier PLC | | 100,920 | | $ | 828,732 |
| | | | | |
| Specialty Chemicals – 4.4% | | | |
| Akzo Nobel N.V. | | 15,580 | | $ | 1,026,920 |
| L’Air Liquide S.A. | | 5,234 | | | 617,839 |
| Linde AG | | 5,790 | | | 696,913 |
| Shin-Etsu Chemical Co. Ltd. | | 12,300 | | | 693,296 |
| Symrise AG | | 21,538 | | | 462,519 |
| | | | | |
| | | | $ | 3,497,487 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| COMMON STOCKS – continued | | | | |
| Specialty Stores – 2.0% | | | | |
| Esprit Holdings Ltd. | | 97,569 | | $ | 642,150 | |
| Industria de Diseno Textil S.A. | | 9,880 | | | 612,201 | |
| Staples, Inc. | | 16,090 | | | 395,653 | |
| | | | | | |
| | | | $ | 1,650,004 | |
| | | | | | |
| Telecommunications – Wireless – 1.5% | | | | | | |
| MTN Group Ltd. | | 44,500 | | $ | 707,966 | |
| Philippine Long Distance Telephone Co. | | 9,000 | | | 510,058 | |
| | | | | | |
| | | | $ | 1,218,024 | |
| | | | | | |
| Telephone Services – 2.3% | | | | | | |
| China Unicom Ltd. | | 798,000 | | $ | 1,048,852 | |
| Telefonica S.A. | | 28,380 | | | 790,995 | |
| | | | | | |
| | | | $ | 1,839,847 | |
| | | | | | |
Total Common Stocks
(Identified Cost, $76,422,071) | | | | $ | 79,143,945 | |
| | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.7% | |
| Navigator Securities Lending Prime Portfolio, at Cost and Net Asset Value | | 589,250 | | $ | 589,250 | |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.2% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 945,330 | | $ | 945,330 | |
| | | | | | |
Total Investments
(Identified Cost, $77,956,651) | | | | $ | 80,678,525 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.6)% | | | | | (505,345 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 80,173,180 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (l) | | All or a portion of this security is on loan. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
See Notes to Financial Statements
9
MFS Global Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $77,011,321) | | $79,733,195 | | | |
Underlying funds, at cost and value | | 945,330 | | | |
Total investments, at value, including $561,808 of securities on loan (identified cost, $77,956,651) | | $80,678,525 | | | |
Cash | | $3,258 | | | |
Foreign currency, at value (identified cost, $519) | | 520 | | | |
Receivables for | | | | | |
Investments sold | | 120,526 | | | |
Fund shares sold | | 1,801 | | | |
Interest and dividends | | 107,633 | | | |
Other assets | | 3,356 | | | |
Total assets | | | | | $80,915,619 |
Liabilities | | | | | |
Payables for | | | | | |
Fund shares reacquired | | $61,511 | | | |
Collateral for securities loaned, at value | | 589,250 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 3,974 | | | |
Shareholder servicing costs | | 30 | | | |
Distribution and/or service fees | | 69 | | | |
Administrative services fee | | 165 | | | |
Payable for Trustees’ compensation | | 87 | | | |
Accrued expenses and other liabilities | | 87,353 | | | |
Total liabilities | | | | | $742,439 |
Net assets | | | | | $80,173,180 |
Net assets consist of | | | | | |
Paid-in capital | | $122,818,410 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 2,724,832 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (45,933,775 | ) | | |
Undistributed net investment income | | 563,713 | | | |
Net assets | | | | | $80,173,180 |
Shares of beneficial interest outstanding | | | | | 5,473,198 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $75,171,060 | | 5,130,193 | | $14.65 |
Service Class | | 5,002,120 | | 343,005 | | 14.58 |
See Notes to Financial Statements
10
MFS Global Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $1,609,606 | | | | |
Interest | | 24,230 | | | | |
Dividends from underlying funds | | 2,231 | | | | |
Foreign taxes withheld | | (123,635 | ) | | | |
Total investment income | | | | | $1,512,432 | |
Expenses | | | | | | |
Management fee | | $623,080 | | | | |
Distribution and/or service fees | | 11,237 | | | | |
Shareholder servicing costs | | 10,348 | | | | |
Administrative services fee | | 28,295 | | | | |
Trustees’ compensation | | 10,577 | | | | |
Custodian fee | | 140,056 | | | | |
Shareholder communications | | 7,946 | | | | |
Auditing fees | | 82,428 | | | | |
Legal fees | | 8,171 | | | | |
Miscellaneous | | 16,893 | | | | |
Total expenses | | | | | $939,031 | |
Net investment income | | | | | $573,401 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions (net of $189 country tax) | | $(4,828,989 | ) | | | |
Foreign currency transactions | | (6,102 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(4,835,091 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $27,737,757 | | | | |
Translation of assets and liabilities in foreign currencies | | 4,142 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $27,741,899 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $22,906,808 | |
Change in net assets from operations | | | | | $23,480,209 | |
See Notes to Financial Statements
11
MFS Global Growth Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $573,401 | | | $926,104 | |
Net realized gain (loss) on investments and foreign currency transactions | | (4,835,091 | ) | | (7,788,235 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 27,741,899 | | | (40,912,900 | ) |
Change in net assets from operations | | $23,480,209 | | | $(47,775,031 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(797,216 | ) | | $(1,066,638 | ) |
Change in net assets from fund share transactions | | $(9,468,184 | ) | | $(24,786,548 | ) |
Total change in net assets | | $13,214,809 | | | $(73,628,217 | ) |
Net assets | | | | | | |
At beginning of period | | 66,958,371 | | | 140,586,588 | |
At end of period (including undistributed net investment income of $563,713 and
$793,441, respectively) | | $80,173,180 | | | $66,958,371 | |
See Notes to Financial Statements
12
MFS Global Growth Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $10.62 | | | $17.54 | | | $15.74 | | | $13.48 | | | $12.31 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.10 | | | $0.13 | | | $0.14 | | | $0.20 | | | $0.07 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 4.07 | | | (6.90 | ) | | 1.94 | | | 2.14 | | | 1.16 | |
Total from investment operations | | $4.17 | | | $(6.77 | ) | | $2.08 | | | $2.34 | | | $1.23 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.14 | ) | | $(0.15 | ) | | $(0.28 | ) | | $(0.08 | ) | | $(0.06 | ) |
Net asset value, end of period | | $14.65 | | | $10.62 | | | $17.54 | | | $15.74 | | | $13.48 | |
Total return (%) (k)(s) | | 39.81 | | | (38.93 | ) | | 13.27 | | | 17.37 | | | 10.03 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.34 | | | 1.25 | | | 1.10 | | | 1.14 | | | 1.08 | |
Net investment income | | 0.85 | | | 0.90 | | | 0.83 | | | 1.39 | | | 0.59 | |
Portfolio turnover | | 76 | | | 81 | | | 76 | | | 92 | | | 87 | |
Net assets at end of period (000 omitted) | | $75,171 | | | $62,289 | | | $131,870 | | | $148,793 | | | $155,375 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $10.55 | | | $17.42 | | | $15.63 | | | $13.39 | | | $12.24 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.07 | | | $0.10 | | | $0.09 | | | $0.17 | | | $0.04 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 4.05 | | | (6.86 | ) | | 1.94 | | | 2.12 | | | 1.14 | |
Total from investment operations | | $4.12 | | | $(6.76 | ) | | $2.03 | | | $2.29 | | | $1.18 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.09 | ) | | $(0.11 | ) | | $(0.24 | ) | | $(0.05 | ) | | $(0.03 | ) |
Net asset value, end of period | | $14.58 | | | $10.55 | | | $17.42 | | | $15.63 | | | $13.39 | |
Total return (%) (k)(s) | | 39.43 | | | (39.07 | ) | | 13.04 | | | 17.09 | | | 9.65 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.59 | | | 1.49 | | | 1.35 | | | 1.39 | | | 1.33 | |
Net investment income | | 0.58 | | | 0.67 | | | 0.56 | | | 1.16 | | | 0.34 | |
Portfolio turnover | | 76 | | | 81 | | | 76 | | | 92 | | | 87 | |
Net assets at end of period (000 omitted) | | $5,002 | | | $4,670 | | | $8,716 | | | $8,723 | | | $7,599 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
13
MFS Global Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Growth Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
14
MFS Global Growth Portfolio
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 December 31, 2009 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 | | $32,881,796 | | $— | | $— | | $32,881,796 |
Switzerland | | — | | 7,672,789 | | — | | 7,672,789 |
United Kingdom | | 768,101 | | 6,179,330 | | — | | 6,947,431 |
France | | 1,567,096 | | 4,369,140 | | — | | 5,936,236 |
Japan | | 921,093 | | 4,207,192 | | — | | 5,128,285 |
Germany | | 1,611,596 | | 2,685,541 | | — | | 4,297,137 |
China | | — | | 1,626,805 | | — | | 1,626,805 |
Taiwan | | 693,699 | | 779,307 | | — | | 1,473,006 |
Brazil | | 1,443,328 | | — | | — | | 1,443,328 |
Other Countries | | 4,533,132 | | 7,204,000 | | — | | 11,737,132 |
| Mutual Funds | | 1,534,580 | | — | | — | | 1,534,580 |
| Total Investments | | $45,954,421 | | $34,724,104 | | $— | | $80,678,525 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash
15
MFS Global Growth Portfolio
Notes to Financial Statements – continued
collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 wash sale loss deferrals and foreign taxes.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $797,216 | | $1,066,638 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $78,040,564 | |
| Gross appreciation | | 8,600,608 | |
| Gross depreciation | | (5,962,647 | ) |
| Net unrealized appreciation (depreciation) | | $2,637,961 | |
| Undistributed ordinary income | | 564,465 | |
| Capital loss carryforwards | | (45,849,862 | ) |
| Other temporary differences | | 2,206 | |
16
MFS Global Growth Portfolio
Notes to Financial Statements – continued
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(33,257,724 | ) |
| 12/31/16 | | (7,268,811 | ) |
| 12/31/17 | | (5,323,327 | ) |
| | $(45,849,862 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $763,972 | | $1,013,748 |
| Service Class | | 33,244 | | 52,890 |
| Total | | $797,216 | | $1,066,638 |
| (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 billion of average daily net assets | | 0.90% |
| Next $1 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $2 billion | | 0.65% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
Effective August 1, 2009, the investment adviser 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 operating expenses do not exceed 1.40% of average daily net assets for the Initial Class shares and 1.65% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $10,348, which equated to 0.0149% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets.
17
MFS Global Growth Portfolio
Notes to Financial Statements – continued
The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0409% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,237 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $51,320,830 and $60,974,267, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 89,730 | | | $1,097,090 | | | 87,834 | | | $1,322,408 | |
Service Class | | 47,525 | | | 530,482 | | | 123,966 | | | 1,528,855 | |
| | 137,255 | | | $1,627,572 | | | 211,800 | | | $2,851,263 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 73,885 | | | $763,972 | | | 58,362 | | | $1,013,748 | |
Service Class | | 3,224 | | | 33,244 | | | 3,061 | | | 52,890 | |
| | 77,109 | | | $797,216 | | | 61,423 | | | $1,066,638 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (899,889 | ) | | $(10,282,882 | ) | | (1,797,172 | ) | | $(26,303,369 | ) |
Service Class | | (150,575 | ) | | (1,610,090 | ) | | (184,455 | ) | | (2,401,080 | ) |
| | (1,050,464 | ) | | $(11,892,972 | ) | | (1,981,627 | ) | | $(28,704,449 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (736,274 | ) | | $(8,421,820 | ) | | (1,650,976 | ) | | $(23,967,213 | ) |
Service Class | | (99,826 | ) | | (1,046,364 | ) | | (57,428 | ) | | (819,335 | ) |
| | (836,100 | ) | | $(9,468,184 | ) | | (1,708,404 | ) | | $(24,786,548 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $1,020 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
18
MFS Global Growth Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 23,363,268 | | (22,417,938 | ) | | 945,330 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $2,231 | | | $945,330 |
19
MFS Global Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS Global Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Growth Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Global Growth Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
20
MFS Global Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
21
MFS Global Growth Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS Global Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers David Antonelli Jeffrey Constantino | | |
23
MFS Global Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and in the 2nd quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
24
MFS Global Growth Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to observe an expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
25
MFS Global Growth Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 40.09% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
Income derived from foreign sources was $1,113,925. The fund intends to pass through foreign tax credits of $100,964 for the fiscal year.
26
MFS Global Growth Portfolio
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.
27
MFS® RESEARCH INTERNATIONAL PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research International Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Research International Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Nestle S.A. | | 2.9% |
| Royal Dutch Shell PLC, “A” | | 2.8% |
| BNP Paribas | | 2.7% |
| HSBC Holdings PLC | | 2.7% |
| TOTAL S.A. | | 2.6% |
| Roche Holding AG | | 2.6% |
| Vodafone Group PLC | | 2.6% |
| E.ON AG | | 2.1% |
| BHP Billiton PLC | | 2.0% |
| GDF Suez | | 2.0% |
| | |
| Global equity sectors | | |
| Financial Services | | 25.2% |
| Capital Goods | | 23.0% |
| Energy | | 13.9% |
| Health Care | | 8.1% |
| Consumer Staples | | 7.8% |
| Technology | | 7.7% |
| Consumer Cyclicals | | 7.4% |
| Telecom/Cable Television | | 6.1% |
| |
| Country weightings (w) | | |
| United Kingdom | | 15.9% |
| Japan | | 15.0% |
| France | | 11.7% |
| Switzerland | | 10.3% |
| Germany | | 10.0% |
| Netherlands | | 7.4% |
| China | | 4.6% |
| Taiwan | | 2.8% |
| Hong Kong | | 2.8% |
| Other Countries | | 19.5% |
| (w) | Country weightings are based on the valuation currency of each security. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Research International Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Research International Portfolio (the “fund”) provided a total return of 30.94%, while Service Class shares of the fund provided a total return of 30.50%. These compare with a return of 32.46% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) Index. The fund’s other benchmark, the MSCI All Country (ex-US) Index, generated a return of 42.14%.
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
Stock selection in the financial services sector was the primary factor holding back the fund’s relative performance. Selling off shares of financial services firm Barclays PLC (h) (U.K.) prior to this stock’s impressive price increase had a negative impact on relative returns. Owning insurance firm AXA (h) (France) in the first half of the period also detracted from relative performance as this stock underperformed the benchmark during that time. Not owning strong-performing financial services firm Banco Santander (Spain) for the majority of the reporting period was another negative factor impacting relative results. Holdings of financial services firm Sumitomo Mitsui Financial Group (Japan) were also among the fund’s top detractors over the reporting period.
Elsewhere, an overweighted position in pallets and container manufacturer Brambles (h) (Australia) early in the reporting period hurt relative performance as this stock performed poorly during that time. Shares of Brambles fell as the company reported a decrease in its first-half profit amidst the dramatic slowdown in economic activity in its key markets. Holdings of transportation company East Japan Railway (Japan), telecommunications company KDDI (Japan), pharmaceutical company Daiichi Sankyo (h) (Japan), and convenience store chain Lawson (Japan) were also among the fund’s top detractors.
During the reporting period, the fund’s currency exposure detracted from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposures than the benchmark.
The fund’s cash position was also a detractor. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in the consumer cyclicals sector boosted relative performance. Holdings of export trading company Li & Fung (Hong Kong), marketing firm WPP Group (U.K.), and luxury goods maker LVMH Moet Hennessy Louis Vuitton (France) were among the fund’s top contributors. The stock price of Li & Fung, a major supplier of toys and clothing products to large discount retailers such as Wal-Mart and Target, climbed as the company benefited from significant market share gains as the recession pressured consumers to shop for less expensive goods. Shares of Louis Vuitton rose due to increased sales of its fashion division, highlighting the resilience of the brand. Sales of its handbags and leather goods were strong in emerging market countries during the period.
3
MFS Research International Portfolio
Management Review – continued
Stock selection in the technology and energy sectors also had a positive impact on relative returns. Within the technology sector, computer and electronics maker Acer (b) (Taiwan) was a key driver for relative performance. Although the energy sector was a top contributor during the reporting period, no individual securities within this sector were among the fund’s top contributors.
Stocks in other sectors that bolstered relative results included financial services firm BNP Paribas (France), ship builder Keppel (Singapore), industrial machinery manufacturer Bucyrus International (b)(h), specialty chemical manufacturer Akzo Nobel (The Netherlands), banking firm Bank of Cyprus Public (Cyprus), and financial services firm Itau Unibanco (b)(h) (Brazil).
Respectfully,
| | |
| Jose Luis Garcia | | Thomas Melendez |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Research International Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 30.94% | | 4.83% | | 3.25% | | N/A | | |
| | | Service Class | | 8/24/01 | | 30.50% | | 4.56% | | N/A | | 6.48% | | |
Comparative benchmarks
| | | | | | | | | | | | | | |
| | | MSCI EAFE (Europe, Australasia, Far East) Index (f) | | 32.46% | | 4.02% | | 1.58% | | N/A | | |
| | | MSCI All Country World (ex-US) Index (f) | | 42.14% | | 6.30% | | 3.12% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definitions
MSCI All Country World (ex-US) Index – a market capitalization-weighted index that is designed to measure equity market performance in the developed and emerging markets, excluding the U.S.
MSCI EAFE (Europe, Australasia, Far East) Index – a market capitalization-weighted index that is designed to measure equity market performance in the developed markets, excluding the U.S. and Canada.
It is not possible to invest directly in an index.
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.
5
MFS Research International Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Research International Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.10% | | $1,000.00 | | $1,228.21 | | $6.18 |
| | Hypothetical (h) | | 1.10% | | $1,000.00 | | $1,019.66 | | $5.60 |
| Service Class | | Actual | | 1.35% | | $1,000.00 | | $1,225.52 | | $7.57 |
| | Hypothetical (h) | | 1.35% | | $1,000.00 | | $1,018.40 | | $6.87 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Research International Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.2% |
| Alcoholic Beverages – 1.0% | | | |
| Heineken N.V. | | 46,400 | | $ | 2,198,595 |
| | | | | |
| Apparel Manufacturers – 2.0% | | | | | |
| Li & Fung Ltd. | | 232,000 | | $ | 954,791 |
| LVMH Moet Hennessy Louis Vuitton S.A. (l) | | 30,830 | | | 3,464,109 |
| | | | | |
| | | | $ | 4,418,900 |
| | | | | |
| Automotive – 0.9% | | | | | |
| Bridgestone Corp. | | 110,300 | | $ | 1,932,932 |
| | | | | |
| Biotechnology – 0.4% | | | | | |
| Actelion Ltd. (a) | | 17,243 | | $ | 920,116 |
| | | | | |
| Broadcasting – 1.8% | | | | | |
| Grupo Televisa S.A., ADR | | 38,270 | | $ | 794,485 |
| WPP Group PLC | | 328,488 | | | 3,207,642 |
| | | | | |
| | | | $ | 4,002,127 |
| | | | | |
| Brokerage & Asset Managers – 3.4% | | | | | |
| Aberdeen Asset Management PLC | | 317,760 | | $ | 687,750 |
| BM&F Bovespa S.A. | | 160,400 | | | 1,114,756 |
| Deutsche Boerse AG | | 25,820 | | | 2,146,827 |
| Hong Kong Exchanges & Clearing Ltd. | | 104,400 | | | 1,858,571 |
| Nomura Holdings, Inc. | | 214,700 | | | 1,582,247 |
| | | | | |
| | | | $ | 7,390,151 |
| | | | | |
| Business Services – 1.7% | | | | | |
| Mitsubishi Corp. | | 91,700 | | $ | 2,279,923 |
| Nomura Research, Inc. | | 73,400 | | | 1,437,694 |
| | | | | |
| | | | $ | 3,717,617 |
| | | | | |
| Chemicals – 0.4% | | | | | |
| Monsanto Co. | | 9,900 | | $ | 809,325 |
| | | | | |
| Computer Software – Systems – 2.3% | | | | | |
| Acer, Inc. | | 691,890 | | $ | 2,066,988 |
| Konica Minolta Holdings, Inc. | | 164,500 | | | 1,687,131 |
| Ricoh Co. Ltd. | | 86,000 | | | 1,213,335 |
| | | | | |
| | | | $ | 4,967,454 |
| | | | | |
| Conglomerates – 4.9% | | | | | |
| Hutchison Whampoa Ltd. | | 247,000 | | $ | 1,689,165 |
| Keppel Corp. Ltd. | | 494,000 | | | 2,874,440 |
| Siemens AG | | 42,750 | | | 3,921,156 |
| Tomkins PLC | | 727,760 | | | 2,246,791 |
| | | | | |
| | | | $ | 10,731,552 |
| | | | | |
| Construction – 0.8% | | | | | |
| Corporacion Moctezuma S.A. de C.V. | | 71,200 | | $ | 163,278 |
| Geberit AG | | 6,949 | | | 1,230,918 |
| Urbi Desarrollos Urbanos S.A. de C.V. (a) | | 212,740 | | | 477,779 |
| | | | | |
| | | | $ | 1,871,975 |
| | | | | |
| Consumer Products – 1.8% | | | | | |
| Hengan International Group Co. Ltd. | | 114,000 | | $ | 843,816 |
| Kimberly-Clark de Mexico S.A. de C.V., “A” | | 187,320 | | | 838,515 |
| Reckitt Benckiser Group PLC | | 41,200 | | | 2,233,293 |
| | | | | |
| | | | $ | 3,915,624 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Electrical Equipment – 1.4% | | | |
| Legrand S.A. | | 15,350 | | $ | 428,547 |
| Schneider Electric S.A. | | 22,069 | | | 2,556,735 |
| | | | | |
| | | | $ | 2,985,282 |
| | | | | |
| Electronics – 2.6% | | | | | |
| Samsung Electronics Co. Ltd. | | 2,577 | | $ | 1,760,047 |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | 2,014,804 | | | 4,041,570 |
| | | | | |
| | | | $ | 5,801,617 |
| | | | | |
| Energy – Independent – 1.8% | | | | | |
| CNOOC Ltd. | | 390,000 | | $ | 607,173 |
| Cobalt International Energy, Inc. (a) | | 37,350 | | | 516,924 |
| INPEX Corp. | | 174 | | | 1,305,953 |
| Nexen, Inc. | | 25,300 | | | 610,093 |
| Tullow Oil PLC | | 48,114 | | | 1,003,366 |
| | | | | |
| | | | $ | 4,043,509 |
| | | | | |
| Energy – Integrated – 6.7% | | | | | |
| Eni S.p.A. | | 49,760 | | $ | 1,266,844 |
| Marathon Oil Corp. | | 23,200 | | | 724,304 |
| Petroleo Brasileiro S.A., ADR | | 9,100 | | | 433,888 |
| Royal Dutch Shell PLC, “A” | | 202,050 | | | 6,100,431 |
| Suncor Energy, Inc. | | 15,010 | | | 534,037 |
| TOTAL S.A. | | 89,680 | | | 5,746,834 |
| | | | | |
| | | | $ | 14,806,338 |
| | | | | |
| Engineering – Construction – 1.0% | | | | | |
| JGC Corp. | | 117,000 | | $ | 2,153,867 |
| | | | | |
| Food & Beverages – 4.3% | | | | | |
| Groupe Danone | | 50,052 | | $ | 3,048,131 |
| Nestle S.A. | | 129,717 | | | 6,302,015 |
| | | | | |
| | | | $ | 9,350,146 |
| | | | | |
| Food & Drug Stores – 0.9% | | | | | |
| Lawson, Inc. | | 46,400 | | $ | 2,042,626 |
| | | | | |
| Insurance – 4.1% | | | | | |
| China Life Insurance Co. Ltd. | | 155,000 | | $ | 758,466 |
| China Pacific Insurance Co. Ltd. (a) | | 143,000 | | | 569,905 |
| ING Groep N.V. (a) | | 372,750 | | | 3,603,440 |
| SNS REAAL Groep N.V. (a) | | 85,000 | | | 513,907 |
| Storebrand A.S.A. (a) | | 157,260 | | | 1,066,967 |
| Swiss Reinsurance Co. | | 28,800 | | | 1,379,832 |
| Zurich Financial Services Ltd. | | 4,970 | | | 1,080,610 |
| | | | | |
| | | | $ | 8,973,127 |
| | | | | |
| Leisure & Toys – 0.2% | | | | | |
| Sankyo Co. Ltd. | | 7,100 | | $ | 353,723 |
| | | | | |
| Machinery & Tools – 1.0% | | | | | |
| Beml Ltd. | | 26,810 | | $ | 642,015 |
| Glory Ltd. | | 75,200 | | | 1,663,306 |
| | | | | |
| | | | $ | 2,305,321 |
| | | | | |
8
MFS Research International Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Major Banks – 9.5% | | | |
| Bank of China Ltd. | | 4,227,000 | | $ | 2,263,180 |
| BNP Paribas | | 76,479 | | | 6,035,235 |
| Commonwealth Bank of Australia | | 28,070 | | | 1,368,754 |
| HSBC Holdings PLC | | 517,211 | | | 5,902,584 |
| Julius Baer Group Ltd. | | 31,565 | | | 1,102,426 |
| KBC Group N.V. (a) | | 23,012 | | | 996,557 |
| Sumitomo Mitsui Financial Group, Inc. | | 66,100 | | | 1,884,484 |
| Westpac Banking Corp. | | 61,620 | | | 1,387,018 |
| | | | | |
| | | | $ | 20,940,238 |
| | | | | |
| Medical Equipment – 2.0% | | | | | |
| Smith & Nephew PLC | | 165,268 | | $ | 1,696,991 |
| Synthes, Inc. | | 21,330 | | | 2,793,555 |
| | | | | |
| | | | $ | 4,490,546 |
| | | | | |
| Metals & Mining – 2.5% | | | | | |
| BHP Billiton PLC | | 138,980 | | $ | 4,439,400 |
| Iluka Resources Ltd. (a) | | 332,990 | | | 1,059,719 |
| | | | | |
| | | | $ | 5,499,119 |
| | | | | |
| Natural Gas – Distribution – 2.5% | | | | | |
| GDF Suez | | 101,690 | | $ | 4,414,877 |
| Tokyo Gas Co. Ltd. | | 273,000 | | | 1,087,486 |
| | | | | |
| | | | $ | 5,502,363 |
| | | | | |
| Network & Telecom – 1.1% | | | | | |
| Nokia Oyj | | 183,480 | | $ | 2,355,487 |
| | | | | |
| Oil Services – 0.4% | | | | | |
| Saipem S.p.A. | | 27,630 | | $ | 949,167 |
| | | | | |
| Other Banks & Diversified Financials – 7.8% | | | |
| Aeon Credit Service Co. Ltd. | | 136,800 | | $ | 1,314,608 |
| Banco Santander Brasil, ADR | | 112,420 | | | 1,567,135 |
| Bank of Cyprus Public Co. Ltd. | | 200,992 | | | 1,401,006 |
| Chiba Bank Ltd. | | 202,000 | | | 1,205,458 |
| China Construction Bank | | 3,361,000 | | | 2,860,824 |
| HDFC Bank Ltd., ADR | | 13,190 | | | 1,715,755 |
| Housing Development Finance Corp. Ltd. | | 10,637 | | | 611,636 |
| ICICI Bank Ltd. | | 59,587 | | | 1,111,102 |
| ICICI Bank Ltd., ADR | | 15,210 | | | 573,569 |
| UBS AG (a) | | 141,581 | | | 2,174,956 |
| Unione di Banche Italiane ScpA | | 187,679 | | | 2,688,371 |
| | | | | |
| | | | $ | 17,224,420 |
| | | | | |
| Pharmaceuticals – 5.7% | | | | | |
| Bayer AG | | 35,066 | | $ | 2,802,654 |
| Merck KGaA | | 25,720 | | | 2,402,508 |
| Roche Holding AG | | 33,670 | | | 5,727,812 |
| Santen, Inc. | | 51,200 | | | 1,638,224 |
| | | | | |
| | | | $ | 12,571,198 |
| | | | | |
| Precious Metals & Minerals – 1.8% | | | | | |
| Lihir Gold Ltd. | | 366,192 | | $ | 1,068,129 |
| Paladin Resources Ltd. (a)(l) | | 129,007 | | | 478,773 |
| Teck Resources Ltd., “B” (a) | | 68,080 | | | 2,396,812 |
| | | | | |
| | | | $ | 3,943,714 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Printing & Publishing – 0.8% | | | |
| Reed Elsevier PLC | | 207,740 | | $ | 1,705,913 |
| | | | | |
| Railroad & Shipping – 1.2% | | | | | |
| East Japan Railway Co. | | 41,500 | | $ | 2,615,612 |
| | | | | |
| Real Estate – 0.4% | | | | | |
| Mirvac Group | | 33,960 | | $ | 47,245 |
| Shimao Property Holdings Ltd. | | 396,000 | | | 742,706 |
| | | | | |
| | | | $ | 789,951 |
| | | | | |
| Specialty Chemicals – 4.5% | | | | | |
| Akzo Nobel N.V. | | 55,590 | | $ | 3,664,086 |
| Linde AG | | 32,350 | | | 3,893,808 |
| Symrise AG | | 104,122 | | | 2,235,976 |
| | | | | |
| | | | $ | 9,793,870 |
| | | | | |
| Specialty Stores – 1.7% | | | | | |
| Esprit Holdings Ltd. | | 243,813 | | $ | 1,604,654 |
| Industria de Diseno Textil S.A. | | 32,980 | | | 2,043,562 |
| | | | | |
| | | | $ | 3,648,216 |
| | | | | |
| Telecommunications – Wireless – 4.1% | | | | | |
| America Movil S.A.B. de C.V., “L”, ADR | | 20,310 | | $ | 954,164 |
| KDDI Corp. | | 288 | | | 1,518,734 |
| Vivo Participacoes S.A., ADR | | 26,540 | | | 822,740 |
| Vodafone Group PLC | | 2,447,820 | | | 5,668,419 |
| | | | | |
| | | | $ | 8,964,057 |
| | | | | |
| Telephone Services – 2.0% | | | | | |
| China Unicom Ltd. | | 1,090,000 | | $ | 1,432,642 |
| Royal KPN N.V. | | 173,600 | | | 2,946,553 |
| | | | | |
| | | | $ | 4,379,195 |
| | | | | |
| Tobacco – 0.7% | | | | | |
| Japan Tobacco, Inc. | | 477 | | $ | 1,609,474 |
| | | | | |
| Trucking – 2.6% | | | | | |
| TNT N.V. | | 108,953 | | $ | 3,334,925 |
| Yamato Holdings Co. Ltd. | | 179,700 | | | 2,485,141 |
| | | | | |
| | | | $ | 5,820,066 |
| | | | | |
| Utilities – Electric Power – 2.5% | | | | | |
| CEZ AS | | 19,250 | | $ | 905,091 |
| E.ON AG | | 110,403 | | | 4,609,068 |
| | | | | |
| | | | $ | 5,514,159 |
| | | | | |
Total Common Stocks
(Identified Cost, $210,097,048) | | | | $ | 218,008,689 |
| | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.4% | | | |
MFS Institutional Money Market Portfolio,
0.12%, at Cost and Net Asset Value | | 3,132,603 | | $ | 3,132,603 |
| | | | | |
9
MFS Research International Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| COLLATERAL FOR SECURITIES LOANED – 1.2% | |
Navigator Securities Lending Prime Portfolio,
at Cost and Net Asset Value | | 2,681,720 | | $ | 2,681,720 | |
| | | | | | |
Total Investments
(Identified Cost, $215,911,371) | | | | $ | 223,823,012 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (1.8)% | | | | | (4,053,661 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 219,769,351 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (l) | | All or a portion of this security is on loan. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
10
MFS Research International Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $212,778,768) | | $220,690,409 | | | |
Underlying funds, at cost and value | | 3,132,603 | | | |
Total investments, at value, including $2,556,754 of securities on loan (identified cost, $215,911,371) | | $223,823,012 | | | |
Cash | | $3,800 | | | |
Foreign currency, at value (identified cost, $568,807) | | 569,823 | | | |
Receivables for | | | | | |
Investments sold | | 198,776 | | | |
Fund shares sold | | 147,368 | | | |
Interest and dividends | | 356,803 | | | |
Other assets | | 7,988 | | | |
Total assets | | | | | $225,107,570 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $2,120,758 | | | |
Fund shares reacquired | | 357,301 | | | |
Collateral for securities loaned, at value | | 2,681,720 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 13,018 | | | |
Shareholder servicing costs | | 84 | | | |
Distribution and/or service fees | | 1,737 | | | |
Administrative services fee | | 422 | | | |
Payable for Trustees’ compensation | | 233 | | | |
Accrued expenses and other liabilities | | 162,946 | | | |
Total liabilities | | | | | $5,338,219 |
Net assets | | | | | $219,769,351 |
Net assets consist of | | | | | |
Paid-in capital | | $257,527,551 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $25,034 deferred country tax) | | 7,887,931 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (48,421,835 | ) | | |
Undistributed net investment income | | 2,775,704 | | | |
Net assets | | | | | $219,769,351 |
Shares of beneficial interest outstanding | | | | | 17,646,684 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $93,714,289 | | 7,474,679 | | $12.54 |
Service Class | | 126,055,062 | | 10,172,005 | | 12.39 |
See Notes to Financial Statements
11
MFS Research International Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $5,347,507 | | | | |
Interest | | 98,625 | | | | |
Dividends from underlying funds | | 2,871 | | | | |
Foreign taxes withheld | | (539,422 | ) | | | |
Total investment income | | | | | $4,909,581 | |
Expenses | | | | | | |
Management fee | | $1,521,568 | | | | |
Distribution and/or service fees | | 285,703 | | | | |
Shareholder servicing costs | | 24,797 | | | | |
Administrative services fee | | 67,203 | | | | |
Trustees’ compensation | | 25,218 | | | | |
Custodian fee | | 246,401 | | | | |
Shareholder communications | | 12,598 | | | | |
Auditing fees | | 70,255 | | | | |
Legal fees | | 8,185 | | | | |
Miscellaneous | | 25,111 | | | | |
Total expenses | | | | | $2,287,039 | |
Reduction of expenses by investment adviser | | (139,396 | ) | | | |
Net expenses | | | | | $2,147,643 | |
Net investment income | | | | | $2,761,938 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(6,628,916 | ) | | | |
Foreign currency transactions | | 19,395 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(6,609,521 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments (net of $25,034 increase in deferred country tax) | | $49,805,001 | | | | |
Translation of assets and liabilities in foreign currencies | | 11,689 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $49,816,690 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $43,207,169 | |
Change in net assets from operations | | | | | $45,969,107 | |
See Notes to Financial Statements
12
MFS Research International Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $2,761,938 | | | $5,311,218 | |
Net realized gain (loss) on investments and foreign currency transactions | | (6,609,521 | ) | | (41,178,300 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 49,816,690 | | | (87,273,596 | ) |
Change in net assets from operations | | $45,969,107 | | | $(123,140,678 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(4,916,469 | ) | | $(3,791,851 | ) |
From net realized gain on investments | | — | | | (34,803,970 | ) |
Total distributions declared to shareholders | | $(4,916,469 | ) | | $(38,595,821 | ) |
Change in net assets from fund share transactions | | $18,915,236 | | | $10,804,008 | |
Total change in net assets | | $59,967,874 | | | $(150,932,491 | ) |
Net assets | | | | | | |
At beginning of period | | 159,801,477 | | | 310,733,968 | |
At end of period (including undistributed net investment income of $2,775,704 and
$4,910,446, respectively) | | $219,769,351 | | | $159,801,477 | |
See Notes to Financial Statements
13
MFS Research International Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.94 | | | $19.92 | | | $19.94 | | | $16.74 | | | $14.48 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.17 | | | $0.37 | | | $0.30 | | | $0.22 | | | $0.17 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.77 | | | (7.71 | ) | | 2.21 | | | 4.30 | | | 2.21 | |
Total from investment operations | | $2.94 | | | $(7.34 | ) | | $2.51 | | | $4.52 | | | $2.38 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.34 | ) | | $(0.29 | ) | | $(0.23 | ) | | $(0.21 | ) | | $(0.12 | ) |
From net realized gain on investments | | — | | | (2.35 | ) | | (2.30 | ) | | (1.11 | ) | | — | |
Total distributions declared to shareholders | | $(0.34 | ) | | $(2.64 | ) | | $(2.53 | ) | | $(1.32 | ) | | $(0.12 | ) |
Net asset value, end of period | | $12.54 | | | $9.94 | | | $19.92 | | | $19.94 | | | $16.74 | |
Total return (%) (k)(r)(s) | | 30.94 | | | (42.49 | ) | | 13.15 | | | 27.47 | | | 16.56 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.18 | | | 1.17 | | | 1.06 | | | 1.13 | | | 1.12 | |
Expenses after expense reductions (f) | | 1.10 | | | 1.11 | | | 1.06 | | | 1.13 | | | 1.12 | |
Net investment income | | 1.62 | | | 2.43 | | | 1.51 | | | 1.23 | | | 1.11 | |
Portfolio turnover | | 75 | | | 82 | | | 68 | | | 80 | | | 83 | |
Net assets at end of period (000 omitted) | | $93,714 | | | $45,835 | | | $108,167 | | | $119,534 | | | $95,752 | |
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.82 | | | $19.70 | | | $19.77 | | | $16.61 | | | $14.39 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.17 | | | $0.32 | | | $0.23 | | | $0.16 | | | $0.12 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.70 | | | (7.61 | ) | | 2.20 | | | 4.29 | | | 2.19 | |
Total from investment operations | | $2.87 | | | $(7.29 | ) | | $2.43 | | | $4.45 | | | $2.31 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.30 | ) | | $(0.24 | ) | | $(0.20 | ) | | $(0.18 | ) | | $(0.09 | ) |
From net realized gain on investments | | — | | | (2.35 | ) | | (2.30 | ) | | (1.11 | ) | | — | |
Total distributions declared to shareholders | | $(0.30 | ) | | $(2.59 | ) | | $(2.50 | ) | | $(1.29 | ) | | $(0.09 | ) |
Net asset value, end of period | | $12.39 | | | $9.82 | | | $19.70 | | | $19.77 | | | $16.61 | |
Total return (%) (k)(r)(s) | | 30.50 | | | (42.60 | ) | | 12.81 | | | 27.25 | | | 16.19 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.43 | | | 1.42 | | | 1.31 | | | 1.38 | | | 1.37 | |
Expenses after expense reductions (f) | | 1.35 | | | 1.36 | | | 1.31 | | | 1.38 | | | 1.37 | |
Net investment income | | 1.64 | | | 2.17 | | | 1.19 | | | 0.89 | | | 0.78 | |
Portfolio turnover | | 75 | | | 82 | | | 68 | | | 80 | | | 83 | |
Net assets at end of period (000 omitted) | | $126,055 | | | $113,966 | | | $202,567 | | | $155,969 | | | $90,076 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
14
MFS Research International Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Research International Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
15
MFS Research International Portfolio
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 December 31, 2009 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 Kingdom | | $2,921,043 | | $31,971,537 | | $— | | $34,892,580 |
Japan | | 14,414,061 | | 18,597,897 | | — | | 33,011,958 |
France | | 8,307,534 | | 17,386,934 | | — | | 25,694,468 |
Switzerland | | 920,116 | | 21,792,124 | | — | | 22,712,240 |
Germany | | 6,785,311 | | 15,226,686 | | — | | 22,011,997 |
Netherlands | | 2,946,553 | | 13,314,952 | | — | | 16,261,505 |
China | | 569,905 | | 9,508,808 | | — | | 10,078,713 |
Taiwan | | — | | 6,108,557 | | — | | 6,108,557 |
Hong Kong | | — | | 6,107,181 | | — | | 6,107,181 |
| Other Countries | | 15,449,530 | | 25,679,960 | | — | | 41,129,490 |
| Mutual Funds | | 5,814,323 | | — | | — | | 5,814,323 |
| Total Investments | | $58,128,376 | | $165,694,636 | | $— | | $223,823,012 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash
16
MFS Research International Portfolio
Notes to Financial Statements – continued
collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 passive foreign investment companies, wash sale loss deferrals, and foreign taxes.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $4,916,469 | | $14,469,441 |
| Long-term capital gain | | — | | 24,126,380 |
| Total distributions | | $4,916,469 | | $38,595,821 |
17
MFS Research International Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $218,959,745 | |
| Gross appreciation | | 19,443,024 | |
| Gross depreciation | | (14,579,757 | ) |
| Net unrealized appreciation (depreciation) | | $4,863,267 | |
| Undistributed ordinary income | | 2,779,095 | |
| Capital loss carryforwards | | (45,373,461 | ) |
| Other temporary differences | | (27,101 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(33,329,009 | ) |
| 12/31/17 | | (12,044,452 | ) |
| | $(45,373,461 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,443,330 | | $1,388,519 | | $— | | $11,353,704 |
| Service Class | | 3,473,139 | | 2,403,332 | | — | | 23,450,266 |
| Total | | $4,916,469 | | $3,791,851 | | $— | | $34,803,970 |
| (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 billion of average daily net assets | | 0.90% |
| Next $1 billion of average daily net assets | | 0.80% |
| Average daily net assets in excess of $2 billion | | 0.70% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
The investment adviser has agreed 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 operating expenses do not exceed 1.10% of average daily net assets for the Initial Class shares and 1.35% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $139,396 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
18
MFS Research International Portfolio
Notes to Financial Statements – continued
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as a shareholder servicing agent. For the year ended December 31, 2009, the fee was $24,797, which equated to 0.0147% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0398 % of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $3,040 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $142,782,685 and $126,165,421, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 3,780,901 | | | $45,788,727 | | | 282,236 | | | $3,520,499 | |
Service Class | | 920,047 | | | 7,839,938 | | | 1,917,759 | | | 24,193,315 | |
| | 4,700,948 | | | $53,628,665 | | | 2,199,995 | | | $27,713,814 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 162,904 | | | $1,443,330 | | | 735,694 | | | $12,742,223 | |
Service Class | | 396,025 | | | 3,473,139 | | | 1,509,259 | | | 25,853,598 | |
| | 558,929 | | | $4,916,469 | | | 2,244,953 | | | $38,595,821 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,079,610 | ) | | $(11,330,133 | ) | | (1,837,185 | ) | | $(26,771,198 | ) |
Service Class | | (2,751,913 | ) | | (28,299,765 | ) | | (2,099,241 | ) | | (28,734,429 | ) |
| | (3,831,523 | ) | | $(39,629,898 | ) | | (3,936,426 | ) | | $(55,505,627 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 2,864,195 | | | $35,901,924 | | | (819,255 | ) | | $(10,508,476 | ) |
Service Class | | (1,435,841 | ) | | (16,986,688 | ) | | 1,327,777 | | | 21,312,484 | |
| | 1,428,354 | | | $18,915,236 | | | 508,522 | | | $10,804,008 | |
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
19
MFS Research International Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the fund’s commitment fee and interest expense were $ 2,409 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 | | — | | 53,312,790 | | (50,180,187 | ) | | 3,132,603 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $2,871 | | | $3,132,603 |
20
MFS Research International Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Research International Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Research International Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Research International Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
21
MFS Research International Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
22
MFS Research International Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
23
MFS Research International Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Jose Luis Garcia Thomas Melendez | | |
24
MFS Research International Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 2nd quintile for the three-year period and in the 1st quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
25
MFS Research International Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
26
MFS Research International Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $4,679,670. The fund intends to pass through foreign tax credits of $445,029 for the fiscal year.
27
MFS Research International Portfolio
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.
28
MFS® EMERGING MARKETS EQUITY PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Emerging Markets Equity Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS Emerging Markets Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Samsung Electronics Co. Ltd. | | 4.1% |
| Petroleo Brasileiro S.A., ADR | | 3.5% |
| OAO Gazprom, ADR | | 2.6% |
| Infosys Technologies Ltd., ADR | | 2.4% |
| Vale S.A., ADR | | 2.4% |
| Steel Authority of India Ltd. | | 2.2% |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | 2.2% |
| China Construction Bank | | 2.0% |
| Public Bank Berhad | | 2.0% |
| LUKOIL, ADR | | 1.8% |
| | |
| Equity sectors | | |
| Financial Services | | 23.3% |
| Energy | | 15.2% |
| Technology | | 13.4% |
| Utilities & Communications | | 10.6% |
| Basic Materials | | 9.3% |
| Consumer Staples | | 6.4% |
| Special Products & Services | | 5.6% |
| Retailing | | 5.5% |
| Autos & Housing | | 3.3% |
| Health Care | | 3.1% |
| Leisure | | 2.4% |
| Industrial Goods & Services | | 1.1% |
| Transportation | | 0.3% |
| | |
| Country weightings (w) | | |
| Brazil | | 17.8% |
| China | | 12.0% |
| India | | 11.4% |
| Taiwan | | 8.6% |
| Russia | | 7.3% |
| South Africa | | 7.3% |
| South Korea | | 6.9% |
| Mexico | | 6.4% |
| Hong Kong | | 6.0% |
| Other Countries | | 16.3% |
(w) Country weightings are based on the valuation currency of each security.
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Emerging Markets Equity Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Emerging Markets Equity Portfolio (the “fund”) provided a total return of 68.58%, while Service Class shares of the fund provided a total return of 68.13%. This compares with a return of 79.02% for the fund’s benchmark, the Morgan Stanley Capital International (MSCI) Emerging Markets 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 to almost 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
Stock selection and an underweighted position in the financial services sector were primary detractors from performance relative to the MSCI Emerging Markets Index. The fund’s sale, early in the reporting period, of benchmark constituents and banking firms PKO Bank Polski (h) (Poland) and Bank Pekao SA (h) (Poland), hurt relative performance as the fund missed most of the positive price gains achieved by these stocks during the period. Not holding strong-performing commercial banking firm Sberbank (Russia) also held back relative results.
Stock selection and an overweighted position in the consumer staples sector hindered relative performance. Holdings of tobacco distributor British American Tobacco (United Kingdom) and palm oil and refined sugar manufacturer Tradewinds Berhad (b) (Malaysia) were among the fund’s top detractors. Shares of Tradewinds declined as palm oil prices trended down and world prices of sugar fluctuated.
Securities in other sectors that held back relative returns included utility company Manila Water Company (b) (Philippines), wireless communications company China Mobile (Hong Kong), and generic drug manufacturer Teva Pharmaceutical Industries (h) (Israel). Shares of China Mobile fell after the company reported lower-than-expected earnings and experienced their slowest growth rate in five years. Purchasing petrochemical firm Reliance Industries (India) in the middle of the period held back relative performance as the fund missed the stock’s price appreciation earlier in the reporting period.
The fund’s currency exposure was another detractor from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
The fund’s cash position also held back relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in the utilities and communications sector boosted relative performance. The timing of our transactions in integrated communications services company Reliance Communications (h) benefited relative performance as we avoided most of the decline experienced by this benchmark constituent during the reporting period.
3
MFS Emerging Markets Equity Portfolio
Management Review – continued
Stock selection in the health care sector was another positive factor for relative results. Holdings of over-the-counter pharmaceutical company Genomma Lab Internacional (b) (Mexico) and dental plan provider Odontoprev (h) (Brazil) bolstered relative performance as these securities significantly outperformed the benchmark over the reporting period. Shares of Genomma Lab Internacional rose as the company revised its earnings and net sales growth projections based upon higher anticipated sales from recent acquisitions and a positive trend in Mexican and international operations. The company also announced a joint venture with Grupo Televisa to sell and distribute personal care products and medicine in the U.S. and Puerto Rico.
Stock selection in the basic materials sector also aided relative returns. Holdings of petrochemical products manufacturer LG Chemical (h) (South Korea) were among the fund’s top contributors. Shares of LG Chemical climbed after the company reported better-than-expected results.
Securities in other sectors that helped relative returns included credit card processing and administration services company CSU Cardsystem (b) (Brazil), real estate consulting firm Brasil Brokers Participacoes (b) (Brazil), automotive parts company Hyundai Mobis (h) (South Korea), and integrated enterprise management software company Totvs (b) (Brazil). The fund’s overweighted positions in strong-performing automaker PT Astra International (Indonesia) and computer company Acer also benefited relative performance.
Respectfully,
| | | | |
| Jose Luis Garcia | | Robert Lau | | Nicholas Smithie |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
Note to Contract Owners: Effective June 12, 2009, Robert Lau became a co-manager of the fund.
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Emerging Markets Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 6/05/96 | | 68.58% | | 12.83% | | 10.29% | | N/A | | |
| | | Service Class | | 8/24/01 | | 68.13% | | 12.54% | | N/A | | 16.53% | | |
Comparative benchmark
| | | | | | | | | | | | | | |
| | | MSCI Emerging Markets Index (f) | | 79.02% | | 15.88% | | 10.11% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
MSCI Emerging Markets Index – a market capitalization-weighted index that is designed to measure equity market performance in the global emerging markets.
It is not possible to invest directly in an index.
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.
5
MFS Emerging Markets Equity Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Emerging Markets Equity Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.40% | | $1,000.00 | | $1,306.38 | | $8.14 |
| | Hypothetical (h) | | 1.40% | | $1,000.00 | | $1,018.15 | | $7.12 |
| Service Class | | Actual | | 1.65% | | $1,000.00 | | $1,304.27 | | $9.58 |
| | Hypothetical (h) | | 1.65% | | $1,000.00 | | $1,016.89 | | $8.39 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Emerging Markets Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.5% | | | | | |
| Aerospace – 0.1% | | | |
| Embraer-Empresa Brasileira de Aeronautica S.A., ADR | | 5,780 | | $ | 127,791 |
| | | | | |
| Airlines – 0.3% | | | |
| Copa Holdings S.A., “A” | | 5,660 | | $ | 308,300 |
| | | | | |
| Alcoholic Beverages – 0.9% | | | |
| Companhia de Bebidas das Americas, ADR | | 8,520 | | $ | 861,287 |
| | | | | |
| Apparel Manufacturers – 2.2% | | | |
| Li & Fung Ltd. | | 294,000 | | $ | 1,209,951 |
| Stella International Holdings | | 513,500 | | | 930,961 |
| | | | | |
| | | | $ | 2,140,912 |
| | | | | |
| Automotive – 0.9% | | | |
| PT Astra International Tbk. | | 233,500 | | $ | 857,739 |
| | | | | |
| Broadcasting – 0.6% | | | |
| Grupo Televisa S.A., ADR | | 28,430 | | $ | 590,207 |
| | | | | |
| Brokerage & Asset Managers – 2.5% | | | |
| BM&F Bovespa S.A. | | 55,900 | | $ | 388,497 |
| Bolsa Mexicana de Valores S.A. de C.V. (a) | | 319,700 | | | 378,058 |
| Hong Kong Exchanges & Clearing Ltd. | | 92,700 | | | 1,650,283 |
| | | | | |
| | | | $ | 2,416,838 |
| | | | | |
| Business Services – 3.9% | | | |
| Companhia Brasileira de Meios de Pagamento | | 47,490 | | $ | 413,904 |
| Infosys Technologies Ltd., ADR | | 42,120 | | | 2,327,972 |
| Kroton Educacional S.A., IEU | | 49,596 | | | 512,767 |
| Redecard S.A. | | 27,600 | | | 454,787 |
| | | | | |
| | | | $ | 3,709,430 |
| | | | | |
| Cable TV – 1.0% | | | |
| Naspers Ltd. | | 24,160 | | $ | 980,439 |
| | | | | |
| Computer Software – 0.4% | | | |
| Totvs S.A. | | 6,400 | | $ | 430,680 |
| | | | | |
| Computer Software – Systems – 2.8% | | | |
| Acer, Inc. | | 419,480 | | $ | 1,253,176 |
| Hon Hai Precision Industry Co. Ltd. | | 297,000 | | | 1,397,149 |
| | | | | |
| | | | $ | 2,650,325 |
| | | | | |
| Conglomerates – 1.1% | | | |
| First Pacific Co. Ltd. | | 1,804,800 | | $ | 1,093,709 |
| | | | | |
| Construction – 2.4% | | | |
| Anhui Conch Cement Co. Ltd. | | 158,000 | | $ | 1,009,082 |
| Corporacion Moctezuma S.A. de C.V. | | 201,400 | | | 461,856 |
| Duratex S.A. | | 56,789 | | | 523,903 |
| Urbi Desarrollos Urbanos S.A. de C.V. (a) | | 141,490 | | | 317,763 |
| | | | | |
| | | | $ | 2,312,604 |
| | | | | |
| Consumer Products – 2.5% | | | |
| Dabur India Ltd. | | 276,990 | | $ | 942,418 |
| Hengan International Group Co. Ltd. | | 90,000 | | | 666,170 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – continued | | | |
| Kimberly-Clark de Mexico S.A. de C.V., “A” | | 78,940 | | $ | 353,365 |
| Natura Cosmeticos S.A. | | 19,260 | | | 401,683 |
| | | | | |
| | | | $ | 2,363,636 |
| | | | | |
| Consumer Services – 0.6% | | | |
| Anhanguera Educacional Participacoes S.A., IEU (a) | | 43,500 | | $ | 618,157 |
| | | | | |
| Electronics – 9.0% | | | |
| MediaTek, Inc. | | 63,617 | | $ | 1,104,770 |
| Samsung Electronics Co. Ltd. | | 5,802 | | | 3,962,667 |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | 1,038,258 | | | 2,082,680 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 134,947 | | | 1,543,794 |
| | | | | |
| | | | $ | 8,693,911 |
| | | | | |
| Energy – Independent – 7.0% | | | |
| China Shenhua Energy Co. Ltd. | | 213,000 | | $ | 1,029,834 |
| CNOOC Ltd. | | 1,064,000 | | | 1,656,493 |
| OAO Tatneft (a) | | 14,850 | | | 432,729 |
| Oil & Natural Gas Corp. Ltd. | | 48,382 | | | 1,220,389 |
| PTT Exploration & Production Ltd. | | 108,600 | | | 478,830 |
| Reliance Industries Ltd. | | 58,134 | | | 1,352,719 |
| Turkiye Petrol Rafinerileri AS | | 27,503 | | | 544,570 |
| | | | | |
| | | | $ | 6,715,564 |
| | | | | |
| Energy – Integrated – 7.9% | | | |
| LUKOIL, ADR | | 31,110 | | $ | 1,782,603 |
| OAO Gazprom, ADR | | 98,889 | | | 2,465,063 |
| Petroleo Brasileiro S.A., ADR | | 71,052 | | | 3,387,759 |
| | | | | |
| | | | $ | 7,635,425 |
| | | | | |
| Engineering – Construction – 0.5% | | | |
| Orascom Construction Industries | | 10,155 | | $ | 459,735 |
| | | | | |
| Food & Beverages – 1.5% | | | |
| Grupo Continental S.A. | | 220,613 | | $ | 557,856 |
| Tiger Brands Ltd. | | 22,000 | | | 509,336 |
| Tradewinds Berhad | | 435,400 | | | 350,965 |
| | | | | |
| | | | $ | 1,418,157 |
| | | | | |
| Food & Drug Stores – 0.5% | | | |
| Shoprite Group PLC | | 49,286 | | $ | 434,188 |
| | | | | |
| Forest & Paper Products – 0.2% | | | |
| Suzano Papel E Celulose S.A., IPS | | 18,300 | | $ | 213,108 |
| | | | | |
| Gaming & Lodging – 0.8% | | | |
| Genting Berhad | | 363,400 | | $ | 774,425 |
| | | | | |
| General Merchandise – 1.1% | | | |
| Bim Birlesik Magazalar A.S. | | 13,862 | | $ | 642,630 |
| Massmart Holdings Ltd. | | 33,300 | | | 401,599 |
| | | | | |
| | | | $ | 1,044,229 |
| | | | | |
8
MFS Emerging Markets Equity Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Health Maintenance Organizations – 0.9% | | | |
| OdontoPrev S.A. | | 23,000 | | $ | 841,926 |
| | | | | |
| Insurance – 2.6% | | | | | |
| China Life Insurance Co. Ltd. | | 294,000 | | $ | 1,438,640 |
| China Pacific Insurance Co. Ltd. (a) | | 53,600 | | | 213,615 |
| Samsung Fire & Marine Insurance Co. Ltd. | | 5,196 | | | 887,393 |
| | | | | |
| | | | $ | 2,539,648 |
| | | | | |
| Internet – 0.2% | | | | | |
| Universo Online S.A., IPS | | 31,900 | | $ | 170,985 |
| | | | | |
| Machinery & Tools – 0.5% | | | | | |
| Beml Ltd. | | 18,820 | | $ | 450,680 |
| | | | | |
| Major Banks – 4.0% | | | | | |
| Banco Santander Chile, ADR | | 10,863 | | $ | 703,705 |
| Bank of China Ltd. | | 2,489,000 | | | 1,332,636 |
| Standard Chartered PLC | | 18,820 | | | 471,301 |
| Standard Chartered PLC | | 56,000 | | | 1,388,187 |
| | | | | |
| | | | $ | 3,895,829 |
| | | | | |
| Medical & Health Technology & Services – 1.3% | | | |
| Diagnosticos da America S.A. | | 17,600 | | $ | 571,358 |
| Fleury S.A. (a) | | 61,900 | | | 653,843 |
| | | | | |
| | | | $ | 1,225,201 |
| | | | | |
| Metals & Mining – 7.7% | | | | | |
| Grupo Mexico S.A.B. de C.V., “B” | | 139,342 | | $ | 319,649 |
| Mining & Metallurgical Co. Norilsk Nickel, ADR (a) | | 39,700 | | | 557,015 |
| National Aluminum Co. Ltd. | | 153,842 | | | 1,374,556 |
| Novolipetsk Steel, GDR (a) | | 16,000 | | | 491,200 |
| Steel Authority of India Ltd. | | 406,489 | | | 2,094,320 |
| Usinas Siderurgicas de Minas Gerais S.A., IPS | | 11,475 | | | 322,950 |
| Vale S.A., ADR | | 78,474 | | | 2,278,100 |
| | | | | |
| | | | $ | 7,437,790 |
| | | | | |
| Network & Telecom – 1.0% | | | | | |
| High Tech Computer Corp. | | 81,537 | | $ | 927,973 |
| | | | | |
| Oil Services – 0.3% | | | | | |
| Tenaris S.A., ADR | | 7,820 | | $ | 333,523 |
| | | | | |
| Other Banks & Diversified Financials – 12.1% | | | |
| ABSA Group Ltd. | | 29,030 | | $ | 502,685 |
| Banco Compartamos S.A. | | 104,500 | | | 539,515 |
| Banco Santander, S.A., IEU | | 21,300 | | | 290,732 |
| Bancolombia S.A., ADR | | 5,940 | | | 270,329 |
| China Construction Bank | | 2,254,000 | | | 1,918,565 |
| China Merchants Bank Co. Ltd. | | 54,050 | | | 140,216 |
| Credicorp Ltd. | | 3,530 | | | 271,881 |
| CSU Cardsystem S.A. (a) | | 117,140 | | | 569,216 |
| Grupo Financiero Banorte S.A. de C.V. | | 58,000 | | | 212,102 |
| Hana Financial Group, Inc. (a) | | 34,810 | | | 987,691 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Other Banks & Diversified Financials – continued | | | |
| Housing Development Finance Corp. Ltd. | | 22,052 | | $ | 1,268,008 |
| Itau Unibanco Multiplo S.A., ADR | | 37,508 | | | 856,683 |
| OTP Bank Ltd., GDR (a) | | 31,690 | | | 467,111 |
| Public Bank Berhad | | 577,000 | | | 1,897,494 |
| Turkiye Garanti Bankasi A.S. | | 236,696 | | | 1,006,846 |
| Turkiye Is Bankasi A.S., “C” | | 117,730 | | | 496,851 |
| | | | | |
| | | | $ | 11,695,925 |
| | | | | |
| Pharmaceuticals – 0.9% | | | | | |
| Genomma Lab Internacional S.A., “B” (a) | | 371,700 | | $ | 818,013 |
| | | | | |
| Precious Metals & Minerals – 1.4% | | | | | |
| Gold Fields Ltd. | | 41,370 | | $ | 544,325 |
| Impala Platinum Holdings Ltd. | | 31,244 | | | 849,372 |
| | | | | |
| | | | $ | 1,393,697 |
| | | | | |
| Real Estate – 2.1% | | | | | |
| Brasil Brokers Participacoes | | 93,700 | | $ | 344,806 |
| China Overseas Land & Investment Ltd. | | 362,000 | | | 757,979 |
| Hang Lung Properties Ltd. | | 226,000 | | | 882,974 |
| | | | | |
| | | | $ | 1,985,759 |
| | | | | |
| Specialty Stores – 1.7% | | | | | |
| Dufry South America Ltd., BDR | | 19,280 | | $ | 396,411 |
| Foschini Ltd. | | 81,840 | | | 666,879 |
| Lewis Group Ltd. | | 79,919 | | | 571,798 |
| | | | | |
| | | | $ | 1,635,088 |
| | | | | |
| Telecommunications – Wireless – 6.9% | | | | | |
| America Movil S.A.B. de C.V., “L”, ADR | | 35,450 | | $ | 1,665,441 |
| China Mobile Ltd. | | 82,000 | | | 764,331 |
| Egyptian Co. for Mobil Services (Mobinil) | | 10,800 | | | 473,528 |
| Mobile TeleSystems OJSC, ADR | | 17,012 | | | 831,717 |
| MTN Group Ltd. | | 98,620 | | | 1,568,981 |
| Philippine Long Distance Telephone Co. | | 7,920 | | | 448,851 |
| Vimpel-Communications, ADR | | 27,780 | | | 516,430 |
| Vivo Participacoes S.A., ADR | | 12,800 | | | 396,800 |
| | | | | |
| | | | $ | 6,666,079 |
| | | | | |
| Telephone Services – 0.9% | | | | | |
| China Unicom Ltd., ADR | | 50,710 | | $ | 664,808 |
| Empresa Nacional de Telecomunicaciones S.A. | | 14,588 | | | 211,238 |
| | | | | |
| | | | $ | 876,046 |
| | | | | |
| Tobacco – 1.5% | | | | | |
| British American Tobacco PLC | | 19,540 | | $ | 633,889 |
| KT&G Corp. (a) | | 14,275 | | | 788,794 |
| | | | | |
| | | | $ | 1,422,683 |
| | | | | |
| Utilities – Electric Power – 2.8% | | | | | |
| AES Tiete S.A., IPS | | 17,000 | | $ | 194,931 |
| CEZ AS | | 12,807 | | | 602,156 |
9
MFS Emerging Markets Equity Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| COMMON STOCKS – continued | | | | | | |
| Utilities – Electric Power – continued | | | | |
| CPFL Energia S.A. | | 9,800 | | $ | 200,677 | |
| Eletropaulo Metropolitana S.A., IPS | | 29,520 | | | 580,918 | |
| Equatorial Energia S.A. | | 20,700 | | | 213,486 | |
| Manila Water Co., Inc. | | 1,177,000 | | | 398,956 | |
| Tanjong PLC | | 110,000 | | | 541,005 | |
| | | | | | |
| | | | $ | 2,732,129 | |
| | | | | | |
Total Common Stocks
(Identified Cost, $78,759,551) | | | | $ | 95,899,770 | |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.2% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 1,151,778 | | $ | 1,151,778 | |
| | | | | | |
Total Investments
(Identified Cost, $79,911,329) | | | | $ | 97,051,548 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.7)% | | | | | (662,885 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 96,388,663 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| BDR | | Brazilian Depository Receipt |
| GDR | | Global Depository Receipt |
| IEU | | International Equity Unit |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
See Notes to Financial Statements
10
MFS Emerging Markets Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $78,759,551) | | $95,899,770 | | | |
Underlying funds, at cost and value | | 1,151,778 | | | |
Total investments, at value (identified cost, $79,911,329) | | $97,051,548 | | | |
Cash | | 33,774 | | | |
Foreign currency, at value (identified cost, $18,824) | | 18,930 | | | |
Receivables for | | | | | |
Fund shares sold | | 56,916 | | | |
Interest and dividends | | 107,509 | | | |
Receivable from investment adviser | | 23,860 | | | |
Other assets | | 3,749 | | | |
Total assets | | | | | $97,296,286 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $165,207 | | | |
Fund shares reacquired | | 322,901 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 5,537 | | | |
Shareholder servicing costs | | 36 | | | |
Distribution and/or service fees | | 349 | | | |
Administrative services fee | | 194 | | | |
Payable for Trustees’ compensation | | 103 | | | |
Deferred country tax expense payable | | 236,808 | | | |
Accrued expenses and other liabilities | | 176,488 | | | |
Total liabilities | | | | | $907,623 |
Net assets | | | | | $96,388,663 |
Net assets consist of | | | | | |
Paid-in capital | | $84,687,397 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign
currencies (net of $236,808 deferred country tax) | | 16,903,034 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (5,903,167 | ) | | |
Undistributed net investment income | | 701,399 | | | |
Net assets | | | | | $96,388,663 |
Shares of beneficial interest outstanding | | | | | 6,651,419 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $71,025,625 | | 4,885,328 | | $14.54 |
Service Class | | 25,363,038 | | 1,766,091 | | 14.36 |
See Notes to Financial Statements
11
MFS Emerging Markets Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
Year ended 12/31/09 | | | | | |
Net investment income | | | | | |
Income | | | | | |
Dividends | | $1,870,479 | | | |
Interest | | 251 | | | |
Dividends from underlying funds | | 2,536 | | | |
Foreign taxes withheld | | (155,089 | ) | | |
Total investment income | | | | | $1,718,177 |
Expenses | | | | | |
Management fee | | $687,437 | | | |
Distribution and/or service fees | | 38,439 | | | |
Shareholder servicing costs | | 9,029 | | | |
Administrative services fee | | 25,981 | | | |
Trustees’ compensation | | 6,847 | | | |
Custodian fee | | 269,535 | | | |
Shareholder communications | | 17,014 | | | |
Auditing fees | | 78,223 | | | |
Legal fees | | 8,168 | | | |
Miscellaneous | | 16,106 | | | |
Total expenses | | | | | $1,156,779 |
Fees paid indirectly | | (2 | ) | | |
Reduction of expenses by investment adviser | | (200,867 | ) | | |
Net expenses | | | | | $955,910 |
Net investment income | | | | | $762,267 |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | |
Realized gain (loss) (identified cost basis) | | | | | |
Investment transactions (net of $15,037 country tax) | | $225,574 | | | |
Foreign currency transactions | | (77,245 | ) | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $148,329 |
Change in unrealized appreciation (depreciation) | | | | | |
Investments (net of $236,808 increase in deferred country tax) | | $32,680,460 | | | |
Translation of assets and liabilities in foreign currencies | | (1,061 | ) | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $32,679,399 |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $32,827,728 |
Change in net assets from operations | | | | | $33,589,995 |
See Notes to Financial Statements
12
MFS Emerging Markets Equity Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $762,267 | | | $1,514,573 | |
Net realized gain (loss) on investments and foreign currency transactions | | 148,329 | | | (6,071,578 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 32,679,399 | | | (50,749,857 | ) |
Change in net assets from operations | | $33,589,995 | | | $(55,306,862 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(1,343,322 | ) | | $(1,062,070 | ) |
From net realized gain on investments | | — | | | (24,958,371 | ) |
Total distributions declared to shareholders | | $(1,343,322 | ) | | $(26,020,441 | ) |
Change in net assets from fund share transactions | | $21,389,378 | | | $6,272,752 | |
Total change in net assets | | $53,636,051 | | | $(75,054,551 | ) |
Net assets | | | | | | |
At beginning of period | | 42,752,612 | | | 117,807,163 | |
At end of period (including undistributed net investment income of $701,399 and
$1,330,830, respectively) | | $96,388,663 | | | $42,752,612 | |
See Notes to Financial Statements
13
MFS Emerging Markets Equity Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.88 | | | $26.15 | | | $24.52 | | | $21.84 | | | $16.16 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.14 | | | $0.33 | | | $0.30 | | | $0.47 | | | $0.29 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.80 | | | (11.19 | ) | | 7.13 | | | 5.92 | | | 5.59 | |
Total from investment operations | | $5.94 | | | $(10.86 | ) | | $7.43 | | | $6.39 | | | $5.88 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.28 | ) | | $(0.27 | ) | | $(0.55 | ) | | $(0.25 | ) | | $(0.13 | ) |
From net realized gain on investments | | — | | | (6.14 | ) | | (5.25 | ) | | (3.46 | ) | | (0.07 | ) |
Total distributions declared to shareholders | | $(0.28 | ) | | $(6.41 | ) | | $(5.80 | ) | | $(3.71 | ) | | $(0.20 | ) |
Net asset value, end of period | | $14.54 | | | $8.88 | | | $26.15 | | | $24.52 | | | $21.84 | |
Total return (%) (k)(r)(s) | | 68.58 | | | (55.11 | ) | | 35.71 | | | 30.16 | | | 36.76 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.71 | | | 1.85 | | | 1.55 | | | 1.53 | | | 1.31 | |
Expenses after expense reductions (f) | | 1.40 | | | 1.61 | | | N/A | | | N/A | | | N/A | |
Net investment income | | 1.24 | | | 1.94 | | | 1.22 | | | 2.08 | | | 1.62 | |
Portfolio turnover | | 66 | | | 93 | | | 96 | | | 110 | | | 95 | |
Net assets at end of period (000 omitted) | | $71,026 | | | $33,411 | | | $94,193 | | | $89,419 | | | $82,804 | |
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.76 | | | $25.88 | | | $24.33 | | | $21.71 | | | $16.08 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.11 | | | $0.29 | | | $0.23 | | | $0.41 | | | $0.25 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.73 | | | (11.06 | ) | | 7.07 | | | 5.89 | | | 5.54 | |
Total from investment operations | | $5.84 | | | $(10.77 | ) | | $7.30 | | | $6.30 | | | $5.79 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.24 | ) | | $(0.21 | ) | | $(0.50 | ) | | $(0.22 | ) | | $(0.09 | ) |
From net realized gain on investments | | — | | | (6.14 | ) | | (5.25 | ) | | (3.46 | ) | | (0.07 | ) |
Total distributions declared to shareholders | | $(0.24 | ) | | $(6.35 | ) | | $(5.75 | ) | | $(3.68 | ) | | $(0.16 | ) |
Net asset value, end of period | | $14.36 | | | $8.76 | | | $25.88 | | | $24.33 | | | $21.71 | |
Total return (%) (k)(r)(s) | | 68.13 | | | (55.23 | ) | | 35.38 | | | 29.90 | | | 36.36 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.95 | | | 2.10 | | | 1.81 | | | 1.78 | | | 1.56 | |
Expenses after expense reductions (f) | | 1.65 | | | 1.86 | | | N/A | | | N/A | | | N/A | |
Net investment income | | 0.93 | | | 1.70 | | | 0.96 | | | 1.84 | | | 1.38 | |
Portfolio turnover | | 66 | | | 93 | | | 96 | | | 110 | | | 95 | |
Net assets at end of period (000 omitted) | | $25,363 | | | $9,342 | | | $23,614 | | | $19,176 | | | $10,494 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
14
MFS Emerging Markets Equity Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Emerging Markets Equity Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
15
MFS Emerging Markets Equity Portfolio
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity Securities: | | | | | | | | | | | | |
Brazil | | $ | 10,045,934 | | $ | 6,775,796 | | $ | — | | $ | 16,821,730 |
China | | | 878,423 | | | 10,713,947 | | | — | | | 11,592,370 |
India | | | 3,595,980 | | | 7,435,082 | | | — | | | 11,031,062 |
Taiwan | | | 1,543,794 | | | 6,765,748 | | | — | | | 8,309,542 |
Russia | | | 4,054,679 | | | 3,022,078 | | | — | | | 7,076,757 |
South Africa | | | — | | | 7,029,603 | | | — | | | 7,029,603 |
South Korea | | | — | | | 6,626,545 | | | — | | | 6,626,545 |
Mexico | | | 6,213,826 | | | — | | | — | | | 6,213,826 |
Hong Kong | | | — | | | 5,767,877 | | | — | | | 5,767,877 |
Other Countries | | | 8,383,783 | | | 7,046,675 | | | — | | | 15,430,458 |
| Mutual Funds | | | 1,151,778 | | | — | | | — | | | 1,151,778 |
| Total investments | | $ | 35,868,197 | | $ | 61,183,351 | | $ | — | | $ | 97,051,548 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default.
16
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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 December 31, 2009, 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 wash sale loss deferrals, foreign currency transactions, and foreign taxes.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $1,343,322 | | $6,958,086 |
| Long-term capital gain | | — | | 19,062,355 |
| Total distributions | | $1,343,322 | | $26,020,441 |
17
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $80,181,669 | |
| Gross appreciation | | 19,664,143 | |
| Gross depreciation | | (2,794,264 | ) |
| Net unrealized appreciation (depreciation) | | $16,869,879 | |
| Undistributed ordinary income | | 708,417 | |
| Capital loss carryforwards | | (5,632,827 | ) |
| Other temporary differences | | (244,203 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(5,228,580 | ) |
| 12/31/17 | | (404,247 | ) |
| | $(5,632,827 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,089,057 | | $877,643 | | $— | | $19,613,637 |
| Service Class | | 254,265 | | 184,427 | | — | | 5,344,734 |
| Total | | $1,343,322 | | $1,062,070 | | $— | | $24,958,371 |
| (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 $500 million of average daily net assets | | 1.05% |
| Average daily net assets in excess of $500 million | | 1.00% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 1.05% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 1.40% of average daily net assets for the Initial Class shares and 1.65% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $200,867 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
18
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
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. For the year ended December 31, 2009, the fee was $9,029, which equated to 0.0138% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0397% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,156 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $62,572,293 and $41,847,167, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 1,866,216 | | | $21,305,823 | | | 562,118 | | | $6,921,859 | |
Service Class | | 1,017,919 | | | 12,438,640 | | | 351,480 | | | 4,985,217 | |
| | 2,884,135 | | | $33,744,463 | | | 913,598 | | | $11,907,076 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 115,122 | | | $1,089,057 | | | 1,029,195 | | | $20,491,280 | |
Service Class | | 27,165 | | | 254,265 | | | 281,096 | | | 5,529,161 | |
| | 142,287 | | | $1,343,322 | | | 1,310,291 | | | $26,020,441 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (857,701 | ) | | $(9,580,199 | ) | | (1,431,692 | ) | | $(24,195,564 | ) |
Service Class | | (345,148 | ) | | (4,118,208 | ) | | (478,998 | ) | | (7,459,201 | ) |
| | (1,202,849 | ) | | $(13,698,407 | ) | | (1,910,690 | ) | | $(31,654,765 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 1,123,637 | | | $12,814,681 | | | 159,621 | | | $3,217,575 | |
Service Class | | 699,936 | | | 8,574,697 | | | 153,578 | | | 3,055,177 | |
| | 1,823,573 | | | $21,389,378 | | | 313,199 | | | $6,272,752 | |
19
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the fund’s commitment fee and interest expense were $899 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 | | — | | 27,017,642 | | (25,865,864 | ) | | 1,151,778 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $2,536 | | | $1,151,778 |
20
MFS Emerging Markets Equity Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Emerging Markets Equity Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Emerging Markets Equity Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Emerging Markets Equity Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
21
MFS Emerging Markets Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
22
MFS Emerging Markets Equity Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
23
MFS Emerging Markets Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Jose Luis Garcia Robert Lau Nicholas Smithie | | |
24
MFS Emerging Markets Equity Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 5th quintile for the three-year period and in the 3rd quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
25
MFS Emerging Markets Equity Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate was below the median and total expense ratio was above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
26
MFS Emerging Markets Equity Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
Income derived from foreign sources was $1,870,586. The fund intends to pass through foreign tax credits of $175,110 for the fiscal year.
27
MFS Emerging Markets Equity Portfolio
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.
28
MFS® GLOBAL TACTICAL ALLOCATION PORTFOLIO
(formerly MFS® Global Total Return Portfolio)
Notes to Contract Owners: Effective February 8, 2010, the fund changed its name from MFS Global Total Return Portfolio to MFS Global Tactical Allocation Portfolio. Prior to February 8, 2010, the fund normally invested between 40% and 75% of its assets in equity securities and at least 25% of its assets in fixed-income senior securities. Effective February 8, 2010, MFS attempts to achieve the fund’s objective by generating returns from a combination of (i) individual security selection of a combination of debt instruments and equity securities and (ii) a tactical asset allocation overlay primarily using derivative instruments.
Effective February 8, 2010, the fund’s benchmark, JPMorgan Global Government Bond Index Unhedged will be replaced by the Barclays Capital Global Aggregate Index. The fund’s other benchmark, the Global Total Return Blended Index will be replaced by the Global Tactical Allocation Blended Index.
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Tactical Allocation Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Global Tactical Allocation Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top ten holdings (i) |
| Government of Japan, 1.7%, 2017 | | 4.7% |
| Republic of Italy, 4.75%, 2013 | | 3.3% |
| Republic of Italy, 5.25%, 2017 | | 2.2% |
| Nestle S.A. | | 1.9% |
| Vodafone Group PLC | | 1.7% |
| Kingdom of Spain, 5.0%, 2012 | | 1.6% |
| Sanofi-Aventis | | 1.5% |
| Government of Japan, 2.1%, 2024 | | 1.5% |
| Lockheed Martin Corp. | | 1.4% |
| Roche Holding AG | | 1.3% |
Equity sectors | | |
| Financial Services | | 10.7% |
| Health Care | | 8.7% |
| Consumer Staples | | 8.7% |
| Utilities & Communications | | 6.1% |
| Energy | | 5.8% |
| Industrial Goods & Services | | 5.4% |
| Technology | | 3.9% |
| Leisure | | 2.9% |
| Special Products & Services | | 2.1% |
| Basic Materials | | 1.5% |
| Transportation | | 1.4% |
| Retailing | | 1.4% |
| Autos & Housing | | 1.0% |
| | |
| Fixed income sectors (i) |
| Non-U.S. Government Bonds | | 26.3% |
| U.S. Treasury Securities | | 4.3% |
| Emerging Markets Bonds | | 2.5% |
| Mortgage-Backed Securities | | 1.4% |
| U.S. Government Agencies | | 1.2% |
| Commercial Mortgage-Backed Securities | | 0.6% |
| High Grade Corporates | | 0.3% |
Country weightings (i) |
| United States | | 36.3% |
| Japan | | 15.4% |
| United Kingdom | | 11.1% |
| Italy | | 6.0% |
| France | | 5.7% |
| Switzerland | | 5.4% |
| Netherlands | | 4.4% |
| Germany | | 4.1% |
| Spain | | 2.2% |
| Other Countries | | 9.4% |
| (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 any derivative holdings, if applicable. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Global Tactical Allocation Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Global Tactical Allocation Portfolio (formerly MFS Global Total Return Portfolio) (the “fund”) provided a total return of 15.16%, while Service Class shares of the fund provided a total return of 14.78%. These compare with returns of 30.79% and 1.90% for the fund’s benchmarks, the Morgan Stanley Capital International (MSCI) World Index and the JPMorgan Global Government Bond Index Unhedged, respectively. The fund’s other benchmark, the Global Total Return Blended Index (“Blended Index”), generated a return of 18.88%. The Blended Index reflects the blended returns of the equity and fixed income market indices, with percentage allocations to each index designed to resemble the equity and fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
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
Within the equity portion of the fund, a combination of stock selection and an underweighted position in the basic materials sector held back performance relative to the MSCI World Index. Not owning mining company BHP Billiton (U.K.) had a negative impact on relative returns as this stock significantly outperformed the benchmark.
Stock selection in the financial services sector was another major factor that hindered relative performance. Holdings of financial services firm Sumitomo Mitsui Financial Group (Japan) and insurance company Allstate were among the fund’s top detractors. Shares of the Sumitomo fell despite returning to profit in the first quarter as stock markets rebounded. We believe that investors were concerned that Sumitomo, along with other banks, would follow Nomura’s lead in raising new capital and diluting equity shareholders’ stake in the company.
An underweighted position and poor stock selection in the technology sector also detracted from relative returns. Not owning strong-performing personal computer and electronics maker Apple, a benchmark constituent, hurt relative performance.
The fund’s overweighted position in the consumer staples sector was another negative factor for relative results. Household and industrial products manufacturer Kao (Japan) and cosmetics maker KOSE (b) (Japan) were among the fund’s top detractors over the reporting period. Kao’s stock price declined early in the reporting period as the company reported that it might miss its full-year operating profit forecast due to weaker-than-expected sales of cosmetics and chemicals.
Elsewhere, Japanese telecommunications company KDDI, defense contractor Lockheed Martin, and Swiss pharmaceutical and diagnostics company Roche Holding also dampened relative results.
During the reporting period, the fund’s currency exposure detracted from relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
3
MFS Global Tactical Allocation Portfolio
Management Review – continued
The fund’s cash position also held back relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Within the fixed income portion of the fund, our long positions in U.K., Canadian, Australian, and Swedish bonds detracted from performance relative to the JPMorgan Global Government Bond Index Unhedged. The fund’s Euro and Swiss franc exposure also held back relative returns.
Contributors to Performance
Within the equity portion of the fund, stock selection in the transportation sector bolstered relative performance. Package delivery company TNT (The Netherlands) was among the fund’s top contributors. Shares of TNT pushed higher as the company saw encouraging signs in the air freight market and announced that it will invest in the Asia Pacific market.
Stocks in other areas that aided relative results included financial services firms, DnB NOR (Norway), Goldman Sachs, and Credit Agricole (France), electronics maker Samsung Electronics (b) (South Korea), locks manufacturer ASSA ABLOY (Sweden), brewer Heineken (The Netherlands), and semiconductor manufacturer Taiwan Semiconductor (b). Underweighting poor-performing integrated oil and gas company Exxon Mobil, and owning strong-performing oil and gas refiner StatoilHydro (h) (Norway) in the early part of the reporting period, also helped.
Within the fixed income portion of the fund, an increased exposure to Treasury Inflation Protected Securities (TIPS), high-quality commercial mortgage-backed securities, and U.S. dollar-denominated emerging markets debt securities were the key contributors to positive performance relative to the JPMorgan Global Government Bond Index Unhedged. The bonds in all of these sectors performed exceptionally well over the reporting period.
A greater exposure to Euroland versus U.S. bonds and holdings of European sovereign debt of Greece, Portugal, and Ireland also aided relative results. The fund’s long U.S. Dollar currency position in the first quarter of the year, and short U.S. Dollar position for much of the rest of the year, was another positive factor for relative performance. Our exposure to Japanese Yen, Norwegian Krone, and Australian Dollar also boosted relative returns.
The fund’s return from yield, which was greater than that of the benchmark, contributed to relative performance. Yield curve(y) positioning, particularly our lesser exposure to the long end of the curve, also helped.
Respectfully,
| | | | | | |
| Nevin Chitkara | | Steven Gorham | | Matthew Ryan | | Benjamin Stone |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
| Erik Weisman | | Barnaby Wiener | | | | |
| Portfolio Manager | | Portfolio Manager | | | | |
Note to Contract Owners: Effective April 9, 2009, Benjamin Stone became a co-manager of the fund.
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
| (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.
4
MFS Global Tactical Allocation Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 11/07/94 | | 15.16% | | 5.23% | | 6.02% | | N/A | | |
| | | Service Class | | 8/24/01 | | 14.78% | | 4.96% | | N/A | | 7.26% | | |
| | | | | | | | | | | | | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | MSCI World Index (f) | | 30.79% | | 2.57% | | 0.23% | | N/A | | |
| | | JPMorgan Global Government Bond Index Unhedged (f) | | 1.90% | | 4.60% | | 6.70% | | N/A | | |
| | | Global Total Return Blended Index (y) | | 18.88% | | 3.79% | | 3.16% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
| (y) | Global Total Return Blended Index is at a point in time and allocations during the period can change. As of December 31, 2009, the blended index was comprised of 60% MSCI World Index and 40% JPMorgan Global Government Bond Index Unhedged. |
Benchmark Definitions
JPMorgan Global Government Bond Index Unhedged – measures developed government bond markets around the world.
MSCI World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed markets.
It is not possible to invest directly in an index.
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 for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Global Tactical Allocation Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.90% | | $1,000.00 | | $1,134.73 | | $4.84 |
| | Hypothetical (h) | | 0.90% | | $1,000.00 | | $1,020.67 | | $4.58 |
| Service Class | | Actual | | 1.15% | | $1,000.00 | | $1,133.00 | | $6.18 |
| | Hypothetical (h) | | 1.15% | | $1,000.00 | | $1,019.41 | | $5.85 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Global Tactical Allocation Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 59.6% | | | | | |
| Aerospace – 3.4% | | | | | |
| Cobham PLC | | 119,200 | | $ | 480,482 |
| Lockheed Martin Corp. | | 19,750 | | | 1,488,162 |
| Northrop Grumman Corp. | | 14,680 | | | 819,878 |
| United Technologies Corp. | | 10,520 | | | 730,193 |
| | | | | |
| | | | $ | 3,518,715 |
| | | | | |
| Alcoholic Beverages – 0.9% | | | | | |
| Heineken N.V. | | 20,510 | | $ | 971,836 |
| | | | | |
| Apparel Manufacturers – 0.7% | | | | | |
| Compagnie Financiere Richemont S.A. | | 7,500 | | $ | 250,958 |
| NIKE, Inc., “B” | | 6,690 | | | 442,008 |
| | | | | |
| | | | $ | 692,966 |
| | | | | |
| Broadcasting – 2.4% | | | | | |
| Fuji Television Network, Inc. | | 158 | | $ | 217,983 |
| Nippon Television Network Corp. | | 1,930 | | | 248,879 |
| Omnicom Group, Inc. | | 10,570 | | | 413,815 |
| Vivendi S.A. | | 25,512 | | | 753,157 |
| Walt Disney Co. | | 18,490 | | | 596,303 |
| WPP Group PLC | | 28,436 | | | 277,674 |
| | | | | |
| | | | $ | 2,507,811 |
| | | | | |
| Brokerage & Asset Managers – 0.3% | | | | | |
| Daiwa Securities Group, Inc. | | 69,000 | | $ | 345,912 |
| | | | | |
| Business Services – 1.5% | | | | | |
| Accenture Ltd., “A” | | 16,910 | | $ | 701,765 |
| Bunzl PLC | | 29,870 | | | 323,820 |
| Nomura Research, Inc. | | 8,400 | | | 164,532 |
| USS Co. Ltd. | | 6,890 | | | 418,719 |
| | | | | |
| | | | $ | 1,608,836 |
| | | | | |
| Chemicals – 1.5% | | | | | |
| 3M Co. | | 4,750 | | $ | 392,682 |
| Givaudan S.A. | | 590 | | | 469,551 |
| PPG Industries, Inc. | | 12,060 | | | 705,992 |
| | | | | |
| | | | $ | 1,568,225 |
| | | | | |
| Computer Software – 0.5% | | | | | |
| Oracle Corp. | | 21,770 | | $ | 534,236 |
| | | | | |
| Computer Software – Systems – 1.1% | | | | | |
| International Business Machines Corp. | | 4,720 | | $ | 617,848 |
| Konica Minolta Holdings, Inc. | | 48,500 | | | 497,422 |
| | | | | |
| | | | $ | 1,115,270 |
| | | | | |
| Conglomerates – 0.3% | | | | | |
| Tomkins PLC | | 96,820 | | $ | 298,909 |
| | | | | |
| Construction – 1.0% | | | | | |
| Geberit AG | | 4,187 | | $ | 741,668 |
| Sherwin-Williams Co. | | 5,600 | | | 345,240 |
| | | | | |
| | | | $ | 1,086,908 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – 2.6% | | | | | |
| Henkel KGaA, IPS | | 13,710 | | $ | 713,779 |
| Kao Corp. | | 39,400 | | | 920,116 |
| KOSE Corp. | | 15,200 | | | 306,893 |
| Procter & Gamble Co. | | 6,004 | | | 364,023 |
| Reckitt Benckiser Group PLC | | 7,300 | | | 395,705 |
| | | | | |
| | | | $ | 2,700,516 |
| | | | | |
| Consumer Services – 0.3% | | | | | |
| Benesse Corp. | | 6,600 | | $ | 275,664 |
| | | | | |
| Electrical Equipment – 1.0% | | | | | |
| Legrand S.A. | �� | 13,920 | | $ | 388,624 |
| OMRON Corp. | | 16,200 | | | 289,090 |
| Spectris PLC | | 32,240 | | | 379,822 |
| | | | | |
| | | | $ | 1,057,536 |
| | | | | |
| Electronics – 1.7% | | | | | |
| Halma PLC | | 43,530 | | $ | 169,477 |
| Intel Corp. | | 24,190 | | | 493,476 |
| Samsung Electronics Co. Ltd. | | 888 | | | 606,489 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 46,008 | | | 526,332 |
| | | | | |
| | | | $ | 1,795,774 |
| | | | | |
| Energy – Independent – 1.2% | | | | | |
| Apache Corp. | | 4,930 | | $ | 508,628 |
| Devon Energy Corp. | | 5,810 | | | 427,035 |
| EOG Resources, Inc. | | 3,010 | | | 292,873 |
| | | | | |
| | | | $ | 1,228,536 |
| | | | | |
| Energy – Integrated – 4.4% | | | | | |
| Chevron Corp. | | 14,680 | | $ | 1,130,213 |
| Exxon Mobil Corp. | | 8,800 | | | 600,072 |
| Hess Corp. | | 6,330 | | | 382,965 |
| Royal Dutch Shell PLC, “A” | | 38,670 | | | 1,167,551 |
| TOTAL S.A. | | 20,540 | | | 1,316,235 |
| | | | | |
| | | | $ | 4,597,036 |
| | | | | |
| Food & Beverages – 3.2% | | | | | |
| General Mills, Inc. | | 3,370 | | $ | 238,630 |
| J.M. Smucker Co. | | 3,378 | | | 208,592 |
| Kellogg Co. | | 5,350 | | | 284,620 |
| Nestle S.A. | | 41,544 | | | 2,018,324 |
| Nong Shim Co. Ltd. (a) | | 1,202 | | | 256,694 |
| PepsiCo, Inc. | | 5,610 | | | 341,088 |
| | | | | |
| | | | $ | 3,347,948 |
| | | | | |
| Food & Drug Stores – 0.7% | | | | | |
| CVS Caremark Corp. | | 13,290 | | $ | 428,071 |
| Lawson, Inc. | | 5,700 | | | 250,926 |
| | | | | |
| | | | $ | 678,997 |
| | | | | |
7
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Insurance – 3.4% | | | | | |
| Allstate Corp. | | 19,200 | | $ | 576,768 |
| Aon Corp. | | 7,440 | | | 285,250 |
| Hiscox Ltd. | | 46,763 | | | 239,093 |
| ING Groep N.V. (a) | | 38,978 | | | 376,807 |
| Jardine Lloyd Thompson Group PLC | | 38,690 | | | 302,212 |
| MetLife, Inc. | | 22,810 | | | 806,333 |
| Muenchener Ruckvers AG | | 2,460 | | | 383,228 |
| Travelers Cos., Inc. | | 5,220 | | | 260,269 |
| Zurich Financial Services Ltd. | | 1,250 | | | 271,783 |
| | | | | |
| | | | $ | 3,501,743 |
| | | | | |
| Leisure & Toys – 0.1% | | | | | |
| NAMCO BANDAI Holdings, Inc. | | 16,100 | | $ | 153,190 |
| | | | | |
| Machinery & Tools – 1.0% | | | | | |
| ASSA ABLOY AB, “B” | | 26,170 | | $ | 501,133 |
| Neopost S.A. (l) | | 4,490 | | | 371,201 |
| Schindler Holding AG | | 2,000 | | | 153,432 |
| | | | | |
| | | | $ | 1,025,766 |
| | | | | |
| Major Banks – 5.7% | | | | | |
| Bank of America Corp., EU | | 19,990 | | $ | 298,251 |
| Bank of New York Mellon Corp. | | 32,791 | | | 917,164 |
| Credit Agricole S.A. | | 22,769 | | | 396,947 |
| Goldman Sachs Group, Inc. | | 4,870 | | | 822,251 |
| HSBC Holdings PLC | | 62,804 | | | 716,740 |
| JPMorgan Chase & Co. | | 19,020 | | | 792,563 |
| PNC Financial Services Group, Inc. | | 5,020 | | | 265,006 |
| State Street Corp. | | 11,390 | | | 495,921 |
| Sumitomo Mitsui Financial Group, Inc. | | 14,500 | | | 413,389 |
| UniCredito Italiano S.p.A. (a) | | 109,538 | | | 364,365 |
| Wells Fargo & Co. | | 18,320 | | | 494,457 |
| | | | | |
| | | | $ | 5,977,054 |
| | | | | |
| Medical Equipment – 1.6% | | | | | |
| Becton, Dickinson & Co. | | 3,500 | | $ | 276,010 |
| Medtronic, Inc. | | 9,980 | | | 438,920 |
| Smith & Nephew PLC | | 63,686 | | | 653,935 |
| Synthes, Inc. | | 2,470 | | | 323,492 |
| | | | | |
| | | | $ | 1,692,357 |
| | | | | |
| Network & Telecom – 0.6% | | | | | |
| Nokia Oyj | | 51,840 | | $ | 665,514 |
| | | | | |
| Oil Services – 0.2% | | | | | |
| National Oilwell Varco, Inc. | | 5,390 | | $ | 237,645 |
| | | | | |
| Other Banks & Diversified Financials – 1.1% | | | |
| Bangkok Bank Public Co. Ltd. | | 67,400 | | $ | 235,516 |
| DNB Holding A.S.A. (a) | | 39,400 | | | 427,018 |
| Hachijuni Bank Ltd. | | 27,000 | | | 157,070 |
| Sapporo Hokuyo Holdings, Inc. | | 33,200 | | | 120,131 |
| Unione di Banche Italiane ScpA | | 13,525 | | | 193,736 |
| | | | | |
| | | | $ | 1,133,471 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMON STOCKS – continued | | | | | | |
| Pharmaceuticals – 7.1% | | | | | | |
| Abbott Laboratories | | | 12,260 | | $ | 661,917 |
| Daiichi Sankyo Co. Ltd. | | | 16,500 | | | 345,289 |
| GlaxoSmithKline PLC | | | 51,570 | | | 1,092,416 |
| Hisamitsu Pharmaceutical Co., Inc. | | | 2,700 | | | 86,971 |
| Johnson & Johnson | | | 11,180 | | | 720,104 |
| Merck & Co., Inc. | | | 13,430 | | | 490,732 |
| Merck KGaA | | | 4,170 | | | 389,520 |
| Pfizer, Inc. | | | 36,770 | | | 668,846 |
| Roche Holding AG | | | 8,090 | | | 1,376,240 |
| Sanofi-Aventis | | | 19,720 | | | 1,545,786 |
| | | | | | |
| | | | | $ | 7,377,821 |
| | | | | | |
| Printing & Publishing – 0.4% | | | | | | |
| Reed Elsevier PLC | | | 49,092 | | $ | 403,132 |
| | | | | | |
| Real Estate – 0.2% | | | | | | |
| Deutsche Wohnen AG (a) | | | 17,600 | | $ | 169,044 |
| | | | | | |
| Telecommunications – Wireless – 2.5% | | | | | | |
| KDDI Corp. | | | 175 | | $ | 922,842 |
| Vodafone Group PLC | | | 745,570 | | | 1,726,517 |
| | | | | | |
| | | | | $ | 2,649,359 |
| | | | | | |
| Telephone Services – 2.1% | | | | | | |
| AT&T, Inc. | | | 36,440 | | $ | 1,021,413 |
| China Unicom Ltd. | | | 156,000 | | | 205,039 |
| Royal KPN N.V. | | | 57,630 | | | 978,167 |
| | | | | | |
| | | | | $ | 2,204,619 |
| | | | | | |
| Tobacco – 2.0% | | | | | | |
| British American Tobacco PLC | | | 18,740 | | $ | 607,937 |
| Japan Tobacco, Inc. | | | 128 | | | 431,892 |
| Philip Morris International, Inc. | | | 20,756 | | | 1,000,232 |
| | | | | | |
| | | | | $ | 2,040,061 |
| | | | | | |
| Trucking – 1.4% | | | | | | |
| TNT N.V. | | | 22,587 | | $ | 691,362 |
| Yamato Holdings Co. Ltd. | | | 52,000 | | | 719,128 |
| | | | | | |
| | | | | $ | 1,410,490 |
| | | | | | |
| Utilities – Electric Power – 1.5% | | | | | | |
| Dominion Resources, Inc. | | | 11,380 | | $ | 442,910 |
| E.ON AG | | | 15,012 | | | 626,716 |
| FPL Group, Inc. | | | 4,460 | | | 235,577 |
| PPL Corp. | | | 6,330 | | | 204,522 |
| | | | | | |
| | | | | $ | 1,509,725 |
| | | | | | |
Total Common Stocks
(Identified Cost, $66,430,109) | | | | | $ | 62,082,622 |
| | | | | | |
| | |
| BONDS – 36.1% | | | | | | |
| Asset Backed & Securitized – 0.6% | | | | | | |
Bayview Commercial Asset Trust, FRN,
0.895%, 2023 (z) | | CAD | 170,000 | | $ | 118,894 |
Commercial Mortgage Asset Trust, FRN,
0.85%, 2032 (i)(z) | | $ | 2,656,287 | | | 72,379 |
| Commercial Mortgage Pass-Through Certificates, FRN, 0.423%, 2017 (n) | | | 360,000 | | | 336,489 |
8
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Asset Backed & Securitized – continued | | | |
First Union National Bank
Commercial Mortgage Trust, FRN,
0.896%, 2043 (i)(n) | | $ | 7,027,754 | | $ | 52,981 |
| | | | | | |
| | | | | $ | 580,743 |
| | | | | | |
| Emerging Market Quasi-Sovereign – 1.5% | | | |
| Banco do Brasil S.A., 8.5%, 2049 (n) | | $ | 111,000 | | $ | 118,215 |
Empresa Nacional del Petroleo,
6.25%, 2019 (n) | | | 100,000 | | | 103,971 |
| Gaz Capital S.A., 8.125%, 2014 (n) | | | 102,000 | | | 108,120 |
KazMunaiGaz Finance B.V.,
11.75%, 2015 (n) | | | 200,000 | | | 241,000 |
| Korea National Oil Corp., 5.375%, 2014 | | | 112,000 | | | 118,400 |
| Majapahit Holding B.V., 7.75%, 2020 (n) | | | 100,000 | | | 104,750 |
Pemex Project Funding Master Trust,
5.75%, 2018 | | | 103,000 | | | 104,146 |
Petrobras International Finance Co.,
7.875%, 2019 | | | 108,000 | | | 124,504 |
| Petrobras International Finance Co., 6.875%, 2040 | | | 100,000 | | | 102,760 |
| Petroleum Co. of Trinidad & Tobago Ltd., 6%, 2022 | | | 121,000 | | | 112,530 |
| Qtel International Finance Ltd., 7.875%, 2019 (n) | | | 100,000 | | | 112,097 |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 6.75%, 2019 (n) | | | 250,000 | | | 270,481 |
| | | | | | |
| | | | | $ | 1,620,974 |
| | | | | | |
| Emerging Market Sovereign – 0.8% | | | | | | |
| Republic of Brazil, 5.625%, 2041 | | $ | 105,000 | | $ | 98,963 |
| Republic of Croatia, 6.75%, 2019 (n) | | | 110,000 | | | 118,478 |
| Republic of Panama, 5.2%, 2020 | | | 101,000 | | | 101,253 |
| Republic of Peru, 7.125%, 2019 | | | 120,000 | | | 138,000 |
| Republic of Peru, 7.35%, 2025 | | | 100,000 | | | 114,500 |
| Republic of Poland, 6.375%, 2019 | | | 119,000 | | | 129,434 |
| State of Qatar, 6.55%, 2019 (n) | | | 100,000 | | | 111,250 |
| | | | | | |
| | | | | $ | 811,878 |
| | | | | | |
| International Market Quasi-Sovereign – 0.3% |
| Canada Housing Trust, 4.6%, 2011 (n) | | CAD | 303,000 | | $ | 305,129 |
| | | | | | |
| International Market Sovereign – 25.6% |
| Federal Republic of Germany, 5%, 2011 | | EUR | 237,000 | | $ | 359,355 |
| Federal Republic of Germany, 3.75%, 2013 | | EUR | 280,000 | | | 425,008 |
| Federal Republic of Germany, 6.25%, 2030 | | EUR | 623,000 | | | 1,140,142 |
| Government of Canada, 4.5%, 2015 | | CAD | 206,000 | | | 212,839 |
| Government of Canada, 4.25%, 2018 | | CAD | 101,000 | | | 101,898 |
| Government of Canada, 5.75%, 2033 | | CAD | 52,000 | | | 61,231 |
| Government of Japan, 1.3%, 2014 | | JPY | 59,000,000 | | | 657,876 |
| Government of Japan, 1.7%, 2017 | | JPY | 428,000,000 | | | 4,876,369 |
| Government of Japan, 2.1%, 2024 | | JPY | 135,000,000 | | | 1,510,161 |
| Government of Japan, 2.2%, 2027 | | JPY | 105,950,000 | | | 1,175,518 |
| Government of Japan, 2.4%, 2037 | | JPY | 43,000,000 | | | 476,191 |
| Kingdom of Belgium, 5.5%, 2017 | | EUR | 509,000 | | | 831,576 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| International Market Sovereign – continued |
| Kingdom of Netherlands, 3.75%, 2014 | | EUR | 764,000 | | $ | 1,154,681 |
| Kingdom of Netherlands, 5.5%, 2028 | | EUR | 226,000 | | | 376,753 |
| Kingdom of Spain, 5%, 2012 | | EUR | 1,052,000 | | | 1,621,051 |
| Kingdom of Spain, 4.6%, 2019 | | EUR | 445,000 | | | 669,658 |
| Kingdom of Sweden, 4.5%, 2015 | | SEK | 1,295,000 | | | 197,025 |
| Republic of Finland, 3.875%, 2017 | | EUR | 388,000 | | | 577,821 |
| Republic of France, 6%, 2025 | | EUR | 406,000 | | | 710,095 |
| Republic of France, 4.75%, 2035 | | EUR | 257,000 | | | 396,522 |
| Republic of Ireland, 4.6%, 2016 | | EUR | 856,000 | | | 1,265,307 |
| Republic of Italy, 4.75%, 2013 | | EUR | 2,179,000 | | | 3,350,861 |
| Republic of Italy, 5.25%, 2017 | | EUR | 1,429,000 | | | 2,286,256 |
| United Kingdom Treasury, 8%, 2015 | | GBP | 511,000 | | | 1,038,866 |
| United Kingdom Treasury, 8%, 2021 | | GBP | 300,000 | | | 653,953 |
| United Kingdom Treasury, 4.25%, 2036 | | GBP | 358,000 | | | 559,073 |
| | | | | | |
| | | | | $ | 26,686,086 |
| | | | | | |
| Local Authorities – 0.3% | | | | | | |
| Metropolitan Transportation Authority, NY (Build America Bonds), 7.336%, 2039 | | $ | 100,000 | | $ | 111,425 |
| University of California Rev. (Build America Bonds), 5.77%, 2043 | | | 80,000 | | | 77,610 |
| Utah Transit Authority Sales Tax Rev. (Build America Bonds), “B”, 5.937%, 2039 | | | 130,000 | | | 130,846 |
| | | | | | |
| | | | | $ | 319,881 |
| | | | | | |
| Mortgage Backed – 1.4% | | | | | | |
| Fannie Mae, 4.77%, 2012 | | $ | 185,604 | | $ | 195,112 |
| Fannie Mae, 5.37%, 2013 | | | 142,594 | | | 152,278 |
| Fannie Mae, 4.78%, 2015 | | | 95,314 | | | 99,677 |
| Fannie Mae, 4.856%, 2015 | | | 75,787 | | | 78,988 |
| Fannie Mae, 5.5%, 2015 - 2024 | | | 46,740 | | | 50,232 |
| Fannie Mae, 5.09%, 2016 | | | 99,000 | | | 104,346 |
| Fannie Mae, 5.424%, 2016 | | | 102,047 | | | 109,825 |
| Fannie Mae, 4.989%, 2017 | | | 40,709 | | | 43,017 |
| Fannie Mae, 5.05%, 2017 | | | 90,000 | | | 94,655 |
| Fannie Mae, 6.16%, 2019 | | | 50,033 | | | 54,808 |
| Freddie Mac, 5.085%, 2019 | | | 30,000 | | | 31,039 |
| Freddie Mac, 5%, 2023 - 2028 | | | 419,966 | | | 430,375 |
| Freddie Mac, 4%, 2024 | | | 23,857 | | | 23,977 |
| | | | | | |
| | | | | $ | 1,468,329 |
| | | | | | |
| Supranational – 0.1% | | | | | | |
| Eurasian Development Bank, 7.375%, 2014 (n) | | $ | 100,000 | | $ | 103,875 |
| | | | | | |
| U.S. Government Agencies and Equivalents – 1.2% |
| Aid-Egypt, 4.45%, 2015 | | $ | 349,000 | | $ | 366,143 |
| Small Business Administration, 5.09%, 2025 | | | 53,277 | | | 56,056 |
| Small Business Administration, 5.21%, 2026 | | | 671,171 | | | 703,370 |
| Small Business Administration, 5.36%, 2026 | | | 74,705 | | | 79,477 |
| | | | | | |
| | | | | $ | 1,205,046 |
| | | | | | |
9
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| U.S. Treasury Obligations – 4.3% | | | | | | |
| U.S. Treasury Bonds, 4.75%, 2017 | | $ | 1,113,000 | | $ | 1,207,692 |
| U.S. Treasury Bonds, 8%, 2021 | | | 279,000 | | | 379,920 |
| U.S. Treasury Bonds, 6.875%, 2025 | | | 364,000 | | | 461,996 |
| U.S. Treasury Notes, 4.75%, 2012 | | | 777,000 | | | 833,879 |
| U.S. Treasury Notes, 4.125%, 2015 | | | 300,000 | | | 319,875 |
| U.S. Treasury Notes, TIPS, 2%, 2016 | | | 1,197,009 | | | 1,264,060 |
| | | | | | |
| | | | | $ | 4,467,422 |
| | | | | | |
Total Bonds
(Identified Cost, $36,573,965) | | | | | $ | 37,569,363 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| MONEY MARKET FUNDS (v) – 4.0% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 4,181,282 | | $ | 4,181,282 | |
| | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.3% | |
| Navigator Securities Lending Prime Portfolio, at Cost and Net Asset Value | | 290,740 | | $ | 290,740 | |
| | | | | | |
Total Investments
(Identified Cost, $107,476,096) | | | | $ | 104,124,007 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.0)% | | | (16,397 | ) |
| | | | | | |
| Net Assets – 100.0% | | $ | 104,107,610 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (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. |
| (l) | | All or a portion of this security is on loan. |
| (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 $2,086,836, representing 2.0% of net assets. |
| (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 |
| Bayview Commercial Asset Trust, FRN, 0.895%, 2023 | | 5/25/06 | | $153,707 | | $118,894 |
| Commercial Mortgage Asset Trust, FRN, 0.85%, 2032 | | 8/25/03 | | 77,372 | | 72,379 |
| Total Restricted Securities | | | | | | $191,273 |
| % of Net Assets | | | | | | 0.2% |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
| TIPS | | Treasury Inflation Protected Security |
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:
10
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Derivative Contracts at 12/31/09
Forward Foreign Currency Exchange Contracts at 12/31/09
| | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | Counterparty | | Contracts to
Deliver/
Receive | | Settlement
Date
Range | | In Exchange For | | Contracts
at Value | | Net
Unrealized
Appreciation
(Depreciation) |
| Asset Derivatives | | | | | | | | | | | | | | | | | |
| | SELL | | AUD | | Credit Suisse Group | | 95,000 | | 1/13/10 | | $ | 86,035 | | $ | 85,265 | | $ | 770 |
| | BUY | | BRL | | HSBC Bank | | 56,000 | | 1/05/10 | | | 32,162 | | | 32,166 | | | 4 |
| | BUY | | CAD | | Credit Suisse Group | | 85,336 | | 1/13/10-3/10/10 | | | 80,833 | | | 81,595 | | | 762 |
| | BUY | | CAD | | Barclays Bank PLC | | 28,000 | | 1/13/10 | | | 26,665 | | | 26,773 | | | 108 |
| | SELL | | EUR | | JPMorgan Chase Bank | | 291,263 | | 3/15/10 | | | 426,034 | | | 418,011 | | | 8,023 |
| | SELL | | EUR | | Goldman Sachs International | | 41,000 | | 1/13/10 | | | 61,379 | | | 58,775 | | | 2,604 |
| | SELL | | EUR | | Credit Suisse Group | | 40,000 | | 1/13/10 | | | 59,523 | | | 57,342 | | | 2,181 |
| | SELL | | EUR | | UBS AG | | 1,810,329 | | 3/15/10 | | | 2,644,891 | | | 2,594,917 | | | 49,974 |
| | SELL | | EUR | | Barclays Bank PLC | | 231,000 | | 1/13/10-3/15/10 | | | 336,638 | | | 331,116 | | | 5,522 |
| | BUY | | GBP | | Deutsche Bank AG | | 29,331 | | 1/13/10 | | | 46,589 | | | 47,373 | | | 784 |
| | BUY | | GBP | | Barclays Bank PLC | | 39,331 | | 1/13/10-3/15/10 | | | 62,579 | | | 63,519 | | | 940 |
| | BUY | | GBP | | UBS AG | | 40,880 | | 3/15/10 | | | 65,826 | | | 66,000 | | | 174 |
| | SELL | | GBP | | Deutsche Bank AG | | 20,000 | | 1/13/10 | | | 32,725 | | | 32,302 | | | 423 |
| | SELL | | GBP | | Barclays Bank PLC | | 61,000 | | 1/13/10 | | | 101,456 | | | 98,523 | | | 2,933 |
| | SELL | | GBP | | Goldman Sachs International | | 15,000 | | 1/13/10 | | | 24,425 | | | 24,227 | | | 198 |
| | SELL | | JPY | | Citibank N.A. | | 9,944,000 | | 1/13/10 | | | 109,921 | | | 106,774 | | | 3,147 |
| | SELL | | JPY | | Barclays Bank PLC | | 57,265,000 | | 1/13/10 | | | 655,191 | | | 614,886 | | | 40,305 |
| | SELL | | JPY | | Merrill Lynch International Bank | | 7,336,037 | | 1/13/10 | | | 80,909 | | | 78,771 | | | 2,138 |
| | SELL | | JPY | | UBS AG | | 2,403,000 | | 1/13/10 | | | 26,236 | | | 25,802 | | | 434 |
| | SELL | | MXN | | Barclays Bank PLC | | 1,085,000 | | 1/19/10 | | | 84,077 | | | 82,805 | | | 1,272 |
| | SELL | | NOK | | Barclays Bank PLC | | 1,180,000 | | 1/25/10 | | | 204,953 | | | 203,631 | | | 1,322 |
| | SELL | | NOK | | UBS AG | | 637,000 | | 1/13/10 | | | 112,438 | | | 109,983 | | | 2,455 |
| | BUY | | PHP | | JPMorgan Chase Bank | | 3,017,000 | | 1/07/10 | | | 65,106 | | | 65,246 | | | 140 |
| | SELL | | SEK | | Goldman Sachs International | | 303,000 | | 1/28/10 | | | 42,626 | | | 42,355 | | | 271 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 126,884 |
| | | | | | | | | | | | | | | | | | | |
11
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Derivative Contracts at 12/31/09 continued
| | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | Counterparty | | Contracts to
Deliver/
Receive | | Settlement
Date
Range | | In Exchange For | | Contracts
at Value | | Net
Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| | BUY | | AUD | | Citibank N.A. | | 55,000 | | 2/25/10 | | $ | 50,434 | | $ | 49,147 | | $ | (1,287 | ) |
| | BUY | | AUD | | UBS AG | | 273,345 | | 2/25/10 | | | 250,726 | | | 244,257 | | | (6,469 | ) |
| | BUY | | AUD | | Goldman Sachs International | | 24,000 | | 1/13/10 | | | 21,961 | | | 21,540 | | | (421 | ) |
| | BUY | | BRL | | Barclays Bank PLC | | 56,000 | | 1/05/10 | | | 32,305 | | | 32,165 | | | (140 | ) |
| | BUY | | BRL | | HSBC Bank | | 56,000 | | 1/05/10 | | | 32,191 | | | 32,165 | | | (26 | ) |
| | SELL | | BRL | | Barclays Bank PLC | | 56,000 | | 1/05/10 | | | 32,162 | | | 32,166 | | | (4 | ) |
| | SELL | | BRL | | HSBC Bank | | 112,000 | | 1/05/10 | | | 63,727 | | | 64,331 | | | (604 | ) |
| | BUY | | CAD | | Barclays Bank PLC | | 88,000 | | 1/13/10 | | | 85,547 | | | 84,143 | | | (1,404 | ) |
| | SELL | | CAD | | Barclays Bank PLC | | 114,000 | | 1/13/10 | | | 107,550 | | | 109,003 | | | (1,453 | ) |
| | SELL | | CAD | | UBS AG | | 84,697 | | 3/10/10 | | | 80,248 | | | 80,983 | | | (735 | ) |
| | BUY | | DKK | | UBS AG | | 1,405,922 | | 1/29/10 | | | 279,262 | | | 270,765 | | | (8,497 | ) |
| | BUY | | EUR | | Barclays Bank PLC | | 196,000 | | 1/13/10 | | | 292,502 | | | 280,973 | | | (11,529 | ) |
| | BUY | | EUR | | Citibank N.A. | | 56,000 | | 1/13/10 | | | 83,510 | | | 80,278 | | | (3,232 | ) |
| | BUY | | EUR | | JPMorgan Chase Bank | | 489,959 | | 1/13/10 | | | 720,233 | | | 702,376 | | | (17,857 | ) |
| | BUY | | GBP | | Barclays Bank PLC | | 171,371 | | 1/13/10 | | | 285,764 | | | 276,787 | | | (8,977 | ) |
| | BUY | | GBP | | Citibank N.A. | | 30,000 | | 1/13/10 | | | 50,353 | | | 48,454 | | | (1,899 | ) |
| | BUY | | JPY | | Barclays Bank PLC | | 24,231,000 | | 1/13/10 | | | 274,411 | | | 260,182 | | | (14,229 | ) |
| | BUY | | JPY | | Goldman Sachs International | | 5,624,000 | | 1/13/10 | | | 63,357 | | | 60,388 | | | (2,969 | ) |
| | BUY | | JPY | | HSBC Bank | | 21,841,000 | | 1/13/10 | | | 243,413 | | | 234,519 | | | (8,894 | ) |
| | BUY | | JPY | | JPMorgan Chase Bank | | 345,535,541 | | 1/13/10 | | | 3,846,057 | | | 3,710,205 | | | (135,852 | ) |
| | BUY | | JPY | | Merrill Lynch International Bank | | 24,597,000 | | 1/13/10 | | | 271,319 | | | 264,111 | | | (7,208 | ) |
| | BUY | | KRW | | JPMorgan Chase Bank | | 94,262,000 | | 2/11/10 | | | 80,960 | | | 80,857 | | | (103 | ) |
| | BUY | | MXN | | Citibank N.A. | | 1,086,000 | | 1/19/10 | | | 85,698 | | | 82,881 | | | (2,817 | ) |
| | BUY | | NOK | | Citibank N.A. | | 1,816,262 | | 1/25/10 | | | 324,598 | | | 313,430 | | | (11,168 | ) |
| | BUY | | SEK | | Citibank N.A. | | 462,000 | | 1/28/10 | | | 67,984 | | | 64,581 | | | (3,403 | ) |
| | BUY | | SEK | | HSBC Bank | | 6,955 | | 1/28/10 | | | 1,023 | | | 972 | | | (51 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (251,228 | ) |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2009, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
12
MFS Global Tactical Allocation Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $103,294,814) | | $99,942,725 | | | |
Underlying funds, at cost and value | | 4,181,282 | | | |
Total investments, at value, including $278,359 of securities on loan (identified cost, $107,476,096) | | $104,124,007 | | | |
Foreign currency, at value (identified cost, $134) | | $136 | | | |
Receivables for | | | | | |
Forward foreign currency exchange contracts | | 126,884 | | | |
Fund shares sold | | 16,242 | | | |
Interest and dividends | | 689,116 | | | |
Receivable from investment adviser | | 7,114 | | | |
Other assets | | 4,397 | | | |
Total assets | | | | | $104,967,896 |
Liabilities | | | | | |
Payables for | | | | | |
Forward foreign currency exchange contracts | | $251,228 | | | |
Fund shares reacquired | | 230,756 | | | |
Collateral for securities loaned, at value | | 290,740 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 4,309 | | | |
Shareholder servicing costs | | 40 | | | |
Distribution and/or service fees | | 155 | | | |
Administrative services fee | | 210 | | | |
Payable for Trustees’ compensation | | 115 | | | |
Accrued expenses and other liabilities | | 82,733 | | | |
Total liabilities | | | | | $860,286 |
Net assets | | | | | $104,107,610 |
Net assets consist of | | | | | |
Paid-in capital | | $108,993,393 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $4,144 deferred country tax) | | (3,484,454 | ) | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (2,218,498 | ) | | |
Undistributed net investment income | | 817,169 | | | |
Net assets | | | | | $104,107,610 |
Shares of beneficial interest outstanding | | | | | 7,684,281 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $92,880,005 | | 6,850,311 | | $13.56 |
Service Class | | 11,227,605 | | 833,970 | | 13.46 |
See Notes to Financial Statements
13
MFS Global Tactical Allocation Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $1,900,827 | | | | |
Interest | | 1,229,955 | | | | |
Dividends from underlying funds | | 12,503 | | | | |
Foreign taxes withheld | | (120,953 | ) | | | |
Total investment income | | | | | $3,022,332 | |
Expenses | | | | | | |
Management fee | | $738,977 | | | | |
Distribution and/or service fees | | 27,559 | | | | |
Shareholder servicing costs | | 15,129 | | | | |
Administrative services fee | | 40,276 | | | | |
Trustees’ compensation | | 16,770 | | | | |
Custodian fee | | 129,153 | | | | |
Shareholder communications | | 6,798 | | | | |
Auditing fees | | 66,168 | | | | |
Legal fees | | 8,177 | | | | |
Miscellaneous | | 21,254 | | | | |
Total expenses | | | | | $1,070,261 | |
Fees paid indirectly | | (2 | ) | | | |
Reduction of expenses by investment adviser | | (155,548 | ) | | | |
Net expenses | | | | | $914,711 | |
Net investment income | | | | | $2,107,621 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions (net of $560 country tax) | | $(2,077,963 | ) | | | |
Futures contracts | | 20,045 | | | | |
Foreign currency transactions | | (246,582 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(2,304,500 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments (net of $4,144 increase in deferred country tax) | | $13,644,120 | | | | |
Futures contracts | | (34,699 | ) | | | |
Translation of assets and liabilities in foreign currencies | | (284,125 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $13,325,296 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $11,020,796 | |
Change in net assets from operations | | | | | $13,128,417 | |
See Notes to Financial Statements
14
MFS Global Tactical Allocation Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $2,107,621 | | | $3,375,234 | |
Net realized gain (loss) on investments and foreign currency transactions | | (2,304,500 | ) | | 4,927,469 | |
Net unrealized gain (loss) on investments and foreign currency translation | | 13,325,296 | | | (31,114,701 | ) |
Change in net assets from operations | | $13,128,417 | | | $(22,811,998 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(7,793,150 | ) | | $(7,426,422 | ) |
From net realized gain on investments | | — | | | (13,271,445 | ) |
Total distributions declared to shareholders | | $(7,793,150 | ) | | $(20,697,867 | ) |
Change in net assets from fund share transactions | | $(6,933,296 | ) | | $(16,007,014 | ) |
Total change in net assets | | $(1,598,029 | ) | | $(59,516,879 | ) |
Net assets | | | | | | |
| At beginning of period | | 105,705,639 | | | 165,222,518 | |
At end of period (including undistributed net investment income of $817,169 and
$7,298,178, respectively) | | $104,107,610 | | | $105,705,639 | |
See Notes to Financial Statements
15
MFS Global Tactical Allocation Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $12.89 | | | $17.59 | | | $18.11 | | | $16.66 | | | $17.91 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.27 | | | $0.37 | | | $0.40 | | | $0.41 | | | $0.37 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.44 | | | (2.68 | ) | | 1.13 | | | 2.38 | | | 0.23 | |
Total from investment operations | | $1.71 | | | $(2.31 | ) | | $1.53 | | | $2.79 | | | $0.60 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(1.04 | ) | | $(0.86 | ) | | $(0.40 | ) | | $(0.16 | ) | | $(0.75 | ) |
From net realized gain on investments | | — | | | (1.53 | ) | | (1.65 | ) | | (1.18 | ) | | (1.10 | ) |
Total distributions declared to shareholders | | $(1.04 | ) | | $(2.39 | ) | | $(2.05 | ) | | $(1.34 | ) | | $(1.85 | ) |
Net asset value, end of period | | $13.56 | | | $12.89 | | | $17.59 | | | $18.11 | | | $16.66 | |
Total return (%) (k)(r)(s) | | 15.16 | | | (15.42 | ) | | 8.87 | | | 17.20 | | | 3.83 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.06 | | | 0.98 | | | 0.95 | | | 0.93 | | | 0.92 | |
Expenses after expense reductions (f) | | 0.90 | | | 0.90 | | | 0.93 | | | N/A | | | N/A | |
Net investment income | | 2.17 | | | 2.48 | | | 2.24 | | | 2.41 | | | 2.18 | |
Portfolio turnover | | 66 | | | 75 | | | 78 | | | 76 | | | 78 | |
Net assets at end of period (000 Omitted) | | $92,880 | | | $93,254 | | | $145,113 | | | $161,209 | | | $161,143 | |
See Notes to Financial Statements
16
MFS Global Tactical Allocation Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $12.79 | | | $17.46 | | | $17.99 | | | $16.56 | | | $17.82 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.24 | | | $0.34 | | | $0.35 | | | $0.37 | | | $0.32 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.42 | | | (2.66 | ) | | 1.13 | | | 2.36 | | | 0.23 | |
Total from investment operations | | $1.66 | | | $(2.32 | ) | | $1.48 | | | $2.73 | | | $0.55 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.99 | ) | | $(0.82 | ) | | $(0.36 | ) | | $(0.12 | ) | | $(0.71 | ) |
From net realized gain on investments | | — | | | (1.53 | ) | | (1.65 | ) | | (1.18 | ) | | (1.10 | ) |
Total distributions declared to shareholders | | $(0.99 | ) | | $(2.35 | ) | | $(2.01 | ) | | $(1.30 | ) | | $(1.81 | ) |
Net asset value, end of period | | $13.46 | | | $12.79 | | | $17.46 | | | $17.99 | | | $16.56 | |
Total return (%) (k)(r)(s) | | 14.78 | | | (15.59 | ) | | 8.62 | | | 16.91 | | | 3.54 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.31 | | | 1.23 | | | 1.20 | | | 1.18 | | | 1.17 | |
Expenses after expense reductions (f) | | 1.15 | | | 1.15 | | | 1.18 | | | N/A | | | N/A | |
Net investment income | | 1.92 | | | 2.25 | | | 1.99 | | | 2.15 | | | 1.91 | |
Portfolio turnover | | 66 | | | 75 | | | 78 | | | 76 | | | 78 | |
Net assets at end of period (000 Omitted) | | $11,228 | | | $12,451 | | | $20,109 | | | $18,637 | | | $16,797 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
17
MFS Global Tactical Allocation Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Tactical Allocation Portfolio (formerly MFS Global Total Return Portfolio) (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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 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. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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. 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. 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
18
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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 affect 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 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 December 31, 2009 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 | | $25,901,470 | | $— | | | $— | | $25,901,470 | |
United Kingdom | | 697,917 | | 8,537,504 | | | — | | 9,235,421 | |
Japan | | 3,674,913 | | 3,611,125 | | | — | | 7,286,038 | |
Switzerland | | — | | 5,605,448 | | | — | | 5,605,448 | |
France | | 759,825 | | 4,012,125 | | | — | | 4,771,950 | |
Netherlands | | 978,167 | | 2,040,005 | | | — | | 3,018,172 | |
Germany | | 941,793 | | 1,340,495 | | | — | | 2,282,288 | |
South Korea | | — | | 863,183 | | | — | | 863,183 | |
Finland | | — | | 665,514 | | | — | | 665,514 | |
Other Countries | | 1,188,866 | | 1,264,272 | | | — | | 2,453,138 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | — | | 5,672,468 | | | — | | 5,672,468 | |
| Non-U.S. Sovereign Debt | | — | | 29,527,942 | | | — | | 29,527,942 | |
| Corporate Bonds | | — | | 319,881 | | | — | | 319,881 | |
| Residential Mortgage-Backed Securities | | — | | 1,468,329 | | | — | | 1,468,329 | |
| Commercial Mortgage-Backed Securities | | — | | 580,743 | | | — | | 580,743 | |
| Mutual Funds | | 4,472,022 | | — | | | — | | 4,472,022 | |
| Total investments | | $38,614,973 | | $65,509,034 | | | $— | | $104,124,007 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | |
| Forward Currency Contracts | | $— | | $(124,344 | ) | | $— | | $(124,344 | ) |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
19
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009:
| | | | | | | | | | | |
| | | | | Asset Derivatives | | Liability Derivatives | |
| | | | | Location on Statement of
Assets and
Liabilities | | Fair Value | | Location on Statement of
Assets and
Liabilities | | Fair Value | |
| Foreign Exchange Contracts not Accounted for as Hedging Instruments Under ASC 815 | | Forward Foreign Currency Exchange Contracts | | Receivable for forward foreign currency exchange contracts | | $126,884 | | Payable for forward foreign currency exchange contracts | | $(251,228 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | | | |
| | | Investment
Transactions (i.e.,
Purchased
Options) | | | Futures Contracts | | Foreign
Currency
Transactions | | | Total | |
| Interest Rate Contracts | | $(3,533 | ) | | $20,045 | | $— | | | $16,512 | |
| Foreign Exchange Contracts | | (1,255 | ) | | — | | (231,542 | ) | | (232,797 | ) |
Total | | $(4,788 | ) | | $20,045 | | $(231,542 | ) | | $(216,285 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | |
| | | Futures Contracts | | | Translation
of Assets and
Liabilities in
Foreign Currencies | | | Total | |
| Interest Rate Contracts | | $(34,699 | ) | | $— | | | $(34,699 | ) |
| Foreign Exchange Contracts | | — | | | (302,637 | ) | | (302,637 | ) |
Total | | $(34,699 | ) | | $(302,637 | ) | | $(337,336 | ) |
20
MFS Global Tactical Allocation Portfolio
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
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 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.
21
MFS Global Tactical Allocation Portfolio
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.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity. 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 the fund. This amount, for the year ended December 31, 2009, 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
22
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
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, wash sale loss deferrals, straddle loss deferrals, foreign currency transactions, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $7,793,150 | | $7,619,350 |
| Long-term capital gain | | — | | 13,078,517 |
| Total distributions | | $7,793,150 | | $20,697,867 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $107,916,508 | |
| Gross appreciation | | 5,534,532 | |
| Gross depreciation | | (9,327,033 | ) |
| Net unrealized appreciation (depreciation) | | $(3,792,501 | ) |
| Undistributed ordinary income | | 1,259,911 | |
| Capital loss carryforwards | | (1,715,757 | ) |
| Other temporary differences | | (637,436 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $6,938,032 | | $6,516,244 | | $— | | $11,568,828 |
| Service Class | | 855,118 | | 910,178 | | — | | 1,702,617 |
| Total | | $7,793,150 | | $7,426,422 | | $— | | $13,271,445 |
| (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 $300 million of average daily net assets | | 0.75% |
| Average daily net assets in excess of $300 million | | 0.675% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
23
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The investment adviser 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 operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $155,548 and is reflected as a reduction of total expenses in the Statements of Operations.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
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. For the year ended December 31, 2009, the fee was $15,129, which equated to 0.0154% annually of the fund’s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the year ended December 31, 2009, the fund did not pay any out-of-pocket expenses.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0409% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,778 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 purchased option transactions, and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $7,070,221 | | $7,012,509 |
| Investments (non-U.S. Government securities) | | $54,641,969 | | $63,142,199 |
24
MFS Global Tactical Allocation Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 175,991 | | | $2,245,712 | | | 120,242 | | | $1,873,174 | |
Service Class | | 52,217 | | | 665,945 | | | 117,833 | | | 1,759,042 | |
| | 228,208 | | | $2,911,657 | | | 238,075 | | | $3,632,216 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 632,455 | | | $6,938,032 | | | 1,166,779 | | | $18,085,072 | |
Service Class | | 78,379 | | | 855,118 | | | 169,662 | | | 2,612,795 | |
| | 710,834 | | | $7,793,150 | | | 1,336,441 | | | $20,697,867 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,190,033 | ) | | $(14,350,447 | ) | | (2,303,648 | ) | | $(33,896,488 | ) |
Service Class | | (270,275 | ) | | (3,287,656 | ) | | (465,400 | ) | | (6,440,609 | ) |
| | (1,460,308 | ) | | $(17,638,103 | ) | | (2,769,048 | ) | | $(40,337,097 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (381,587 | ) | | $(5,166,703 | ) | | (1,016,627 | ) | | $(13,938,242 | ) |
Service Class | | (139,679 | ) | | (1,766,593 | ) | | (177,905 | ) | | (2,068,772 | ) |
| | (521,266 | ) | | $(6,933,296 | ) | | (1,194,532 | ) | | $(16,007,014 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $1,495 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 | | 7,871,531 | | 27,178,082 | | (30,868,331 | ) | | 4,181,282 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $12,503 | | | $4,181,282 |
Effective February 8, 2010, the MFS Global Total Return Portfolio was renamed the MFS Global Tactical Allocation Portfolio. Prior to February 8, 2010, the fund normally invested between 40% and 75% of its assets in equity securities and at least 25% of its assets in fixed-income senior securities. Effective February 8, 2010, MFS attempts to achieve the fund’s objective by generating returns from a combination of (i) individual security selection of a combination of debt instruments and equity securities and (ii) a tactical asset allocation overlay primarily using derivative instruments.
25
MFS Global Tactical Allocation Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS Global Tactical Allocation Portfolio (formerly MFS Global Total Return Portfolio):
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Tactical Allocation Portfolio (formerly MFS Global Total Return Portfolio) (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Global Tactical Allocation Portfolio (formerly MFS Global Total Return Portfolio) as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
26
MFS Global Tactical Allocation Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
27
MFS Global Tactical Allocation Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
28
MFS Global Tactical Allocation Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Nevin Chitkara Steven Gorham Matthew Ryan Benjamin Stone Erik Weisman Barnaby Wiener | | |
29
MFS Global Tactical Allocation Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
30
MFS Global Tactical Allocation Portfolio
Board Review of Investment Advisory Agreements – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate was approximately at the median and total expense ratio was above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
31
MFS Global Tactical Allocation Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 7.51% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
32
MFS Global Tactical Allocation Portfolio
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.
33
MFS® MONEY MARKET PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Money Market Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Money Market Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (u)
| | |
| Credit Quality: | | |
| All short-term securities are rated A-1 or higher (a) | | |
| | |
| Maturity breakdown (u) | | |
| 0 - 7 days | | 30.9% |
| 8 - 29 days | | 16.1% |
| 30 - 59 days | | 12.2% |
| 60 - 89 days | | 15.2% |
| 90 - 366 days | | 21.9% |
| Other Assets Less Liabilities | | 3.7% |
| (a) | Short-term debt securities’ credit quality is based on the short-term rating of its issuer. For repurchase agreements, the credit quality is based on the short-term rating of the counterparty with which we trade the repurchase agreement. Each short-term rated security is assigned a rating in accordance with the following ratings hierarchy: If the issuer 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. Ratings are converted to the S&P scale and are subject to change. |
| (u) | For purposes of this presentation, accrued interest, where applicable, is included. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Money Market Portfolio
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.
3
MFS Money Market Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
Total returns as well as the current 7-day yield have been provided for the applicable time periods. Performance results reflect the percentage change in net asset value, including the reinvestment of any dividends and capital gains distributions. (See Notes to Performance Summary.) An investment in the portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per unit, it is possible to lose money by investing in the fund.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
| | | | | | | | | | | | |
| | | Class | | Inception | | 1-year total return (w) | | Current 7-day yield (w) | | Current 7-day yield
without waiver | | |
| | | Initial Class | | 7/19/85 | | 0.00% | | 0.00% | | (0.37)% | | |
| | | Service Class | | 8/24/01 | | 0.00% | | 0.00% | | (0.61)% | | |
| (w) | Total return and yield were less than 0.01%. |
Notes to Performance Summary
Yields quoted are based on the latest seven days ended as of December 31, 2009, with dividends annualized. The yield quotations more closely reflect the current earnings of the fund than the total return quotations.
Performance results reflect any applicable expense subsidies, waivers and adjustments in effect during the periods shown. Subsidies and fee waivers may be imposed to enhance a fund’s yield or to avoid a negative yield during periods when the fund’s operating expenses have a significant impact on the fund’s yield due to lower interest rates. Without such subsidies and waivers the fund’s performance results would be less favorable. Please see the prospectus and financial statements for complete details. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS Money Market Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period, July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.28% | | $1,000.00 | | $1,000.00 | | $1.41 |
| | Hypothetical (h) | | 0.28% | | $1,000.00 | | $1,023.79 | | $1.43 |
| Service Class | | Actual | | 0.28% | | $1,000.00 | | $1,000.00 | | $1.41 |
| | Hypothetical (h) | | 0.28% | | $1,000.00 | | $1,023.79 | | $1.43 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
Expense Changes Impacting Table
As disclosed in footnote 3 to the financial statements, the expense ratios reported above include additional expense reductions to avoid a negative yield.
5
MFS Money Market Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMERCIAL PAPER (y) – 47.1% |
| Automotive – 3.0% | | | | | | |
Toyota Motor Credit Corp.,
0.21%, due 3/12/10 | | $ | 11,984,000 | | $ | 11,979,106 |
| | | | | | |
| Computer Software – 0.2% | | | | | | |
| Microsoft Corp., 0.1%, due 1/12/10 (t) | | $ | 1,054,000 | | $ | 1,053,968 |
| | | | | | |
| Energy – Integrated – 2.4% | | | | | | |
| ConocoPhillips, 0.01%, due 1/04/10 (t) | | $ | 9,607,000 | | $ | 9,606,992 |
| | | | | | |
| Financial Institutions – 2.0% | | | | | | |
General Electric Capital Corp.,
0.12%, due 1/15/10 | | $ | 7,673,000 | | $ | 7,672,642 |
General Electric Capital Corp.,
0.02%, due 1/15/10 | | | 292,000 | | | 291,998 |
| | | | | | |
| | | | | $ | 7,964,640 |
| | | | | | |
| Food & Beverages – 3.1% | | | | | | |
| Coca-Cola Co., 0.21%, due 1/15/10 (t) | | $ | 7,000,000 | | $ | 6,999,428 |
| Coca-Cola Co., 0.15%, due 2/01/10 (t) | | | 1,250,000 | | | 1,249,839 |
| Coca-Cola Co., 0.15%, due 2/02/10 (t) | | | 4,000,000 | | | 3,999,467 |
| | | | | | |
| | | | | $ | 12,248,734 |
| | | | | | |
| Major Banks – 20.0% | | | | | | |
| Australia & New Zealand Banking Group, 0.84%, due 6/25/10 | | $ | 15,700,000 | | $ | 15,635,892 |
| BankAmerica Corp., 0.2%, due 3/23/10 | | | 11,997,000 | | | 11,991,601 |
CBA Delaware Finance, Inc.,
0.31%, due 3/25/10 | | | 14,630,000 | | | 14,619,544 |
Goldman Sachs Group, Inc.,
0.13%, due 1/05/10 | | | 8,425,000 | | | 8,424,878 |
JPMorgan Chase Funding,
0.25%, due 4/19/10 | | | 14,271,000 | | | 14,260,297 |
Toronto Dominion HDG USA,
0.4%, due 3/15/10 | | | 13,820,000 | | | 13,808,790 |
Toronto Dominion HDG USA,
0.6%, due 4/09/10 | | | 1,020,000 | | | 1,018,334 |
| | | | | | |
| | | | | $ | 79,759,336 |
| | | | | | |
| Other Banks & Diversified Financials – 13.4% |
| Bank of Nova Scotia, 0.2%, due 1/11/10 | | $ | 4,463,000 | | $ | 4,462,752 |
| Bank of Nova Scotia, 0.18%, due 2/03/10 | | | 9,500,000 | | | 9,498,433 |
Citigroup Funding, Inc.,
0.27%, due 2/02/10 | | | 1,564,000 | | | 1,563,625 |
Citigroup Funding, Inc.,
0.25%, due 1/22/10 | | | 4,994,000 | | | 4,993,272 |
Citigroup Funding, Inc.,
0.25%, due 1/12/10 | | | 5,441,000 | | | 5,440,584 |
| HSBC USA, Inc., 0.16%, due 2/08/10 | | | 12,028,000 | | | 12,025,969 |
Rabobank USA Financial Corp.,
0.4%, due 1/15/10 | | | 15,375,000 | | | 15,372,608 |
| | | | | | |
| | | | | $ | 53,357,243 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMERCIAL PAPER (y) – continued |
| Personal Computers & Peripherals – 3.0% |
Hewlett Packard Co.,
0.11%, due 1/11/10 (t) | | $ | 12,028,000 | | $ | 12,027,632 |
| | | | | | |
Total Commercial Paper, at
Amortized Cost and Value | | | | | $ | 187,997,651 |
| | | | | | |
| U.S. GOVERNMENT AGENCIES AND EQUIVALENTS (y) – 7.5% |
| Fannie Mae, 0.01%, due 1/06/10 | | $ | 4,588,000 | | $ | 4,587,994 |
| Farmer Mac, 0.02%, due 1/22/10 | | | 3,132,000 | | | 3,131,963 |
Federal Home Loan Bank,
0.05%, due 1/13/10 | | | 2,694,000 | | | 2,693,955 |
Federal Home Loan Bank,
0.145%, due 5/26/10 | | | 10,960,000 | | | 10,953,599 |
| Freddie Mac, 0.112%, due 2/23/10 | | | 8,446,000 | | | 8,444,607 |
| | | | | | |
Total U.S. Government Agencies and
Equivalents, at Amortized Cost and Value | | | | | $ | 29,812,118 |
| | | | | | |
| CERTIFICATES OF DEPOSIT – 16.4% |
| Major Banks – 12.5% | | | | | | |
Abbey National North America LLC,
0.16%, due 2/22/10 | | $ | 11,889,000 | | $ | 11,889,000 |
BNP Paribas Finance, Inc.,
0.19%, due 3/24/10 | | | 8,400,000 | | | 8,400,000 |
| Credit Agricole S.A., 0.6%, due 5/18/10 | | | 14,800,000 | | | 14,800,000 |
| Credit Suisse, NY, 0.82%, due 8/02/10 | | | 14,900,000 | | | 14,900,000 |
| | | | | | |
| | | | | $ | 49,989,000 |
| | | | | | |
| Other Banks & Diversified Financials – 3.9% |
Nordea Bank Finland PLC/New York,
0.83%, due 7/15/10 | | $ | 4,900,000 | | $ | 4,900,000 |
Nordea Bank Finland PLC/New York,
0.83%, due 7/15/10 | | | 10,500,000 | | | 10,500,000 |
| | | | | | |
| | | | | $ | 15,400,000 |
| | | | | | |
| Total Certificates of Deposit, at Amortized Cost and Value | | | | �� | $ | 65,389,000 |
| | | | | | |
| FLOATING RATE DEMAND NOTES – 0.8% |
Lincoln County, WY, Pollution Control Rev. (Exxon Mobil Corp.), “C”,
0.2%, due 1/04/10, at Identified Cost | | $ | 3,200,000 | | $ | 3,200,000 |
| | | | | | |
| Total Floating Rate Demand Notes (Identified Cost, $3,200,000) | | | | | $ | 3,200,000 |
| | | | | | |
| REPURCHASE AGREEMENTS – 24.5% |
| Bank of America Corp., 0.01%, dated 12/31/09, due 1/04/10, total to be received $39,825,044 (secured by U.S. Treasury and Federal Agency obligations and Mortgage Backed securities valued at $40,621,576 in a jointly traded account) | | $ | 39,825,000 | | $ | 39,825,000 |
6
MFS Money Market Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| REPURCHASE AGREEMENTS – continued |
| Goldman Sachs, 0.01%, dated 12/31/09, due 1/04/10, total to be received $39,825,044 (secured by U.S. Treasury and Federal Agency obligations and Mortgage Backed securities valued at $40,621,568 in a jointly traded account) | | $ | 39,825,000 | | $ | 39,825,000 |
| Morgan Stanley, 0.0025%, dated 12/31/09, due 1/04/10, total to be received $17,923,005 (secured by U.S. Treasury and Federal Agency obligations and Mortgage Backed securities valued at $18,326,704 in a jointly traded account) | | | 17,923,000 | | | 17,923,000 |
| | | | | | |
| Total Repurchase Agreements, at Cost | | $ | 97,573,000 |
| | | | | | |
Total Investments, at
Amortized Cost and Value | | | | | $ | 383,971,769 |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 3.7% | | | | | | 14,650,199 |
| | | | | | |
| Net Assets – 100.0% | | | | | $ | 398,621,968 |
| | | | | | |
| (t) | Security exempt from registration with the U.S. Securities and Exchange Commission under Section 4(2) of the Securities Act of 1933. |
| (y) | The rate shown represents an annualized yield at time of purchase. |
The following abbreviations are used in this report and are defined:
| PLC | | Public Limited Company |
See Notes to Financial Statements
7
MFS Money Market Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments, at amortized cost and value | | $286,398,769 | | | |
Repurchase agreements, at value | | 97,573,000 | | | |
Total investments, at amortized cost and value | | $383,971,769 | | | |
Cash | | 14,116,149 | | | |
Receivables for
Fund shares sold | | 835,029 | | | |
Interest | | 143,598 | | | |
Other assets | | 17,620 | | | |
Total assets | | | | | $399,084,165 |
Liabilities | | | | | |
Payables for fund shares reacquired | | $389,571 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 19,392 | | | |
Distribution and/or service fees | | 61 | | | |
Administrative services fee | | 745 | | | |
Payable for Trustees’ compensation | | 463 | | | |
Accrued expenses and other liabilities | | 51,965 | | | |
Total liabilities | | | | | $462,197 |
Net assets | | | | | $398,621,968 |
Net assets consist of | | | | | |
Paid-in capital | | $398,846,511 | | | |
Accumulated net realized gain (loss) on investments | | (224,543 | ) | | |
Net assets | | | | | $398,621,968 |
Shares of beneficial interest outstanding | | | | | 398,847,606 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $206,513,367 | | 206,639,567 | | $1.00 |
Service Class | | 192,108,601 | | 192,208,039 | | 1.00 |
See Notes to Financial Statements
8
MFS Money Market Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
Year ended 12/31/09 | | | | | |
| Net investment income | | | | | |
Interest income | | | | | $1,676,143 |
Expenses | | | | | |
Management fee | | $2,525,940 | | | |
Distribution and/or service fees | | 535,139 | | | |
Administrative services fee | | 207,187 | | | |
Trustees’ compensation | | 90,261 | | | |
Custodian fee | | 25,468 | | | |
Shareholder communications | | 26,647 | | | |
Auditing fees | | 30,350 | | | |
Legal fees | | 7,041 | | | |
Miscellaneous | | 132,512 | | | |
Total expenses | | | | | $3,580,545 |
Fees paid indirectly | | (31 | ) | | |
Reduction of expenses by investment adviser and distributor | | (1,904,461 | ) | | |
Net expenses | | | | | $1,676,053 |
Net investment income | | | | | $90 |
Change in net assets from operations | | | | | $90 |
See Notes to Financial Statements
9
MFS Money Market Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $90 | | | $11,122,169 | |
Net realized gain (loss) on investments | | — | | | (192,925 | ) |
Change in net assets from operations | | $90 | | | $10,929,244 | |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(1,328 | ) | | $(11,122,169 | ) |
Change in net assets from fund share transactions | | $(165,760,538 | ) | | $10,247,156 | |
Total change in net assets | | $(165,761,776 | ) | | $10,054,231 | |
Net assets | | | | | | |
At beginning of period | | 564,383,744 | | | 554,329,513 | |
At end of period (including undistributed net investment income of $0 and
$1,238, respectively) | | $398,621,968 | | | $564,383,744 | |
See Notes to Financial Statements
10
MFS Money Market Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.00 | (w) | | $0.02 | | | $0.05 | | | $0.04 | | | $0.03 | |
Net realized and unrealized gain (loss) on investments | | 0.00 | | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) |
Total from investment operations | | $0.00 | (w) | | $0.02 | | | $0.05 | | | $0.04 | | | $0.03 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.00 | )(w) | | $(0.02 | ) | | $(0.05 | ) | | $(0.04 | ) | | $(0.03 | ) |
Net asset value, end of period | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | |
Total return (%) (k)(r)(s) | | 0.00 | (x) | | 2.03 | | | 4.84 | | | 4.59 | | | 2.72 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.60 | | | 0.59 | | | 0.55 | | | 0.59 | | | 0.60 | |
Expenses after expense reductions (f) | | 0.33 | | | 0.57 | | | N/A | | | N/A | | | 0.60 | |
Net investment income | | 0.00 | | | 2.02 | | | 4.73 | | | 4.52 | | | 2.65 | |
Net assets at end of period (000 omitted) | | $206,513 | | | $322,980 | | | $320,807 | | | $283,055 | | | $241,684 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.00 | | | $0.02 | | | $0.04 | | | $0.04 | | | $0.02 | |
Net realized and unrealized gain (loss) on investments | | 0.00 | | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) | | (0.00 | )(w) |
Total from investment operations | | $0.00 | | | $0.02 | | | $0.04 | | | $0.04 | | | $0.02 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.00 | )(w) | | $(0.02 | ) | | $(0.04 | ) | | $(0.04 | ) | | $(0.02 | ) |
Net asset value, end of period | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | | | $1.00 | |
Total return (%) (k)(r)(s) | | 0.00 | (x) | | 1.80 | | | 4.58 | | | 4.33 | | | 2.46 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.85 | | | 0.84 | | | 0.80 | | | 0.84 | | | 0.85 | |
Expenses after expense reductions (f) | | 0.33 | | | 0.80 | | | N/A | | | N/A | | | 0.85 | |
Net investment income | | 0.00 | | | 1.76 | | | 4.48 | | | 4.28 | | | 2.49 | |
Net assets at end of period (000 omitted) | | $192,109 | | | $241,404 | | | $233,523 | | | $163,515 | | | $123,232 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (w) | Per share amount was less than $0.01. |
| (x) | Total return was less than 0.01%. |
See Notes to Financial Statements
11
MFS Money Market Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Money Market Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued.
Investment Valuations – Pursuant to procedures approved by the Board of Trustees, investments held by the fund are generally valued at amortized cost, which approximates market value. Amortized cost involves valuing an instrument at its cost as adjusted for amortization of premium or accretion of discount rather than its current market value. The amortized cost value of an instrument can be different from the market value of an instrument.
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Short term securities | | $— | | $383,971,769 | | $— | | $383,971,769 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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 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 December 31, 2009, is shown as a reduction of total expenses on the Statement of Operations.
12
MFS Money Market Portfolio
Notes to Financial Statements – continued
Treasury Temporary Guarantee Program – On October 1, 2008, the Trustees of the fund approved the fund’s participation in the initial term of the United States Department of Treasury’s Temporary Guarantee Program (the Program) through December 18, 2008. On December 3, 2008, the Trustees approved the fund’s participation in the Program’s extension through April 30, 2009. The Program provides coverage to shareholders for amounts held in participating funds as of the close of business September 19, 2008, subject to certain conditions and limitations (but does not guarantee a $1.00 net asset value upon redemption or liquidation of shares). Under the Program, if the fund’s market value per share falls below $0.995, shareholders of record on that date may be eligible to receive payment (applicable only up to their share balances as of September 19, 2008) from the Treasury in the event of the fund’s liquidation. The costs of the Program, which are borne by the fund, are 0.01% of the fund’s net assets as of September 19, 2008 for the initial term of the Program (September 19, 2008 through December 18, 2008), and 0.015% of the fund’s net assets as of September 19, 2008 for the Program’s extension period (December 19, 2008 through April 30, 2009). This fee is recognized ratably over the period of participation in the Program and is included in miscellaneous expense on the fund’s Statement of Operations. This fee, incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0155% of the fund’s average daily net assets. After considering the costs and benefits of continuing to participate in the Program, the fund has determined not to continue its participation in the Program after April 30, 2009.
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.
During the year ended December 31, 2009, there were no significant adjustments due to differences between book and tax accounting.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $1,328 | | $11,122,169 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $383,971,769 | |
| Capital loss carryforwards | | (224,543 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/11 | | $(271 | ) |
| 12/31/12 | | (66 | ) |
| 12/31/15 | | (31,281 | ) |
| 12/31/16 | | (192,925 | ) |
| | $(224,543 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or 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
13
MFS Money Market Portfolio
Notes to Financial Statements – continued
generally due to differences in separate class expenses. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,030 | | $6,531,076 |
| Service Class | | 298 | | 4,591,093 |
| Total | | $1,328 | | $11,122,169 |
| (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 0.50% of the fund’s average daily net assets. The investment adviser has agreed in writing to reduce its management fee to 0.45% of average daily net assets in excess of $500 million. This written agreement will continue until modified or rescinded by the fund’s shareholders, but such agreement will continue at least until April 30, 2010. This management fee reduction amounted to $2,588, which is shown as a reduction of total expenses in the Statement of Operations. During the year ended December 31, 2009, MFS voluntarily waived receipt of $1,212,045 of the fund’s management fee in order to avoid a negative yield. For the year ended December 31, 2009, this voluntary waiver had the effect of reducing the management fee by 0.24% of average daily net assets on an annualized basis. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.26% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, and brokerage commissions, such that total annual fund operating expenses do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s total annual operating expenses is contained in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval.
The investment adviser has also 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 operating expenses do not exceed 0.57% of average daily net assets for the Initial Class shares and 0.82% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $154,749 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries. During the year ended December 31, 2009, MFD voluntarily waived receipt of $535,079 of the fund’s distribution and/or service fees in order to avoid a negative yield. For the year ended December 31, 2009, this voluntary waiver had the effect of reducing the distribution and/or service fees by 0.25% of average daily net assets attributable to Service Class shares on an annualized basis. The distribution and/or service fees incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.00% of the average daily net assets attributable to Service Class shares.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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
14
MFS Money Market Portfolio
Notes to Financial Statements – continued
provide these services. The fund is charged an annual fixed amount of $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0410% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $9,302 and are included in miscellaneous expense on the Statement of Operations.
Purchases and sales of money market securities, exclusive of securities subject to repurchase agreements, aggregated $18,020,441,311 and $18,188,708,700, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 43,373,549 | | | $43,373,550 | | | 99,394,222 | | | $99,394,326 | |
Service Class | | 66,446,136 | | | 66,446,135 | | | 122,510,431 | | | 122,510,435 | |
| | 109,819,685 | | | $109,819,685 | | | 221,904,653 | | | $221,904,761 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 1,028 | | | $1,028 | | | 6,531,184 | | | $6,531,076 | |
Service Class | | 298 | | | 298 | | | 4,591,094 | | | 4,591,093 | |
| | 1,326 | | | $1,326 | | | 11,122,278 | | | $11,122,169 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (159,840,114 | ) | | $(159,840,114 | ) | | (103,646,568 | ) | | $(103,646,568 | ) |
Service Class | | (115,741,435 | ) | | (115,741,435 | ) | | (119,133,206 | ) | | (119,133,206 | ) |
| | (275,581,549 | ) | | $(275,581,549 | ) | | (222,779,774 | ) | | $(222,779,774 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (116,465,537 | ) | | $(116,465,536 | ) | | 2,278,838 | | | $2,278,834 | |
Service Class | | (49,295,001 | ) | | (49,295,002 | ) | | 7,968,319 | | | 7,968,322 | |
| | (165,760,538 | ) | | $(165,760,538 | ) | | 10,247,157 | | | $10,247,156 | |
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 December 31, 2009, the fund’s commitment fee and interest expense were $8,293 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
15
MFS Money Market Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Money Market Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Money Market Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodian and brokers. 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 Money Market Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
16
MFS Money Market Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
17
MFS Money Market Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
18
MFS® Money Market Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Edward O’Dette | | |
19
MFS Money Market Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 3rd quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
20
MFS Money Market Portfolio
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further noted that MFS agreed to reduce its advisory fee on average daily net assets over $500 million on a permanent basis, requiring shareholder approval for any modification or termination, and they accepted MFS’ offer to continue the total expense limitation for the next year. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
21
MFS Money Market Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
22
MFS Money Market Portfolio
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.
23
MFS® MASSACHUSETTS INVESTORS GROWTH STOCK PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Massachusetts Investors Growth Stock Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS Massachusetts Investors Growth Stock Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Oracle Corp. | | 4.4% |
| Cisco Systems, Inc. | | 4.2% |
| Accenture Ltd., “A” | | 3.9% |
| MasterCard, Inc., “A” | | 3.8% |
| Google, Inc., “A” | | 3.5% |
| Procter & Gamble Co. | | 3.0% |
| Danaher Corp. | | 2.9% |
| PepsiCo, Inc. | | 2.8% |
| NIKE, Inc., “B” | | 2.6% |
| Medtronic, Inc. | | 2.4% |
| | |
| Equity sectors | | |
| Technology | | 21.7% |
| Health Care | | 20.6% |
| Consumer Staples | | 14.4% |
| Special Products & Services | | 14.0% |
| Financial Services | | 7.5% |
| Retailing | | 7.2% |
| Industrial Goods & Services | | 6.4% |
| Energy | | 2.6% |
| Leisure | | 2.2% |
| Basic Materials | | 2.0% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Massachusetts Investors Growth Stock Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Massachusetts Investors Growth Stock Portfolio (the “fund”) provided a total return of 40.14%, while Service Class shares of the fund provided a total return of 39.78%. These compare with a return of 37.21% for the fund’s benchmark, the Russell 1000 Growth 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.
Contributors to Performance
Strong security selection in the industrial goods and services sector contributed to the fund’s performance relative to the Russell 1000 Growth Index. Strong-performing industrial automation products maker Rockwell Automation was among the fund’s top relative contributors. Shares of Rockwell jumped in anticipation of an economic recovery and signs that stability was returning to the industrial sector.
Favorable stock selection in the health care sector was another positive area of relative strength. The timing of our ownership in shares of pharmaceutical and medical products maker Abbott Laboratories had a positive impact on relative performance. Not owning weak-performing biotech firm Gilead Sciences also benefited relative returns.
Individual standout performers in other sectors that bolstered relative results included credit card company MasterCard, Canadian wireless solutions provider Research In Motion (b)(h), and internet search giant Google. Shares of Research In Motion soared early in the year after the wireless-device maker reported solid earnings growth due to strong demand for BlackBerry phones.
Elsewhere, our underweighted position in integrated oil and gas company Exxon Mobil aided relative performance during the reporting period. In addition, the timing of our ownership in shares of oilfield services provider Halliburton boosted relative returns. Not owning poor-performing retail giant Wal-Mart and fast-food giant McDonald’s also helped relative results as these benchmark constituents significantly underperformed the benchmark.
During the reporting period, the fund’s currency exposure was also a contributor to relative performance. All of our investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
Detractors from Performance
Individual securities that detracted from relative results included global biotech company Genzyme, integrated energy company Chevron (b), drugstore retailer CVS Caremark, and household products maker Procter & Gamble. Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down due to a viral infection in one of its bioreactors. In addition, the timing of our ownership in shares of software giant Microsoft (h), business information provider Dun & Bradstreet Corp., and financial services provider Bank of New York Mellon also hindered relative performance.
3
MFS Massachusetts Investors Growth Stock Portfolio
Management Review – continued
Elsewhere, our underweighted position in strong-performing computer and personal electronics maker Apple, and not holding internet retailer Amazon.com, a stand out performer, held back relative returns.
The fund’s cash position was another detractor from relative results. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
Jeffrey Constantino
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS Massachusetts Investors Growth Stock Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 40.14% | | 1.97% | | (2.75)% | | N/A | | |
| | | Service Class | | 8/24/01 | | 39.78% | | 1.74% | | N/A | | 0.67% | | |
Comparative benchmark
| | | | | | | | | | | | | | |
| | | Russell 1000 Growth Index (f) | | 37.21% | | 1.63% | | (3.99)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
Russell 1000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Massachusetts Investors Growth Stock Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.82% | | $1,000.00 | | $1,242.95 | | $4.64 |
| | Hypothetical (h) | | 0.82% | | $1,000.00 | | $1,021.07 | | $4.18 |
| Service Class | | Actual | | 1.07% | | $1,000.00 | | $1,241.98 | | $6.05 |
| | Hypothetical (h) | | 1.07% | | $1,000.00 | | $1,019.81 | | $5.45 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Massachusetts Investors Growth Stock Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 98.6% | | | | | |
| Aerospace – 2.5% | | | | | |
| Precision Castparts Corp. | | 16,260 | | $ | 1,794,288 |
| United Technologies Corp. | | 163,210 | | | 11,328,406 |
| | | | | |
| | | | $ | 13,122,694 |
| | | | | |
| Alcoholic Beverages – 1.5% | | | | | |
| Companhia de Bebidas das Americas, ADR | | 30,940 | | $ | 3,127,725 |
| Diageo PLC | | 272,230 | | | 4,747,521 |
| | | | | |
| | | | $ | 7,875,246 |
| | | | | |
| Apparel Manufacturers – 3.7% | | | | | |
| LVMH Moet Hennessy Louis Vuitton S.A. (l) | | 53,200 | | $ | 5,977,639 |
| NIKE, Inc., “B” | | 207,620 | | | 13,717,453 |
| | | | | |
| | | | $ | 19,695,092 |
| | | | | |
| Biotechnology – 1.4% | | | | | |
| Genzyme Corp. (a) | | 154,490 | | $ | 7,571,555 |
| | | | | |
| Broadcasting – 0.9% | | | | | |
| Grupo Televisa S.A., ADR | | 80,490 | | $ | 1,670,972 |
| Omnicom Group, Inc. | | 72,480 | | | 2,837,592 |
| | | | | |
| | | | $ | 4,508,564 |
| | | | | |
| Brokerage & Asset Managers – 3.5% | | | | | |
| Charles Schwab Corp. | | 541,570 | | $ | 10,192,347 |
| CME Group, Inc. | | 24,050 | | | 8,079,598 |
| | | | | |
| | | | $ | 18,271,945 |
| | | | | |
| Business Services – 14.0% | | | | | |
| Accenture Ltd., “A” | | 496,400 | | $ | 20,600,600 |
| Amdocs Ltd. (a) | | 73,840 | | | 2,106,655 |
| Automatic Data Processing, Inc. | | 96,180 | | | 4,118,428 |
| Dun & Bradstreet Corp. | | 148,280 | | | 12,510,384 |
| Fidelity National Information Services, Inc. | | 159,890 | | | 3,747,822 |
| MasterCard, Inc., “A” | | 77,810 | | | 19,917,804 |
| Visa, Inc., “A” | | 28,920 | | | 2,529,343 |
| Western Union Co. | | 448,300 | | | 8,450,455 |
| | | | | |
| | | | $ | 73,981,491 |
| | | | | |
| Cable TV – 0.7% | | | | | |
| DIRECTV Group, Inc., “A” (a) | | 107,520 | | $ | 3,585,792 |
| | | | | |
| Chemicals – 0.9% | | | | | |
| 3M Co. | | 25,180 | | $ | 2,081,631 |
| Monsanto Co. | | 33,710 | | | 2,755,793 |
| | | | | |
| | | | $ | 4,837,424 |
| | | | | |
| Computer Software – 4.4% | | | | | |
| Oracle Corp. | | 956,980 | | $ | 23,484,289 |
| | | | | |
| Computer Software – Systems – 5.7% | | | | | |
| Apple, Inc. (a) | | 46,320 | | $ | 9,767,035 |
| EMC Corp. (a) | | 103,680 | | | 1,811,290 |
| Hewlett-Packard Co. | | 207,390 | | | 10,682,659 |
| International Business Machines Corp. | | 59,050 | | | 7,729,645 |
| | | | | |
| | | | $ | 29,990,629 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued |
| Consumer Products – 7.0% | | | | | |
| Church & Dwight Co., Inc. | | 146,900 | | $ | 8,880,105 |
| Colgate-Palmolive Co. | | 148,390 | | | 12,190,239 |
| Procter & Gamble Co. | | 258,591 | | | 15,678,372 |
| | | | | |
| | | | $ | 36,748,716 |
| | | | | |
| Electrical Equipment – 3.9% | | | | | |
| Danaher Corp. | | 202,120 | | $ | 15,199,424 |
| Rockwell Automation, Inc. | | 52,850 | | | 2,482,893 |
| W.W. Grainger, Inc. | | 29,350 | | | 2,841,961 |
| | | | | |
| | | | $ | 20,524,278 |
| | | | | |
| Electronics – 3.4% | | | | | |
| National Semiconductor Corp. | | 504,930 | | $ | 7,755,725 |
| Samsung Electronics Co. Ltd., GDR | | 14,977 | | | 5,164,170 |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | 447,243 | | | 5,116,460 |
| | | | | |
| | | | $ | 18,036,355 |
| | | | | |
| Energy – Integrated – 1.5% | | | | | |
| Chevron Corp. | | 58,680 | | $ | 4,517,773 |
| Exxon Mobil Corp. | | 27,520 | | | 1,876,589 |
| Hess Corp. | | 26,540 | | | 1,605,670 |
| | | | | |
| | | | $ | 8,000,032 |
| | | | | |
| Food & Beverages – 5.9% | | | | | |
| Groupe Danone | | 93,322 | | $ | 5,683,242 |
| Mead Johnson Nutrition Co., “A” | | 124,490 | | | 5,440,213 |
| Nestle S.A. | | 100,960 | | | 4,904,919 |
| PepsiCo, Inc. | | 245,770 | | | 14,942,816 |
| | | | | |
| | | | $ | 30,971,190 |
| | | | | |
| Food & Drug Stores – 1.7% | | | | | |
| CVS Caremark Corp. | | 280,307 | | $ | 9,028,688 |
| | | | | |
| Gaming & Lodging – 0.6% | | | | | |
| Starwood Hotels & Resorts Worldwide, Inc. | | 91,400 | | $ | 3,342,498 |
| | | | | |
| General Merchandise – 0.9% | | | | | |
| Target Corp. | | 97,990 | | $ | 4,739,776 |
| | | | | |
| Insurance – 0.8% | | | | | |
| Verisk Analytics, Inc., “A” (a) | | 138,580 | | $ | 4,196,202 |
| | | | | |
| Internet – 4.0% | | | | | |
| eBay, Inc. (a) | | 114,710 | | $ | 2,700,273 |
| Google, Inc., “A” (a) | | 29,550 | | | 18,320,409 |
| | | | | |
| | | | $ | 21,020,682 |
| | | | | |
| Major Banks – 3.2% | | | | | |
| Bank of New York Mellon Corp. | | 238,335 | | $ | 6,666,230 |
| State Street Corp. | | 238,050 | | | 10,364,697 |
| | | | | |
| | | | $ | 17,030,927 |
| | | | | |
Medical & Health Technology &
Services – 3.0% | | | | | |
| Laboratory Corp. of America Holdings (a) | | 41,600 | | $ | 3,113,344 |
| Medco Health Solutions, Inc. (a) | | 60,880 | | | 3,890,841 |
7
MFS Massachusetts Investors Growth Stock Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| Medical & Health Technology & Services – continued |
| Patterson Cos., Inc. (a) | | 212,810 | | $ | 5,954,424 |
| VCA Antech, Inc. (a) | | 109,360 | | | 2,725,251 |
| | | | | |
| | | | $ | 15,683,860 |
| | | | | |
| Medical Equipment – 11.7% | | | | | |
| Becton, Dickinson & Co. | | 59,310 | | $ | 4,677,187 |
| DENTSPLY International, Inc. | | 311,400 | | | 10,951,938 |
| Medtronic, Inc. | | 287,980 | | | 12,665,360 |
| St. Jude Medical, Inc. (a) | | 200,430 | | | 7,371,815 |
| Synthes, Inc. | | 39,140 | | | 5,126,102 |
| Thermo Fisher Scientific, Inc. (a) | | 260,350 | | | 12,416,092 |
| Waters Corp. (a) | | 142,710 | | | 8,842,312 |
| | | | | |
| | | | $ | 62,050,806 |
| | | | | |
| Metals & Mining – 0.5% | | | | | |
| BHP Billiton Ltd., ADR | | 38,020 | | $ | 2,911,572 |
| | | | | |
| Network & Telecom – 4.2% | | | | | |
| Cisco Systems, Inc. (a)(s) | | 930,897 | | $ | 22,285,674 |
| | | | | |
| Oil Services – 1.1% | | | | | |
| Halliburton Co. | | 189,050 | | $ | 5,688,515 |
| | | | | |
| Pharmaceuticals – 4.5% | | | | | |
| Abbott Laboratories | | 170,240 | | $ | 9,191,258 |
| Allergan, Inc. | | 81,290 | | | 5,122,083 |
| Johnson & Johnson | | 149,150 | | | 9,606,752 |
| | | | | |
| | | | $ | 23,920,093 |
| | | | | |
| Specialty Chemicals – 0.6% | | | | | |
| Praxair, Inc. | | 39,420 | | $ | 3,165,820 |
| | | | | |
| Specialty Stores – 0.9% | | | | | |
| Staples, Inc. | | 202,360 | | $ | 4,976,032 |
| | | | | |
Total Common Stocks
(Identified Cost, $475,679,274) | | | | $ | 521,246,437 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| |
| MONEY MARKET FUNDS (v) – 0.8% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 4,308,898 | | $ | 4,308,898 |
| | | | | |
| | |
COLLATERAL FOR SECURITIES
LOANED – 0.4% | | | | | |
| Navigator Securities Lending Prime Portfolio, at Cost and Net Asset Value | | 2,121,300 | | $ | 2,121,300 |
| | | | | |
Total Investments
(Identified Cost, $482,109,472) | | | | $ | 527,676,635 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.2% | | | | | 925,348 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 528,601,983 |
| | | | | |
| (a) | | Non-income producing security. |
| (l) | | All or a portion of this security is on loan. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $174,523. At December 31, 2009, the fund had no short sales outstanding. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| GDR | | Global Depository Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
MFS Massachusetts Investors Growth Stock Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $477,800,574) | | $523,367,737 | | | |
Underlying funds, at cost and value | | 4,308,898 | | | |
Total investments, at value, including $2,022,510 of securities on loan (identified cost, $482,109,472) | | $527,676,635 | | | |
Receivables for | | | | | |
Investments sold | | $3,416,831 | | | |
Fund shares sold | | 33,908 | | | |
Interest and dividends | | 496,761 | | | |
Other assets | | 18,972 | | | |
Total assets | | | | | $531,643,107 |
Liabilities | | | | | |
Payable to custodian | | $22,437 | | | |
Payables for | | | | | |
Fund shares reacquired | | 713,938 | | | |
Collateral for securities loaned, at value | | 2,121,300 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 29,746 | | | |
Distribution and/or service fees | | 1,109 | | | |
Administrative services fee | | 992 | | | |
Payable for Trustees’ compensation | | 476 | | | |
Accrued expenses and other liabilities | | 151,126 | | | |
Total liabilities | | | | | $3,041,124 |
Net assets | | | | | $528,601,983 |
Net assets consist of | | | | | |
Paid-in capital | | $805,845,976 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 45,573,839 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (324,169,229 | ) | | |
Undistributed net investment income | | 1,351,397 | | | |
Net assets | | | | | $528,601,983 |
Shares of beneficial interest outstanding | | | | | 52,242,142 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $448,333,195 | | 44,260,447 | | $10.13 |
Service Class | | 80,268,788 | | 7,981,695 | | 10.06 |
See Notes to Financial Statements
9
MFS Massachusetts Investors Growth Stock Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
Year ended 12/31/09 | | | | | | |
Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $3,410,260 | | | | |
Interest | | 83,226 | | | | |
Dividends from underlying funds | | 7,132 | | | | |
Foreign taxes withheld | | (71,237 | ) | | | |
Total investment income | | | | | $3,429,381 | |
Expenses | | | | | | |
Management fee | | $1,761,614 | | | | |
Distribution and/or service fees | | 153,514 | | | | |
Administrative services fee | | 92,941 | | | | |
Trustees’ compensation | | 32,533 | | | | |
Custodian fee | | 34,956 | | | | |
Shareholder communications | | 12,879 | | | | |
Auditing fees | | 54,429 | | | | |
Legal fees | | 16,691 | | | | |
Miscellaneous | | 30,665 | | | | |
Total expenses | | | | | $2,190,222 | |
Reduction of expenses by investment adviser | | (106,190 | ) | | | |
Net expenses | | | | | $2,084,032 | |
Net investment income | | | | | $1,345,349 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(9,152,309 | ) | | | |
Foreign currency transactions | | (3,438 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(9,155,747 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $85,991,818 | | | | |
Translation of assets and liabilities in foreign currencies | | 8,425 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $86,000,243 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $76,844,496 | |
Change in net assets from operations | | | | | $78,189,845 | |
See Notes to Financial Statements
10
MFS Massachusetts Investors Growth Stock Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $1,345,349 | | | $1,754,889 | |
Net realized gain (loss) on investments and foreign currency transactions | | (9,155,747 | ) | | (38,945,865 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 86,000,243 | | | (97,597,305 | ) |
Change in net assets from operations | | $78,189,845 | | | $(134,788,281 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(1,718,063 | ) | | $(1,772,918 | ) |
Change in net assets from fund share transactions | | $246,693,529 | | | $(86,534,238 | ) |
Total change in net assets | | $323,165,311 | | | $(223,095,437 | ) |
Net assets | | | | | | |
At beginning of period | | 205,436,672 | | | 428,532,109 | |
At end of period (including undistributed net investment income of $1,351,397 and
$1,717,549, respectively) | | $528,601,983 | | | $205,436,672 | |
See Notes to Financial Statements
11
MFS Massachusetts Investors Growth Stock Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $7.30 | | | $11.69 | | | $10.52 | | | $9.78 | | | $9.42 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.05 | | | $0.06 | | | $0.05 | | | $0.03 | | | $0.01 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.85 | | | (4.39 | ) | | 1.16 | | | 0.72 | | | 0.40 | |
Total from investment operations | | $2.90 | | | $(4.33 | ) | | $1.21 | | | $0.75 | | | $0.41 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.07 | ) | | $(0.06 | ) | | $(0.04 | ) | | $(0.01 | ) | | $(0.05 | ) |
Net asset value, end of period | | $10.13 | | | $7.30 | | | $11.69 | | | $10.52 | | | $9.78 | |
Total return (%) (k)(r)(s) | | 40.14 | | | (37.22 | ) | | 11.53 | | | 7.67 | | | 4.37 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.87 | | | 0.86 | | | 0.84 | | | 0.82 | | | 0.85 | |
Expenses after expense reductions (f) | | 0.82 | | | 0.83 | | | 0.83 | | | N/A | | | N/A | |
Net investment income | | 0.62 | | | 0.62 | | | 0.48 | | | 0.34 | | | 0.12 | |
Portfolio turnover | | 53 | | | 42 | | | 62 | | | 72 | | | 136 | |
Net assets at end of period (000 omitted) | | $448,333 | | | $145,858 | | | $309,208 | | | $336,383 | | | $395,782 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $7.24 | | | $11.59 | | | $10.43 | | | $9.71 | | | $9.35 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | $0.04 | | | $0.04 | | | $0.02 | | | $0.01 | | | $(0.01 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.82 | | | (4.36 | ) | | 1.15 | | | 0.71 | | | 0.40 | |
Total from investment operations | | $2.86 | | | $(4.32 | ) | | $1.17 | | | $0.72 | | | $0.39 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.04 | ) | | $(0.03 | ) | | $(0.01 | ) | | $— | | | $(0.03 | ) |
Net asset value, end of period | | $10.06 | | | $7.24 | | | $11.59 | | | $10.43 | | | $9.71 | |
Total return (%) (k)(r)(s) | | 39.78 | | | (37.35 | ) | | 11.26 | | | 7.42 | | | 4.15 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.12 | | | 1.11 | | | 1.09 | | | 1.07 | | | 1.10 | |
Expenses after expense reductions (f) | | 1.07 | | | 1.08 | | | 1.08 | | | N/A | | | N/A | |
Net investment income (loss) | | 0.43 | | | 0.37 | | | 0.19 | | | 0.09 | | | (0.13 | ) |
Portfolio turnover | | 53 | | | 42 | | | 62 | | | 72 | | | 136 | |
Net assets at end of period (000 omitted) | | $80,269 | | | $59,579 | | | $119,324 | | | $88,696 | | | $89,314 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
12
MFS Massachusetts Investors Growth Stock Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Massachusetts Investors Growth Stock Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
13
MFS Massachusetts Investors Growth Stock Portfolio
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 December 31, 2009 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 | | $476,816,115 | | $— | | $— | | $476,816,115 |
France | | 5,977,639 | | 5,683,242 | | — | | 11,660,881 |
Switzerland | | — | | 10,031,021 | | — | | 10,031,021 |
South Korea | | — | | 5,164,170 | | — | | 5,164,170 |
Taiwan | | 5,116,460 | | — | | — | | 5,116,460 |
United Kingdom | | — | | 4,747,521 | | — | | 4,747,521 |
Brazil | | 3,127,725 | | — | | — | | 3,127,725 |
Australia | | 2,911,572 | | — | | — | | 2,911,572 |
Mexico | | 1,670,972 | | — | | — | | 1,670,972 |
| Mutual Funds | | 6,430,198 | | — | | — | | 6,430,198 |
| Total Investments | | $502,050,681 | | $25,625,954 | | $— | | $527,676,635 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund has yet to enter into such transactions.
14
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $1,718,063 | | $1,772,918 |
15
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $485,296,860 | |
| Gross appreciation | | 65,104,221 | |
| Gross depreciation | | (22,724,446 | ) |
| Net unrealized appreciation (depreciation) | | $42,379,775 | |
| Undistributed ordinary income | | 1,351,397 | |
| Capital loss carryforwards | | (320,981,841 | ) |
| Other temporary differences | | 6,676 | |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(209,855,944 | ) |
| 12/31/15 | | (43,030,094 | ) |
| 12/31/16 | | (59,160,964 | ) |
| 12/31/17 | | (8,934,839 | ) |
| | $(320,981,841 | ) |
The availability of a portion of the capital loss carryforwards, which were acquired on June 22, 2007 and December 4, 2009 in connection with the MFS Strategic Growth Series merger and MFS Capital Appreciation Portfolio merger, respectively, 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 and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,377,328 | | $1,460,223 |
| Service Class | | 340,735 | | 312,695 |
| Total | | $1,718,063 | | $1,772,918 |
| (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 0.75% of the fund’s average daily net assets. The investment adviser has agreed in writing to reduce its management fee to 0.65% of average daily net assets in excess of $1 billion. This written agreement will continue until modified or rescinded by the fund’s shareholders, but such agreement will continue at least until April 30, 2010. For the year ended December 31, 2009, the fund’s average daily net assets did not exceed $1 billion and therefore, the management fee was not reduced. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 0.82% of average daily net assets for the Initial Class shares and 1.07% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $106,190 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the
16
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0396% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $3,808 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $110,447,795 and $153,627,996, respectively. Purchases exclude the value of securities acquired in connection with the MFS Capital Appreciation Portfolio merger. (See Note 8.)
| (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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 664,081 | | | $5,131,553 | | | 286,691 | | | $2,363,737 | |
Service Class | | 220,773 | | | 1,660,218 | | | 690,767 | | | 5,621,814 | |
| | 884,854 | | | $6,791,771 | | | 977,458 | | | $7,985,551 | |
| Shares issued in connection with acquisition of MFS Capital Appreciation Portfolio | | | | | | | | | | | | |
Initial Class | | 27,551,763 | | | $273,589,013 | | | | | | | |
Service Class | | 1,622,091 | | | 15,994,679 | | | | | | | |
| | 29,173,854 | | | $289,583,692 | | | | | | | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 183,889 | | | $1,377,328 | | | 127,419 | | | $1,460,223 | |
Service Class | | 45,736 | | | 340,735 | | | 27,502 | | | 312,695 | |
| | 229,625 | | | $1,718,063 | | | 154,921 | | | $1,772,918 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (4,110,630 | ) | | $(33,784,807 | ) | | (6,893,149 | ) | | $(69,151,636 | ) |
Service Class | | (2,135,944 | ) | | (17,615,190 | ) | | (2,785,503 | ) | | (27,141,071 | ) |
| | (6,246,574 | ) | | $(51,399,997 | ) | | (9,678,652 | ) | | $(96,292,707 | ) |
17
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | |
| | | Year ended 12/31/09 | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | Shares | | | Amount | |
| Net change | | | | | | | | | | | |
Initial Class | | 24,289,103 | | | $246,313,087 | | (6,479,039 | ) | | $(65,327,676 | ) |
Service Class | | (247,344 | ) | | 380,442 | | (2,067,234 | ) | | (21,206,562 | ) |
| | 24,041,759 | | | $246,693,529 | | (8,546,273 | ) | | $(86,534,238 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $3,174 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 | | 2,901,808 | | 51,374,591 | | (49,967,501 | ) | | 4,308,898 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $7,132 | | | $4,308,898 |
At close of business on December 4, 2009, the fund with net assets of $237,649,679, acquired all of the assets and liabilities of MFS Capital Appreciation Portfolio. The purpose of the transaction was to provide shareholders of the MFS Capital Appreciation Portfolio 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 29,173,854 shares of the fund (valued at $289,583,692) for all of the assets and liabilities of MFS Capital Appreciation Portfolio. MFS Capital Appreciation Portfolio then distributed the shares of the fund that MFS Capital Appreciation Portfolio received from the fund to its shareholders. MFS Capital Appreciation Portfolio’s net assets on that date were $289,583,692, including investments valued at $290,620,865 with a cost basis of $265,631,184. 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 Capital Appreciation Portfolio 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.
Assuming the acquisition had been completed on January 1, 2009, the fund’s pro forma results of operations for the year ended December 31, 2009 are as follows:
| | |
| Net investment income | | $3,042,938 |
| Net realized and unrealized gain (loss) on investments and foreign currency transactions | | $157,830,440 |
| Change in net assets from operations | | $160,873,378 |
18
MFS Massachusetts Investors Growth Stock Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Massachusetts Investors Growth Stock Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Massachusetts Investors Growth Stock Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers. 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 Massachusetts Investors Growth Stock Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
19
MFS Massachusetts Investors Growth Stock Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
20
MFS Massachusetts Investors Growth Stock Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
21
MFS Massachusetts Investors Growth Stock Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Jeffrey Constantino | | |
22
MFS Massachusetts Investors Growth Stock Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 1st quintile for the three-year period and the 2nd quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
23
MFS Massachusetts Investors Growth Stock Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each at the median of such fees and expenses of funds in the Lipper expense group. The Trustees further noted that MFS agreed to reduce its advisory fee on average daily net assets over $1 billion on a permanent basis, requiring shareholder approval for any modification or termination, and they accepted MFS’ offer to continue the total expense limitation for the next year. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
24
MFS Massachusetts Investors Growth Stock Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100.00% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
25
MFS Massachusetts Investors Growth Stock Portfolio
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.
26
MFS® NEW DISCOVERY PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS New Discovery Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS New Discovery Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Lincare Holdings, Inc. | | 1.8% |
| Hittite Microwave Corp. | | 1.7% |
| CoStar Group, Inc. | | 1.7% |
| Silicon Laboratories, Inc. | | 1.6% |
| Verisk Analytics, Inc., “A” | | 1.5% |
| MICROS Systems, Inc. | | 1.5% |
| Gen-Probe, Inc. | | 1.4% |
| MSCI, Inc., “A” | | 1.4% |
| NxStage Medical, Inc. | | 1.4% |
| Mindray Medical International Ltd., ADR | | 1.4% |
| | |
| Equity sectors | | |
| Health Care | | 26.9% |
| Technology | | 21.7% |
| Special Products & Services | | 9.4% |
| Industrial Goods & Services | | 8.3% |
| Financial Services | | 8.1% |
| Leisure | | 7.7% |
| Retailing | | 4.0% |
| Transportation | | 3.6% |
| Consumer Staples | | 3.1% |
| Energy | | 2.8% |
| Basic Materials | | 2.7% |
| Utilities & Communications | | 1.0% |
(o) Less than 0.1%.
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS New Discovery Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS New Discovery Portfolio (the “fund”) provided a total return of 62.96%, while Service Class shares of the fund provided a total return of 62.71%. These compare with a return of 34.47% for the fund’s benchmark, the Russell 2000 Growth 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.
Contributors to Performance
Stock selection in the health care sector was the key driver of the fund’s outperformance relative to the Russell 2000 Growth Index. Within this sector, the fund’s holdings of strong-performing medical device manufacturers, NxStage Medical and Mindray Medical International (b), and Latin American medical diagnostics company Diagnosticos da America (b) were among the fund’s top relative contributors. NxStage Medical benefited from an increase in revenue despite challenging economic conditions. The company, which makes equipment to treat kidney disease, continued to execute on initiatives to drive broader market adoption in the home market and expand overseas.
Stock selection in the energy sector also boosted relative returns. Top relative contributors included holdings of oil service and equipment company Dresser-Rand Group (b) and independent oil and natural gas exploration and production company Continental Resources (b)(h). Dresser-Rand Group’s earnings surged sharply despite lower commodity prices and reductions in exploration and production capital spending.
Stock selection and, to a lesser extent, a slightly underweighted position in the industrial goods and services sector was another positive factor for relative performance. No individual securities within this sector were among the fund’s top contributors for the reporting period.
Elsewhere, the fund’s holdings of digital products manufacturer ARM Holdings (b), travel service provider Ctrip.com International (b), urban fashion apparel retailer Citi Trends, restaurant operator P.F. Chang’s China Bistro, and online marketing and web analytics company Omniture(h) were all top relative contributors. ARM Holdings’ shares rose after the company reported a better-than-expected rise in revenue boosted by the stronger U.S. dollar and a robust licensing pipeline. The company expects continued growth in the smartphone market in 2010. Shares of Citi Trends appreciated due, in part, to management’s savvy insight into what clothes, and in what supply, should be stocked in their stores. Shares of Omniture surged after Adobe announced that it would acquire the company at a significant premium. Adobe plans to add Omniture’s number-crunching products to its array of popular creative software, such as Photoshop and Flash.
During the reporting period, the fund’s currency exposure was also a positive factor that helped relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposures than the benchmark.
3
MFS New Discovery Portfolio
Management Review – continued
Detractors from Performance
Top relative detractors for the reporting period included medical device maker Abiomed (h) and pipeline leak repair company Team Inc. Abiomed’s shares were pressured in the first quarter as the company reported revenue that fell short of expectations. In addition, clinical trials of the company’s cardiac assist device system appeared to move more slowly than expected. Team Inc. lowered its fiscal 2009 outlook at the beginning of the year based on weakening demand, sending the shares lower. Relative fund performance was also negatively impacted by not holding strong-performing biotech firm Dendreon.
Respectfully,
Thomas Wetherald
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS New Discovery Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 62.96% | | 3.76% | | 1.03% | | N/A | | |
| | | Service Class | | 8/24/01 | | 62.71% | | 3.50% | | N/A | | 2.23% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Russell 2000 Growth Index (f) | | 34.47% | | 0.87% | | (1.37)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
Russell 2000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the small-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS New Discovery Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.95% | | $1,000.00 | | $1,304.02 | | $5.52 |
| | Hypothetical (h) | | 0.95% | | $1,000.00 | | $1,020.42 | | $4.84 |
| Service Class | | Actual | | 1.20% | | $1,000.00 | | $1,302.35 | | $6.96 |
| | Hypothetical (h) | | 1.20% | | $1,000.00 | | $1,019.16 | | $6.11 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS New Discovery Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.3% | | | | | |
| Aerospace – 0.8% | | | | | |
| HEICO Corp. | | 22,100 | | $ | 979,693 |
| HEICO Corp., “A” | | 14,020 | | | 504,159 |
| | | | | |
| | | | $ | 1,483,852 |
| | | | | |
| Apparel Manufacturers – 0.3% | | | | | |
| Stella International Holdings | | 349,000 | | $ | 632,727 |
| | | | | |
| Biotechnology – 3.6% | | | | | |
| Gen-Probe, Inc. (a) | | 64,160 | | $ | 2,752,464 |
| Human Genome Sciences, Inc. (a) | | 47,920 | | | 1,466,352 |
| Luminex Corp. (a) | | 78,980 | | | 1,179,171 |
| Myriad Genetics, Inc. (a) | | 58,880 | | | 1,536,768 |
| | | | | |
| | | | $ | 6,934,755 |
| | | | | |
| Brokerage & Asset Managers – 1.5% | | | | | |
| Penson Worldwide, Inc. (a) | | 151,120 | | $ | 1,369,147 |
| Thomas Weisel Partners Group (a) | | 57,320 | | | 216,670 |
| TradeStation Group, Inc. (a) | | 181,630 | | | 1,433,061 |
| | | | | |
| | | | $ | 3,018,878 |
| | | | | |
| Business Services – 5.9% | | | | | |
| Concur Technologies, Inc. (a) | | 46,410 | | $ | 1,984,028 |
| Constant Contact, Inc. (a) | | 150,760 | | | 2,412,160 |
| Copart, Inc. (a) | | 53,570 | | | 1,962,269 |
| CoStar Group, Inc. (a) | | 76,700 | | | 3,203,759 |
| Ultimate Software Group, Inc. (a) | | 65,400 | | | 1,920,798 |
| | | | | |
| | | | $ | 11,483,014 |
| | | | | |
| Chemicals – 0.9% | | | | | |
| Intrepid Potash, Inc. (a) | | 61,160 | | $ | 1,784,037 |
| | | | | |
| Computer Software – 4.5% | | | | | |
| Akamai Technologies, Inc. (a) | | 20,750 | | $ | 525,598 |
| ANSYS, Inc. (a) | | 12,080 | | | 524,997 |
| Autonomy Corp. PLC (a) | | 60,320 | | | 1,472,151 |
| Blackboard, Inc. (a) | | 40,150 | | | 1,822,409 |
| Nuance Communications, Inc. (a) | | 81,295 | | | 1,263,324 |
| Salesforce.com, Inc. (a) | | 23,540 | | | 1,736,546 |
| SolarWinds, Inc. (a) | | 57,530 | | | 1,323,765 |
| | | | | |
| | | | $ | 8,668,790 |
| | | | | |
| Computer Software – Systems – 3.5% | | | | | |
| Ariba, Inc. (a) | | 81,990 | | $ | 1,026,515 |
| LogMeIn, Inc. (a) | | 23,530 | | | 469,424 |
| MICROS Systems, Inc. (a) | | 94,050 | | | 2,918,372 |
| PROS Holdings, Inc. (a) | | 111,340 | | | 1,152,369 |
| SuccessFactors, Inc. (a) | | 70,280 | | | 1,165,242 |
| | | | | |
| | | | $ | 6,731,922 |
| | | | | |
| Consumer Products – 1.9% | | | | | |
| Colgate-Palmolive (India) Ltd. | | 67,412 | | $ | 954,647 |
| Dabur India Ltd. | | 177,490 | | | 603,884 |
| Hengan International Group Co. Ltd. | | 110,000 | | | 814,208 |
| Natura Cosmeticos S.A. | | 62,100 | | | 1,295,147 |
| | | | | |
| | | | $ | 3,667,886 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Consumer Services – 3.5% | | | | | |
Anhanguera Educacional Participacoes S.A.,
IEU (a) | | 120,700 | | $ | 1,715,207 |
| Archipelago Learning, Inc. (a) | | 47,340 | | | 979,938 |
| Capella Education Co. (a) | | 22,820 | | | 1,718,346 |
| Strayer Education, Inc. | | 11,230 | | | 2,386,263 |
| | | | | |
| | | | $ | 6,799,754 |
| | | | | |
| Electrical Equipment – 0.9% | | | | | |
| Houston Wire & Cable Co. | | 76,250 | | $ | 907,375 |
| Mettler-Toledo International, Inc. (a) | | 7,330 | | | 769,577 |
| | | | | |
| | | | $ | 1,676,952 |
| | | | | |
| Electronics – 7.2% | | | | | |
| ARM Holdings PLC | | 924,350 | | $ | 2,643,170 |
| CEVA, Inc. (a) | | 73,210 | | | 941,481 |
| Hittite Microwave Corp. (a) | | 82,520 | | | 3,362,690 |
| NetLogic Microsystems, Inc. (a) | | 36,630 | | | 1,694,504 |
| PMC-Sierra, Inc. (a) | | 168,270 | | | 1,457,218 |
| Silicon Laboratories, Inc. (a) | | 62,920 | | | 3,041,553 |
| Tessera Technologies, Inc. (a) | | 38,660 | | | 899,618 |
| | | | | |
| | | | $ | 14,040,234 |
| | | | | |
| Energy – Independent – 1.0% | | | | | |
| Cobalt International Energy, Inc. (a) | | 69,410 | | $ | 960,634 |
| EXCO Resources, Inc. | | 51,000 | | | 1,082,730 |
| | | | | |
| | | | $ | 2,043,364 |
| | | | | |
| Engineering – Construction – 1.9% | | | | | |
| North American Energy Partners, Inc. (a) | | 314,070 | | $ | 2,280,148 |
| Team, Inc. (a) | | 78,450 | | | 1,475,645 |
| | | | | |
| | | | $ | 3,755,793 |
| | | | | |
| Food & Beverages – 1.2% | | | | | |
| Mead Johnson Nutrition Co., “A” | | 53,490 | | $ | 2,337,513 |
| | | | | |
| Gaming & Lodging – 2.3% | | | | | |
| International Game Technology | | 83,620 | | $ | 1,569,547 |
| Orient-Express Hotels Ltd., “A” (a) | | 48,820 | | | 495,035 |
| WMS Industries, Inc. (a) | | 61,300 | | | 2,452,000 |
| | | | | |
| | | | $ | 4,516,582 |
| | | | | |
| Health Maintenance Organizations – 0.6% | | | |
| OdontoPrev S.A. | | 31,700 | | $ | 1,160,394 |
| | | | | |
| Insurance – 2.2% | | | | | |
| PICO Holdings, Inc. (a) | | 38,630 | | $ | 1,264,360 |
| Verisk Analytics, Inc., “A” (a) | | 98,550 | | | 2,984,094 |
| | | | | |
| | | | $ | 4,248,454 |
| | | | | |
| Internet – 4.0% | | | | | |
| Dealertrack Holdings, Inc. (a) | | 81,150 | | $ | 1,524,809 |
| GSI Commerce, Inc. (a) | | 49,060 | | | 1,245,633 |
| Rackspace Hosting, Inc. (a) | | 71,400 | | | 1,488,690 |
| TechTarget, Inc. (a) | | 251,000 | | | 1,413,130 |
| Vocus, Inc. (a) | | 113,980 | | | 2,051,640 |
| | | | | |
| | | | $ | 7,723,902 |
| | | | | |
7
MFS New Discovery Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Machinery & Tools – 4.7% | | | | | |
| Bucyrus International, Inc. | | 41,360 | | $ | 2,331,463 |
| Colfax Corp. (a) | | 43,040 | | | 518,202 |
| Jain Irrigation Systems Ltd. | | 65,933 | | | 1,235,987 |
| Kennametal, Inc. | | 32,070 | | | 831,254 |
| Polypore International, Inc. (a) | | 80,090 | | | 953,071 |
| Ritchie Bros. Auctioneers, Inc. | | 81,840 | | | 1,835,671 |
| RTI International Metals, Inc. (a) | | 58,710 | | | 1,477,731 |
| | | | | |
| | | | $ | 9,183,379 |
| | | | | |
| Medical & Health Technology & Services – 11.9% | | | |
| Allscripts Healthcare Solutions, Inc. (a) | | 39,260 | | $ | 794,230 |
| athenahealth, Inc. (a) | | 35,690 | | | 1,614,616 |
| Cerner Corp. (a) | | 16,160 | | | 1,332,230 |
| DaVita, Inc. (a) | | 23,880 | | | 1,402,711 |
| Diagnosticos da America S.A. | | 59,300 | | | 1,925,088 |
| Fleury S.A. (a) | | 104,000 | | | 1,098,541 |
| Healthcare Services Group, Inc. | | 113,715 | | | 2,440,324 |
| IDEXX Laboratories, Inc. (a) | | 39,566 | | | 2,114,407 |
| IPC The Hospitalist Co., Inc. (a) | | 59,650 | | | 1,983,363 |
| Lincare Holdings, Inc. (a) | | 92,780 | | | 3,443,994 |
| Medassets, Inc. (a) | | 64,230 | | | 1,362,318 |
| MEDNAX, Inc. (a) | | 20,920 | | | 1,257,501 |
| MWI Veterinary Supply, Inc. (a) | | 35,030 | | | 1,320,631 |
| Phase Forward, Inc. (a) | | 62,370 | | | 957,380 |
| | | | | |
| | | | $ | 23,047,334 |
| | | | | |
| Medical Equipment – 9.4% | | | | | |
| AGA Medical Holdings, Inc. (a) | | 96,150 | | $ | 1,420,136 |
| AtriCure, Inc. (a) | | 39,420 | | | 238,097 |
| Conceptus, Inc. (a) | | 74,770 | | | 1,402,685 |
| DexCom, Inc. (a) | | 255,030 | | | 2,060,642 |
| Edwards Lifesciences Corp. (a) | | 16,380 | | | 1,422,603 |
| Insulet Corp. (a) | | 47,930 | | | 684,440 |
| Mindray Medical International Ltd., ADR | | 79,220 | | | 2,687,142 |
| NxStage Medical, Inc. (a) | | 323,600 | | | 2,702,060 |
| Orthovita, Inc. (a) | | 327,890 | | | 1,150,894 |
| ResMed, Inc. (a) | | 23,790 | | | 1,243,503 |
| Thoratec Corp. (a) | | 45,980 | | | 1,237,782 |
| Volcano Corp. (a) | | 113,260 | | | 1,968,459 |
| | | | | |
| | | | $ | 18,218,443 |
| | | | | |
| Metals & Mining – 1.3% | | | | | |
| Globe Specialty Metals, Inc. (a) | | 141,830 | | $ | 1,333,202 |
| Iluka Resources Ltd. (a) | | 407,110 | | | 1,295,601 |
| | | | | |
| | | | $ | 2,628,803 |
| | | | | |
| Network & Telecom – 2.5% | | | | | |
| Ciena Corp. (a) | | 184,780 | | $ | 2,003,015 |
| Fortinet, Inc. (a) | | 86,660 | | | 1,522,616 |
| Polycom, Inc. (a) | | 54,820 | | | 1,368,855 |
| | | | | |
| | | | $ | 4,894,486 |
| | | | | |
| Oil Services – 1.8% | | | | | |
| Core Laboratories N.V. | | 4,130 | | $ | 487,836 |
| Dresser-Rand Group, Inc. (a) | | 51,500 | | | 1,627,915 |
| Exterran Holdings, Inc. (a) | | 61,410 | | | 1,317,245 |
| | | | | |
| | | | $ | 3,432,996 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Other Banks & Diversified Financials – 4.4% | | | |
| Assured Guaranty Ltd. | | 42,530 | | $ | 925,453 |
| City National Corp. | | 25,310 | | | 1,154,136 |
| Metro Bancorp, Inc. (a) | | 67,940 | | | 854,006 |
| Ocwen Financial Corp. (a) | | 123,060 | | | 1,177,684 |
| PacWest Bancorp | | 27,700 | | | 558,155 |
| Signature Bank (a) | | 43,240 | | | 1,379,356 |
| SVB Financial Group (a) | | 24,500 | | | 1,021,405 |
| TCF Financial Corp. | | 104,280 | | | 1,420,294 |
| | | | | |
| | | | $ | 8,490,489 |
| | | | | |
| Pharmaceuticals – 1.4% | | | | | |
| Auxilium Pharmaceuticals, Inc. (a) | | 15,440 | | $ | 462,891 |
| Eurand N.V. (a) | | 85,010 | | | 1,096,629 |
| Genomma Lab Internacional S.A., “B” (a) | | 363,500 | | | 799,967 |
| Inspire Pharmaceuticals, Inc. (a) | | 74,450 | | | 410,964 |
| | | | | |
| | | | $ | 2,770,451 |
| | | | | |
| Printing & Publishing – 2.3% | | | | | |
| MSCI, Inc., “A” (a) | | 85,590 | | $ | 2,721,762 |
| VistaPrint Ltd. (a) | | 30,520 | | | 1,729,263 |
| | | | | |
| | | | $ | 4,451,025 |
| | | | | |
| Railroad & Shipping – 0.3% | | | | | |
| Diana Shipping, Inc. (a) | | 38,190 | | $ | 552,991 |
| | | | | |
| Restaurants – 3.1% | | | | | |
| McCormick & Schmick’s Seafood Restaurant, Inc. (a) | | 169,050 | | $ | 1,176,588 |
| P.F. Chang’s China Bistro, Inc. (a) | | 70,280 | | | 2,664,315 |
| Peet’s Coffee & Tea, Inc. (a) | | 22,710 | | | 756,924 |
| Red Robin Gourmet Burgers, Inc. (a) | | 76,500 | | | 1,369,350 |
| | | | | |
| | | | $ | 5,967,177 |
| | | | | |
| Specialty Chemicals – 0.5% | | | | | |
| Asian Paints Ltd. | | 23,175 | | $ | 891,263 |
| | | | | |
| Specialty Stores – 3.7% | | | | | |
| Citi Trends, Inc. (a) | | 59,790 | | $ | 1,651,400 |
| Ctrip.com International Ltd., ADR (a) | | 17,770 | | | 1,276,948 |
| Dufry South America Ltd., BDR | | 33,020 | | | 678,915 |
| Monro Muffler Brake, Inc. | | 21,950 | | | 734,008 |
| Overstock.com, Inc. (a) | | 59,450 | | | 806,142 |
| Titan Machinery, Inc. (a) | | 127,780 | | | 1,474,581 |
| Zumiez, Inc. (a) | | 45,140 | | | 574,181 |
| | | | | |
| | | | $ | 7,196,175 |
| | | | | |
| Telecommunications – Wireless – 1.0% | | | |
| SBA Communications Corp. (a) | | 57,830 | | $ | 1,975,473 |
| | | | | |
| Trucking – 3.3% | | | | | |
| Atlas Air Worldwide Holdings, Inc. (a) | | 61,530 | | $ | 2,291,993 |
| Landstar System, Inc. | | 64,480 | | | 2,499,890 |
| Old Dominion Freight Lines, Inc. (a) | | 50,020 | | | 1,535,614 |
| | | | | |
| | | | $ | 6,327,497 |
| | | | | |
Total Common Stocks
(Identified Cost, $175,368,258) | | $ | 192,736,785 |
| | | | | |
8
MFS New Discovery Portfolio
Portfolio of Investments – continued
| | | | | | | | | | |
| Issuer | | Strike
Price | | First
Exercise | | Shares/Par | | Value ($) |
| | | | | | | | | | |
| WARRANTS – 0.0% | | | | | | | | | | |
| Alcoholic Beverages – 0.0% | | | | | | | |
Castle Brands, Inc. (1 share for 1 warrant) (Identified
Cost, $70,840) (a)(z) | | $ | 6.57 | | 5/08/07 | | 50,440 | | $ | 1,556 |
| | | | | | | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| MONEY MARKET FUNDS (v) – 0.5% | | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 1,095,029 | | $ | 1,095,029 |
| | | | | |
Total Investments
(Identified Cost, $176,534,127) | | | | $ | 193,833,370 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.2% | | | | | 302,691 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 194,136,061 |
| | | | | |
| (a) | | Non-income producing security. |
| (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 security: |
| | | | | | |
| Restricted Security | | Acquisition
Date | | Cost | | Current
Market Value |
| Castle Brands, Inc. (Warrants) | | 4/18/07 | | $70,840 | | $1,556 |
| % of Net Assets | | | | | | 0.0% |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| BDR | | Brazilian Depository Receipt |
| IEU | | International Equity Unit |
| PLC | | Public Limited Company |
See Notes to Financial Statements
9
MFS New Discovery Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $175,439,098) | | $192,738,341 | | | |
Underlying funds, at cost and value | | 1,095,029 | | | |
Total investments, at value (identified cost, $176,534,127) | | $193,833,370 | | | |
Foreign currency, at value (identified cost, $20,428) | | $20,482 | | | |
Receivables for | | | | | |
Investments sold | | 1,378,434 | | | |
Interest and dividends | | 106,421 | | | |
Receivable from investment adviser | | 5,419 | | | |
Other assets | | 7,201 | | | |
Total assets | | | | | $195,351,327 |
Liabilities | | | | | |
Payable to custodian | | $933 | | | |
Payables for | | | | | |
Investments purchased | | 734,788 | | | |
Fund shares reacquired | | 289,310 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 9,684 | | | |
Distribution and/or service fees | | 1,598 | | | |
Administrative services fee | | 377 | | | |
Payable for Trustees’ compensation | | 207 | | | |
Deferred country tax expense payable | | 86,227 | | | |
Accrued expenses and other liabilities | | 92,142 | | | |
Total liabilities | | | | | $1,215,266 |
Net assets | | | | | $194,136,061 |
Net assets consist of | | | | | |
Paid-in capital | | $221,692,161 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $86,227 deferred country tax) | | 17,213,143 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (44,769,243 | ) | | |
Net assets | | | | | $194,136,061 |
Shares of beneficial interest outstanding | | | | | 14,440,691 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $78,619,747 | | 5,762,635 | | $13.64 |
Service Class | | 115,516,314 | | 8,678,056 | | 13.31 |
See Notes to Financial Statements
10
MFS New Discovery Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
Year ended 12/31/09 | | | | | | |
Net investment loss | | | | | | |
Income | | | | | | |
Dividends | | $761,224 | | | | |
Income on securities loaned | | 60,131 | | | | |
Interest | | 42 | | | | |
Dividends from underlying funds | | 792 | | | | |
Foreign taxes withheld | | (15,242 | ) | | | |
Total investment income | | | | | $806,947 | |
Expenses | | | | | | |
Management fee | | $1,566,591 | | | | |
Distribution and/or service fees | | 267,674 | | | | |
Administrative services fee | | 70,177 | | | | |
Trustees’ compensation | | 26,051 | | | | |
Custodian fee | | 72,559 | | | | |
Shareholder communications | | 24,235 | | | | |
Auditing fees | | 45,307 | | | | |
Legal fees | | 8,185 | | | | |
Miscellaneous | | 25,227 | | | | |
Total expenses | | | | | $2,106,006 | |
Fees paid indirectly | | (1 | ) | | | |
Reduction of expenses by investment adviser | | (179,600 | ) | | | |
Net expenses | | | | | $1,926,405 | |
Net investment loss | | | | | $(1,119,458 | ) |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions (net of $8,418 country tax) | | $27,008,244 | | | | |
Foreign currency transactions | | (23,452 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $26,984,792 | |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments (net of $86,227 increase in deferred country tax) | | $61,407,459 | | | | |
Translation of assets and liabilities in foreign currencies | | 117 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $61,407,576 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $88,392,368 | |
Change in net assets from operations | | | | | $87,272,910 | |
See Notes to Financial Statements
11
MFS New Discovery Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment loss | | $(1,119,458 | ) | | $(1,047,389 | ) |
Net realized gain (loss) on investments and foreign currency transactions | | 26,984,792 | | | (64,800,853 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 61,407,576 | | | (40,366,188 | ) |
Change in net assets from operations | | $87,272,910 | | | $(106,214,430 | ) |
Distributions declared to shareholders | | | | | | |
From net realized gain on investments | | $— | | | $(45,004,029 | ) |
Change in net assets from fund share transactions | | $(57,934,600 | ) | | $(528,514 | ) |
Total change in net assets | | $29,338,310 | | | $(151,746,973 | ) |
Net assets | | | | | | |
At beginning of period | | 164,797,751 | | | 316,544,724 | |
At end of period | | $194,136,061 | | | $164,797,751 | |
See Notes to Financial Statements
12
MFS New Discovery Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.37 | | | $16.24 | | | $16.24 | | | $14.35 | | | $13.64 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.05 | ) | | $(0.04 | ) | | $(0.08 | ) | | $(0.09 | ) | | $(0.07 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.32 | | | (5.42 | ) | | 0.52 | | | 1.98 | | | 0.78 | |
Total from investment operations | | $5.27 | | | $(5.46 | ) | | $0.44 | | | $1.89 | | | $0.71 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net realized gain on investments | | $— | | | $(2.41 | ) | | $(0.44 | ) | | $— | | | $— | |
Net asset value, end of period | | $13.64 | | | $8.37 | | | $16.24 | | | $16.24 | | | $14.35 | |
Total return (%) (k)(r)(s) | | 62.96 | | | (39.57 | ) | | 2.56 | | | 13.17 | | | 5.21 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.05 | | | 1.02 | | | 1.00 | | | 1.00 | | | 1.00 | |
Expenses after expense reductions (f) | | 0.95 | | | 0.95 | | | 0.95 | | | 0.98 | | | N/A | |
Net investment loss | | (0.49 | ) | | (0.28 | ) | | (0.45 | ) | | (0.60 | ) | | (0.56 | ) |
Portfolio turnover | | 153 | | | 127 | | | 95 | | | 107 | | | 127 | |
Net assets at end of period (000 omitted) | | $78,620 | | | $59,861 | | | $130,029 | | | $163,825 | | | $176,958 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.18 | | | $15.97 | | | $16.02 | | | $14.19 | | | $13.52 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.07 | ) | | $(0.07 | ) | | $(0.12 | ) | | $(0.13 | ) | | $(0.11 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.20 | | | (5.31 | ) | | 0.51 | | | 1.96 | | | 0.78 | |
Total from investment operations | | $5.13 | | | $(5.38 | ) | | $0.39 | | | $1.83 | | | $0.67 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net realized gain on investments | | $— | | | $(2.41 | ) | | $(0.44 | ) | | $— | | | $— | |
Net asset value, end of period | | $13.31 | | | $8.18 | | | $15.97 | | | $16.02 | | | $14.19 | |
Total return (%) (k)(r)(s) | | 62.71 | | | (39.76 | ) | | 2.28 | | | 12.90 | | | 4.96 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.30 | | | 1.27 | | | 1.25 | | | 1.26 | | | 1.26 | |
Expenses after expense reductions (f) | | 1.20 | | | 1.20 | | | 1.20 | | | 1.23 | | | N/A | |
Net investment loss | | (0.74 | ) | | (0.54 | ) | | (0.70 | ) | | (0.84 | ) | | (0.81 | ) |
Portfolio turnover | | 153 | | | 127 | | | 95 | | | 107 | | | 127 | |
Net assets at end of period (000 omitted) | | $115,516 | | | $104,937 | | | $186,516 | | | $181,468 | | | $131,180 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
13
MFS New Discovery Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS New Discovery Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
14
MFS New Discovery Portfolio
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 December 31, 2009 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 | | $163,790,354 | | $1,556 | | $— | | $163,791,910 |
Brazil | | 2,393,688 | | 4,800,689 | | — | | 7,194,377 |
China | | 3,964,095 | | 814,208 | | — | | 4,778,303 |
Canada | | 4,115,819 | | — | | — | | 4,115,819 |
United Kingdom | | 1,472,151 | | 2,643,170 | | — | | 4,115,321 |
India | | 2,190,634 | | 1,495,147 | | — | | 3,685,781 |
Australia | | — | | 1,295,601 | | — | | 1,295,601 |
Netherlands | | 1,096,629 | | — | | — | | 1,096,629 |
Mexico | | 799,967 | | — | | — | | 799,967 |
Other Countries | | 552,991 | | 1,311,642 | | — | | 1,864,633 |
| Mutual Funds | | 1,095,029 | | — | | — | | 1,095,029 |
| Total Investments | | $181,471,357 | | $12,362,013 | | $— | | $193,833,370 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of
15
MFS New Discovery Portfolio
Notes to Financial Statements – continued
the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is separately reported on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. As of December 31, 2009, there were no securities on loan.
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. 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 December 31, 2009, 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 net operating losses and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $— | | $12,386,029 |
| Long-term capital gain | | — | | 32,618,000 |
| Total distributions | | $— | | $45,004,029 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $178,691,263 | |
| Gross appreciation | | 24,956,444 | |
| Gross depreciation | | (9,814,337 | ) |
| Net unrealized appreciation (depreciation) | | $15,142,107 | |
| Capital loss carryforwards | | (42,612,107 | ) |
| Other temporary differences | | (86,100 | ) |
16
MFS New Discovery Portfolio
Notes to Financial Statements – continued
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 realized gain
on investments |
| | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $— | | $17,250,961 |
| Service Class | | — | | 27,753,068 |
| Total | | $— | | $45,004,029 |
| (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 billion of average daily net assets | | 0.90% |
| Average daily net assets in excess of $1 billion | | 0.80% |
The investment adviser has agreed in writing to reduce its management fee to 0.75% of average daily net assets in excess of $2.5 billion. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 0.95% of average daily net assets for the Initial Class shares and 1.20% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $179,600 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0403% of the fund’s average daily net assets.
17
MFS New Discovery Portfolio
Notes to Financial Statements – continued
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $3,115 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $264,040,749 and $323,393,118, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 381,699 | | | $3,641,700 | | | 680,507 | | | $6,730,272 | |
Service Class | | 346,397 | | | 3,223,051 | | | 2,767,379 | | | 26,015,964 | |
| | 728,096 | | | $6,864,751 | | | 3,447,886 | | | $32,746,236 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | — | | | $— | | | 1,235,742 | | | $17,250,961 | |
Service Class | | — | | | — | | | 2,028,733 | | | 27,753,068 | |
| | — | | | $— | | | 3,264,475 | | | $45,004,029 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,775,010 | ) | | $(18,353,031 | ) | | (2,767,391 | ) | | $(34,988,647 | ) |
Service Class | | (4,493,420 | ) | | (46,446,320 | ) | | (3,647,151 | ) | | (43,290,132 | ) |
| | (6,268,430 | ) | | $(64,799,351 | ) | | (6,414,542 | ) | | $(78,278,779 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,393,311 | ) | | $(14,711,331 | ) | | (851,142 | ) | | $(11,007,414 | ) |
Service Class | | (4,147,023 | ) | | (43,223,269 | ) | | 1,148,961 | | | 10,478,900 | |
| | (5,540,334 | ) | | $(57,934,600 | ) | | 297,819 | | | $(528,514 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $2,641 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
18
MFS New Discovery Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 39,491,938 | | (38,396,909 | ) | | 1,095,029 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $792 | | | $1,095,029 |
19
MFS New Discovery Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS New Discovery Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS New Discovery Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 New Discovery Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
20
MFS New Discovery Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
21
MFS New Discovery Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS New Discovery Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Thomas Wetherald | | |
23
MFS New Discovery Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 3rd quintile for the three-year period and the 4th quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
24
MFS New Discovery Portfolio
Board Review of Investment Advisory Agreement – continued
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees noted that MFS agreed to continue its waiver to reduce its advisory fee on average daily net assets over $2.5 billion, and they accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
25
MFS New Discovery Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
26
MFS New Discovery Portfolio
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.
27
MFS® GROWTH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Growth Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Google, Inc., “A” | | 4.5% |
| Apple, Inc. | | 3.7% |
| Cisco Systems, Inc. | | 2.9% |
| Danaher Corp. | | 2.4% |
| Adobe Systems, Inc. | | 2.3% |
| Hewlett-Packard Co. | | 2.2% |
| Visa, Inc., “A” | | 1.7% |
| American Tower Corp., “A” | | 1.7% |
| CME Group, Inc. | | 1.6% |
| Express Scripts, Inc. | | 1.5% |
| | |
| Equity sectors | | |
| Technology | | 24.9% |
| Health Care | | 15.0% |
| Retailing | | 8.9% |
| Special Products & Services | | 8.3% |
| Financial Services | | 7.2% |
| Leisure | | 7.2% |
| Consumer Staples | | 7.2% |
| Energy | | 5.8% |
| Basic Materials | | 4.9% |
| Industrial Goods & Services | | 4.8% |
| Utilities & Communications | | 2.1% |
| Transportation | | 1.9% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Growth Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Growth Portfolio (the “fund”) provided a total return of 37.74%, while Service Class shares of the fund provided a total return of 37.45%. These compare with a return of 37.01% for the fund’s benchmark, the Russell 3000 Growth Index. Effective at the close of business, December 31, 2009, the Russell 1000 Growth Index replaced the Russell 3000 Growth Index as the fund’s benchmark. For the twelve months ended December 31, 2009, the Russell 1000 Growth Index generated a return of 37.21%.
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.
Contributors to Performance
Stock selection in the leisure and special products and services sectors boosted the fund’s performance relative to the Russell 3000 Growth Index. In the leisure sector, not owning fast-food restaurant chain McDonald’s benefited relative returns as this benchmark constituent underperformed the index over the reporting period. Within the special products and services sector, online travel company Priceline.com was among the fund’s top contributors.
Stock selection in the technology sector also had a positive impact on relative results. Holdings of personal computer and electronics maker Apple, networking chip maker Marvell Technology Group, internet search engine Google, and internet software service provider Tencent Holdings (b) all turned in impressive returns over the reporting period. The stock price of Marvell Technology Group climbed after the company’s management announced cost-cutting initiatives in response to deteriorating economic conditions earlier in the year. The company also raised earnings expectations.
Elsewhere, the fund’s timing of ownership in shares of integrated oil and gas company Exxon Mobil (h), biotechnology company Genentech (h), and financial services firm Goldman Sachs Group aided relative performance. Underweighting consumer products maker Procter & Gamble was another positive as this stock underperformed the benchmark.
During the reporting period, the fund’s currency exposure contributed to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposures than the benchmark.
Detractors from Performance
Stock selection in the financial services sector was a major factor detracting from relative performance. Here, the timing of our ownership in shares of financial services firm Wells Fargo (h), and the fund’s holdings of JPMorgan Chase (b), held back relative results.
Individual securities in other sectors that also hindered relative returns included global biotech company Genzyme, cardiovascular medical device maker St. Jude Medical (h), biotechnology company Gilead Sciences, and integrated energy company Chevron (b)(h). Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down production due to a viral infection in one of its bioreactors. Elsewhere, the timing of our ownership in shares of brewer Molson Coors Brewing (h), and not owning strong-performing software giant Microsoft and technology company International Business Machines (IBM), hindered relative returns.
3
MFS Growth Portfolio
Management Review – continued
The fund’s cash position was also a detractor. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
Eric Fischman
Portfolio Manager
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
The views expressed in this report are those of the portfolio manager 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.
4
MFS Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/01/95 | | 37.74% | | 4.29% | | (4.36)% | | N/A | | |
| | | Service Class | | 8/24/01 | | 37.45% | | 4.03% | | N/A | | 2.16% | | |
Comparative benchmarks
| | | | | | | | | | | | | | |
| | | Russell 3000 Growth Index (f) | | | | 37.01% | | 1.58% | | (3.79)% | | N/A | | |
| | | Russell 1000 Growth Index (f) | | | | 37.21% | | 1.63% | | (3.99)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Effective the close of business on 12/31/09, the fund changed its benchmark from the Russell 3000 Growth Index to the Russell 1000 Growth Index to better reflect the fund’s investment policies and objectives.
Benchmark Definitions
Russell 1000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
Russell 3000 Growth Index – constructed to provide a comprehensive barometer for growth securities in the small to large-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
5
MFS Growth Portfolio
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.86% | | $1,000.00 | | $1,239.36 | | $4.85 |
| | Hypothetical (h) | | 0.86% | | $1,000.00 | | $1,020.87 | | $4.38 |
| Service Class | | Actual | | 1.11% | | $1,000.00 | | $1,238.53 | | $6.26 |
| | Hypothetical (h) | | 1.11% | | $1,000.00 | | $1,019.61 | | $5.65 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 98.2% | | | | | |
| Aerospace – 1.4% | | | | | |
| Goodrich Corp. | | 21,270 | | $ | 1,366,597 |
| Precision Castparts Corp. | | 8,500 | | | 937,975 |
| | | | | |
| | | | $ | 2,304,572 |
| | | | | |
| Apparel Manufacturers – 0.7% | | | | | |
| Coach, Inc. | | 11,630 | | $ | 424,844 |
| NIKE, Inc., “B” | | 11,080 | | | 732,056 |
| | | | | |
| | | | $ | 1,156,900 |
| | | | | |
| Biotechnology – 2.6% | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | 17,700 | | $ | 864,114 |
| Celgene Corp. (a) | | 16,840 | | | 937,651 |
| Genzyme Corp. (a) | | 18,760 | | | 919,428 |
| Gilead Sciences, Inc. (a) | | 30,890 | | | 1,336,919 |
| Human Genome Sciences, Inc. (a) | | 11,980 | | | 366,588 |
| | | | | |
| | | | $ | 4,424,700 |
| | | | | |
| Broadcasting – 1.4% | | | | | |
| Discovery Communications, Inc., “A” (a) | | 31,720 | | $ | 972,852 |
| Walt Disney Co. | | 45,000 | | | 1,451,250 |
| | | | | |
| | | | $ | 2,424,102 |
| | | | | |
| Brokerage & Asset Managers – 3.6% | | | | | |
| Affiliated Managers Group, Inc. (a) | | 15,420 | | $ | 1,038,537 |
| BM&F Bovespa S.A. | | 97,700 | | | 679,001 |
| Charles Schwab Corp. | | 34,240 | | | 644,397 |
| CME Group, Inc. | | 8,320 | | | 2,795,104 |
| Franklin Resources, Inc. | | 3,150 | | | 331,852 |
| Hong Kong Exchanges & Clearing Ltd. | | 32,700 | | | 582,139 |
| | | | | |
| | | | $ | 6,071,030 |
| | | | | |
| Business Services – 5.3% | | | | | |
| Accenture Ltd., “A” | | 18,400 | | $ | 763,600 |
| Cognizant Technology Solutions Corp., “A” (a) | | 39,780 | | | 1,802,034 |
| MasterCard, Inc., “A” | | 9,780 | | | 2,503,484 |
| Visa, Inc., “A” | | 33,730 | | | 2,950,026 |
| Western Union Co. | | 52,510 | | | 989,814 |
| | | | | |
| | | | $ | 9,008,958 |
| | | | | |
| Chemicals – 1.4% | | | | | |
| Monsanto Co. | | 29,130 | | $ | 2,381,378 |
| | | | | |
| Computer Software – 4.9% | | | | | |
| Adobe Systems, Inc. (a) | | 104,140 | | $ | 3,830,269 |
| Autonomy Corp. PLC (a) | | 17,800 | | | 434,421 |
| Citrix Systems, Inc. (a) | | 26,190 | | | 1,089,766 |
| Oracle Corp. | | 91,150 | | | 2,236,821 |
| VeriSign, Inc. (a) | | 29,718 | | | 720,364 |
| | | | | |
| | | | $ | 8,311,641 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – Systems – 7.1% | | | | | |
| Apple, Inc. (a)(s) | | 29,990 | | $ | 6,323,691 |
| EMC Corp. (a) | | 81,270 | | | 1,419,787 |
| Hewlett-Packard Co. | | 73,300 | | | 3,775,683 |
| VMware, Inc. (a) | | 13,970 | | | 592,049 |
| | | | | |
| | | | $ | 12,111,210 |
| | | | | |
| Consumer Products – 3.2% | | | | | |
| Avon Products, Inc. | | 31,400 | | $ | 989,100 |
| Colgate-Palmolive Co. | | 29,920 | | | 2,457,928 |
| Natura Cosmeticos S.A. | | 49,410 | | | 1,030,487 |
| Procter & Gamble Co. | | 16,030 | | | 971,899 |
| | | | | |
| | | | $ | 5,449,414 |
| | | | | |
| Consumer Services – 3.0% | | | | | |
| Capella Education Co. (a) | | 7,820 | | $ | 588,846 |
| DeVry, Inc. | | 21,600 | | | 1,225,368 |
| Monster Worldwide, Inc. (a) | | 26,020 | | | 452,748 |
| Priceline.com, Inc. (a) | | 7,200 | | | 1,573,200 |
| Strayer Education, Inc. | | 5,650 | | | 1,200,568 |
| | | | | |
| | | | $ | 5,040,730 |
| | | | | |
| Electrical Equipment – 3.1% | | | | | |
| Danaher Corp. | | 54,830 | | $ | 4,123,216 |
| Rockwell Automation, Inc. | | 11,640 | | | 546,847 |
| Tyco Electronics Ltd. | | 21,510 | | | 528,071 |
| | | | | |
| | | | $ | 5,198,134 |
| | | | | |
| Electronics – 2.9% | | | | | |
| Hittite Microwave Corp. (a) | | 13,450 | | $ | 548,088 |
| Intel Corp. | | 80,960 | | | 1,651,584 |
| Linear Technology Corp. | | 24,580 | | | 750,673 |
| Marvell Technology Group Ltd. (a) | | 27,260 | | | 565,645 |
| National Semiconductor Corp. | | 36,500 | | | 560,640 |
| Samsung Electronics Co. Ltd. | | 1,332 | | | 909,733 |
| | | | | |
| | | | $ | 4,986,363 |
| | | | | |
| Energy – Independent – 3.0% | | | | | |
| Anadarko Petroleum Corp. | | 24,630 | | $ | 1,537,405 |
| Apache Corp. | | 12,710 | | | 1,311,291 |
| Noble Energy, Inc. | | 22,770 | | | 1,621,679 |
| Southwestern Energy Co. (a) | | 13,390 | | | 645,398 |
| | | | | |
| | | | $ | 5,115,773 |
| | | | | |
| Energy – Integrated – 0.3% | | | | | |
| Petroleo Brasileiro S.A., ADR | | 10,470 | | $ | 499,210 |
| | | | | |
| Engineering – Construction – 0.4% | | | | | |
| Fluor Corp. | | 13,430 | | $ | 604,887 |
| | | | | |
| Entertainment – 2.2% | | | | | |
| DreamWorks Animation, Inc., “A” (a) | | 59,540 | | $ | 2,378,623 |
| TiVo, Inc. (a) | | 134,630 | | | 1,370,533 |
| | | | | |
| | | | $ | 3,749,156 |
| | | | | |
8
MFS Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Food & Beverages – 2.7% | | | | | |
| Coca-Cola Co. | | 40,270 | | $ | 2,295,390 |
| Mead Johnson Nutrition Co., “A” | | 21,900 | | | 957,030 |
| PepsiCo, Inc. | | 20,850 | | | 1,267,680 |
| | | | | |
| | | | $ | 4,520,100 |
| | | | | |
| Food & Drug Stores – 0.7% | | | | | |
| Walgreen Co. | | 34,250 | | $ | 1,257,660 |
| | | | | |
| Gaming & Lodging – 2.1% | | | | | |
| Carnival Corp. (a) | | 12,460 | | $ | 394,857 |
| International Game Technology | | 53,130 | | | 997,250 |
| Royal Caribbean Cruises Ltd. (a) | | 43,150 | | | 1,090,832 |
| Starwood Hotels & Resorts Worldwide, Inc. | | 28,340 | | | 1,036,394 |
| | | | | |
| | | | $ | 3,519,333 |
| | | | | |
| General Merchandise – 2.1% | | | | | |
| Costco Wholesale Corp. | | 20,100 | | $ | 1,189,317 |
| Dollar General Corp. (a) | | 18,060 | | | 405,086 |
| Target Corp. | | 40,910 | | | 1,978,817 |
| | | | | |
| | | | $ | 3,573,220 |
| | | | | |
| Insurance – 0.7% | | | | | |
| Verisk Analytics, Inc., “A” (a) | | 41,620 | | $ | 1,260,254 |
| | | | | |
| Internet – 5.2% | | | | | |
| Google, Inc., “A” (a) | | 12,190 | | $ | 7,557,556 |
| Tencent Holdings Ltd. | | 57,700 | | | 1,243,574 |
| | | | | |
| | | | $ | 8,801,130 |
| | | | | |
| Leisure & Toys – 0.4% | | | | | |
| THQ, Inc. (a) | | 133,650 | | $ | 673,596 |
| | | | | |
| Major Banks – 2.0% | | | | | |
| Bank of America Corp. | | 67,500 | | $ | 1,016,550 |
| Goldman Sachs Group, Inc. | | 8,960 | | | 1,512,806 |
| JPMorgan Chase & Co. | | 13,100 | | | 545,877 |
| State Street Corp. | | 8,200 | | | 357,028 |
| | | | | |
| | | | $ | 3,432,261 |
| | | | | |
| Medical & Health Technology & Services – 4.2% | | | |
| athenahealth, Inc. (a) | | 7,900 | | $ | 357,396 |
| Cerner Corp. (a) | | 11,000 | | | 906,840 |
| Express Scripts, Inc. (a) | | 29,530 | | | 2,552,869 |
| IDEXX Laboratories, Inc. (a) | | 19,950 | | | 1,066,128 |
| Medassets, Inc. (a) | | 26,300 | | | 557,823 |
| Medco Health Solutions, Inc. (a) | | 27,040 | | | 1,728,126 |
| | | | | |
| | | | $ | 7,169,182 |
| | | | | |
| Medical Equipment – 4.6% | | | | | |
| Becton, Dickinson & Co. | | 20,160 | | $ | 1,589,818 |
| Conceptus, Inc. (a) | | 78,680 | | | 1,476,037 |
| Covidien PLC | | 35,400 | | | 1,695,306 |
| DENTSPLY International, Inc. | | 18,630 | | | 655,217 |
| Synthes, Inc. | | 7,100 | | | 929,875 |
| Thermo Fisher Scientific, Inc. (a) | | 29,300 | | | 1,397,317 |
| | | | | |
| | | | $ | 7,743,570 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Metals & Mining – 0.9% | | | | | |
| BHP Billiton Ltd., ADR | | 9,440 | | $ | 722,915 |
| Freeport-McMoRan Copper & Gold, Inc. | | 10,070 | | | 808,520 |
| | | | | |
| | | | $ | 1,531,435 |
| | | | | |
| Network & Telecom – 4.8% | | | | | |
| Ciena Corp. (a) | | 36,600 | | $ | 396,744 |
| Cisco Systems, Inc. (a) | | 207,680 | | | 4,971,859 |
| Juniper Networks, Inc. (a) | | 89,800 | | | 2,394,966 |
| Palm, Inc. (a) | | 30,680 | | | 308,027 |
| | | | | |
| | | | $ | 8,071,596 |
| | | | | |
| Oil Services – 2.5% | | | | | |
| Halliburton Co. | | 59,610 | | $ | 1,793,665 |
| Noble Corp. | | 32,128 | | | 1,307,610 |
| Schlumberger Ltd. | | 17,180 | | | 1,118,246 |
| | | | | |
| | | | $ | 4,219,521 |
| | | | | |
| Other Banks & Diversified Financials – 0.9% | | | |
| American Express Co. | | 38,800 | | $ | 1,572,176 |
| | | | | |
| Pharmaceuticals – 3.6% | | | | | |
| Abbott Laboratories | | 41,080 | | $ | 2,217,909 |
| Allergan, Inc. | | 16,600 | | | 1,045,966 |
| Merck & Co., Inc. | | 16,620 | | | 607,295 |
| Teva Pharmaceutical Industries Ltd., ADR | | 39,760 | | | 2,233,717 |
| | | | | |
| | | | $ | 6,104,887 |
| | | | | |
| Precious Metals & Minerals – 1.0% | | | | | |
| Goldcorp, Inc. | | 17,070 | | $ | 671,534 |
| Teck Resources Ltd., “B” (a) | | 30,660 | | | 1,072,180 |
| | | | | |
| | | | $ | 1,743,714 |
| | | | | |
| Printing & Publishing – 1.1% | | | | | |
| MSCI, Inc., “A” (a) | | 43,110 | | $ | 1,370,898 |
| VistaPrint Ltd. (a) | | 9,930 | | | 562,634 |
| | | | | |
| | | | $ | 1,933,532 |
| | | | | |
| Railroad & Shipping – 0.6% | | | | | |
| Union Pacific Corp. | | 15,060 | | $ | 962,334 |
| | | | | |
| Specialty Chemicals – 1.5% | | | | | |
| Air Products & Chemicals, Inc. | | 5,050 | | $ | 409,353 |
| Praxair, Inc. | | 25,810 | | | 2,072,801 |
| | | | | |
| | | | $ | 2,482,154 |
| | | | | |
| Specialty Stores – 5.4% | | | | | |
| Abercrombie & Fitch Co., “A” | | 24,800 | | $ | 864,280 |
| Amazon.com, Inc. (a) | | 16,450 | | | 2,212,854 |
| Ctrip.com International Ltd., ADR (a) | | 14,190 | | | 1,019,693 |
| Home Depot, Inc. | | 52,600 | | | 1,521,718 |
| J. Crew Group, Inc. (a) | | 14,820 | | | 663,047 |
| Staples, Inc. | | 60,460 | | | 1,486,711 |
| Tiffany & Co. | | 16,300 | | | 700,900 |
| TJX Cos., Inc. | | 17,350 | | | 634,143 |
| | | | | |
| | | | $ | 9,103,346 |
| | | | | |
| Telecommunications – Wireless – 0.4% | | | | | |
| America Movil S.A.B. de C.V., “L”, ADR | | 14,190 | | $ | 666,646 |
| | | | | |
9
MFS Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Telephone Services – 1.7% | | | | | |
| American Tower Corp., “A” (a) | | 67,385 | | $ | 2,911,706 |
| | | | | |
| Tobacco – 1.3% | | | | | |
| Philip Morris International, Inc. | | 46,190 | | $ | 2,225,896 |
| | | | | |
| Trucking – 1.3% | | | | | |
| Expeditors International of Washington, Inc. | | 28,160 | | $ | 977,997 |
| Landstar System, Inc. | | 31,990 | | | 1,240,252 |
| | | | | |
| | | | $ | 2,218,249 |
| | | | | |
Total Common Stocks
(Identified Cost, $143,493,363) | | | | $ | 166,535,656 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 2.1% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 3,530,908 | | $ | 3,530,908 | |
| | | | | | |
Total Investments
(Identified Cost, $147,024,271) | | | | $ | 170,066,564 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.3)% | | | | | (424,305 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 169,642,259 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $183,448. At December 31, 2009, the fund had no short sales outstanding. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
10
MFS Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $143,493,363) | | $166,535,656 | | | |
Underlying funds, at cost and value | | 3,530,908 | | | |
Total investments, at value (identified cost, $147,024,271) | | $170,066,564 | | | |
Cash | | $3,592 | | | |
Receivables for | | | | | |
Fund shares sold | | 14 | | | |
Interest and dividends | | 127,209 | | | |
Other assets | | 6,503 | | | |
Total assets | | | | | $170,203,882 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $336,799 | | | |
Fund shares reacquired | | 153,425 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 7,041 | | | |
Distribution and/or service fees | | 198 | | | |
Administrative services fee | | 331 | | | |
Payable for Trustees’ compensation | | 183 | | | |
Accrued expenses and other liabilities | | 63,646 | | | |
Total liabilities | | | | | $561,623 |
Net assets | | | | | $169,642,259 |
Net assets consist of | | | | | |
Paid-in capital | | $403,097,524 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 23,042,498 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (256,624,314 | ) | | |
Undistributed net investment income | | 126,551 | | | |
Net assets | | | | | $169,642,259 |
Shares of beneficial interest outstanding | | | | | 8,843,475 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $155,356,618 | | 8,087,571 | | $19.21 |
Service Class | | 14,285,641 | | 755,904 | | 18.90 |
See Notes to Financial Statements
11
MFS Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $1,485,560 | | | | |
Interest | | 24,733 | | | | |
Dividends from underlying funds | | 6,904 | | | | |
Foreign taxes withheld | | (12,518 | ) | | | |
Total investment income | | | | | $1,504,679 | |
Expenses | | | | | | |
Management fee | | $1,121,794 | | | | |
Distribution and/or service fees | | 32,303 | | | | |
Administrative services fee | | 60,356 | | | | |
Trustees’ compensation | | 22,977 | | | | |
Custodian fee | | 29,280 | | | | |
Shareholder communications | | 13,909 | | | | |
Auditing fees | | 53,336 | | | | |
Legal fees | | 8,182 | | | | |
Miscellaneous | | 24,453 | | | | |
Total expenses | | | | | $1,366,590 | |
Net investment income | | | | | $138,089 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(8,739,956 | ) | | | |
Foreign currency transactions | | (11,032 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(8,750,988 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $56,940,063 | | | | |
Translation of assets and liabilities in foreign currencies | | 1,158 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $56,941,221 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $48,190,233 | |
Change in net assets from operations | | | | | $48,328,322 | |
See Notes to Financial Statements
12
MFS Growth Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $138,089 | | | $412,458 | |
Net realized gain (loss) on investments and foreign currency transactions | | (8,750,988 | ) | | (18,386,248 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 56,941,221 | | | (75,448,341 | ) |
Change in net assets from operations | | $48,328,322 | | | $(93,422,131 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(381,689 | ) | | $(498,653 | ) |
Change in net assets from fund share transactions | | $(23,251,969 | ) | | $(48,993,679 | ) |
Total change in net assets | | $24,694,664 | | | $(142,914,463 | ) |
Net assets | | | | | | |
At beginning of period | | 144,947,595 | | | 287,862,058 | |
At end of period (including undistributed net investment income of $126,551 and
$381,183, respectively) | | $169,642,259 | | | $144,947,595 | |
See Notes to Financial Statements
13
MFS Growth Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.99 | | | $22.37 | | | $18.45 | | | $17.08 | | | $15.65 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | $0.02 | | | $0.04 | | | $0.04 | | | $(0.02 | ) | | $(0.04 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.24 | | | (8.37 | ) | | 3.88 | | | 1.39 | | | 1.47 | |
Total from investment operations | | $5.26 | | | $(8.33 | ) | | $3.92 | | | $1.37 | | | $1.43 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.04 | ) | | $(0.05 | ) | | $— | | | $— | | | $— | |
Net asset value, end of period | | $19.21 | | | $13.99 | | | $22.37 | | | $18.45 | | | $17.08 | |
Total return (%) (k)(s) | | 37.74 | | | (37.33 | ) | | 21.25 | | | 8.02 | | | 9.14 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.89 | | | 0.88 | | | 0.84 | | | 0.83 | | | 0.84 | |
Net investment income (loss) | | 0.11 | | | 0.21 | | | 0.19 | | | (0.14 | ) | | (0.26 | ) |
Portfolio turnover | | 95 | | | 120 | | | 76 | | | 123 | | | 88 | |
Net assets at end of period (000 omitted) | | $155,357 | | | $131,692 | | | $264,089 | | | $291,965 | | | $350,083 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.75 | | | $22.01 | | | $18.19 | | | $16.89 | | | $15.51 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.02 | ) | | $(0.01 | ) | | $(0.01 | ) | | $(0.07 | ) | | $(0.08 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 5.17 | | | (8.25 | ) | | 3.83 | | | 1.37 | | | 1.46 | |
Total from investment operations | | $5.15 | | | $(8.26 | ) | | $3.82 | | | $1.30 | | | $1.38 | |
Net asset value, end of period | | $18.90 | | | $13.75 | | | $22.01 | | | $18.19 | | | $16.89 | |
Total return (%) (k)(s) | | 37.45 | | | (37.53 | ) | | 21.00 | | | 7.70 | | | 8.90 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.14 | | | 1.13 | | | 1.09 | | | 1.08 | | | 1.09 | |
Net investment loss | | (0.14 | ) | | (0.04 | ) | | (0.06 | ) | | (0.38 | ) | | (0.51 | ) |
Portfolio turnover | | 95 | | | 120 | | | 76 | | | 123 | | | 88 | |
Net assets at end of period (000 omitted) | | $14,286 | | | $13,256 | | | $23,773 | | | $21,538 | | | $21,597 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
14
MFS Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Growth Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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 affect 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 investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the
15
MFS Growth Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 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 | | $153,840,532 | | $— | | $— | | $153,840,532 |
China | | 1,019,693 | | 1,243,574 | | — | | 2,263,267 |
Israel | | 2,233,717 | | — | | — | | 2,233,717 |
Brazil | | 1,529,696 | | 679,001 | | — | | 2,208,697 |
Canada | | 1,743,714 | | — | | — | | 1,743,714 |
Switzerland | | — | | 929,875 | | — | | 929,875 |
South Korea | | — | | 909,733 | | — | | 909,733 |
Australia | | 722,915 | | — | | — | | 722,915 |
Mexico | | 666,646 | | — | | — | | 666,646 |
Other Countries | | 434,421 | | 582,139 | | — | | 1,016,560 |
| Mutual Funds | | 3,530,908 | | — | | — | | 3,530,908 |
| Total Investments | | $165,722,242 | | $4,344,322 | | $— | | $170,066,564 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
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
16
MFS Growth Portfolio
Notes to Financial Statements – continued
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. At December 31, 2009, the fund did not have any outstanding derivative instruments.
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | |
| | | Investment
Transactions
(i.e.,
Purchased
Options) | |
Equity Contracts | | $(113,811 | ) |
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can
17
MFS Growth Portfolio
Notes to Financial Statements – continued
exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund has yet to enter into such transactions.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $381,689 | | $498,653 |
18
MFS Growth Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $147,753,081 | |
| Gross appreciation | | 27,737,559 | |
| Gross depreciation | | (5,424,076 | ) |
| Net unrealized appreciation (depreciation) | | $22,313,483 | |
| Undistributed ordinary income | | 126,551 | |
| Capital loss carryforwards | | (255,895,504 | ) |
| Other temporary differences | | 205 | |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(229,227,867 | ) |
| 12/31/16 | | (16,338,857 | ) |
| 12/31/17 | | (10,328,780 | ) |
| | $(255,895,504 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $381,689 | | $498,653 |
| (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 $300 million of average daily net assets | | 0.75% |
| Average daily net assets in excess of $300 million | | 0.675% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The
19
MFS Growth Portfolio
Notes to Financial Statements – continued
administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0403% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,662 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $138,396,906 and $159,215,065, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 74,869 | | | $1,153,758 | | | 231,630 | | | $3,957,438 | |
Service Class | | 65,640 | | | 987,139 | | | 157,569 | | | 2,631,563 | |
| | 140,509 | | | $2,140,897 | | | 389,199 | | | $6,589,001 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 27,147 | | | $381,689 | | | 22,143 | | | $498,653 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,429,039 | ) | | $(21,797,038 | ) | | (2,644,192 | ) | | $(51,102,967 | ) |
Service Class | | (273,528 | ) | | (3,977,517 | ) | | (274,074 | ) | | (4,978,366 | ) |
| | (1,702,567 | ) | | $(25,774,555 | ) | | (2,918,266 | ) | | $(56,081,333 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,327,023 | ) | | $(20,261,591 | ) | | (2,390,419 | ) | | $(46,646,876 | ) |
Service Class | | (207,888 | ) | | (2,990,378 | ) | | (116,505 | ) | | (2,346,803 | ) |
| | (1,534,911 | ) | | $(23,251,969 | ) | | (2,506,924 | ) | | $(48,993,679 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $2,222 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
20
MFS Growth Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 32,388,423 | | (28,857,515 | ) | | 3,530,908 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $6,904 | | | $3,530,908 |
21
MFS Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Growth Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Growth Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
22
MFS Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
23
MFS Growth Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
24
MFS Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Eric Fischman | | |
25
MFS Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
26
MFS Growth Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
27
MFS Growth Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100.00% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
28
MFS Growth Portfolio
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.
29
MFS® MID CAP GROWTH PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Mid Cap Growth Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Mid Cap Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Adobe Systems, Inc. | | 1.8% |
| American Tower Corp., “A” | | 1.6% |
| IDEXX Laboratories, Inc. | | 1.5% |
| DreamWorks Animation, Inc., “A” | | 1.4% |
| MasterCard, Inc., “A” | | 1.4% |
| Priceline.com, Inc. | | 1.4% |
| Goodrich Corp. | | 1.4% |
| J.M. Smucker Co. | | 1.4% |
| MICROS Systems, Inc. | | 1.4% |
| DeVry, Inc. | | 1.4% |
| | |
| Equity sectors | | |
| Technology | | 15.2% |
| Health Care | | 12.6% |
| Special Products & Services | | 12.5% |
| Leisure | | 10.2% |
| Retailing | | 8.8% |
| Industrial Goods & Services | | 8.6% |
| Financial Services | | 7.5% |
| Energy | | 6.4% |
| Consumer Staples | | 4.9% |
| Transportation | | 4.0% |
| Basic Materials | | 3.5% |
| Utilities & Communications | | 3.0% |
| Autos & Housing | | 1.6% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Mid Cap Growth Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Mid Cap Growth Portfolio (the “fund”) provided a total return of 42.31%, while Service Class shares of the fund provided a total return of 41.93% at net asset value. This compares with a return of 46.29% for the portfolio’s benchmark, the Russell Midcap Growth 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 to almost 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
Stock selection in the energy sector was a primary factor detracting from the fund’s performance relative to the Russell Midcap Growth Index. No individual securities within this sector were among the fund’s top detractors during the reporting period.
Stock selection in the health care sector also hindered relative performance. Holdings of global biotech company Genzyme (b)(h) and cardiovascular medical device maker St. Jude Medical (h) held back relative results as both stocks underperformed the benchmark during the reporting period. Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down production due to a viral infection in one of its bioreactors. An overweighted position in medical technologies company C.R. Bard also hurt.
Elsewhere, holdings of brewer Molson Coors Brewing (h) and education services company New Oriental Educational (b)(h) dampened relative results. Shares of Molson fell as the volume of its beverages sold worldwide declined, causing a drop in profits. Overweighted positions in higher education company Devry and transportation services company Landstar Systems, and not holding strong-performing computer hard drive maker Western Digital, also held back relative performance. The timing of our transactions in marketing and public relations firm Liberty Media Group (h) hindered relative performance as the fund missed some of this stock’s positive price gains during the reporting period.
The fund’s cash position was also a detractor from relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Contributors to Performance
Stock selection in the special products and services sector aided relative returns. The timing of our ownership in for-profit education company Apollo Group (h) benefited relative performance as we were able to capture more of the stock’s positive impact than the benchmark during the reporting period. The fund’s overweighted position in strong-performing internet travel company Priceline.com also helped.
Stock selection in the leisure sector was another positive factor for relative performance. No individual securities within this sector were among the fund’s top relative contributors.
Stock selection in the consumer staples sector also benefited relative results. The timing of our transactions in soft-drink company Pepsi Bottling Group (h) bolstered relative performance as we captured more of the stock’s price gains than the benchmark during the reporting period.
3
MFS Mid Cap Growth Portfolio
Management Review – continued
Stocks in other sectors that helped relative returns included electronics design and manufacturing services provider Flextronics (b)(h), business intelligence software company MicroStrategy (b), diversified mining company Teck Resources (b), networking chip maker Marvell Technology Group (h), and offshore drilling contractor Transocean (b)(h). Shares of Teck Resources rose as the company announced plans to sell a significant stake to China Investment Corp., with the proceeds going towards paying down the company’s debt. The timing of our transactions in automotive parts retailer O’Reilly Automotive (h) and offshore drilling company Noble (g) also benefited relative results.
Respectfully,
| | |
| David DeGroff | | Eric Fischman |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Mid Cap Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment (t)
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | Life (t) | | |
| | | Initial Class | | 8/31/00 | | 42.31% | | (4.30)% | | (7.82)% | | |
| | | Service Class | | 8/24/01 | | 41.93% | | (4.52)% | | (4.81)% | | |
Comparative benchmark
| | | | | | | | | | | | |
| | | Russell Midcap Growth Index (f) | | 46.29% | | 2.40% | | (2.31)% | | |
| (f) | Source: FactSet Research Systems Inc. |
| (t) | For the period from the class inception date through the stated period end. The comparative benchmark information provided for the “life” period is from the inception date of the Initial Class. (See Notes to Performance Summary.) |
Benchmark Definition
Russell Midcap Growth Index – constructed to provide a comprehensive barometer for growth securities in the mid-cap segment of the U.S. equity universe. Companies in this index generally have higher price-to-book ratios and higher forecasted growth values.
It is not possible to invest directly in an index.
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.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Mid Cap Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.99% | | $1,000.00 | | $1,263.59 | | $5.65 |
| | Hypothetical (h) | | 0.99% | | $1,000.00 | | $1,020.21 | | $5.04 |
| Service Class | | Actual | | 1.24% | | $1,000.00 | | $1,262.43 | | $7.07 |
| | Hypothetical (h) | | 1.24% | | $1,000.00 | | $1,018.95 | | $6.31 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Mid Cap Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 98.8% | | | | | |
| Aerospace – 1.4% | | | | | |
| Goodrich Corp. | | 7,740 | | $ | 497,295 |
| | | | | |
| Airlines – 0.6% | | | | | |
| Copa Holdings S.A., “A” | | 4,290 | | $ | 233,676 |
| | | | | |
| Apparel Manufacturers – 0.5% | | | | | |
| Coach, Inc. | | 5,230 | | $ | 191,052 |
| | | | | |
| Biotechnology – 1.7% | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | 6,470 | | $ | 315,865 |
| Human Genome Sciences, Inc. (a) | | 4,000 | | | 122,400 |
| Illumina, Inc. (a) | | 4,020 | | | 123,213 |
| Millipore Corp. (a) | | 1,000 | | | 72,350 |
| | | | | |
| | | | $ | 633,828 |
| | | | | |
| Broadcasting – 1.1% | | | | | |
| Discovery Communications, Inc., “A” (a) | | 13,050 | | $ | 400,244 |
| | | | | |
| Brokerage & Asset Managers – 4.0% | | | | | |
| Affiliated Managers Group, Inc. (a) | | 7,050 | | $ | 474,817 |
| BM&F Bovespa S.A. | | 25,600 | | | 177,916 |
| Evercore Partners, Inc. | | 5,260 | | | 159,904 |
| Greenhill & Co., Inc. | | 1,590 | | | 127,582 |
| IntercontinentalExchange, Inc. (a) | | 890 | | | 99,947 |
| Lazard Ltd. | | 2,900 | | | 110,113 |
| TD AMERITRADE Holding Corp. (a) | | 15,910 | | | 308,336 |
| | | | | |
| | | | $ | 1,458,615 |
| | | | | |
| Business Services – 6.4% | | | | | |
| Amdocs Ltd. (a) | | 8,630 | | $ | 246,214 |
Cognizant Technology Solutions
Corp., “A” (a) | | 9,900 | | | 448,470 |
| Concur Technologies, Inc. (a) | | 7,140 | | | 305,235 |
| Constant Contact, Inc. (a) | | 4,600 | | | 73,600 |
| CoStar Group, Inc. (a) | | 8,120 | | | 339,172 |
| Fidelity National Information Services, Inc. | | 7,810 | | | 183,066 |
| MasterCard, Inc., “A” | | 2,020 | | | 517,080 |
| Visa, Inc., “A” | | 2,310 | | | 202,033 |
| | | | | |
| | | | $ | 2,314,870 |
| | | | | |
| Computer Software – 7.8% | | | | | |
| Adobe Systems, Inc. (a)(s) | | 17,730 | | $ | 652,109 |
| Akamai Technologies, Inc. (a) | | 9,500 | | | 240,635 |
| Autodesk, Inc. (a) | | 7,670 | | | 194,895 |
| Autonomy Corp. PLC (a) | | 6,600 | | | 161,078 |
| Citrix Systems, Inc. (a) | | 11,660 | | | 485,173 |
| MicroStrategy, Inc., “A” (a)(s) | | 4,460 | | | 419,329 |
| Parametric Technology Corp. (a) | | 27,670 | | | 452,128 |
| VeriSign, Inc. (a) | | 9,480 | | | 229,795 |
| | | | | |
| | | | $ | 2,835,142 |
| | | | | |
| Computer Software – Systems – 1.6% | | | | | |
| MICROS Systems, Inc. (a) | | 15,930 | | $ | 494,308 |
| SuccessFactors, Inc. (a) | | 4,500 | | | 74,610 |
| | | | | |
| | | | $ | 568,918 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Construction – 1.6% | | | | | |
| Black & Decker Corp. | | 3,010 | | $ | 195,138 |
| NVR, Inc. (a) | | 200 | | | 142,142 |
| Sherwin-Williams Co. | | 4,210 | | | 259,546 |
| | | | | |
| | | | $ | 596,826 |
| | | | | |
| Consumer Products – 2.0% | | | | | |
| Church & Dwight Co., Inc. | | 5,700 | | $ | 344,565 |
| Natura Cosmeticos S.A. | | 18,330 | | | 382,287 |
| | | | | |
| | | | $ | 726,852 |
| | | | | |
| Consumer Services – 6.1% | | | | | |
Anhanguera Educacional Participacoes
S.A., IEU (a) | | 5,500 | | $ | 78,158 |
| Capella Education Co. (a) | | 4,810 | | | 362,193 |
| DeVry, Inc. | | 8,710 | | | 494,118 |
| Monster Worldwide, Inc. (a) | | 10,420 | | | 181,308 |
| Priceline.com, Inc. (a) | | 2,330 | | | 509,105 |
| Sotheby’s | | 6,300 | | | 141,624 |
| Strayer Education, Inc. | | 2,090 | | | 444,104 |
| | | | | |
| | | | $ | 2,210,610 |
| | | | | |
| Electrical Equipment – 5.0% | | | | | |
| AMETEK, Inc. | | 12,220 | | $ | 467,293 |
| Baldor Electric Co. | | 8,090 | | | 227,248 |
| Danaher Corp. | | 4,260 | | | 320,352 |
| Mettler-Toledo International, Inc. (a) | | 3,230 | | | 339,118 |
| Rockwell Automation, Inc. | | 5,410 | | | 254,162 |
| Tyco Electronics Ltd. | | 8,580 | | | 210,639 |
| | | | | |
| | | | $ | 1,818,812 |
| | | | | |
| Electronics – 4.9% | | | | | |
| Dolby Laboratories, Inc., “A” (a) | | 5,230 | | $ | 249,628 |
| Hittite Microwave Corp. (a) | | 5,680 | | | 231,460 |
| Linear Technology Corp. | | 12,410 | | | 379,001 |
| National Semiconductor Corp. | | 22,490 | | | 345,446 |
| PMC-Sierra, Inc. (a) | | 14,900 | | | 129,034 |
| Silicon Laboratories, Inc. (a) | | 5,130 | | | 247,984 |
| Tessera Technologies, Inc. (a) | | 7,890 | | | 183,600 |
| | | | | |
| | | | $ | 1,766,153 |
| | | | | |
| Energy – Independent – 2.8% | | | | | |
| Newfield Exploration Co. (a) | | 6,860 | | $ | 330,858 |
| Plains Exploration & Production Co. (a) | | 7,710 | | | 213,259 |
| Ultra Petroleum Corp. (a) | | 9,570 | | | 477,160 |
| | | | | |
| | | | $ | 1,021,277 |
| | | | | |
| Entertainment – 1.9% | | | | | |
| DreamWorks Animation, Inc., “A” (a) | | 13,040 | | $ | 520,948 |
| TiVo, Inc. (a) | | 15,860 | | | 161,455 |
| | | | | |
| | | | $ | 682,403 |
| | | | | |
7
MFS Mid Cap Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Food & Beverages – 2.9% | | | | | |
| Flowers Foods, Inc. | | 6,700 | | $ | 159,192 |
| J.M. Smucker Co. | | 8,040 | | | 496,470 |
| Mead Johnson Nutrition Co., “A” | | 8,640 | | | 377,568 |
| | | | | |
| | | | $ | 1,033,230 |
| | | | | |
| Gaming & Lodging – 3.7% | | | | | |
| International Game Technology | | 23,480 | | $ | 440,720 |
| Las Vegas Sands Corp. (a) | | 8,590 | | | 128,335 |
| Royal Caribbean Cruises Ltd. (a) | | 14,600 | | | 369,088 |
| Starwood Hotels & Resorts Worldwide, Inc. | | 10,660 | | | 389,836 |
| | | | | |
| | | | $ | 1,327,979 |
| | | | | |
| General Merchandise – 0.6% | | | | | |
| Dollar General Corp. (a) | | 10,300 | | $ | 231,029 |
| | | | | |
| Insurance – 1.9% | | | | | |
| Allied World Assurance Co. Holdings Ltd. | | 2,550 | | $ | 117,479 |
| Aspen Insurance Holdings Ltd. | | 8,190 | | | 208,435 |
| Verisk Analytics, Inc., “A” (a) | | 12,360 | | | 374,261 |
| | | | | |
| | | | $ | 700,175 |
| | | | | |
| Leisure & Toys – 0.4% | | | | | |
| THQ, Inc. (a) | | 28,720 | | $ | 144,749 |
| | | | | |
| Machinery & Tools – 2.2% | | | | | |
| Flowserve Corp. | | 2,740 | | $ | 259,012 |
| Kennametal, Inc. | | 13,220 | | | 342,662 |
| Ritchie Bros. Auctioneers, Inc. | | 7,900 | | | 177,197 |
| | | | | |
| | | | $ | 778,871 |
| | | | | |
| Major Banks – 0.3% | | | | | |
| Regions Financial Corp. | | 20,660 | | $ | 109,291 |
| | | | | |
| Medical & Health Technology & Services – 8.2% | | | |
| athenahealth, Inc. (a) | | 4,770 | | $ | 215,795 |
| Cerner Corp. (a) | | 4,160 | | | 342,950 |
| DaVita, Inc. (a) | | 1,800 | | | 105,732 |
| Express Scripts, Inc. (a) | | 5,100 | | | 440,895 |
| Henry Schein, Inc. (a) | | 3,450 | | | 181,470 |
| IDEXX Laboratories, Inc. (a) | | 9,840 | | | 525,850 |
| Lincare Holdings, Inc. (a) | | 6,930 | | | 257,242 |
| Medassets, Inc. (a) | | 13,960 | | | 296,092 |
| Medco Health Solutions, Inc. (a) | | 5,260 | | | 336,167 |
| MEDNAX, Inc. (a) | | 4,740 | | | 284,921 |
| | | | | |
| | | | $ | 2,987,114 |
| | | | | |
| Medical Equipment – 2.7% | | | | | |
| C.R. Bard, Inc. | | 1,950 | | $ | 151,905 |
| DENTSPLY International, Inc. | | 9,300 | | | 327,081 |
| Edwards Lifesciences Corp. (a) | | 2,660 | | | 231,021 |
| Intuitive Surgical, Inc. (a) | | 610 | | | 185,025 |
| Synthes, Inc. | | 600 | | | 78,581 |
| | | | | |
| | | | $ | 973,613 |
| | | | | |
| Metals & Mining – 0.9% | | | | | |
| Cliffs Natural Resources, Inc. | | 3,430 | | $ | 158,089 |
| Steel Dynamics, Inc. | | 9,940 | | | 176,137 |
| | | | | |
| | | | $ | 334,226 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Natural Gas – Distribution – 0.9% | | | | | |
| EQT Corp. | | 4,560 | | $ | 200,275 |
| Questar Corp. | | 2,620 | | | 108,913 |
| | | | | |
| | | | $ | 309,188 |
| | | | | |
| Network & Telecom – 0.9% | | | | | |
| Ciena Corp. (a) | | 17,370 | | $ | 188,291 |
| Fortinet, Inc. (a) | | 3,200 | | | 56,224 |
| Palm, Inc. (a) | | 7,880 | | | 79,115 |
| | | | | |
| | | | $ | 323,630 |
| | | | | |
| Oil Services – 3.6% | | | | | |
| Cameron International Corp. (a) | | 10,020 | | $ | 418,836 |
| Dresser-Rand Group, Inc. (a) | | 5,000 | | | 158,050 |
| Oceaneering International, Inc. (a) | | 5,640 | | | 330,053 |
| Pride International, Inc. (a) | | 4,480 | | | 142,957 |
| Smith International, Inc. | | 9,470 | | | 257,300 |
| | | | | |
| | | | $ | 1,307,196 |
| | | | | |
| Other Banks & Diversified Financials – 1.3% | | | |
| Ocwen Financial Corp. (a) | | 7,410 | | $ | 70,914 |
| People’s United Financial, Inc. | | 5,150 | | | 86,005 |
| SVB Financial Group (a) | | 6,260 | | | 260,979 |
| TCF Financial Corp. | | 4,650 | | | 63,333 |
| | | | | |
| | | | $ | 481,231 |
| | | | | |
| Precious Metals & Minerals – 1.2% | | | | | |
| Teck Resources Ltd., “B” (a) | | 12,220 | | $ | 427,333 |
| | | | | |
| Printing & Publishing – 2.5% | | | | | |
| Moody’s Corp. | | 4,660 | | $ | 124,888 |
| MSCI, Inc., “A” (a) | | 12,800 | | | 407,040 |
| VistaPrint Ltd. (a) | | 6,390 | | | 362,057 |
| | | | | |
| | | | $ | 893,985 |
| | | | | |
| Restaurants – 0.6% | | | | | |
| P.F. Chang’s China Bistro, Inc. (a) | | 5,880 | | $ | 222,911 |
| | | | | |
| Specialty Chemicals – 1.4% | | | | | |
| Airgas, Inc. | | 7,620 | | $ | 362,712 |
| Albemarle Corp. | | 3,500 | | | 127,295 |
| | | | | |
| | | | $ | 490,007 |
| | | | | |
| Specialty Stores – 7.7% | | | | | |
| Abercrombie & Fitch Co., “A” | | 12,150 | | $ | 423,427 |
| Advance Auto Parts, Inc. | | 4,850 | | | 196,328 |
| Ctrip.com International Ltd., ADR (a) | | 3,630 | | | 260,852 |
| Dick’s Sporting Goods, Inc. (a) | | 14,900 | | | 370,563 |
| GameStop Corp., “A” (a) | | 6,300 | | | 138,222 |
| J. Crew Group, Inc. (a) | | 5,890 | | | 263,519 |
| Limited Brands, Inc. | | 8,500 | | | 163,540 |
| Ross Stores, Inc. | | 5,540 | | | 236,613 |
| Staples, Inc. | | 15,720 | | | 386,555 |
| Tiffany & Co. | | 8,080 | | | 347,440 |
| | | | | |
| | | | $ | 2,787,059 |
| | | | | |
| Telephone Services – 1.6% | | | | | |
| American Tower Corp., “A” (a) | | 13,490 | | $ | 582,903 |
| | | | | |
8
MFS Mid Cap Growth Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Trucking – 3.4% | | | | | |
| Atlas Air Worldwide Holdings, Inc. (a) | | 4,600 | | $ | 171,350 |
| Expeditors International of Washington, Inc. | | 9,330 | | | 324,031 |
| J.B. Hunt Transport Services, Inc. | | 5,940 | | | 191,684 |
| Landstar System, Inc. | | 10,890 | | | 422,205 |
| Old Dominion Freight Lines, Inc. (a) | | 4,410 | | | 135,387 |
| | | | | |
| | | | $ | 1,244,657 |
| | | | | |
| Utilities – Electric Power – 0.5% | | | | | |
| AES Corp. (a) | | 12,960 | | $ | 172,498 |
| | | | | |
Total Common Stocks
(Identified Cost, $29,426,387) | | | | $ | 35,819,448 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.3% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 450,920 | | $ | 450,920 | |
| | | | | | |
Total Investments
(Identified Cost, $29,877,307) | | | | $ | 36,270,368 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | (25,634 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 36,244,734 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $183,975. At December 31, 2009, the fund had no short sales outstanding. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| IEU | | International Equity Unit |
| PLC | | Public Limited Company |
See Notes to Financial Statements
9
MFS Mid Cap Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $29,426,387) | | $35,819,448 | | | |
Underlying funds, at cost and value | | 450,920 | | | |
Total investments, at value (identified cost, $29,877,307) | | $36,270,368 | | | |
Receivables for | | | | | |
Fund shares sold | | $36,621 | | | |
Interest and dividends | | 17,983 | | | |
Other assets | | 1,721 | | | |
Total assets | | | | | $36,326,693 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $28,275 | | | |
Fund shares reacquired | | 13,678 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 1,508 | | | |
Distribution and/or service fees | | 221 | | | |
Administrative services fee | | 85 | | | |
Payable for Trustees’ compensation | | 39 | | | |
Accrued expenses and other liabilities | | 38,153 | | | |
Total liabilities | | | | | $81,959 |
Net assets | | | | | $36,244,734 |
Net assets consist of | | | | | |
Paid-in capital | | $67,623,896 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 6,393,063 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (37,772,225 | ) | | |
Net assets | | | | | $36,244,734 |
Shares of beneficial interest outstanding | | | | | 7,857,091 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $20,300,373 | | 4,365,160 | | $4.65 |
Service Class | | 15,944,361 | | 3,491,931 | | 4.57 |
See Notes to Financial Statements
10
MFS Mid Cap Growth Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
Year ended 12/31/09 | | | | | | |
Net investment loss | | | | | | |
Income | | | | | | |
Dividends | | $258,441 | | | | |
Interest | | 204 | | | | |
Dividends from underlying funds | | 1,776 | | | | |
Foreign taxes withheld | | (351 | ) | | | |
Total investment income | | | | | $260,070 | |
Expenses | | | | | | |
Management fee | | $237,357 | | | | |
Distribution and/or service fees | | 36,429 | | | | |
Administrative services fee | | 13,862 | | | | |
Trustees’ compensation | | 4,711 | | | | |
Custodian fee | | 10,501 | | | | |
Shareholder communications | | 4,933 | | | | |
Auditing fees | | 42,007 | | | | |
Legal fees | | 8,166 | | | | |
Miscellaneous | | 11,988 | | | | |
Total expenses | | | | | $369,954 | |
Net investment loss | | | | | $(109,884 | ) |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(3,767,817 | ) | | | |
Foreign currency transactions | | 107 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(3,767,710 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $15,070,464 | | | | |
Translation of assets and liabilities in foreign currencies | | (10 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $15,070,454 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $11,302,744 | |
Change in net assets from operations | | | | | $11,192,860 | |
See Notes to Financial Statements
11
MFS Mid Cap Growth Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income (loss) | | $(109,884 | ) | | $12,265 | |
Net realized gain (loss) on investments and foreign currency transactions | | (3,767,710 | ) | | (16,668,097 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 15,070,454 | | | (15,689,340 | ) |
Change in net assets from operations | | $11,192,860 | | | $(32,345,172 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(11,707 | ) | | $— | |
From tax return of capital | | (102 | ) | | — | |
Total distributions declared to shareholders | | $(11,809 | ) | | $— | |
Change in net assets from fund share transactions | | $(5,049,354 | ) | | $(15,405,068 | ) |
Total change in net assets | | $6,131,697 | | | $(47,750,240 | ) |
Net assets | | | | | | |
At beginning of period | | 30,113,037 | | | 77,863,277 | |
At end of period (including undistributed net investment income of $0 and
$11,707, respectively) | | $36,244,734 | | | $30,113,037 | |
See Notes to Financial Statements
12
MFS Mid Cap Growth Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $3.27 | | | $6.72 | | | $6.12 | | | $5.98 | | | $5.80 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | $(0.01 | ) | | $0.01 | | | $(0.01 | ) | | $0.01 | | | $(0.02 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.39 | | | (3.46 | ) | | 0.61 | | | 0.13 | | | 0.20 | |
Total from investment operations | | $1.38 | | | $(3.45 | ) | | $0.60 | | | $0.14 | | | $0.18 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.00 | )(w) | | $— | | | $(0.00 | )(w) | | $— | | | $— | |
From tax return of capital | | (0.00 | )(w) | | — | | | — | | | — | | | — | |
Total distribution to shareholders | | $(0.00 | )(w) | | $— | | | $(0.00 | )(w) | | $— | | | $— | |
Net asset value, end of period | | $4.65 | | | $3.27 | | | $6.72 | | | $6.12 | | | $5.98 | |
Total return (%) (k)(r)(s) | | 42.31 | | | (51.34 | ) | | 9.84 | | | 2.34 | | | 3.10 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.05 | | | 0.97 | | | 0.88 | | | 0.93 | | | 0.89 | |
Expenses after expense reductions (f) | | N/A | | | N/A | | | 0.88 | | | 0.91 | | | N/A | |
Net investment income (loss) | | (0.23 | ) | | 0.13 | | | (0.12 | ) | | 0.11 | | | (0.40 | ) |
Portfolio turnover | | 100 | | | 100 | | | 80 | | | 139 | | | 81 | |
Net assets at end of period (000 omitted) | | $20,300 | | | $15,803 | | | $44,944 | | | $53,504 | | | $68,637 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $3.22 | | | $6.63 | | | $6.05 | | | $5.92 | | | $5.76 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment loss (d) | | $(0.02 | ) | | $(0.01 | ) | | $(0.02 | ) | | $(0.01 | ) | | $(0.04 | ) |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.37 | | | (3.40 | ) | | 0.60 | | | 0.14 | | | 0.20 | |
Total from investment operations | | $1.35 | | | $(3.41 | ) | | $0.58 | | | $0.13 | | | $0.16 | |
Net asset value, end of period | | $4.57 | | | $3.22 | | | $6.63 | | | $6.05 | | | $5.92 | |
Total return (%) (k)(r)(s) | | 41.93 | | | (51.43 | ) | | 9.59 | | | 2.20 | | | 2.78 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.30 | | | 1.22 | | | 1.13 | | | 1.18 | | | 1.15 | |
Expenses after expense reductions (f) | | N/A | | | N/A | | | 1.13 | | | 1.16 | | | N/A | |
Net investment loss | | (0.48 | ) | | (0.12 | ) | | (0.37 | ) | | (0.11 | ) | | (0.65 | ) |
Portfolio turnover | | 100 | | | 100 | | | 80 | | | 139 | | | 81 | |
Net assets at end of period (000 omitted) | | $15,944 | | | $14,310 | | | $32,919 | | | $36,645 | | | $41,713 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (w) | | Per share amount was less than $0.01. |
See Notes to Financial Statements
13
MFS Mid Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Mid Cap Growth Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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.
14
MFS Mid Cap Growth Portfolio
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 December 31, 2009 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 | | $33,732,257 | | $— | | $— | | $33,732,257 |
Brazil | | 382,287 | | 256,074 | | — | | 638,361 |
Canada | | 604,530 | | — | | — | | 604,530 |
China | | 260,852 | | — | | — | | 260,852 |
Panama | | 233,676 | | — | | — | | 233,676 |
United Kingdom | | 161,078 | | — | | — | | 161,078 |
Bermuda | | 110,113 | | — | | — | | 110,113 |
Switzerland | | — | | 78,581 | | — | | 78,581 |
| Mutual Funds | | 450,920 | | — | | — | | 450,920 |
| Total Investments | | $35,935,713 | | $334,655 | | $— | | $36,270,368 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund had no short sales outstanding.
15
MFS Mid Cap Growth Portfolio
Notes to Financial Statements – continued
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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 net operating losses.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $11,707 | | $— |
| Tax return of capital (b) | | 102 | | — |
| Total distributions | | $11,809 | | $— |
| | (b) | Distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital. | |
16
MFS Mid Cap Growth Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $29,881,969 | |
| Gross appreciation | | 7,426,356 | |
| Gross depreciation | | (1,037,957 | ) |
| Net unrealized appreciation (depreciation) | | $6,388,399 | |
| Capital loss carryforwards | | (37,767,563 | ) |
| Other temporary differences | | 2 | |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(17,325,087 | ) |
| 12/31/16 | | (16,008,756 | ) |
| 12/31/17 | | (4,433,720 | ) |
| | $(37,767,563 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $11,707 | | $— | | $102 | | $— |
| Service Class | | — | | — | | — | | — |
| (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 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $1 billion | | 0.70% |
The investment adviser has agreed in writing to reduce its management fee to 0.65% of average daily net assets in excess of $2.5 billion. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
17
MFS Mid Cap Growth Portfolio
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0438% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $563 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $30,778,747 and $35,691,699, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 452,816 | | | $1,799,092 | | | 373,591 | | | $1,559,371 | |
Service Class | | 217,078 | | | 734,486 | | | 1,019,185 | | | 3,755,838 | |
| | 669,894 | | | $2,533,578 | | | 1,392,776 | | | $5,315,209 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 3,484 | | | $11,809 | | | — | | | $— | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (922,970 | ) | | $(3,364,108 | ) | | (2,227,156 | ) | | $(12,493,264 | ) |
Service Class | | (1,173,530 | ) | | (4,230,633 | ) | | (1,536,459 | ) | | (8,227,013 | ) |
| | (2,096,500 | ) | | $(7,594,741 | ) | | (3,763,615 | ) | | $(20,720,277 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (466,670 | ) | | $(1,553,207 | ) | | (1,853,565 | ) | | $(10,933,893 | ) |
Service Class | | (956,452 | ) | | (3,496,147 | ) | | (517,274 | ) | | (4,471,175 | ) |
| | (1,423,122 | ) | | $(5,049,354 | ) | | (2,370,839 | ) | | $(15,405,068 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $457 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
18
MFS Mid Cap Growth Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 9,400,062 | | (8,949,142 | ) | | 450,920 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $1,776 | | | $450,920 |
19
MFS Mid Cap Growth Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Mid Cap Growth Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Mid Cap Growth Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Mid Cap Growth Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
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MFS Mid Cap Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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 (4) (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) |
21
MFS Mid Cap Growth Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Mark D. Fischer (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS Mid Cap Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers David DeGroff Eric Fischman | | |
23
MFS Mid Cap Growth Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 5th quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS’ explanation of steps taken to improve performance, the Board of Trustees concluded that the Fund’s performance was adequate.
24
MFS Mid Cap Growth Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each at the median of such fees and expenses of funds in the Lipper expense group. The Trustees further noted that MFS agreed to continue to reduce its advisory fee on average daily net assets over $2.5 billion, and concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
25
MFS Mid Cap Growth Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
26
MFS Mid Cap Growth Portfolio
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.
27
MFS® UTILITIES PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Utilities Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Utilities Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top ten holdings (i) | | |
| Sempra Energy | | 3.5% |
| Questar Corp. | | 3.4% |
| CMS Energy Corp. | | 3.4% |
| EQT Corp. | | 3.2% |
| Williams Cos., Inc. | | 2.9% |
| AES Corp. | | 2.7% |
| PPL Corp. | | 2.7% |
| Vodafone Group PLC | | 2.6% |
| Cellcom Israel Ltd. | | 2.6% |
| Virgin Media, Inc. | | 2.6% |
| | |
| Top five industries (i) | | |
| Utilities - Electric Power | | 47.2% |
| Telephone Services | | 13.0% |
| Natural Gas - Distribution | | 12.9% |
| Telecommunications - Wireless | | 11.7% |
| Natural Gas - Pipeline | | 6.6% |
| | |
| Country weightings (i) | | |
| United States | | 69.3% |
| Brazil | | 6.9% |
| United Kingdom | | 4.2% |
| Spain | | 3.5% |
| Israel | | 3.3% |
| Germany | | 2.3% |
| Czech Republic | | 2.1% |
| France | | 1.7% |
| Netherlands | | 1.4% |
| Other Countries | | 5.3% |
| (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 any derivative holdings, if applicable. |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Utilities Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Utilities Portfolio (the “fund”) provided a total return of 33.63%, while Service Class shares of the fund provided a total return of 33.27%. These compare with a return of 26.46% for the fund’s benchmark, the Standard & Poor’s 500 Stock Index, and a return of 11.91% for the fund’s other benchmark, the Standard & Poor’s 500 Utilities Index (S&P Utilities 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.
Contributors to Performance
During the reporting period, strong stock selection in the electric power industry contributed to the fund’s performance relative to the S&P Utilities Index. Standout performers in this industry included electricity distributor Eletropaulo Metropolitana (Brazil) (b), integrated electric power company AES Corp., electric utility company CMS Energy, and electric power generator AES Tiete (Brazil) (b). Shares of Eletropaulo Metropolitana appreciated, buoyed by its strong dividend yield, attractive valuation, and solid quality metrics. In a similar vein, AES Corp. has continued to improve its financial position, rationalize its investments, and generate good free-cash-flow. Elsewhere, not holding poor-performing electric utility companies, Exelon Corp. and Southern Company, also had a positive impact on relative returns.
The fund’s holdings in the telephone services and wireless communications industries, which are not represented in the S&P Utilities Index, were other positive areas for relative performance. Within the telephone services industry, telecommunications company Virgin Media (b), was among the fund’s top relative contributors. Stock of Virgin Media had impressive performance due to increased revenue in its U.K. broadband internet business. Within the wireless communications industry, Cellcom Israel (b) and Vivo Participacoes (Brazil) (b) benefited relative results. Shares of Vivo Participacoes rose significantly over the latter part of the reporting period due to better profitability, better margins, and cost improvement strategies.
Elsewhere, our holdings of cable company Time Warner Cable (b) aided relative returns as the stock significantly outperformed the benchmark over the reporting period.
During the reporting period, the fund’s currency exposure was also a contributor to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
Detractors from Performance
Individual securities that held back relative performance included wireless service provider Metro PCS Communications (b)(h), electricity provider Allegheny Energy, and power generation company NRG Energy (b). The share price of Metro PCS came under pressure from competition for market share. The company also missed new customer and earnings targets as a result of heightened competition in the prepaid market. Elsewhere, the timing of our ownership in shares of power generation company FPL Group and electricity distributor Consolidated Edison, and not holding strong-performing power and natural gas distributor Duke Energy, also negatively impacted relative results.
3
MFS Utilities Portfolio
Management Review – continued
The fund’s cash position was another detractor from relative returns. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| Robert Persons | | Maura Shaughnessy |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Utilities Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 11/16/93 | | 33.63% | | 10.86% | | 6.25% | | N/A | | |
| | | Service Class | | 8/24/01 | | 33.27% | | 10.58% | | N/A | | 8.75% | | |
| | | | | | |
| | Comparative benchmarks | | | | | | | | | | |
| | | Standard & Poor’s 500 Utilities Index (f) | | 11.91% | | 6.05% | | 4.88% | | N/A | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 26.46% | | 0.42% | | (0.95)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definitions
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
Standard & Poor’s 500 Utilities Index – a market capitalization-weighted index designed to measure the utilities sector, including those companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.
It is not possible to invest directly in an index.
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
5
MFS Utilities Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Utilities Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.84% | | $1,000.00 | | $1,205.29 | | $4.67 |
| | Hypothetical (h) | | 0.84% | | $1,000.00 | | $1,020.97 | | $4.28 |
| Service Class | | Actual | | 1.09% | | $1,000.00 | | $1,203.10 | | $6.05 |
| | Hypothetical (h) | | 1.09% | | $1,000.00 | | $1,019.71 | | $5.55 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Utilities Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 92.9% | | | | | |
| Broadcasting – 0.1% | | | | | |
| Walt Disney Co. | | 4,800 | | $ | 154,800 |
| | | | | |
| Cable TV – 4.2% | | | | | |
| Cablevision Systems Corp., “A” | | 6,100 | | $ | 157,502 |
| Comcast Corp., “Special A” | | 350,700 | | | 5,614,707 |
| DIRECTV Group, Inc., “A” (a) | | 31,200 | | | 1,040,520 |
| Liberty Global, Inc., “A” (a) | | 14,400 | | | 315,504 |
| Time Warner Cable, Inc. | | 143,399 | | | 5,935,285 |
| | | | | |
| | | | $ | 13,063,518 |
| | | | | |
| Energy – Independent – 0.2% | | | | | |
| Apache Corp. | | 6,500 | | $ | 670,605 |
| | | | | |
| Natural Gas – Distribution – 12.9% | | | | | |
| EQT Corp. | | 230,200 | | $ | 10,110,384 |
| GDF Suez | | 114,221 | | | 4,958,912 |
| NiSource, Inc. | | 125,100 | | | 1,924,038 |
| ONEOK, Inc. | | 18,000 | | | 802,260 |
| Questar Corp. | | 260,700 | | | 10,837,299 |
| Sempra Energy | | 196,800 | | | 11,016,864 |
| Southern Union Co. | | 14,800 | | | 335,960 |
| Spectra Energy Corp. | | 29,600 | | | 607,096 |
| | | | | |
| | | | $ | 40,592,813 |
| | | | | |
| Natural Gas – Pipeline – 5.8% | | | | | |
| El Paso Corp. | | 698,600 | | $ | 6,867,238 |
| Enagas S.A. | | 110,074 | | | 2,436,213 |
| Williams Cos., Inc. | | 429,817 | | | 9,060,542 |
| | | | | |
| | | | $ | 18,363,993 |
| | | | | |
| Oil Services – 0.4% | | | | | |
| Weatherford International Ltd. (a) | | 78,400 | | $ | 1,404,144 |
| | | | | |
| Pollution Control – 0.1% | | | | | |
| SUEZ Environnement | | 13,400 | | $ | 309,754 |
| | | | | |
| Telecommunications – Wireless – 11.7% | | | | | |
| America Movil S.A.B. de C.V., “L”, ADR | | 43,100 | | $ | 2,024,838 |
| Cellcom Israel Ltd. | | 257,722 | | | 8,262,567 |
| Mobile TeleSystems OJSC, ADR | | 37,900 | | | 1,852,931 |
| MTN Group Ltd. | | 171,100 | | | 2,722,091 |
| NII Holdings, Inc. (a) | | 44,300 | | | 1,487,594 |
| Partner Communication Co. Ltd., ADR | | 102,700 | | | 2,089,945 |
| Philippine Long Distance Telephone Co. | | 10,900 | | | 617,737 |
| Philippine Long Distance Telephone Co., ADR | | 24,200 | | | 1,371,414 |
| Rogers Communications, Inc., “B” | | 83,100 | | | 2,597,446 |
| Tim Participacoes S.A., ADR | | 5,800 | | | 172,318 |
| Vimpel-Communications, ADR | | 66,300 | | | 1,232,517 |
| Vivo Participacoes S.A., ADR | | 133,475 | | | 4,137,725 |
| Vodafone Group PLC | | 3,597,000 | | | 8,329,575 |
| | | | | |
| | | | $ | 36,898,698 |
| | | | | |
| Telephone Services – 12.6% | | | | | |
| American Tower Corp., “A” (a) | | 61,400 | | $ | 2,653,094 |
| AT&T, Inc. | | 273,100 | | | 7,654,993 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Telephone Services – continued | | | | | |
| CenturyTel, Inc. | | 142,500 | | $ | 5,159,925 |
| China Unicom Ltd., ADR | | 72,600 | | | 951,786 |
| Crown Castle International Corp. (a) | | 12,100 | | | 472,384 |
| Frontier Communications Corp. | | 162,500 | | | 1,269,125 |
| Hellenic Telecommunications Organization S.A. | | 32,400 | | | 474,383 |
| Royal KPN N.V. | | 256,500 | | | 4,353,634 |
| Singapore Telecommunications Ltd. | | 515,000 | | | 1,134,119 |
| Telefonica S.A. | | 99,200 | | | 2,764,858 |
| Virgin Media, Inc. | | 489,700 | | | 8,241,651 |
| Windstream Corp. | | 418,455 | | | 4,598,820 |
| | | | | |
| | | | $ | 39,728,772 |
| | | | | |
| Utilities – Electric Power – 44.9% | | | | | |
| AES Corp. (a) | | 646,600 | | $ | 8,606,246 |
| AES Tiete S.A., IPS | | 291,254 | | | 3,339,665 |
| Allegheny Energy, Inc. | | 161,600 | | | 3,794,368 |
| Alliant Energy Corp. | | 30,800 | | | 932,008 |
| American Electric Power Co., Inc. | | 199,390 | | | 6,936,778 |
| American Water Works Co., Inc. | | 72,410 | | | 1,622,708 |
| Calpine Corp. (a) | | 171,200 | | | 1,883,200 |
| CenterPoint Energy, Inc. | | 75,260 | | | 1,092,023 |
| CEZ AS | | 138,800 | | | 6,526,060 |
| China Longyuan Power Group (a) | | 1,269,000 | | | 1,643,248 |
| CMS Energy Corp. | | 680,900 | | | 10,662,894 |
| Companhia de Saneamento de Minas Gerais-Copasa MG | | 121,600 | | | 2,310,562 |
| Companhia Paranaense de Energia, ADR | | 48,600 | | | 1,042,470 |
| Companhia Paranaense de Energia, IPS | | 32,400 | | | 693,573 |
| Consolidated Edison, Inc. | | 17,080 | | | 775,944 |
| Constellation Energy Group, Inc. | | 152,600 | | | 5,366,942 |
| Covanta Holding Corp. (a) | | 31,100 | | | 562,599 |
| CPFL Energia S.A. | | 31,600 | | | 647,082 |
| CPFL Energia S.A., ADR | | 2,700 | | | 166,806 |
| Dominion Resources, Inc. | | 111,900 | | | 4,355,148 |
| DPL, Inc. | | 200,800 | | | 5,542,080 |
| DTE Energy Co. | | 24,800 | | | 1,081,032 |
| E.ON AG | | 145,979 | | | 6,094,283 |
| Electricite de France | | 2,700 | | | 160,862 |
| Eletropaulo Metropolitana S.A., IPS | | 267,340 | | | 5,260,838 |
| Energias do Brasil S.A. | | 57,960 | | | 1,110,054 |
| Entergy Corp. | | 25,300 | | | 2,070,552 |
| FirstEnergy Corp. | | 106,500 | | | 4,946,925 |
| National Grid PLC | | 360,300 | | | 3,938,475 |
| Northeast Utilities | | 173,500 | | | 4,474,565 |
| NRG Energy, Inc. (a) | | 291,486 | | | 6,881,984 |
| OGE Energy Corp. | | 103,900 | | | 3,832,871 |
| PG&E Corp. | | 90,400 | | | 4,036,360 |
| PPL Corp. | | 262,200 | | | 8,471,682 |
| Public Service Enterprise Group, Inc. | | 207,100 | | | 6,886,075 |
| Red Electrica de Espana | | 108,601 | | | 6,018,875 |
| RWE AG | | 11,300 | | | 1,098,107 |
8
MFS Utilities Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMON STOCKS – continued | | | |
| Utilities – Electric Power – continued | | | |
| Tractebel Energia S.A. | | | 237,200 | | $ | 2,907,865 |
| Wisconsin Energy Corp. | | | 75,100 | | | 3,742,233 |
| | | | | | |
| | | | | $ | 141,516,042 |
| | | | | | |
Total Common Stocks
(Identified Cost, $284,941,065) | | | | | $ | 292,703,139 |
| | | | | | |
| |
| BONDS – 0.6% | | | |
| Asset Backed & Securitized – 0.0% | | | | | | |
| Falcon Franchise Loan LLC, FRN, 3.034%, 2023 (i)(z) | | $ | 505,496 | | $ | 23,910 |
| | | | | | |
| Cable TV – 0.5% | | | | | | |
| CSC Holdings, Inc., 8.625%, 2019 (z) | | $ | 715,000 | | $ | 769,519 |
| Virgin Media Finance PLC, 9.5%, 2016 | | | 545,000 | | | 585,194 |
| Virgin Media Finance PLC, 8.375%, 2019 | | | 280,000 | | | 288,050 |
| | | | | | |
| | | | | $ | 1,642,763 |
| | | | | | |
| Metals & Mining – 0.1% | | | | | | |
| Cloud Peak Energy, Inc., 8.25%, 2017 (n) | | $ | 115,000 | | $ | 115,000 |
| Cloud Peak Energy, Inc., 8.5%, 2019 (n) | | | 115,000 | | | 117,300 |
| | | | | | |
| | | | | $ | 232,300 |
| | | | | | |
Total Bonds
(Identified Cost, $1,737,848) | | | | | $ | 1,898,973 |
| | | | | | |
|
| CONVERTIBLE PREFERRED STOCKS – 2.6% |
| Natural Gas – Pipeline – 0.8% | | | | | | |
| El Paso Corp., 4.99% | | | 2,770 | | $ | 2,503,388 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| CONVERTIBLE PREFERRED STOCKS – continued |
| Utilities – Electric Power – 1.8% | | | | | | |
| FPL Group, Inc., 8.375% | | | 77,200 | | $ | 3,994,328 |
| Great Plains Energy, Inc., 12% | | | 23,750 | | | 1,567,500 |
| | | | | | |
| | | | | $ | 5,561,828 |
| | | | | | |
Total Convertible Preferred Stocks
(Identified Cost, $8,376,262) | | | | | $ | 8,065,216 |
| | | | | | |
| |
| CONVERTIBLE BONDS – 0.9% | | | |
| Telephone Services – 0.3% | | | | | | |
| Virgin Media, Inc., 6.5%, 2016 (z) | | $ | 913,000 | | $ | 1,081,905 |
| | | | | | |
| Utilities – Electric Power – 0.6% | | | | | | |
| Covanta Holding Corp., 3.25%, 2014 (z) | | $ | 1,519,890 | | $ | 1,751,673 |
| | | | | | |
Total Convertible Bonds
(Identified Cost, $2,052,156) | | | | | $ | 2,833,578 |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 2.2% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | | 7,071,633 | | $ | 7,071,633 |
| | | | | | |
Total Investments
(Identified Cost, $304,178,964) | | | | | $ | 312,572,539 |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.8% | | | | | | 2,497,010 |
| | | | | | |
| Net Assets – 100.0% | | | | | $ | 315,069,549 |
| | | | | | |
| (a) | | Non-income producing security. |
| (i) | | Interest only security for which the series 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 $232,300, representing 0.1% of net assets. |
| (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 |
| Covanta Holding Corp., 3.25%, 2014 | | 5/18/09 | | $1,519,890 | | $1,751,673 |
| CSC Holdings, Inc., 8.625%, 2019 | | 2/9/09 | | 682,590 | | 769,519 |
| Falcon Franchise Loan LLC, FRN, 3.034%, 2023 | | 1/18/02 | | 29,341 | | 23,910 |
| Virgin Media, Inc., 6.5%, 2016 | | 2/26/09-4/6/09 | | 532,266 | | 1,081,905 |
| Total Restricted Securities | | | | | | $3,627,007 |
| % of Net Assets | | | | | | 1.2% |
9
MFS Utilities Portfolio
Portfolio of Investments – continued
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| IPS | | International Preference Stock |
| 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:
Derivative Contracts at 12/31/09
Forward Foreign Currency Exchange Contracts at 12/31/09
| | | | | | | | | | | | | | | | | | | | |
Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | Contracts
at Value | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| BUY | | EUR | | Barclays Bank PLC | | 72,854 | | 3/15/10 | | $ | 103,964 | | $ | 104,429 | | $ | 465 | |
| SELL | | EUR | | Deutsche Bank AG | | 134,729 | | 1/13/10 | | | 202,689 | | | 193,140 | | | 9,549 | |
| SELL | | EUR | | HSBC Bank | | 89,047 | | 1/13/10 | | | 130,852 | | | 127,653 | | | 3,199 | |
| SELL | | EUR | | Credit Suisse Group | | 44,333 | | 3/15/10 | | | 64,317 | | | 63,547 | | | 770 | |
| SELL | | EUR | | Merrill Lynch International Bank | | 1,723,746 | | 3/15/10 | | | 2,517,531 | | | 2,470,808 | | | 46,723 | |
| SELL | | EUR | | UBS AG | | 13,075,655 | | 3/15/10 | | | 19,103,533 | | | 18,742,577 | | | 360,956 | |
| SELL | | GBP | | Barclays Bank PLC | | 100,224 | | 1/13/10 | | | 162,352 | | | 161,874 | | | 478 | |
| SELL | | GBP | | Citibank N.A. | | 309,000 | | 1/13/10 | | | 516,604 | | | 499,075 | | | 17,529 | |
| SELL | | GBP | | UBS AG | | 82,089 | | 1/13/10 | | | 134,279 | | | 132,584 | | | 1,695 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 441,364 | |
| | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| BUY | | EUR | | Barclays Bank PLC | | 105,759 | | 1/13/10 | | $ | 157,079 | | $ | 151,610 | | $ | (5,469 | ) |
| BUY | | EUR | | JPMorgan Chase Bank | | 2,818,387 | | 1/13/10 | | | 4,142,988 | | | 4,040,269 | | | (102,719 | ) |
| BUY | | EUR | | HSBC Bank | | 512,536 | | 1/13/10 | | | 766,413 | | | 734,741 | | | (31,672 | ) |
| BUY | | EUR | | Deutsche Bank AG | | 128,764 | | 1/13/10 | | | 193,190 | | | 184,588 | | | (8,602 | ) |
| BUY | | EUR | | Credit Suisse Group | | 116,619 | | 3/15/10 | | | 169,186 | | | 167,161 | | | (2,025 | ) |
| SELL | | EUR | | Barclays Bank PLC | | 17,890 | | 3/15/10 | | | 25,530 | | | 25,644 | | | (114 | ) |
| SELL | | GBP | | Deutsche Bank AG | | 1,780,803 | | 1/13/10 | | | 2,828,628 | | | 2,876,227 | | | (47,599 | ) |
| SELL | | GBP | | Credit Suisse Group | | 74,438 | | 1/13/10 | | | 118,906 | | | 120,226 | | | (1,320 | ) |
| SELL | | GBP | | Barclays Bank PLC | | 1,836,344 | | 1/13/10 | | | 2,916,698 | | | 2,965,932 | | | (49,234 | ) |
| SELL | | GBP | | HSBC Bank | | 89,006 | | 1/13/10 | | | 141,733 | | | 143,756 | | | (2,023 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (250,777 | ) |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2009, the fund had sufficient cash and/or securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
10
MFS Utilities Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $297,107,331) | | $305,500,906 | | | |
Underlying funds, at cost and value | | 7,071,633 | | | |
Total investments, at value (identified cost, $304,178,964) | | $312,572,539 | | | |
Receivables for | | | | | |
Forward foreign currency exchange contracts | | 441,364 | | | |
Investments sold | | 2,867,341 | | | |
Fund shares sold | | 592,559 | | | |
Interest and dividends | | 881,223 | | | |
Other assets | | 11,262 | | | |
Total assets | | | | | $317,366,288 |
Liabilities | | | | | |
Payables for | | | | | |
Forward foreign currency exchange contracts | | $250,777 | | | |
Investments purchased | | 1,603,132 | | | |
Fund shares reacquired | | 340,788 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 12,984 | | | |
Distribution and/or service fees | | 1,588 | | | |
Administrative services fee | | 598 | | | |
Payable for Trustees’ compensation | | 334 | | | |
Accrued expenses and other liabilities | | 86,538 | | | |
Total liabilities | | | | | $2,296,739 |
Net assets | | | | | $315,069,549 |
Net assets consist of | | | | | |
Paid-in capital | | $342,994,079 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 8,577,047 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (45,970,671 | ) | | |
Undistributed net investment income | | 9,469,094 | | | |
Net assets | | | | | $315,069,549 |
Shares of beneficial interest outstanding | | | | | 16,119,607 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $199,634,493 | | 10,179,416 | | $19.61 |
Service Class | | 115,435,056 | | 5,940,191 | | 19.43 |
See Notes to Financial Statements
11
MFS Utilities Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $13,126,557 | | | | |
Interest | | 980,485 | | | | |
Dividends from underlying funds | | 9,673 | | | | |
Foreign taxes withheld | | (645,414 | ) | | | |
Total investment income | | | | | $13,471,301 | |
Expenses | | | | | | |
Management fee | | $2,022,132 | | | | |
Distribution and/or service fees | | 230,072 | | | | |
Administrative services fee | | 108,058 | | | | |
Trustees’ compensation | | 41,565 | | | | |
Custodian fee | | 95,137 | | | | |
Shareholder communications | | 12,109 | | | | |
Auditing fees | | 48,221 | | | | |
Legal fees | | 7,091 | | | | |
Miscellaneous | | 34,668 | | | | |
Total expenses | | | | | $2,599,053 | |
Fees paid indirectly | | (1 | ) | | | |
Net expenses | | | | | $2,599,052 | |
Net investment income | | | | | $10,872,249 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | (18,432,941 | ) | | | |
Foreign currency transactions | | (303,170 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(18,736,111 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $87,611,057 | | | | |
Translation of assets and liabilities in foreign currencies | | (781,591 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $86,829,466 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $68,093,355 | |
Change in net assets from operations | | | | | $78,965,604 | |
See Notes to Financial Statements
12
MFS Utilities Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $10,872,249 | | | $10,642,858 | |
Net realized gain (loss) on investments and foreign currency transactions | | (18,736,111 | ) | | (25,907,557 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 86,829,466 | | | (156,813,965 | ) |
Change in net assets from operations | | $78,965,604 | | | $(172,078,664 | ) |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(13,093,061 | ) | | $(7,378,975 | ) |
From net realized gain on investments | | — | | | (70,215,254 | ) |
Total distributions declared to shareholders | | $(13,093,061 | ) | | $(77,594,229 | ) |
Change in net assets from fund share transactions | | $(12,855,938 | ) | | $3,940,360 | |
Total change in net assets | | $53,016,605 | | | $(245,732,533 | ) |
| Net assets | | | | | | |
At beginning of period | | 262,052,944 | | | 507,785,477 | |
At end of period (including undistributed net investment income of $9,469,094 and
$12,027,667, respectively) | | $315,069,549 | | | $262,052,944 | |
See Notes to Financial Statements
13
MFS Utilities Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $15.56 | | | $29.51 | | | $23.25 | | | $18.11 | | | $15.61 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.69 | | | $0.62 | | | $0.58 | | | $0.48 | | | $0.31 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 4.21 | | | (9.78 | ) | | 6.02 | | | 5.25 | | | 2.35 | |
Total from investment operations | | $4.90 | | | $(9.16 | ) | | $6.60 | | | $5.73 | | | $2.66 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.85 | ) | | $(0.47 | ) | | $(0.34 | ) | | $(0.59 | ) | | $(0.16 | ) |
From net realized gain on investments | | — | | | (4.32 | ) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.85 | ) | | $(4.79 | ) | | $(0.34 | ) | | $(0.59 | ) | | $(0.16 | ) |
Net asset value, end of period | | $19.61 | | | $15.56 | | | $29.51 | | | $23.25 | | | $18.11 | |
Total return (%) (k)(s) | | 33.63 | | | (37.16 | )(t) | | 28.53 | | | 32.35 | | | 17.23 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.88 | | | 0.86 | | | 0.84 | | | 0.84 | | | 0.86 | |
Net investment income | | 4.14 | | | 2.73 | | | 2.18 | | | 2.41 | | | 1.87 | |
Portfolio turnover | | 70 | | | 63 | | | 90 | | | 93 | | | 96 | |
Net assets at end of period (000 omitted) | | $199,634 | | | $178,805 | | | $381,498 | | | $377,354 | | | $344,717 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $15.41 | | | $29.28 | | | $23.09 | | | $18.01 | | | $15.53 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.63 | | | $0.57 | | | $0.52 | | | $0.42 | | | $0.27 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 4.18 | | | (9.71 | ) | | 5.97 | | | 5.22 | | | 2.35 | |
Total from investment operations | | $4.81 | | | $(9.14 | ) | | $6.49 | | | $5.64 | | | $2.62 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.79 | ) | | $(0.41 | ) | | $(0.30 | ) | | $(0.56 | ) | | $(0.14 | ) |
From net realized gain on investments | | — | | | (4.32 | ) | | — | | | — | | | — | |
Total distributions declared to shareholders | | $(0.79 | ) | | $(4.73 | ) | | $(0.30 | ) | | $(0.56 | ) | | $(0.14 | ) |
Net asset value, end of period | | $19.43 | | | $15.41 | | | $29.28 | | | $23.09 | | | $18.01 | |
Total return (%) (k)(s) | | 33.27 | | | (37.31 | )(t) | | 28.24 | | | 31.96 | | | 16.97 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.13 | | | 1.12 | | | 1.08 | | | 1.09 | | | 1.11 | |
Net investment income | | 3.81 | | | 2.57 | | | 1.93 | | | 2.12 | | | 1.62 | |
Portfolio turnover | | 70 | | | 63 | | | 90 | | | 93 | | | 96 | |
Net assets at end of period (000 omitted) | | $115,435 | | | $83,248 | | | $126,288 | | | $78,660 | | | $47,240 | |
| (d) | Per share data are based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
| (t) | Excluding the effect of the proceeds received from a non-recurring litigation settlement against Enron Corp., the Initial Class and Service Class total returns for the year ended December 31, 2008 would have been lower by approximately 1.01%. |
See Notes to Financial Statements
14
MFS Utilities Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Utilities Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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 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. 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 affect 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 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
15
MFS Utilities Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 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 | | $198,517,052 | | $6,497,715 | | $— | | $205,014,767 |
Brazil | | 5,519,319 | | 16,269,639 | | — | | 21,788,958 |
United Kingdom | | — | | 12,268,051 | | — | | 12,268,051 |
Spain | | — | | 11,219,945 | | — | | 11,219,945 |
Israel | | 10,352,512 | | — | | — | | 10,352,512 |
Germany | | — | | 7,192,389 | | — | | 7,192,389 |
Czech Republic | | 6,526,060 | | — | | — | | 6,526,060 |
France | | 5,429,527 | | — | | — | | 5,429,527 |
Netherlands | | 4,353,634 | | — | | — | | 4,353,634 |
Other Countries | | 12,291,918 | | 4,330,594 | | — | | 16,622,512 |
| Corporate Bonds | | — | | 3,835,397 | | — | | 3,835,397 |
| Commercial Mortgage-Backed Securities | | — | | 23,910 | | — | | 23,910 |
| Foreign Bonds | | — | | 873,244 | | — | | 873,244 |
| Mutual Funds | | 7,071,633 | | — | | — | | 7,071,633 |
| Total investments | | $250,061,655 | | $62,510,884 | | $— | | $312,572,539 |
| | | | |
| Other Financial Instruments | | | | | | | | |
| Forward Currency Contracts | | $— | | $190,587 | | $— | | $190,587 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
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
16
MFS Utilities Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | | | | | | |
| | | | | Asset Derivatives | | Liability Derivatives | |
| | | | | Location on Statement of
Assets and
Liabilities | | Fair Value | | Location on Statement of
Assets and
Liabilities | | Fair Value | |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts Not Accounted For as Hedging Instruments Under ASC 815 | | Receivable for forward foreign currency exchange contracts | | $441,364 | | Payable for forward foreign currency exchange contracts | | $(250,777 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | |
| | | Foreign Currency
Transactions | |
| Foreign Exchange Contracts | | $(398,108 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | |
| | | Translation
of Assets and
Liabilities in
Foreign Currencies | |
| Foreign Exchange Contracts | | $(784,350 | ) |
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
17
MFS Utilities Portfolio
Notes to Financial Statements – continued
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.
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.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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 December 31, 2009, 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
18
MFS Utilities Portfolio
Notes to Financial Statements – continued
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 over distributions 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 wash sale loss deferrals, foreign currency transactions, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $13,093,061 | | $7,383,972 |
| Long-term capital gain | | — | | 70,210,257 |
| Total distributions | | $13,093,061 | | $77,594,229 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $309,133,677 | |
| Gross appreciation | | 28,121,669 | |
| Gross depreciation | | (24,682,807 | ) |
| Net unrealized appreciation (depreciation) | | $3,438,862 | |
| Undistributed ordinary income | | 9,659,681 | |
| Capital loss carryforwards | | (41,015,958 | ) |
| Other temporary differences | | (7,115 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(18,412,487 | ) |
| 12/31/17 | | (22,603,471 | ) |
| | $(41,015,958 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $8,907,825 | | $5,508,025 | | $— | | $50,644,712 |
| Service Class | | 4,185,236 | | 1,870,950 | | — | | 19,570,542 |
| Total | | $13,093,061 | | $7,378,975 | | $— | | $70,215,254 |
| (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 $300 million of average daily net assets | | 0.75% |
| Average daily net assets in excess of $300 million | | 0.675% |
19
MFS Utilities Portfolio
Notes to Financial Statements – continued
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0400% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $4,827 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $185,119,212 and $199,446,306, respectively.
20
MFS Utilities Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 215,871 | | | $3,701,667 | | | 288,875 | | | $6,892,701 | |
Service Class | | 1,240,433 | | | 21,101,323 | | | 1,529,033 | | | 33,924,835 | |
| | 1,456,304 | | | $24,802,990 | | | 1,817,908 | | | $40,817,536 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 634,008 | | | $8,907,825 | | | 2,247,908 | | | $56,152,737 | |
Service Class | | 300,017 | | | 4,185,236 | | | 865,623 | | | 21,441,492 | |
| | 934,025 | | | $13,093,061 | | | 3,113,531 | | | $77,594,229 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (2,161,977 | ) | | $(34,577,975 | ) | | (3,972,057 | ) | | $(88,256,964 | ) |
Service Class | | (1,003,392 | ) | | (16,174,014 | ) | | (1,305,000 | ) | | (26,214,441 | ) |
| | (3,165,369 | ) | | $(50,751,989 | ) | | (5,277,057 | ) | | $(114,471,405 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,312,098 | ) | | $(21,968,483 | ) | | (1,435,274 | ) | | $(25,211,526 | ) |
Service Class | | 537,058 | | | 9,112,545 | | | 1,089,656 | | | 29,151,886 | |
| | (775,040 | ) | | $(12,855,938 | ) | | (345,618 | ) | | $3,940,360 | |
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 December 31, 2009, the fund’s commitment fee and interest expense were $3,988 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 | | — | | 81,397,737 | | (74,326,104 | ) | | 7,071,633 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $9,673 | | | $7,071,633 |
21
MFS Utilities Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Utilities Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Utilities Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Utilities Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
22
MFS Utilities Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
23
MFS Utilities Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
24
MFS Utilities Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Robert Persons Maura Shaughnessy | | |
25
MFS Utilities Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
26
MFS Utilities Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
27
MFS Utilities Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 41.35% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
28
MFS Utilities Portfolio
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.
29
MFS® VALUE PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Value Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Value Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Lockheed Martin Corp. | | 4.2% |
| AT&T, Inc. | | 3.6% |
| Philip Morris International, Inc. | | 2.9% |
| Bank of New York Mellon Corp. | | 2.8% |
| JPMorgan Chase & Co. | | 2.6% |
| Goldman Sachs Group, Inc. | | 2.5% |
| Northrop Grumman Corp. | | 2.5% |
| MetLife, Inc. | | 2.5% |
| TOTAL S.A., ADR | | 2.3% |
| Chevron Corp. | | 2.2% |
| | |
| Equity sectors | | |
| Financial Services | | 20.8% |
| Energy | | 13.4% |
| Health Care | | 11.9% |
| Consumer Staples | | 11.0% |
| Utilities & Communications | | 10.3% |
| Industrial Goods & Services | | 10.2% |
| Retailing | | 4.8% |
| Technology | | 4.8% |
| Basic Materials | | 3.2% |
| Special Products & Services | | 3.1% |
| Leisure | | 3.0% |
| Autos & Housing | | 1.9% |
| Transportation | | 0.3% |
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Value Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Value Portfolio (the “fund”) provided a total return of 20.49%, while Service Class shares of the fund provided a total return of 20.30%. These compare with a return of 19.69% for the fund’s benchmark, the Russell 1000 Value 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 to almost 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.
Contributors to Performance
Strong stock selection and an underweighted position in the energy sector boosted performance relative to the Russell 1000 Value Index. An underweighted position in integrated oil and gas company Exxon Mobil helped as this stock lagged the benchmark during the reporting period.
The fund’s overweighted position in the technology sector was another contributor to relative results. Holdings of strong-performing computer products and services provider International Business Machines (IBM)(b) and enterprise software products maker Oracle (b) bolstered relative performance. Shares of IBM and Oracle both rose due to strong balance sheets, solid cash flow generation, and better-than-expected results. An overweighted position in semiconductor company Intel also helped as this stock outperformed the benchmark.
An underweighted position in the utilities and communications sector was another positive factor for relative performance. An underweighted position in telecommunications service provider Verizon (h) aided results as this benchmark constituent underperformed the benchmark during the reporting period.
Stock selection in the health care sector benefited relative results. No individual stocks within this sector were among the fund’s top contributors.
Elsewhere, our ownership of strong-performing financial services firm Goldman Sachs, not holding poor-performing Citigroup and having an underweighted position in Wells Fargo, an underperformer during the period, positively affected our relative returns. Not holding poor-performing diversified industrial conglomerate General Electric and holdings of strong-performing coatings, glass and chemicals maker PPG Industries also helped.
During the reporting period, the fund’s currency exposure was also a contributor to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our portfolios to have different currency exposures than the benchmark.
Detractors from Performance
Stock selection in the autos and housing sector was the primary detractor from performance. Not holding auto maker Ford Motor Company hurt relative returns as this stock significantly outperformed the benchmark during the reporting period.
3
MFS Value Portfolio
Management Review – continued
Elsewhere, holdings of defense contractor Lockheed Martin (b) were among the fund’s top detractors. Shares of Lockheed Martin fell due to project delays, lower award fees in its Information Systems business, and increased concerns about the prospects for future defense budget cuts in the face of increasingly large and growing U.S. budget deficits. Our overweighted positions in insurance company Allstate, grocery chain Kroger, and financial services firm Bank of New York Mellon held back relative performance. Not holding strong-performing precious metals company Freeport-McMoRan Copper and Gold and financial services firm Morgan Stanley also hindered relative results. The timing of our transactions in financial services firm Bank of America dampened relative performance as the fund missed most of the stock’s positive price gains during the reporting period. An underweighted position in financial services firm JPMorgan Chase hurt.
The fund’s cash position was also a detractor from relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| Nevin Chitkara | | Steven Gorham |
| Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Value Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 20.49% | | 2.46% | | 5.47% | | N/A | | |
| | | Service Class | | 8/24/01 | | 20.30% | | 2.21% | | N/A | | 3.85% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Russell 1000 Value Index (f) | | 19.69% | | (0.25)% | | 2.47% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
Russell 1000 Value Index – constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values.
It is not possible to invest directly in an index.
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.
5
MFS Value Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Value Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.83% | | $1,000.00 | | $1,181.31 | | $4.56 |
| | Hypothetical (h) | | 0.83% | | $1,000.00 | | $1,021.02 | | $4.23 |
| Service Class | | Actual | | 1.08% | | $1,000.00 | | $1,179.68 | | $5.93 |
| | Hypothetical (h) | | 1.08% | | $1,000.00 | | $1,019.76 | | $5.50 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Value Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 98.7% | | | |
| Aerospace – 8.7% | | | | | |
| Lockheed Martin Corp. | | 277,897 | | $ | 20,939,539 |
| Northrop Grumman Corp. | | 218,520 | | | 12,204,342 |
| United Technologies Corp. | | 146,625 | | | 10,177,241 |
| | | | | |
| | | | $ | 43,321,122 |
| | | | | |
| Alcoholic Beverages – 1.4% | | | | | |
| Diageo PLC | | 397,199 | | $ | 6,926,902 |
| | | | | |
| Apparel Manufacturers – 1.4% | | | | | |
| NIKE, Inc., “B” | | 105,887 | | $ | 6,995,954 |
| | | | | |
| Automotive – 0.3% | | | | | |
| Johnson Controls, Inc. | | 55,445 | | $ | 1,510,322 |
| | | | | |
| Broadcasting – 2.6% | | | | | |
| Omnicom Group, Inc. | | 145,778 | | $ | 5,707,209 |
| Walt Disney Co. | | 222,622 | | | 7,179,559 |
| | | | | |
| | | | $ | 12,886,768 |
| | | | | |
| Business Services – 2.9% | | | | | |
| Accenture Ltd., “A” | | 254,257 | | $ | 10,551,666 |
| Dun & Bradstreet Corp. | | 21,007 | | | 1,772,361 |
| Western Union Co. | | 98,825 | | | 1,862,851 |
| | | | | |
| | | | $ | 14,186,878 |
| | | | | |
| Chemicals – 2.4% | | | | | |
| 3M Co. | | 64,508 | | $ | 5,332,876 |
| PPG Industries, Inc. | | 108,517 | | | 6,352,585 |
| | | | | |
| | | | $ | 11,685,461 |
| | | | | |
| Computer Software – 1.4% | | | | | |
| Oracle Corp. | | 292,763 | | $ | 7,184,404 |
| | | | | |
| Computer Software – Systems – 2.0% | | | | | |
| Hewlett-Packard Co. | | 34,070 | | $ | 1,754,946 |
| International Business Machines Corp. | | 61,625 | | | 8,066,713 |
| | | | | |
| | | | $ | 9,821,659 |
| | | | | |
| Construction – 1.6% | | | | | |
| Black & Decker Corp. | | 28,030 | | $ | 1,817,185 |
| Pulte Homes, Inc. (a) | | 155,818 | | | 1,558,180 |
| Sherwin-Williams Co. | | 75,572 | | | 4,659,014 |
| | | | | |
| | | | $ | 8,034,379 |
| | | | | |
| Consumer Products – 1.4% | | | | | |
| Kimberly-Clark Corp. | | 25,280 | | $ | 1,610,589 |
| Procter & Gamble Co. | | 87,068 | | | 5,278,933 |
| | | | | |
| | | | $ | 6,889,522 |
| | | | | |
| Consumer Services – 0.2% | | | | | |
| Apollo Group, Inc., “A” (a) | | 13,570 | | $ | 822,071 |
| | | | | |
| Electrical Equipment – 0.8% | | | | | |
| Danaher Corp. | | 33,130 | | $ | 2,491,376 |
| W.W. Grainger, Inc. | | 14,815 | | | 1,434,536 |
| | | | | |
| | | | $ | 3,925,912 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Electronics – 1.4% | | | | | |
| Intel Corp. | | 340,922 | | $ | 6,954,809 |
| | | | | |
| Energy – Independent – 4.4% | | | | | |
| Apache Corp. | | 75,705 | | $ | 7,810,485 |
| Devon Energy Corp. | | 79,625 | | | 5,852,438 |
| EOG Resources, Inc. | | 46,072 | | | 4,482,806 |
| Occidental Petroleum Corp. | | 44,177 | | | 3,593,799 |
| | | | | |
| | | | $ | 21,739,528 |
| | | | | |
| Energy – Integrated – 8.3% | | | | | |
| Chevron Corp. | | 142,213 | | $ | 10,948,979 |
| ConocoPhillips | | 44,705 | | | 2,283,084 |
| Exxon Mobil Corp. | | 146,297 | | | 9,975,992 |
| Hess Corp. | | 108,815 | | | 6,583,308 |
| TOTAL S.A., ADR | | 180,775 | | | 11,576,831 |
| | | | | |
| | | | $ | 41,368,194 |
| | | | | |
| Food & Beverages – 4.9% | | | | | |
| Campbell Soup Co. | | 29,140 | | $ | 984,932 |
| General Mills, Inc. | | 40,890 | | | 2,895,421 |
| J.M. Smucker Co. | | 32,487 | | | 2,006,072 |
| Kellogg Co. | | 77,920 | | | 4,145,344 |
| Nestle S.A. | | 189,064 | | | 9,185,258 |
| PepsiCo, Inc. | | 80,993 | | | 4,924,374 |
| | | | | |
| | | | $ | 24,141,401 |
| | | | | |
| Food & Drug Stores – 1.7% | | | | | |
| CVS Caremark Corp. | | 190,583 | | $ | 6,138,678 |
| Kroger Co. | | 120,192 | | | 2,467,542 |
| | | | | |
| | | | $ | 8,606,220 |
| | | | | |
| General Merchandise – 0.6% | | | | | |
| Wal-Mart Stores, Inc. | | 60,220 | | $ | 3,218,759 |
| | | | | |
| Insurance – 7.2% | | | | | |
| Allstate Corp. | | 294,665 | | $ | 8,851,737 |
| Aon Corp. | | 102,010 | | | 3,911,063 |
| Chubb Corp. | | 64,225 | | | 3,158,586 |
| MetLife, Inc. | | 345,078 | | | 12,198,507 |
| Prudential Financial, Inc. | | 56,037 | | | 2,788,401 |
| Travelers Cos., Inc. | | 95,995 | | | 4,786,311 |
| | | | | |
| | | | $ | 35,694,605 |
| | | | | |
| Leisure & Toys – 0.4% | | | | | |
| Hasbro, Inc. | | 58,473 | | $ | 1,874,644 |
| | | | | |
| Machinery & Tools – 0.7% | | | | | |
| Eaton Corp. | | 53,260 | | $ | 3,388,401 |
| | | | | |
| Major Banks – 13.2% | | | | | |
| Bank of America Corp., EU | | 326,550 | | $ | 4,872,126 |
| Bank of New York Mellon Corp. | | 501,685 | | | 14,032,129 |
| Goldman Sachs Group, Inc. | | 73,852 | | | 12,469,172 |
| JPMorgan Chase & Co. | | 315,372 | | | 13,141,551 |
| PNC Financial Services Group, Inc. | | 72,725 | | | 3,839,153 |
| Regions Financial Corp. | | 259,470 | | | 1,372,596 |
8
MFS Value Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Major Banks – continued | | | | | |
| State Street Corp. | | 156,765 | | $ | 6,825,548 |
| Wells Fargo & Co. | | 340,292 | | | 9,184,481 |
| | | | | |
| | | | $ | 65,736,756 |
| | | | | |
| Medical Equipment – 3.7% | | | | | |
| Becton, Dickinson & Co. | | 60,192 | | $ | 4,746,741 |
| Medtronic, Inc. | | 159,810 | | | 7,028,444 |
| St. Jude Medical, Inc. (a) | | 65,180 | | | 2,397,320 |
| Thermo Fisher Scientific, Inc. (a) | | 36,205 | | | 1,726,616 |
| Waters Corp. (a) | | 38,075 | | | 2,359,127 |
| | | | | |
| | | | $ | 18,258,248 |
| | | | | |
| Network & Telecom – 0.0% | | | | | |
| Fortinet, Inc. (a) | | 110 | | $ | 1,933 |
| | | | | |
| Oil Services – 0.7% | | | | | |
| National Oilwell Varco, Inc. | | 82,300 | | $ | 3,628,607 |
| | | | | |
| Other Banks & Diversified Financials – 0.4% | | | |
| Northern Trust Corp. | | 36,060 | | $ | 1,889,544 |
| | | | | |
| Pharmaceuticals – 8.2% | | | | | |
| Abbott Laboratories | | 167,572 | | $ | 9,047,212 |
| GlaxoSmithKline PLC | | 114,420 | | | 2,423,778 |
| Johnson & Johnson | | 163,707 | | | 10,544,368 |
| Merck & Co., Inc. | | 194,352 | | | 7,101,622 |
| Pfizer, Inc. | | 541,688 | | | 9,853,305 |
| Roche Holding AG | | 11,023 | | | 1,875,191 |
| | | | | |
| | | | $ | 40,845,476 |
| | | | | |
| Railroad & Shipping – 0.3% | | | | | |
| Canadian National Railway Co. | | 25,910 | | $ | 1,408,468 |
| | | | | |
| Real Estate – 0.0% | | | | | |
| Host Hotels & Resorts, Inc., REIT (a) | | 138 | | $ | 1,610 |
| | | | | |
| Specialty Chemicals – 0.8% | | | | | |
| Air Products & Chemicals, Inc. | | 49,077 | | $ | 3,978,182 |
| | | | | |
| Specialty Stores – 1.1% | | | | | |
| Advance Auto Parts, Inc. | | 62,390 | | $ | 2,525,547 |
| Home Depot, Inc. | | 32,852 | | | 950,408 |
| Staples, Inc. | | 83,260 | | | 2,047,363 |
| | | | | |
| | | | $ | 5,523,318 |
| | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| COMMON STOCKS – continued | | | | |
| Telecommunications – Wireless – 1.4% | | | | |
| Vodafone Group PLC | | 3,110,147 | | $ | 7,202,170 | |
| | | | | | |
| Telephone Services – 3.6% | | | | | | |
| AT&T, Inc. | | 637,342 | | $ | 17,864,696 | |
| | | | | | |
| Tobacco – 3.3% | | | | | | |
| Altria Group, Inc. | | 52,982 | | $ | 1,040,037 | |
| Lorillard, Inc. | | 9,545 | | | 765,795 | |
| Philip Morris International, Inc. | | 299,085 | | | 14,412,906 | |
| | | | | | |
| | | | $ | 16,218,738 | |
| | | | | | |
| Utilities – Electric Power – 5.3% | | | | |
| Dominion Resources, Inc. | | 187,960 | | $ | 7,315,403 | |
| Entergy Corp. | | 37,925 | | | 3,103,782 | |
| FPL Group, Inc. | | 52,250 | | | 2,759,845 | |
| PG&E Corp. | | 106,988 | | | 4,777,014 | |
| PPL Corp. | | 114,132 | | | 3,687,605 | |
| Public Service Enterprise Group, Inc. | | 134,223 | | | 4,462,915 | |
| | | | | | |
| | | | $ | 26,106,564 | |
| | | | | | |
Total Common Stocks
(Identified Cost, $449,284,192) | | | | $ | 489,842,225 | |
| | | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.8% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 9,025,795 | | $ | 9,025,795 | |
| | | | | | |
Total Investments (Identified Cost, $458,309,987) | | | | $ | 498,868,020 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.5)% | | | | | (2,478,973 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 496,389,047 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (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. |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
MFS Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $449,284,192) | | $489,842,225 | | | |
Underlying funds, at cost and value | | 9,025,795 | | | |
Total investments, at value (identified cost, $458,309,987) | | $498,868,020 | | | |
Cash | | 5,182 | | | |
Receivables for | | | | | |
Fund shares sold | | 851,628 | | | |
Interest and dividends | | 955,870 | | | |
Other assets | | 16,834 | | | |
Total assets | | | | | $500,697,534 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $3,910,706 | | | |
Fund shares reacquired | | 265,107 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 20,539 | | | |
Distribution and/or service fees | | 3,151 | | | |
Administrative services fee | | 930 | | | |
Payable for Trustees’ compensation | | 517 | | | |
Accrued expenses and other liabilities | | 107,537 | | | |
Total liabilities | | | | | $4,308,487 |
Net assets | | | | | $496,389,047 |
Net assets consist of | | | | | |
Paid-in capital | | $466,660,010 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 40,556,967 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (17,758,606 | ) | | |
Undistributed net investment income | | 6,930,676 | | | |
Net assets | | | | | $496,389,047 |
Shares of beneficial interest outstanding | | | | | 39,407,507 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $268,001,193 | | 21,195,995 | | $12.64 |
Service Class | | 228,387,854 | | 18,211,512 | | 12.54 |
See Notes to Financial Statements
10
MFS Value Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $10,629,561 | | | | |
Interest | | 27,566 | | | | |
Dividends from underlying funds | | 10,809 | | | | |
Foreign taxes withheld | | (126,422 | ) | | | |
Total investment income | | | | | $10,541,514 | |
Expenses | | | | | | |
Management fee | | $2,792,574 | | | | |
Distribution and/or service fees | | 460,778 | | | | |
Administrative services fee | | 146,917 | | | | |
Trustees’ compensation | | 50,517 | | | | |
Custodian fee | | 37,553 | | | | |
Shareholder communications | | 19,716 | | | | |
Auditing fees | | 47,047 | | | | |
Legal fees | | 24,766 | | | | |
Miscellaneous | | 37,994 | | | | |
Total expenses | | | | | $3,617,862 | |
Fees paid indirectly | | (1 | ) | | | |
Net expenses | | | | | $3,617,861 | |
Net investment income | | | | | $6,923,653 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(1,214,995 | ) | | | |
Foreign currency transactions | | (2,471 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(1,217,466 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $75,377,319 | | | | |
Translation of assets and liabilities in foreign currencies | | 6,216 | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $75,383,535 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $74,166,069 | |
Change in net assets from operations | | | | | $81,089,722 | |
See Notes to Financial Statements
11
MFS Value Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $6,923,653 | | | $5,940,485 | |
Net realized gain (loss) on investments and foreign currency transactions | | (1,217,466 | ) | | (8,644,369 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 75,383,535 | | | (136,655,431 | ) |
Change in net assets from operations | | $81,089,722 | | | $(139,359,315 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(5,894,567 | ) | | $(5,994,945 | ) |
From net realized gain on investments | | — | | | (53,295,636 | ) |
Total distributions declared to shareholders | | $(5,894,567 | ) | | $(59,290,581 | ) |
Change in net assets from fund share transactions | | $109,663,966 | | | $100,628,291 | |
Total change in net assets | | $184,859,121 | | | $(98,021,605 | ) |
Net assets | | | | | | |
At beginning of period | | 311,529,926 | | | 409,551,531 | |
At end of period (including undistributed net investment income of $6,930,676 and
$5,894,061, respectively) | | $496,389,047 | | | $311,529,926 | |
See Notes to Financial Statements
12
MFS Value Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $10.70 | | | $18.78 | | | $18.70 | | | $16.30 | | | $15.51 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.22 | | | $0.25 | | | $0.27 | | | $0.28 | | | $0.24 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.92 | | | (5.50 | ) | | 1.22 | | | 3.04 | | | 0.77 | |
| Total from investment operations | | $2.14 | | | $(5.25 | ) | | $1.49 | | | $3.32 | | | $1.01 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.20 | ) | | $(0.30 | ) | | $(0.30 | ) | | $(0.27 | ) | | $(0.22 | ) |
From net realized gain on investments | | — | | | (2.53 | ) | | (1.11 | ) | | (0.65 | ) | | — | |
Total distributions declared to shareholders | | $(0.20 | ) | | $(2.83 | ) | | $(1.41 | ) | | $(0.92 | ) | | $(0.22 | ) |
Net asset value, end of period | | $12.64 | | | $10.70 | | | $18.78 | | | $18.70 | | | $16.30 | |
Total return (%) (k)(s) | | 20.49 | | | (32.64 | ) | | 7.92 | | | 20.96 | | | 6.60 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.85 | | | 0.84 | | | 0.83 | | | 0.86 | | | 0.85 | |
Net investment income | | 1.98 | | | 1.75 | | | 1.40 | | | 1.62 | | | 1.51 | |
Portfolio turnover | | 27 | | | 44 | | | 25 | | | 26 | | | 22 | |
Net assets at end of period (000 omitted) | | $268,001 | | | $146,011 | | | $267,967 | | | $323,094 | | | $319,952 | |
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $10.61 | | | $18.66 | | | $18.59 | | | $16.21 | | | $15.43 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.19 | | | $0.22 | | | $0.22 | | | $0.23 | | | $0.20 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.91 | | | (5.48 | ) | | 1.22 | | | 3.02 | | | 0.77 | |
| Total from investment operations | | $2.10 | | | $(5.26 | ) | | $1.44 | | | $3.25 | | | $0.97 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.17 | ) | | $(0.26 | ) | | $(0.26 | ) | | $(0.22 | ) | | $(0.19 | ) |
From net realized gain on investments | | — | | | (2.53 | ) | | (1.11 | ) | | (0.65 | ) | | — | |
Total distributions declared to shareholders | | $(0.17 | ) | | $(2.79 | ) | | $(1.37 | ) | | $(0.87 | ) | | $(0.19 | ) |
Net asset value, end of period | | $12.54 | | | $10.61 | | | $18.66 | | | $18.59 | | | $16.21 | |
Total return (%) (k)(s) | | 20.30 | | | (32.87 | ) | | 7.67 | | | 20.66 | | | 6.34 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.10 | | | 1.09 | | | 1.08 | | | 1.11 | | | 1.10 | |
Net investment income | | 1.73 | | | 1.62 | | | 1.16 | | | 1.37 | | | 1.27 | |
Portfolio turnover | | 27 | | | 44 | | | 25 | | | 26 | | | 22 | |
Net assets at end of period (000 omitted) | | $228,388 | | | $165,519 | | | $141,584 | | | $141,334 | | | $126,809 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
13
MFS Value Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Value Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. The fund can invest in foreign securities. 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.
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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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
14
MFS Value Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 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 | | $449,243,628 | | $— | | $— | | $449,243,628 |
United Kingdom | | — | | 16,552,849 | | — | | 16,552,849 |
France | | 11,576,831 | | — | | — | | 11,576,831 |
Switzerland | | — | | 11,060,449 | | — | | 11,060,449 |
Canada | | 1,408,468 | | — | | — | | 1,408,468 |
| Mutual Funds | | 9,025,795 | | — | | — | | 9,025,795 |
| Total Investments | | $471,254,722 | | $27,613,298 | | $— | | $498,868,020 |
Country disclosure is based on the country of domicile. For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009 there were no securities on loan.
15
MFS Value Portfolio
Notes to Financial Statements – continued
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. 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 December 31, 2009, 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 wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $5,894,567 | | $8,698,851 |
| Long-term capital gain | | — | | 50,591,730 |
| Total distributions | | $5,894,567 | | $59,290,581 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $460,086,310 | |
| Gross appreciation | | 52,441,463 | |
| Gross depreciation | | (13,659,753 | ) |
| Net unrealized appreciation (depreciation) | | $38,781,710 | |
| Undistributed ordinary income | | 6,930,676 | |
| Capital loss carryforwards | | (15,982,283 | ) |
| Other temporary differences | | (1,066 | ) |
16
MFS Value Portfolio
Notes to Financial Statements – continued
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/15 | | $(6,190,794 | ) |
| 12/31/16 | | (6,450,354 | ) |
| 12/31/17 | | (3,341,135 | ) |
| | $(15,982,283 | ) |
The availability of a portion of the capital loss carryforwards, which were acquired on June 26, 2009 in connection with the MFS Strategic Value Portfolio merger and on December 4, 2009 in connection with the MFS Mid Cap Value Portfolio 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 and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $2,944,412 | | $3,747,705 | | $— | | $31,412,527 |
| Service Class | | 2,950,155 | | 2,247,240 | | — | | 21,883,109 |
| Total | | $5,894,567 | | $5,994,945 | | $— | | $53,295,636 |
| (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 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $1 billion | | 0.65% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75 % of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
17
MFS Value Portfolio
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0395% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $6,595 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $191,130,426 and $96,976,043, respectively. Purchases exclude the value of securities acquired in connection with the MFS Strategic Value Portfolio and the MFS Mid Cap Value Portfolio mergers. (See Note 8.)
| (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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 9,685,135 | | | $106,694,744 | | | 1,777,770 | | | $21,640,444 | |
Service Class | | 3,247,251 | | | 31,552,403 | | | 7,278,802 | | | 101,235,972 | |
| | 12,932,386 | | | $138,247,147 | | | 9,056,572 | | | $122,876,416 | |
| Shares issued in connection with acquisition of MFS Strategic Value Portfolio | | | | | | | | | | | | |
Initial Class | | 6,041 | | | $64,532 | | | — | | | $— | |
Service Class | | 228,743 | | | 2,426,959 | | | — | | | — | |
| | 234,784 | | | $2,491,491 | | | — | | | $— | |
| Shares issued in connection with acquisition of MFS Mid Cap Value Portfolio | | | | | | | | | | | | |
Initial Class | | — | | | $— | | | — | | | $— | |
Service Class | | 969,447 | | | 12,059,916 | | | — | | | — | |
| | 969,447 | | | $12,059,916 | | | — | | | $— | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 301,373 | | | $2,944,412 | | | 2,264,020 | | | $35,160,232 | |
Service Class | | 304,140 | | | 2,950,155 | | | 1,563,859 | | | 24,130,349 | |
| | 605,513 | | | $5,894,567 | | | 3,827,879 | | | $59,290,581 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (2,446,952 | ) | | $(25,925,344 | ) | | (4,660,114 | ) | | $(68,798,535 | ) |
Service Class | | (2,133,996 | ) | | (23,103,811 | ) | | (835,834 | ) | | (12,740,171 | ) |
| | (4,580,948 | ) | | $(49,029,155 | ) | | (5,495,948 | ) | | $(81,538,706 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 7,545,597 | | | $83,778,344 | | | (618,324 | ) | | $(11,997,859 | ) |
Service Class | | 2,615,585 | | | 25,885,622 | | | 8,006,827 | | | 112,626,150 | |
| | 10,161,182 | | | $109,663,966 | | | 7,388,503 | | | $100,628,291 | |
18
MFS Value Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the fund’s commitment fee and interest expense were $5,508 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 | | — | | 102,731,108 | | (93,705,313 | ) | | 9,025,795 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $10,809 | | | $9,025,795 |
At close of business on June 26, 2009, the fund with net assets of $355,099,729, acquired all of the assets and liabilities of MFS Strategic Value Portfolio. The purpose of the transaction was to provide shareholders of the MFS Strategic Value Portfolio 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 234,784 shares of the fund (valued at $2,491,491) for all of the assets and liabilities of MFS Strategic Value Portfolio. MFS Strategic Value Portfolio then distributed the shares of the fund that MFS Strategic Value Portfolio received from the fund to its shareholders. MFS Strategic Value Portfolio’s net assets on that date were $2,491,491, including investments valued at $2,465,078 with a cost basis of $2,663,205. 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 Strategic Value Portfolio 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. No pro forma information is provided as it is not material to the combined fund results.
At close of business on December 4, 2009, the fund with net assets valued at $470,376,146, acquired all of the assets and liabilities of MFS Mid Cap Value Portfolio. The purpose of the transaction was to provide shareholders of the MFS Mid Cap Value Portfolio the opportunity to participate in a larger combined portfolio with an identical investment objective and similar investment strategies and policies. The acquisition was accomplished by a tax-free exchange of 969,447 shares of the fund (valued at $12,059,916) for all of the assets and liabilities of MFS Mid Cap Value Portfolio. MFS Mid Cap Value Portfolio then distributed the shares of the fund that MFS Mid Cap Value Portfolio received from the fund to its shareholders. MFS Mid Cap Value Portfolio’s net assets on that date were $12,059,916, including investments valued at $12,330,572 with a cost basis of $11,960,655. 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 Mid Cap Value Portfolio 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. No pro forma information is provided as it is not material to the combined fund results.
19
MFS Value Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Value Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Value Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Value Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
20
MFS Value Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
21
MFS Value Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
22
MFS Value Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Nevin Chitkara Steven Gorham | | |
23
MFS Value Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
24
MFS Value Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
25
MFS Value Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
26
MFS Value Portfolio
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.
27
MFS® CORE EQUITY PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Core Equity Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Core Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | |
| Top ten holdings | | |
| Apple, Inc. | | 2.3% |
| Johnson & Johnson | | 2.3% |
| JPMorgan Chase & Co. | | 2.0% |
| Chevron Corp. | | 2.0% |
| AT&T, Inc. | | 1.9% |
| Google, Inc., “A” | | 1.9% |
| Procter & Gamble Co. | | 1.8% |
| Abbott Laboratories | | 1.6% |
| Exxon Mobil Corp. | | 1.6% |
| Bank of America Corp. | | 1.6% |
| | |
| Equity sectors | | |
| Technology | | 17.6% |
| Financial Services | | 14.3% |
| Health Care | | 13.2% |
| Energy | | 10.6% |
| Consumer Staples | | 8.0% |
| Retailing | | 7.5% |
| Utilities & Communications | | 7.1% |
| Industrial Goods & Services | | 6.9% |
| Basic Materials | | 4.6% |
| Leisure | | 3.6% |
| Transportation | | 2.8% |
| Special Products & Services | | 2.6% |
| Autos & Housing | | 0.5% |
(o) Less than 0.1%.
Percentages are based on net assets as of 12/31/09.
The portfolio is actively managed and current holdings may be different.
2
MFS Core Equity Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Core Equity Portfolio (the “fund”) provided a total return of 32.74%, while Service Class shares of the fund provided a total return of 32.44%. These compare with a return of 28.34% for the fund’s benchmark, the Russell 3000 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.
Contributors to Performance
Strong stock selection in the technology sector contributed to the fund’s performance relative to the Russell 3000 Index. Standout performers within this sector included computer and personal electronics maker Apple, business intelligence software company MicroStrategy, and networking chip maker Marvell Technology Group. Shares of Apple climbed as revenues and earnings increased year-over-year due to strong sales of its popular iPhone and Mac computers.
Favorable security selection in the health care sector also boosted relative returns over the reporting period. The fund’s ownership of global healthcare company Schering-Plough (h) had a positive impact on relative performance. Shares of Schering-Plough rose after Merck announced plans to merge the two companies in a stock and cash deal that offered a significant premium to Schering-Plough shareholders.
Stock selection in the industrial goods and services sector was another positive area of relative returns. Not owning struggling diversified industrial conglomerate General Electric was a positive factor as this benchmark constituent significantly underperformed the benchmark.
Individual securities in other sectors that aided relative performance included financial services firm JPMorgan Chase, luxury retailer Nordstrom (h), and real estate investment trust (REIT) Mack-Cali Realty. During the reporting period, shares of Nordstrom performed well as the company reported earnings that met expectations as the company tightly managed its inventory and lowered its prices in an effort to offset slumping sales. In addition, our underweighted position in integrated oil and gas company Exxon Mobil, and not holding poor-performing financial services firm Citigroup, also helped.
Detractors from Performance
Stock selection in the energy sector detracted from the fund’s relative performance. An overweighted position in integrated energy company Chevron hindered relative results as the stock underperformed the benchmark during the reporting period.
Elsewhere, our overweighted position in global biotech company Genzyme, defense contractor Lockheed Martin, and insurance company MetLife had a negative effect on relative returns. Shares of Genzyme suffered as the company announced that it had failed a government inspection in its Massachusetts manufacturing facility and had to temporarily shut down due to a viral infection in one of its bioreactors. In addition, the timing of our ownership in shares of bank operator Bank of America, pharmaceutical and medical products maker Abbott Laboratories, and specialty retailer of pet food and supplies PETsMART (h)
3
MFS Core Equity Portfolio
Management Review – continued
also held back relative performance. Not owning strong-performing software giant Microsoft and diversified technology products and services company International Business Machines (IBM) were two other negative factors for relative results.
The fund’s cash position was also a detractor from relative performance. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
Respectfully,
| | |
| Joseph MacDougall | | Katrina Mead |
| Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
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.
4
MFS Core Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/12/97 | | 32.74% | | 1.43% | | 1.28% | | N/A | | |
| | | Service Class | | 8/24/01 | | 32.44% | | 1.18% | | N/A | | 2.42% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Russell 3000 Index (f) | | | | 28.34% | | 0.76% | | (0.20)% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.)
Benchmark Definition
Russell 3000 Index – constructed to provide a comprehensive barometer for the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Core Equity Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.85% | | $1,000.00 | | $1,228.23 | | $4.77 |
| | Hypothetical (h) | | 0.85% | | $1,000.00 | | $1,020.92 | | $4.33 |
| Service Class | | Actual | | 1.10% | | $1,000.00 | | $1,226.36 | | $6.17 |
| | Hypothetical (h) | | 1.10% | | $1,000.00 | | $1,019.66 | | $5.60 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 99.3% | | | | | |
| Aerospace – 2.8% | | | | | |
| Goodrich Corp. | | 11,840 | | $ | 760,720 |
| Honeywell International, Inc. | | 8,100 | | | 317,520 |
| Lockheed Martin Corp. | | 12,890 | | | 971,261 |
| Precision Castparts Corp. | | 4,810 | | | 530,784 |
| United Technologies Corp. | | 20,520 | | | 1,424,293 |
| | | | | |
| | | | $ | 4,004,578 |
| | | | | |
| Airlines – 0.2% | | | | | |
| Copa Holdings S.A., “A” | | 3,200 | | $ | 174,304 |
| UAL Corp. (a) | | 12,400 | | | 160,084 |
| | | | | |
| | | | $ | 334,388 |
| | | | | |
| Alcoholic Beverages – 0.2% | | | | | |
| Boston Beer Co., Inc., “A” (a) | | 7,210 | | $ | 335,986 |
| | | | | |
| Apparel Manufacturers – 0.8% | | | | | |
| NIKE, Inc., “B” | | 17,300 | | $ | 1,143,011 |
| | | | | |
| Biotechnology – 1.8% | | | | | |
| Amgen, Inc. (a) | | 18,240 | | $ | 1,031,837 |
| Genzyme Corp. (a) | | 23,341 | | | 1,143,942 |
| Gilead Sciences, Inc. (a) | | 5,870 | | | 254,054 |
| Human Genome Sciences, Inc. (a) | | 6,530 | | | 199,818 |
| | | | | |
| | | | $ | 2,629,651 |
| | | | | |
| Broadcasting – 1.5% | | | | | |
| CBS Corp., “B” | | 21,260 | | $ | 298,703 |
| Discovery Communications, Inc., “A” (a) | | 10,510 | | | 322,342 |
| Time Warner, Inc. | | 21,083 | | | 614,359 |
| Walt Disney Co. | | 30,010 | | | 967,822 |
| | | | | |
| | | | $ | 2,203,226 |
| | | | | |
| Brokerage & Asset Managers – 1.5% | | | | | |
| Affiliated Managers Group, Inc. (a) | | 4,180 | | $ | 281,523 |
| Charles Schwab Corp. | | 13,460 | | | 253,317 |
| CME Group, Inc. | | 2,110 | | | 708,854 |
| GFI Group, Inc. | | 73,010 | | | 333,656 |
| Invesco Ltd. | | 18,250 | | | 428,693 |
| LaBranche & Co., Inc. (a) | | 19,600 | | | 55,664 |
| MarketAxess Holdings, Inc. | | 6,450 | | | 89,655 |
| | | | | |
| | | | $ | 2,151,362 |
| | | | | |
| Business Services – 1.8% | | | | | |
| Accenture Ltd., “A” | | 18,210 | | $ | 755,715 |
| Dun & Bradstreet Corp. | | 7,100 | | | 599,027 |
| MasterCard, Inc., “A” | | 2,670 | | | 683,467 |
| Western Union Co. | | 24,370 | | | 459,375 |
| | | | | |
| | | | $ | 2,497,584 |
| | | | | |
| Cable TV – 1.0% | | | | | |
| Comcast Corp., “Special A” | | 21,690 | | $ | 347,257 |
| DIRECTV Group, Inc., “A” (a) | | 22,490 | | | 750,041 |
| Time Warner Cable, Inc. | | 9,110 | | | 377,063 |
| | | | | |
| | | | $ | 1,474,361 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Chemicals – 1.9% | | | | | |
| Celanese Corp. | | 25,740 | | $ | 826,254 |
| Monsanto Co. | | 18,440 | | | 1,507,470 |
| Solutia, Inc. (a) | | 28,400 | | | 360,680 |
| | | | | |
| | | | $ | 2,694,404 |
| | | | | |
| Computer Software – 4.5% | | | | | |
| Adobe Systems, Inc. (a) | | 49,830 | | $ | 1,832,747 |
| MicroStrategy, Inc., “A” (a) | | 23,230 | | | 2,184,085 |
| Nuance Communications, Inc. (a) | | 37,700 | | | 585,858 |
| Oracle Corp. | | 76,310 | | | 1,872,647 |
| | | | | |
| | | | $ | 6,475,337 |
| | | | | |
| Computer Software – Systems – 5.2% | | | | | |
| Apple, Inc. (a) | | 15,490 | | $ | 3,266,221 |
| Compellent Technologies, Inc. (a) | | 21,350 | | | 484,218 |
| Dell, Inc. (a) | | 111,110 | | | 1,595,540 |
| Hewlett-Packard Co. | | 40,860 | | | 2,104,699 |
| | | | | |
| | | | $ | 7,450,678 |
| | | | | |
| Construction – 0.5% | | | | | |
| Lennar Corp., “A” | | 30,890 | | $ | 394,465 |
| Sherwin-Williams Co. | | 5,090 | | | 313,799 |
| | | | | |
| | | | $ | 708,264 |
| | | | | |
| Consumer Products – 2.5% | | | | | |
| Church & Dwight Co., Inc. | | 4,390 | | $ | 265,375 |
| Kimberly-Clark Corp. | | 11,630 | | | 740,947 |
| Procter & Gamble Co. | | 41,470 | | | 2,514,326 |
| | | | | |
| | | | $ | 3,520,648 |
| | | | | |
| Consumer Services – 0.8% | | | | | |
| Apollo Group, Inc., “A” (a) | | 3,760 | | $ | 227,781 |
| Priceline.com, Inc. (a) | | 1,500 | | | 327,750 |
| Strayer Education, Inc. | | 2,860 | | | 607,721 |
| | | | | |
| | | | $ | 1,163,252 |
| | | | | |
| Electrical Equipment – 2.4% | | | | | |
| AMETEK, Inc. | | 20,430 | | $ | 781,243 |
| Danaher Corp. | | 26,010 | | | 1,955,952 |
| Rockwell Automation, Inc. | | 7,710 | | | 362,216 |
| Tyco Electronics Ltd. | | 13,000 | | | 319,150 |
| | | | | |
| | | | $ | 3,418,561 |
| | | | | |
| Electronics – 4.1% | | | | | |
| First Solar, Inc. (a) | | 3,010 | | $ | 407,554 |
| Flextronics International Ltd. (a) | | 63,729 | | | 465,859 |
| Hittite Microwave Corp. (a) | | 12,850 | | | 523,637 |
| Intel Corp. | | 109,530 | | | 2,234,412 |
| Marvell Technology Group Ltd. (a) | | 27,500 | | | 570,625 |
| National Semiconductor Corp. | | 74,350 | | | 1,142,016 |
| Silicon Laboratories, Inc. (a) | | 4,190 | | | 202,545 |
| Tessera Technologies, Inc. (a) | | 14,450 | | | 336,252 |
| | | | | |
| | | | $ | 5,882,900 |
| | | | | |
7
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Energy – Independent – 4.0% | | | | | |
| Alpha Natural Resources, Inc. (a) | | 3,500 | | $ | 151,830 |
| Anadarko Petroleum Corp. | | 10,500 | | | 655,410 |
| Apache Corp. | | 12,470 | | | 1,286,530 |
| Denbury Resources, Inc. (a) | | 16,020 | | | 237,096 |
| Energen Corp. | | 8,720 | | | 408,096 |
| Nexen, Inc. | | 28,490 | | | 687,018 |
| Noble Energy, Inc. | | 8,180 | | | 582,580 |
| Occidental Petroleum Corp. | | 14,270 | | | 1,160,865 |
| Walter Energy, Inc. | | 1,800 | | | 135,558 |
| XTO Energy, Inc. | | 10,120 | | | 470,884 |
| | | | | |
| | | | $ | 5,775,867 |
| | | | | |
| Energy – Integrated – 4.8% | | | | | |
| Chevron Corp. | | 37,340 | | $ | 2,874,807 |
| Exxon Mobil Corp. (s) | | 33,766 | | | 2,302,503 |
| Hess Corp. | | 11,620 | | | 703,010 |
| Marathon Oil Corp. | | 18,420 | | | 575,072 |
| Suncor Energy, Inc. | | 9,570 | | | 337,917 |
| | | | | |
| | | | $ | 6,793,309 |
| | | | | |
| Engineering – Construction – 0.8% | | | | | |
| Fluor Corp. | | 19,860 | | $ | 894,494 |
| North American Energy Partners, Inc. (a) | | 39,230 | | | 284,810 |
| | | | | |
| | | | $ | 1,179,304 |
| | | | | |
| Food & Beverages – 3.7% | | | | | |
| General Mills, Inc. | | 22,570 | | $ | 1,598,182 |
| J.M. Smucker Co. | | 9,570 | | | 590,948 |
| Kellogg Co. | | 22,380 | | | 1,190,616 |
| PepsiCo, Inc. (s) | | 31,477 | | | 1,913,802 |
| | | | | |
| | | | $ | 5,293,548 |
| | | | | |
| Food & Drug Stores – 0.8% | | | | | |
| Kroger Co. | | 14,740 | | $ | 302,612 |
| Walgreen Co. | | 23,300 | | | 855,576 |
| | | | | |
| | | | $ | 1,158,188 |
| | | | | |
| Gaming & Lodging – 0.6% | | | | | |
| International Game Technology | | 11,840 | | $ | 222,237 |
| Las Vegas Sands Corp. (a) | | 13,610 | | | 203,333 |
| Royal Caribbean Cruises Ltd. (a) | | 10,750 | | | 271,760 |
| Starwood Hotels & Resorts Worldwide, Inc. | | 4,530 | | | 165,662 |
| | | | | |
| | | | $ | 862,992 |
| | | | | |
| General Merchandise – 2.5% | | | | | |
| Dollar General Corp. (a) | | 23,420 | | $ | 525,311 |
| Target Corp. | | 31,870 | | | 1,541,552 |
| Wal-Mart Stores, Inc. | | 29,230 | | | 1,562,344 |
| | | | | |
| | | | $ | 3,629,207 |
| | | | | |
| Health Maintenance Organizations – 0.5% | | | |
| WellPoint, Inc. (a) | | 13,110 | | $ | 764,182 |
| | | | | |
| Insurance – 3.1% | | | | | |
| ACE Ltd. | | 4,180 | | $ | 210,672 |
| Allied World Assurance Co. Holdings Ltd. | | 19,560 | | | 901,129 |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Insurance – continued | | | | | |
| Chubb Corp. | | 22,420 | | $ | 1,102,616 |
| MetLife, Inc. | | 27,510 | | | 972,479 |
| Prudential Financial, Inc. | | 6,890 | | | 342,846 |
| Travelers Cos., Inc. | | 9,050 | | | 451,233 |
| Verisk Analytics, Inc., “A” (a) | | 13,910 | | | 421,195 |
| | | | | |
| | | | $ | 4,402,170 |
| | | | | |
| Internet – 1.9% | | | | | |
| Google, Inc., “A” (a) | | 4,340 | | $ | 2,690,713 |
| | | | | |
| Machinery & Tools – 0.5% | | | | | |
| Gardner Denver, Inc. | | 9,190 | | $ | 391,034 |
| RTI International Metals, Inc. (a) | | 12,520 | | | 315,128 |
| | | | | |
| | | | $ | 706,162 |
| | | | | |
| Major Banks – 6.5% | | | | | |
| Bank of America Corp. | | 150,950 | | $ | 2,273,307 |
| Bank of New York Mellon Corp. | | 23,195 | | | 648,764 |
| Goldman Sachs Group, Inc. | | 9,990 | | | 1,686,712 |
| JPMorgan Chase & Co. (s) | | 69,150 | | | 2,881,480 |
| Regions Financial Corp. | | 81,600 | | | 431,664 |
| State Street Corp. | | 18,560 | | | 808,102 |
| SunTrust Banks, Inc. | | 29,650 | | | 601,599 |
| | | | | |
| | | | $ | 9,331,628 |
| | | | | |
| Medical & Health Technology & Services – 1.5% | | | |
| DaVita, Inc. (a) | | 10,080 | | $ | 592,099 |
| Express Scripts, Inc. (a) | | 3,670 | | | 317,271 |
| Laboratory Corp. of America Holdings (a) | | 7,920 | | | 592,733 |
| Medco Health Solutions, Inc. (a) | | 5,300 | | | 338,723 |
| VCA Antech, Inc. (a) | | 10,320 | | | 257,174 |
| | | | | |
| | | | $ | 2,098,000 |
| | | | | |
| Medical Equipment – 3.0% | | | | | |
| Becton, Dickinson & Co. | | 9,950 | | $ | 784,657 |
| Covidien PLC | | 5,110 | | | 244,718 |
| Medtronic, Inc. | | 17,980 | | | 790,760 |
| NxStage Medical, Inc. (a)(z) | | 68,214 | | | 569,587 |
| NxStage Medical, Inc. (a) | | 16,160 | | | 134,936 |
| St. Jude Medical, Inc. (a) | | 20,610 | | | 758,036 |
| Thermo Fisher Scientific, Inc. (a) | | 15,060 | | | 718,211 |
| Waters Corp. (a) | | 4,830 | | | 299,267 |
| | | | | |
| | | | $ | 4,300,172 |
| | | | | |
| Metals & Mining – 0.7% | | | | | |
| Cameco Corp. | | 6,130 | | $ | 197,202 |
| Steel Dynamics, Inc. | | 23,090 | | | 409,155 |
| United States Steel Corp. | | 7,000 | | | 385,840 |
| | | | | |
| | | | $ | 992,197 |
| | | | | |
| Natural Gas – Distribution – 0.6% | | | | | |
| EQT Corp. | | 9,720 | | $ | 426,902 |
| South Jersey Industries, Inc. | | 11,540 | | | 440,597 |
| | | | | |
| | | | $ | 867,499 |
| | | | | |
8
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Network & Telecom – 1.9% | | | | | |
| Cisco Systems, Inc. (a) | | 85,310 | | $ | 2,042,321 |
| Juniper Networks, Inc. (a) | | 17,610 | | | 469,659 |
| Polycom, Inc. (a) | | 8,230 | | | 205,503 |
| | | | | |
| | | | $ | 2,717,483 |
| | | | | |
| Oil Services – 1.8% | | | | | |
| Halliburton Co. | | 39,090 | | $ | 1,176,218 |
| National Oilwell Varco, Inc. | | 9,700 | | | 427,673 |
| Noble Corp. | | 17,430 | | | 709,401 |
| Weatherford International Ltd. (a) | | 16,970 | | | 303,933 |
| | | | | |
| | | | $ | 2,617,225 |
| | | | | |
| Other Banks & Diversified Financials – 1.3% | | | |
| American Express Co. | | 9,050 | | $ | 366,706 |
| CIT Group, Inc. (a) | | 5,600 | | | 154,616 |
| Euro Dekania Ltd. (z) | | 100,530 | | | 152,762 |
| NewAlliance Bancshares, Inc. | | 23,690 | | | 284,517 |
| Ocwen Financial Corp. (a) | | 45,870 | | | 438,976 |
| TCF Financial Corp. | | 32,640 | | | 444,557 |
| | | | | |
| | | | $ | 1,842,134 |
| | | | | |
| Pharmaceuticals – 6.4% | | | | | |
| Abbott Laboratories | | 42,930 | | $ | 2,317,791 |
| Inverness Medical Innovations, Inc. (a) | | 8,400 | | | 348,684 |
| Johnson & Johnson | | 50,100 | | | 3,226,941 |
| Merck & Co., Inc. | | 4,320 | | | 157,853 |
| Pfizer, Inc. | | 100,682 | | | 1,831,406 |
| Teva Pharmaceutical Industries Ltd., ADR | | 21,270 | | | 1,194,949 |
| | | | | |
| | | | $ | 9,077,624 |
| | | | | |
| Pollution Control – 0.4% | | | | | |
| Republic Services, Inc. | | 19,220 | | $ | 544,118 |
| | | | | |
| Precious Metals & Minerals – 0.4% | | | | | |
| Goldcorp, Inc. | | 2,740 | | $ | 107,792 |
| Teck Resources Ltd., “B” (a) | | 11,590 | | | 408,035 |
| | | | | |
| | | | $ | 515,827 |
| | | | | |
| Printing & Publishing – 0.2% | | | | | |
| Moody’s Corp. | | 12,610 | | $ | 337,948 |
| | | | | |
| Railroad & Shipping – 1.1% | | | | | |
| Canadian National Railway Co. | | 18,050 | | $ | 981,198 |
| Union Pacific Corp. | | 8,380 | | | 535,482 |
| | | | | |
| | | | $ | 1,516,680 |
| | | | | |
| Real Estate – 1.9% | | | | | |
| Annaly Mortgage Management, Inc., REIT | | 42,710 | | $ | 741,018 |
| Entertainment Property Trust, REIT | | 32,540 | | | 1,147,686 |
| Kilroy Realty Corp., REIT | | 12,820 | | | 393,189 |
| Mack-Cali Realty Corp., REIT | | 12,410 | | | 429,014 |
| | | | | |
| | | | $ | 2,710,907 |
| | | | | |
| Restaurants – 0.3% | | | | | |
| P.F. Chang’s China Bistro, Inc. (a) | | 9,720 | | $ | 368,485 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Chemicals – 1.6% | | | | | |
| Airgas, Inc. | | 7,500 | | $ | 357,000 |
| Praxair, Inc. | | 16,400 | | | 1,317,084 |
| Rockwood Holdings, Inc. (a) | | 22,800 | | | 537,168 |
| | | | | |
| | | | $ | 2,211,252 |
| | | | | |
| Specialty Stores – 3.4% | | | | | |
| Abercrombie & Fitch Co., “A” | | 20,480 | | $ | 713,728 |
| Advance Auto Parts, Inc. | | 12,900 | | | 522,192 |
| Amazon.com, Inc. (a) | | 5,180 | | | 696,814 |
| GameStop Corp., “A” (a) | | 28,070 | | | 615,856 |
| Home Depot, Inc. | | 40,650 | | | 1,176,004 |
| Limited Brands, Inc. | | 27,520 | | | 529,485 |
| Staples, Inc. | | 23,270 | | | 572,209 |
| | | | | |
| | | | $ | 4,826,288 |
| | | | | |
| Telecommunications – Wireless – 0.1% | | | |
| Sprint Nextel Corp. (a) | | 35,270 | | $ | 129,088 |
| | | | | |
| Telephone Services – 3.0% | | | | | |
| American Tower Corp., “A” (a) | | 16,610 | | $ | 717,718 |
| AT&T, Inc. | | 99,120 | | | 2,778,334 |
| CenturyTel, Inc. | | 20,040 | | | 725,648 |
| | | | | |
| | | | $ | 4,221,700 |
| | | | | |
| Tobacco – 1.6% | | | | | |
| Lorillard, Inc. | | 3,940 | | $ | 316,106 |
| Philip Morris International, Inc. | | 42,140 | | | 2,030,727 |
| | | | | |
| | | | $ | 2,346,833 |
| | | | | |
| Trucking – 1.5% | | | | | |
| Atlas Air Worldwide Holdings, Inc. (a) | | 14,020 | | $ | 522,245 |
| Expeditors International of Washington, Inc. | | 25,610 | | | 889,435 |
| Landstar System, Inc. | | 19,640 | | | 761,443 |
| | | | | |
| | | | $ | 2,173,123 |
| | | | | |
| Utilities – Electric Power – 3.4% | | | | | |
| American Electric Power Co., Inc. | | 21,530 | | $ | 749,029 |
| CMS Energy Corp. | | 39,540 | | | 619,196 |
| Dominion Resources, Inc. | | 9,770 | | | 380,248 |
| NRG Energy, Inc. (a) | | 7,940 | | | 187,463 |
| PG&E Corp. | | 14,800 | | | 660,820 |
| PPL Corp. | | 20,540 | | | 663,647 |
| Progress Energy, Inc. | | 10,420 | | | 427,324 |
| Public Service Enterprise Group, Inc. | | 16,620 | | | 552,615 |
| Wisconsin Energy Corp. | | 11,440 | | | 570,055 |
| | | | | |
| | | | $ | 4,810,397 |
| | | | | |
Total Common Stocks
(Identified Cost, $136,873,976) | | | | $ | 141,900,441 |
| | | | | |
| | | | | | | | | | |
| | | Strike
Price | | First
Exercise | | | | |
| WARRANTS – 0.0% | | | | | | | | | | |
| Medical Equipment – 0.0% | | | | | | | |
NxStage Medical, Inc.
(1 share for 1 warrant)
(Identified Cost, $37,441) (a)(z) | | $ | 5.50 | | 5/23/08 | | 13,643 | | $ | 62,493 |
| | | | | | | | | | |
9
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | |
| MONEY MARKET FUNDS (v) – 0.7% | | | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 990,356 | | $ | 990,356 | |
| | | | | | |
Total Investments
(Identified Cost, $137,901,773) | | | | $ | 142,953,290 | |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.0)% | | | | | (47,513 | ) |
| | | | | | |
| Net Assets – 100.0% | | | | $ | 142,905,777 | |
| | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short. At December 31, 2009, the value of securities pledged amounted to $173,690. At December 31, 2009, the fund had no short sales outstanding. |
| (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 |
| Euro Dekania Ltd. | | 3/08/07-6/25/07 | | $1,412,164 | | $152,762 |
| NxStage Medical, Inc. (Warrants) | | 5/22/08 | | 37,441 | | 62,493 |
| NxStage Medical, Inc. | | 5/22/08 | | 269,523 | | 569,587 |
| Total Restricted Securities | | | | | | $784,842 |
| % of Net Assets | | | | | | 0.5% |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
10
MFS Core Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $136,911,417) | | $141,962,934 | | | |
Underlying funds, at cost and value | | 990,356 | | | |
Total investments, at value (identified cost, $137,901,773) | | $142,953,290 | | | |
Cash | | $3,694 | | | |
Receivables for | | | | | |
Investments sold | | 88,612 | | | |
Fund shares sold | | 67,602 | | | |
Interest and dividends | | 189,488 | | | |
Other assets | | 5,499 | | | |
Total assets | | | | | $143,308,185 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $78,300 | | | |
Fund shares reacquired | | 251,597 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 21,030 | | | |
Distribution and/or service fees | | 464 | | | |
Administrative services fee | | 282 | | | |
Payable for Trustees’ compensation | | 154 | | | |
Accrued expenses and other liabilities | | 50,581 | | | |
Total liabilities | | | | | $402,408 |
Net assets | | | | | $142,905,777 |
Net assets consist of | | | | | |
Paid-in capital | | $184,597,817 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 5,051,531 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (48,260,905 | ) | | |
Undistributed net investment income | | 1,517,334 | | | |
Net assets | | | | | $142,905,777 |
Shares of beneficial interest outstanding | | | | | 11,664,163 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $109,322,391 | | 8,908,964 | | $12.27 |
Service Class | | 33,583,386 | | 2,755,199 | | 12.19 |
See Notes to Financial Statements
11
MFS Core Equity Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Dividends | | $2,545,199 | | | | |
Interest | | 111,036 | | | | |
Dividends from underlying funds | | 2,291 | | | | |
Foreign taxes withheld | | (24,182 | ) | | | |
Total investment income | | | | | $2,634,344 | |
Expenses | | | | | | |
Management fee | | $928,007 | | | | |
Distribution and/or service fees | | 64,866 | | | | |
Administrative services fee | | 49,979 | | | | |
Trustees’ compensation | | 18,880 | | | | |
Custodian fee | | 18,023 | | | | |
Shareholder communications | | 9,243 | | | | |
Auditing fees | | 45,845 | | | | |
Legal fees | | 8,196 | | | | |
Dividend and interest expense on securities sold short | | 983 | | | | |
Miscellaneous | | 22,055 | | | | |
Total expenses | | | | | $1,166,077 | |
Reduction of expenses by investment adviser | | (46,857 | ) | | | |
Net expenses | | | | | $1,119,220 | |
Net investment income | | | | | $1,515,124 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(15,522,504 | ) | | | |
Securities sold short | | (27,627 | ) | | | |
Foreign currency transactions | | 1,208 | | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(15,548,923 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $49,752,395 | | | | |
Translation of assets and liabilities in foreign currencies | | (476 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $49,751,919 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $34,202,996 | |
Change in net assets from operations | | | | | $35,718,120 | |
See Notes to Financial Statements
12
MFS Core Equity Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $1,515,124 | | | $2,184,354 | |
Net realized gain (loss) on investments and foreign currency transactions | | (15,548,923 | ) | | (27,972,754 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 49,751,919 | | | (57,522,788 | ) |
Change in net assets from operations | | $35,718,120 | | | $(83,311,188 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(2,144,224 | ) | | $(1,142,274 | ) |
From net realized gain on investments | | — | | | (14,365,876 | ) |
Total distributions declared to shareholders | | $(2,144,224 | ) | | $(15,508,150 | ) |
Change in net assets from fund share transactions | | $(10,000,204 | ) | | $(28,843,221 | ) |
Total change in net assets | | $23,573,692 | | | $(127,662,559 | ) |
Net assets | | | | | | |
At beginning of period | | 119,332,085 | | | 246,994,644 | |
At end of period (including undistributed net investment income of $1,517,334 and
$2,143,684, respectively) | | $142,905,777 | | | $119,332,085 | |
See Notes to Financial Statements
13
MFS Core Equity Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years Ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.43 | | | $16.52 | | | $17.13 | | | $15.15 | | | $14.32 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.13 | | | $0.16 | | | $0.11 | | | $0.08 | | | $0.09 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.89 | | | (6.11 | ) | | 1.41 | | | 1.99 | | | 0.84 | |
Total from investment operations | | $3.02 | | | $(5.95 | ) | | $1.52 | | | $2.07 | | | $0.93 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.18 | ) | | $(0.09 | ) | | $(0.09 | ) | | $(0.09 | ) | | $(0.10 | ) |
From net realized gain on investments | | — | | | (1.05 | ) | | (2.04 | ) | | — | | | — | |
Total distributions declared to shareholders | | $(0.18 | ) | | $(1.14 | ) | | $(2.13 | ) | | $(0.09 | ) | | $(0.10 | ) |
Net asset value, end of period | | $12.27 | | | $9.43 | | | $16.52 | | | $17.13 | | | $15.15 | |
Total return (%) (k)(r)(s) | | 32.74 | | | (38.63 | )(x) | | 8.71 | | | 13.74 | | | 6.56 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.89 | | | 0.88 | | | 0.86 | | | 0.91 | | | 0.90 | |
Expenses after expense reductions (f) | | 0.85 | | | 0.85 | | | N/A | | | 0.91 | | | N/A | |
Expenses after expense reductions excluding short sale dividend and interest expense (f) | | 0.85 | | | N/A | | | N/A | | | N/A | | | N/A | |
Net investment income | | 1.28 | | | 1.22 | | | 0.65 | | | 0.53 | | | 0.64 | |
Portfolio turnover | | 91 | | | 109 | | | 156 | | | 122 | | | 92 | |
Net assets at end of period (000 omitted) | | $109,322 | | | $97,648 | | | $212,063 | | | $80,024 | | | $80,710 | |
See Notes to Financial Statements
14
MFS Core Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | |
| Service Class | | Years Ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.36 | | | $16.42 | | | $17.05 | | | $15.09 | | | $14.25 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.10 | | | $0.13 | | | $0.07 | | | $0.04 | | | $0.06 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 2.88 | | | (6.08 | ) | | 1.39 | | | 1.98 | | | 0.84 | |
Total from investment operations | | $2.98 | | | $(5.95 | ) | | $1.46 | | | $2.02 | | | $0.90 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.15 | ) | | $(0.06 | ) | | $(0.05 | ) | | $(0.06 | ) | | $(0.06 | ) |
From net realized gain on investments | | — | | | (1.05 | ) | | (2.04 | ) | | — | | | — | |
Total distributions declared to shareholders | | $(0.15 | ) | | $(1.11 | ) | | $(2.09 | ) | | $(0.06 | ) | | $(0.06 | ) |
Net asset value, end of period | | $12.19 | | | $9.36 | | | $16.42 | | | $17.05 | | | $15.09 | |
Total return (%) (k)(r)(s) | | 32.44 | | | (38.79 | )(x) | | 8.40 | | | 13.44 | | | 6.39 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.14 | | | 1.13 | | | 1.11 | | | 1.16 | | | 1.15 | |
Expenses after expense reductions (f) | | 1.10 | | | 1.10 | | | N/A | | | 1.16 | | | N/A | |
Expenses after expense reductions excluding short sale dividend and
interest expense (f) | | 1.10 | | | N/A | | | N/A | | | N/A | | | N/A | |
Net investment income | | 1.02 | | | 1.00 | | | 0.41 | | | 0.29 | | | 0.39 | |
Portfolio turnover | | 91 | | | 109 | | | 156 | | | 122 | | | 92 | |
Net assets at end of period (000 omitted) | | $33,583 | | | $21,684 | | | $34,932 | | | $12,675 | | | $9,990 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
| (x) | Excluding the effect of the proceeds received from a non-recurring litigation settlement against Enron Corp., the total return for the year ended December 31, 2008 would have been lower by approximately 1.32%. |
See Notes to Financial Statements
15
MFS Core Equity Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Core Equity Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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 affect 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
16
MFS Core Equity Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009 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 | | $136,804,867 | | $632,080 | | $— | | $137,436,947 |
Canada | | 3,003,972 | | — | | — | | 3,003,972 |
Israel | | 1,194,949 | | — | | — | | 1,194,949 |
Panama | | 174,304 | | — | | — | | 174,304 |
United Kingdom | | — | | — | | 152,762 | | 152,762 |
| Mutual Funds | | 990,356 | | — | | — | | 990,356 |
| Total Investments | | $142,168,448 | | $632,080 | | $152,762 | | $142,953,290 |
Country disclosure is based on the country of domicile. 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 12/31/08 | | $291,503 | |
Accrued discounts/premiums | | — | |
Realized gain (loss) | | — | |
Change in unrealized appreciation (depreciation) | | (138,741 | ) |
Net purchases (sales) | | — | |
Transfers in and/or out of Level 3 | | — | |
| Balance as of 12/31/09 | | $152,762 | |
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
17
MFS Core Equity Portfolio
Notes to Financial Statements – continued
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.
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. At December 31, 2009, the fund did not have any outstanding derivative instruments.
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | |
| | | Investment
Transactions (i.e.,
Purchased
Options) | |
| Equity Contracts | | $(62,701 | ) |
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option,
18
MFS Core Equity Portfolio
Notes to Financial Statements – continued
the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
Short Sales – The fund may enter into short sales whereby it sells a security it does not own in anticipation of a decline in the value of that security. The fund will realize a gain if the security price decreases and a loss if the security price increases between the date of the short sale and the date on which the fund replaces the borrowed security. Losses from short sales can exceed the proceeds of the security sold; and they can also exceed the potential loss from an ordinary buy and sell transaction. The amount of any premium, dividends, or interest the fund may be required to pay in connection with a short sale will be recognized as a fund expense. During the year ended December 31, 2009, this expense amounted to $983. The fund segregates cash or marketable securities in an amount that, when combined with the amount of proceeds from the short sale deposited with the broker, at least equals the current market value of the security sold short. At December 31, 2009, the fund had no short sales outstanding.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009 there were no securities on loan.
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. 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. For the year ended December 31, 2009, custody fees were not reduced.
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.
19
MFS Core Equity Portfolio
Notes to Financial Statements – continued
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 wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $2,144,224 | | $1,147,300 |
| Long-term capital gain | | — | | 14,360,850 |
| Total distributions | | $2,144,224 | | $15,508,150 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $138,215,485 | |
| Gross appreciation | | 15,303,616 | |
| Gross depreciation | | (10,565,811 | ) |
| Net unrealized appreciation (depreciation) | | $4,737,805 | |
| Undistributed ordinary income | | 1,517,334 | |
| Capital loss carryforwards | | (47,925,833 | ) |
| Other temporary differences | | (21,346 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(31,554,907 | ) |
| 12/31/17 | | (16,370,926 | ) |
| | $(47,925,833 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $1,773,261 | | $1,011,464 | | $— | | $12,075,166 |
| Service Class | | 370,963 | | 130,810 | | — | | 2,290,710 |
| Total | | $2,144,224 | | $1,142,274 | | $— | | $14,365,876 |
| (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 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $1 billion | | 0.65% |
The investment adviser has agreed in writing to reduce its management fee to 0.60% of average daily net assets in excess of $2.5 billion. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
20
MFS Core Equity Portfolio
Notes to Financial Statements – continued
The investment adviser has agreed 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 operating expenses do not exceed 0.85% of average daily net assets for the Initial Class shares and 1.10% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $46,857 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0404% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,207 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 $111,276,475 and $118,014,781, respectively.
21
MFS Core Equity Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 49,334 | | | $520,084 | | | 87,028 | | | $913,713 | |
Service Class | | 828,177 | | | 8,475,311 | | | 563,165 | | | 6,995,439 | |
| | 877,511 | | | $8,995,395 | | | 650,193 | | | $7,909,152 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 195,078 | | | $1,773,261 | | | 865,518 | | | $13,086,630 | |
Service Class | | 41,036 | | | 370,963 | | | 161,113 | | | 2,421,520 | |
| | 236,114 | | | $2,144,224 | | | 1,026,631 | | | $15,508,150 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (1,687,964 | ) | | $(16,790,054 | ) | | (3,434,646 | ) | | $(45,796,150 | ) |
Service Class | | (429,882 | ) | | (4,349,769 | ) | | (535,610 | ) | | (6,464,373 | ) |
| | (2,117,846 | ) | | $(21,139,823 | ) | | (3,970,256 | ) | | $(52,260,523 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,443,552 | ) | | $(14,496,709 | ) | | (2,482,100 | ) | | $(31,795,807 | ) |
Service Class | | 439,331 | | | 4,496,505 | | | 188,668 | | | 2,952,586 | |
| | (1,004,221 | ) | | $(10,000,204 | ) | | (2,293,432 | ) | | $(28,843,221 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $1,821 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 | | — | | 19,475,489 | | (18,485,133 | ) | | 990,356 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $2,291 | | | $990,356 |
22
MFS Core Equity Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Core Equity Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Core Equity Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Core Equity Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
23
MFS Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
24
MFS Core Equity Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
25
MFS Core Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Joseph MacDougall Katrina Mead | | |
26
MFS Core Equity Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 2nd quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
27
MFS Core Equity Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees noted that MFS agreed to continue its waiver to reduce its advisory fee on average daily net assets over $2.5 billion, and they accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
28
MFS Core Equity Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
29
MFS Core Equity Portfolio
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.
30
MFS® STRATEGIC INCOME PORTFOLIO
This report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Strategic Income Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Strategic Income Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Fixed income sectors (i) | | |
| High Grade Corporates | | 33.6% |
| High Yield Corporates | | 32.4% |
| Non-U.S. Government Bonds | | 16.4% |
| Emerging Markets Bonds | | 7.9% |
| U.S. Treasury Securities | | 4.2% |
| Commercial Mortgage-Backed Securities | | 3.6% |
| U.S. Government Agencies | | 1.5% |
| Floating Rate Loans | | 1.5% |
| Mortgage-Backed Securities | | 0.8% |
| Asset-Backed Securities | | 0.7% |
| Collateralized Debt Obligations | | 0.1% |
| | |
| Credit quality of bonds (a)(r) | | |
| AAA | | 12.6% |
| AA | | 11.0% |
| A | | 13.3% |
| BBB | | 24.7% |
| BB | | 14.4% |
| B | | 15.5% |
| CCC | | 6.5% |
| CC | | 0.6% |
| C | | 0.2% |
| D | | 0.3% |
| Not Rated | | 0.9% |
| | |
| Portfolio facts | | |
| Average Duration (d)(i) | | 4.8 |
| Average Effective Maturity (i)(m) | | 7.0 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a) | | BBB |
| | |
| Country weightings (i) | | |
| United States | | 62.5% |
| Japan | | 4.6% |
| Germany | | 3.8% |
| France | | 3.4% |
| Canada | | 2.9% |
| Italy | | 2.5% |
| Netherlands | | 2.4% |
| Brazil | | 2.2% |
| United Kingdom | | 2.2% |
| Other Countries | | 13.5% |
| (a) | 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. 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. 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. Also excluded from the calculation are convertible bonds, inverse floaters, currencies, futures, options, swaps, cash, and cash-equivalents. Average ratings are converted to the S&P scale and are subject to change. |
| (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 any derivative holdings, if applicable. |
| (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. Percentages are based on the total market value of investments as of 12/31/09. |
| (r) | Percentages are based on the total market value of investments as of 12/31/09. |
From time to time “Cash & Other Net Assets” may be negative due to the timing of cash receipts and/or equivalent exposure from any derivative holdings.
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Strategic Income Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Strategic Income Portfolio (the “fund”) provided a total return of 27.52%, while Service Class shares of the fund provided a total return of 27.24%. These compare with a return of 58.21% for the fund’s benchmark, the Barclays Capital U.S. High-Yield Corporate Bond Index. The fund’s other benchmark, the Strategic Income Blended Index (the “Blended Index”), generated a return of 23.76%. The Blended Index reflects the blended returns of various fixed income market indices, with percentage allocations to each index designed to resemble the fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
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 Blended Index, the fund’s lower exposure to “CCC” rated (r) securities detracted from performance as bonds within this quality tier performed exceptionally well over the reporting period as investors appeared to be recovering their appetite for risk in an improving economy.
The fund’s lesser exposure to emerging markets debt, particularly to Russian bonds, also held back relative results as this market segment turned in strong performance over the reporting period.
Among individual securities, the fund’s holdings of some sovereign bonds from Japan and France were top relative detractors.
Contributors to Performance
A greater exposure to “BBB” rated securities, relative to the Blended Index, was a key driver of positive performance as bonds within this credit quality sector performed well over the reporting period.
Security selection also boosted relative results. Top individual contributors during the reporting period included the fund’s holdings of financial services companies Prudential Securities Secured Financing, UniCredito Italiano Capital Trust, ING Groep N.V., BAC Capital Trust, and Nuveen Investments. Holdings of real estate investment trust (REIT) Simon Property Group, Spanish-language network television operator Univision Communications, concrete products manufacturer CRH PLC, and automatic transmission manufacturer Allison Transmission also helped.
A greater exposure to high-grade bonds in the financial and banking sectors also contributed to relative returns as holdings within these sectors exhibited strong returns for the reporting period. Similarly, the fund’s greater exposure to high-grade securities in the industrial sector also helped.
3
MFS Strategic Income Portfolio
Management Review – continued
Yield curve (y) positioning, particularly a lesser exposure to the long end of the curve, was another positive factor for performance.
Respectfully,
| | | | | | | | |
| John Addeo | | James Calmas | | Robert Persons | | Matthew Ryan | | Erik Weisman |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | 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 Moody’s Investors Service. If not available, ratings by Standard & Poor’s 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. |
| (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.
4
MFS Strategic Income Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
5
MFS Strategic Income Portfolio
Performance Summary – continued
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 27.52% | | 4.55% | | 5.70% | | N/A | | |
| | | Service Class | | 8/24/01 | | 27.24% | | 4.28% | | N/A | | 5.98% | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | Barclays Capital U.S. High-Yield Corporate Bond Index (f) | | 58.21% | | 6.46% | | 6.72% | | N/A | | |
| | | Strategic Income Blended Index (f)(x)(y) | | 23.76% | | 6.02% | | 7.12% | | N/A | | |
| | | Barclays Capital U.S. Credit Bond Index (f) | | 16.04% | | 4.68% | | 6.64% | | N/A | | |
| | | Barclays Capital U.S. Government/Mortgage Bond Index (f) | | 1.96% | | 5.32% | | 6.32% | | N/A | | |
| | | Citigroup World Government Bond Non-Dollar Hedged Index (f) | | 2.38% | | 4.79% | | 5.35% | | N/A | | |
| | | Citigroup World Government Bond Non-Dollar Index (f) | | 4.39% | | 4.46% | | 6.60% | | N/A | | |
| | | JPMorgan Emerging Markets Bond Index Global (f) | | 28.18% | | 8.11% | | 10.52% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
| (x) | Strategic Income Blended Index (the “Blended Index”) is at a point in time and allocations during the period can change. As of December 31, 2009, the blended index was comprised of 10% Barclays Capital U.S. Credit Bond Index, 33% Barclays Capital U.S. High-Yield Corporate Bond Index, 14% JPMorgan Emerging Markets Bond Index Global, 8.5% Citigroup World Government Bond Non-Dollar Hedged Index, 8.5% Citigroup World Government Bond Non-Dollar Index, and 26% Barclays Capital U.S. Government/Mortgage Bond Index. |
| (y) | Effective November 1, 2009, Strategic Income Blended Index (the “Blended Index”) replaced Barclays Capital U.S. Credit Bond Index, Barclays Capital U.S. Government/Mortgage Bond Index, Citigroup World Government Bond Non-Dollar Hedged Index, Citigroup World Government Bond Non-Dollar Index, and JPMorgan Emerging Markets Bond Index Global as the fund’s other benchmark. For comparison purposes, the Blended Index more appropriately depicts the fund’s investment strategy. The former indices are each constituents of the Blended Index as described above. |
Benchmark Definitions
Barclays Capital U.S. Credit Bond Index – a market capitalization-weighted index that measures the performance of publicly issued, SEC-registered, U.S. corporate and specified foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.
Barclays Capital U.S. Government/Mortgage Bond Index – measures debt issued by the U.S. Government, and its agencies, as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
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.
Citigroup World Government Bond Non-Dollar Hedged Index- a market capitalization-weighted index that is designed to represent the currency-hedged performance of the international developed government bond markets, excluding the United States.
Citigroup World Government Bond Non-Dollar Index – a market capitalization-weighted index that is designed to represent the performance of the international developed government bond markets, excluding the United States.
JPMorgan Emerging Markets Bond Index Global – measures the performance of U.S.-dollar denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Strategic Income Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.90% | | $1,000.00 | | $1,127.53 | | $4.83 |
| | Hypothetical (h) | | 0.90% | | $1,000.00 | | $1,020.67 | | $4.58 |
| Service Class | | Actual | | 1.15% | | $1,000.00 | | $1,125.75 | | $6.16 |
| | Hypothetical (h) | | 1.15% | | $1,000.00 | | $1,019.41 | | $5.85 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Strategic Income Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – 95.3% | | | | | | |
| Aerospace – 0.5% | | | | | | |
| Bombardier, Inc., 6.3%, 2014 (n) | | $ | 100,000 | | $ | 99,000 |
| Hawker Beechcraft Acquisition Co. LLC, 8.5%, 2015 | | | 75,000 | | | 52,875 |
| Spirit AeroSystems Holdings, Inc., 7.5%, 2017 (n) | | | 60,000 | | | 59,100 |
| Triumph Group, Inc., 8%, 2017 (z) | | | 10,000 | | | 10,088 |
| Vought Aircraft Industries, Inc., 8%, 2011 | | | 65,000 | | | 64,106 |
| | | | | | |
| | | | | $ | 285,169 |
| | | | | | |
| Airlines – 0.4% | | | | | | |
| American Airlines Pass-Through Trust, 6.817%, 2011 | | $ | 70,000 | | $ | 67,200 |
| Continental Airlines, Inc., 7.339%, 2014 | | | 126,000 | | | 116,524 |
| Delta Air Lines, Inc., 7.711%, 2011 | | | 25,000 | | | 24,625 |
| | | | | | |
| | | | | $ | 208,349 |
| | | | | | |
| Apparel Manufacturers – 0.1% | | | | | | |
| Hanes Brand, Inc., 8%, 2016 | | $ | 10,000 | | $ | 10,188 |
| Levi Strauss & Co., 9.75%, 2015 | | | 35,000 | | | 36,750 |
| | | | | | |
| | | | | $ | 46,938 |
| | | | | | |
| Asset Backed & Securitized – 4.3% | | | | | | |
| Anthracite Ltd., CDO, 6%, 2037 (z) | | $ | 200,000 | | $ | 14,000 |
| ARCap REIT, Inc., CDO, “H”, 6.08%, 2045 (z) | | | 200,000 | | | 7,500 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.031%, 2040 (z) | | | 202,271 | | | 86,006 |
| Brazilian Merchant Voucher Receivables Ltd., 5.911%, 2011 (z) | | | 110,980 | | | 112,090 |
| Chase Commercial Mortgage Securities Corp., 6.6%, 2029 (z) | | | 110,140 | | | 113,333 |
| Countrywide Asset-Backed Certificates, FRN, 4.575%, 2035 | | | 235 | | | 234 |
| Crest Ltd., CDO, 7%, 2040 | | | 270,000 | | | 13,500 |
| Deutsche Mortgage & Asset Receiving Corp., FRN, 7.5%, 2031 | | | 210,966 | | | 223,649 |
| DLJ Commercial Mortgage Corp., 6.04%, 2031 (z) | | | 265,000 | | | 268,965 |
| Falcon Franchise Loan LLC, 6.5%, 2014 (z) | | | 250,000 | | | 85,000 |
| Falcon Franchise Loan LLC, FRN, 3.038%, 2023 (i)(z) | | | 413,699 | | | 19,568 |
| Falcon Franchise Loan LLC, FRN, 3.669%, 2025 (i)(z) | | | 565,884 | | | 39,555 |
| First Union-Lehman Brothers Bank of America, FRN, 0.424%, 2035 (i) | | | 2,497,493 | | | 47,811 |
| First Union-Lehman Brothers Commercial Mortgage Trust, 7%, 2029 (n) | | | 93,771 | | | 98,192 |
| GMAC LLC, FRN, 6.02%, 2033 (z) | | | 350,000 | | | 320,783 |
| Hertz Global Holdings, Inc., 4.26%, 2014 (n) | | | 150,000 | | | 149,482 |
| Morgan Stanley Capital I, Inc., FRN, 1.276%, 2039 (i)(z) | | | 2,334,965 | | | 37,103 |
| Prudential Securities Secured Financing Corp., FRN, 7.27%, 2013 (z) | | | 411,000 | | | 363,639 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Asset Backed & Securitized – continued |
| Salomon Brothers Mortgage Securities, Inc., FRN, 6.843%, 2032 (z) | | $ | 210,129 | | $ | 218,874 |
| | | | | | |
| | | | | $ | 2,219,284 |
| | | | | | |
| Automotive – 1.1% | | | | | | |
| Accuride Corp., 8.5%, 2015 (d) | | $ | 20,000 | | $ | 17,000 |
| Allison Transmission, Inc., 11%, 2015 (n) | | | 135,000 | | | 141,750 |
| FCE Bank PLC, 7.125%, 2012 | | EUR | 100,000 | | | 140,488 |
| Ford Motor Credit Co. LLC, 9.75%, 2010 | | $ | 100,000 | | | 103,185 |
| Ford Motor Credit Co. LLC, 12%, 2015 | | | 100,000 | | | 115,963 |
| Johnson Controls, Inc., 5.25%, 2011 | | | 60,000 | | | 62,964 |
| | | | | | |
| | | | | $ | 581,350 |
| | | | | | |
| Basic Industry – 0.0% | | | | | | |
| TriMas Corp., 9.75%, 2017 (z) | | $ | 5,000 | | $ | 4,906 |
| | | | | | |
| Broadcasting – 2.1% | | | | | | |
| Allbritton Communications Co., 7.75%, 2012 | | $ | 106,000 | | $ | 104,278 |
| CanWest MediaWorks LP, 9.25%, 2015 (d)(n) | | | 85,000 | | | 12,644 |
| Intelsat Jackson Holdings Ltd., 9.5%, 2016 | | | 85,000 | | | 90,950 |
| Lamar Media Corp., “C”, 6.625%, 2015 | | | 70,000 | | | 67,200 |
| LBI Media, Inc., 8.5%, 2017 (z) | | | 55,000 | | | 45,650 |
| LIN TV Corp., 6.5%, 2013 | | | 90,000 | | | 86,850 |
| Local TV Finance LLC, 10%, 2015 (p)(z) | | | 132,300 | | | 56,117 |
| Newport Television LLC, 13%, 2017 (n)(p) | | | 106,875 | | | 42,628 |
| News America, Inc., 6.4%, 2035 | | | 220,000 | | | 225,905 |
| News America, Inc., 6.9%, 2039 (n) | | | 47,000 | | | 51,271 |
| Nexstar Broadcasting Group, Inc., 7%, 2014 | | | 30,000 | | | 22,538 |
| Nexstar Broadcasting Group, Inc., 0.5% to 2011, 7% to 2014 (n)(p) | | | 89,328 | | | 66,898 |
| Salem Communications Corp., 9.625%, 2016 (n) | | | 15,000 | | | 15,713 |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 25,000 | | | 26,000 |
| Univision Communications, Inc., 12%, 2014 (n) | | | 25,000 | | | 27,531 |
| Univision Communications, Inc., 9.75%, 2015 (n)(p) | | | 152,612 | | | 128,785 |
| | | | | | |
| | | | | $ | 1,070,958 |
| | | | | | |
| Brokerage & Asset Managers – 1.1% | | | |
| BlackRock, Inc., 3.5%, 2014 | | $ | 130,000 | | $ | 128,367 |
| Janus Capital Group, Inc., 6.95%, 2017 | | | 70,000 | | | 65,979 |
| Nuveen Investments, Inc., 10.5%, 2015 | | | 50,000 | | | 45,375 |
| TD AMERITRADE Holding Corp., 5.6%, 2019 | | | 310,000 | | | 307,943 |
| | | | | | |
| | | | | $ | 547,664 |
| | | | | | |
8
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Building – 1.6% | | | | | | |
| Associated Materials, Inc., 11.25%, 2014 | | $ | 50,000 | | $ | 48,250 |
| Building Materials Corp. of America, 7.75%, 2014 | | | 70,000 | | | 69,300 |
| Cemex Finance Europe BV, 9.625%, 2017 (z) | | EUR | 50,000 | | | 74,258 |
| CRH PLC, 8.125%, 2018 | | $ | 120,000 | | | 139,961 |
| Lafarge S.A., 6.15%, 2011 | | | 330,000 | | | 343,887 |
| Norcraft Cos., LP, 10.5%, 2015 (z) | | | 20,000 | | | 20,500 |
| Nortek, Inc., 11%, 2013 | | | 65,288 | | | 68,226 |
| Ply Gem Industries, Inc., 11.75%, 2013 | | | 40,000 | | | 40,000 |
| USG Corp., 9.75%, 2014 (n) | | | 5,000 | | | 5,338 |
| | | | | | |
| | | | | $ | 809,720 |
| | | | | | |
| Business Services – 0.7% | | | | | | |
| First Data Corp., 9.875%, 2015 | | $ | 130,000 | | $ | 121,225 |
| First Data Corp., 11.25%, 2016 | | | 80,000 | | | 68,400 |
| Iron Mountain, Inc., 6.625%, 2016 | | | 60,000 | | | 58,800 |
| Iron Mountain, Inc., 8.375%, 2021 | | | 25,000 | | | 25,813 |
| SunGard Data Systems, Inc., 10.25%, 2015 | | | 106,000 | | | 112,890 |
| | | | | | |
| | | | | $ | 387,128 |
| | | | | | |
| Cable TV – 2.2% | | | | | | |
| CCO Holdings LLC, 8.75%, 2013 | | $ | 165,000 | | $ | 169,331 |
| Charter Communications, Inc., 8.375%, 2014 (n) | | | 50,000 | | | 51,375 |
| Charter Communications, Inc., 10.875%, 2014 (n) | | | 25,000 | | | 28,000 |
| CSC Holdings, Inc., 6.75%, 2012 | | | 10,000 | | | 10,325 |
| CSC Holdings, Inc., 8.5%, 2014 (n) | | | 80,000 | | | 85,200 |
| DIRECTV Holdings LLC, 7.625%, 2016 | | | 55,000 | | | 60,088 |
| DIRECTV Holdings LLC, 5.875%, 2019 (n) | | | 70,000 | | | 71,197 |
| Mediacom LLC, 9.125%, 2019 (n) | | | 5,000 | | | 5,100 |
| TCI Communications, Inc., 9.8%, 2012 | | | 245,000 | | | 277,292 |
| Time Warner Cable, Inc., 8.25%, 2019 | | | 190,000 | | | 226,308 |
| Videotron LTEE, 6.875%, 2014 | | | 35,000 | | | 35,175 |
| Virgin Media Finance PLC, 9.125%, 2016 | | | 100,000 | | | 105,375 |
| | | | | | |
| | | | | $ | 1,124,766 |
| | | | | | |
| Chemicals – 2.6% | | | | | | |
| Ashland, Inc., 9.125%, 2017 (n) | | $ | 75,000 | | $ | 82,313 |
| Dow Chemical Co., 8.55%, 2019 | | | 260,000 | | | 310,218 |
| Hexion Specialty Chemicals, Inc., 9.75%, 2014 | | | 20,000 | | | 19,600 |
| Huntsman International LLC, 5.5%, 2016 (n) | | | 40,000 | | | 35,500 |
| Innophos Holdings, Inc., 8.875%, 2014 | | | 90,000 | | | 91,350 |
| Lumena Resources Corp., 12%, 2014 (n) | | | 253,000 | | | 220,665 |
| Momentive Performance Materials, Inc., 12.5%, 2014 (n) | | | 65,000 | | | 71,500 |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 41,000 | | | 36,285 |
| Nalco Finance Holdings, Inc., 9%, 2014 | | | 115,000 | | | 117,300 |
| NOVA Chemicals Corp., 8.375%, 2016 (n) | | | 20,000 | | | 20,300 |
| Yara International A.S.A., 5.25%, 2014 (n) | | | 310,000 | | | 323,777 |
| | | | | | |
| | | | | $ | 1,328,808 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Computer Software – Systems – 0.0% | | | | | | |
| DuPont Fabros Technology, Inc., 8.5%, 2017 (z) | | $ | 25,000 | | $ | 25,406 |
| | | | | | |
| Conglomerates – 0.4% | | | | | | |
| American Standard Cos., Inc., 7.625%, 2010 | | $ | 225,000 | | $ | 226,294 |
| | | | | | |
| Construction – 0.6% | | | | | | |
| Lennar Corp., 5.125%, 2010 | | $ | 270,000 | | $ | 271,350 |
| Lennar Corp., 12.25%, 2017 | | | 30,000 | | | 36,150 |
| | | | | | |
| | | | | $ | 307,500 |
| | | | | | |
| Consumer Products – 1.2% | | | | | | |
| ACCO Brands Corp., 10.625%, 2015 (n) | | $ | 5,000 | | $ | 5,500 |
| ACCO Brands Corp., 7.625%, 2015 | | | 25,000 | | | 23,250 |
| Controladora Mabe S.A. de C.V., 7.875%, 2019 (n) | | | 108,000 | | | 108,270 |
| Fortune Brands, Inc., 5.125%, 2011 | | | 244,000 | | | 251,660 |
| Hasbro, Inc., 6.125%, 2014 | | | 40,000 | | | 43,550 |
| Jarden Corp., 7.5%, 2017 | | | 65,000 | | | 64,838 |
| Visant Holding Corp., 8.75%, 2013 | | | 40,000 | | | 41,100 |
| Whirlpool Corp., 8%, 2012 | | | 91,000 | | | 98,590 |
| | | | | | |
| | | | | $ | 636,758 |
| | | | | | |
| Consumer Services – 0.9% | | | | | | |
| KAR Holdings, Inc., 10%, 2015 | | $ | 30,000 | | $ | 32,100 |
| KAR Holdings, Inc., FRN, 4.28%, 2014 | | | 35,000 | | | 32,638 |
| Service Corp. International, 7%, 2017 | | | 135,000 | | | 130,950 |
| Ticketmaster Entertainment, Inc., 10.75%, 2016 | | | 40,000 | | | 43,100 |
| Western Union Co., 5.4%, 2011 | | | 230,000 | | | 245,567 |
| | | | | | |
| | | | | $ | 484,355 |
| | | | | | |
| Containers – 0.6% | | | | | | |
| Graham Packaging Holdings Co., 9.875%, 2014 | | $ | 100,000 | | $ | 102,000 |
| Greif, Inc., 6.75%, 2017 | | | 125,000 | | | 122,500 |
| Owens-Brockway Glass Container, Inc., 8.25%, 2013 | | | 65,000 | | | 66,788 |
| | | | | | |
| | | | | $ | 291,288 |
| | | | | | |
| Defense Electronics – 0.6% | | | | | | |
| BAE Systems Holdings, Inc., 5.2%, 2015 (n) | | $ | 212,000 | | $ | 218,400 |
| BAE Systems Holdings, Inc., 6.375%, 2019 (n) | | | 60,000 | | | 64,540 |
| L-3 Communications Corp., 5.875%, 2015 | | | 50,000 | | | 49,938 |
| | | | | | |
| | | | | $ | 332,878 |
| | | | | | |
| Electronics – 0.4% | | | | | | |
| Avago Technologies Ltd., 11.875%, 2015 | | $ | 40,000 | | $ | 44,050 |
| Flextronics International Ltd., 6.25%, 2014 | | | 33,000 | | | 32,505 |
| Freescale Semiconductor, Inc., 8.875%, 2014 | | | 70,000 | | | 64,225 |
| Jabil Circuit, Inc., 7.75%, 2016 | | | 50,000 | | | 52,500 |
| | | | | | |
| | | | | $ | 193,280 |
| | | | | | |
| Emerging Market Quasi-Sovereign – 2.6% |
| BNDES Participacoes S.A., 6.5%, 2019 (n) | | $ | 197,000 | | $ | 211,775 |
| Export-Import Bank of Korea, 5.875%, 2015 | | | 129,000 | | | 138,431 |
9
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Emerging Market Quasi-Sovereign – continued | | | |
| Gaz Capital S.A., 8.125%, 2014 (n) | | $ | 123,000 | | $ | 130,380 |
| KazMunaiGaz Finance B.V., 11.75%, 2015 (n) | | | 100,000 | | | 120,500 |
| Majapahit Holding B.V., 7.75%, 2020 (n) | | | 112,000 | | | 117,320 |
| Petrobras International Finance Co., 7.875%, 2019 | | | 208,000 | | | 239,785 |
| Qtel International Finance Ltd., 7.875%, 2019 (n) | | | 100,000 | | | 112,097 |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 5.832%, 2016 (n) | | | 250,000 | | | 261,803 |
| | | | | | |
| | | | | $ | 1,332,091 |
| | | | | | |
| Emerging Market Sovereign – 1.5% | | | |
| Republic of Argentina, FRN, 0.943%, 2012 | | $ | 63,338 | | $ | 57,931 |
| Republic of Colombia, 6.125%, 2041 | | | 156,000 | | | 144,690 |
| Republic of Croatia, 6.75%, 2019 (n) | | | 101,000 | | | 108,785 |
| Republic of Panama, 5.2%, 2020 | | | 118,000 | | | 118,295 |
| Republic of Philippines, 6.375%, 2034 | | | 100,000 | | | 98,000 |
| State of Qatar, 6.55%, 2019 (n) | | | 101,000 | | | 112,363 |
| State of Qatar, 5.25%, 2020 (n) | | | 116,000 | | | 116,870 |
| United Mexican States, 5.95%, 2019 | | | 12,000 | | | 12,690 |
| | | | | | |
| | | | | $ | 769,624 |
| | | | | | |
| Energy – Independent – 3.3% | | | | | | |
| Anadarko Finance Co., 6.75%, 2011 | | $ | 180,000 | | $ | 190,212 |
| Chaparral Energy, Inc., 8.875%, 2017 | | | 70,000 | | | 61,775 |
| Chesapeake Energy Corp., 9.5%, 2015 | | | 20,000 | | | 21,950 |
| Chesapeake Energy Corp., 6.375%, 2015 | | | 120,000 | | | 117,600 |
| EnCana Corp., 6.5%, 2019 | | | 100,000 | | | 111,864 |
| Forest Oil Corp., 8.5%, 2014 (n) | | | 20,000 | | | 20,900 |
| Forest Oil Corp., 7.25%, 2019 | | | 50,000 | | | 49,375 |
| Hilcorp Energy I LP, 9%, 2016 (n) | | | 115,000 | | | 116,725 |
| Mariner Energy, Inc., 8%, 2017 | | | 55,000 | | | 52,800 |
| McMoRan Exploration Co., 11.875%, 2014 | | | 35,000 | | | 35,875 |
| Newfield Exploration Co., 6.625%, 2014 | | | 60,000 | | | 60,600 |
| OPTI Canada, Inc., 8.25%, 2014 | | | 55,000 | | | 45,306 |
| Penn Virginia Corp., 10.375%, 2016 | | | 70,000 | | | 76,300 |
| Petrohawk Energy Corp., 10.5%, 2014 | | | 30,000 | | | 32,775 |
| Pioneer Natural Resource Co., 6.875%, 2018 | | | 55,000 | | | 54,418 |
| Pioneer Natural Resource Co., 7.5%, 2020 | | | 30,000 | | | 30,014 |
| Plains Exploration & Production Co., 7%, 2017 | | | 125,000 | | | 122,813 |
| Questar Market Resources, Inc., 6.8%, 2020 | | | 122,000 | | | 127,161 |
| Quicksilver Resources, Inc., 8.25%, 2015 | | | 85,000 | | | 87,125 |
| Range Resources Corp., 8%, 2019 | | | 65,000 | | | 69,550 |
| SandRidge Energy, Inc., 9.875%, 2016 (n) | | | 15,000 | | | 15,788 |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 115,000 | | | 112,988 |
| Southwestern Energy Co., 7.5%, 2018 | | | 55,000 | | | 58,300 |
| Swift Energy Co., 8.875%, 2020 | | | 5,000 | | | 5,125 |
| Talisman Energy, Inc., 7.75%, 2019 | | | 20,000 | | | 23,488 |
| | | | | | |
| | | | | $ | 1,700,827 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Energy – Integrated – 1.0% | | | |
| CCL Finance Ltd., 9.5%, 2014 (n) | | $ | 118,000 | | $ | 126,850 |
| Cenovus Energy, Inc., 4.5%, 2014 (n) | | | 60,000 | | | 61,935 |
| Hess Corp., 8.125%, 2019 | | | 60,000 | | | 72,357 |
| Pacific Rubiales Energy Corp., 8.75%, 2016 (n) | | | 100,000 | | | 105,000 |
| Petro-Canada, 5%, 2014 | | | 170,000 | | | 178,249 |
| | | | | | |
| | | | | $ | 544,391 |
| | | | | | |
| Entertainment – 0.4% | | | |
| AMC Entertainment, Inc., 11%, 2016 | | $ | 65,000 | | $ | 67,925 |
| AMC Entertainment, Inc., 8.75%, 2019 | | | 55,000 | | | 56,100 |
| Cinemark USA, Inc., 8.625%, 2019 (n) | | | 75,000 | | | 78,000 |
| | | | | | |
| | | | | $ | 202,025 |
| | | | | | |
| Financial Institutions – 1.4% | | | |
| General Electric Capital Corp., 6%, 2019 | | $ | 50,000 | | $ | 51,901 |
| General Electric Capital Corp., FRN, 0.41%, 2012 | | | 170,000 | | | 163,949 |
| GMAC LLC, 6.875%, 2011 (n) | | | 130,000 | | | 128,050 |
| GMAC LLC, 7%, 2012 (n) | | | 35,000 | | | 34,475 |
| GMAC LLC, 6.75%, 2014 (n) | | | 50,000 | | | 47,500 |
| GMAC LLC, 8%, 2031 (n) | | | 21,000 | | | 18,900 |
| International Lease Finance Corp., 5.625%, 2013 | | | 105,000 | | | 82,363 |
| ORIX Corp., 5.48%, 2011 | | | 200,000 | | | 200,739 |
| | | | | | |
| | | | | $ | 727,877 |
| | | | | | |
| Food & Beverages – 1.9% | | | |
| Anheuser-Busch Cos., Inc., 7.75%, 2019 (n) | | $ | 220,000 | | $ | 257,575 |
| ARAMARK Corp., 8.5%, 2015 | | | 50,000 | | | 51,500 |
| B&G Foods, Inc., 8%, 2011 | | | 80,000 | | | 81,400 |
| Dean Foods Co., 7%, 2016 | | | 65,000 | | | 63,700 |
| Del Monte Foods Co., 6.75%, 2015 | | | 90,000 | | | 91,800 |
| Kraft Foods, Inc., 6.125%, 2018 | | | 170,000 | | | 179,240 |
| Michael Foods, Inc., 8%, 2013 | | | 110,000 | | | 112,613 |
| Pinnacle Foods Finance LLC, 9.25%, 2015 | | | 40,000 | | | 40,600 |
| Tyson Foods, Inc., 7.85%, 2016 | | | 120,000 | | | 123,000 |
| | | | | | |
| | | | | $ | 1,001,428 |
| | | | | | |
| Forest & Paper Products – 0.6% | | | |
| Buckeye Technologies, Inc., 8.5%, 2013 | | $ | 66,000 | | $ | 67,403 |
| Cascades, Inc., 7.75%, 2017 (z) | | | 15,000 | | | 15,150 |
| Georgia-Pacific Corp., 7.125%, 2017 (n) | | | 60,000 | | | 60,750 |
| Georgia-Pacific Corp., 8%, 2024 | | | 35,000 | | | 35,700 |
| Graphic Packaging International Corp., 9.5%, 2013 | | | 40,000 | | | 41,300 |
| Jefferson Smurfit Corp., 8.25%, 2012 (d) | | | 25,000 | | | 22,000 |
| Millar Western Forest Products Ltd., 7.75%, 2013 | | | 125,000 | | | 91,250 |
| | | | | | |
| | | | | $ | 333,553 |
| | | | | | |
| Gaming & Lodging – 2.0% | | | | | | |
| Boyd Gaming Corp., 6.75%, 2014 | | $ | 60,000 | | $ | 54,075 |
| Firekeepers Development Authority, 13.875%, 2015 (n) | | | 65,000 | | | 73,775 |
10
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Gaming & Lodging – continued | | | | | | |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (d)(n) | | $ | 95,000 | | $ | 950 |
| Harrah’s Operating Co., Inc., 11.25%, 2017 (n) | | | 20,000 | | | 20,925 |
| Harrah’s Operating Co., Inc., 10%, 2018 (n) | | | 4,000 | | | 3,210 |
| Harrah’s Operating Co., Inc., 10%, 2018 (n) | | | 137,000 | | | 109,943 |
| Host Hotels & Resorts, Inc., 7.125%, 2013 | | | 30,000 | | | 30,488 |
| Host Hotels & Resorts, Inc., 6.75%, 2016 | | | 60,000 | | | 59,700 |
| Host Hotels & Resorts, Inc., 9%, 2017 (n) | | | 15,000 | | | 16,219 |
| Marriott International, Inc., 5.625%, 2013 | | | 120,000 | | | 123,134 |
| MGM Mirage, 6.75%, 2013 | | | 60,000 | | | 51,750 |
| MGM Mirage, 10.375%, 2014 (n) | | | 5,000 | | | 5,425 |
| MGM Mirage, 7.5%, 2016 | | | 80,000 | | | 62,400 |
| MGM Mirage, 11.125%, 2017 (n) | | | 20,000 | | | 22,150 |
| MGM Mirage, 11.375%, 2018 (n) | | | 30,000 | | | 26,850 |
| Penn National Gaming, Inc., 8.75%, 2019 (n) | | | 50,000 | | | 51,125 |
| Pinnacle Entertainment, Inc., 7.5%, 2015 | | | 115,000 | | | 105,800 |
| Royal Caribbean Cruises Ltd., 7%, 2013 | | | 45,000 | | | 44,888 |
| Royal Caribbean Cruises Ltd., 11.875%, 2015 | | | 35,000 | | | 40,469 |
| Scientific Games Corp., 6.25%, 2012 | | | 65,000 | | | 64,025 |
| Station Casinos, Inc., 6%, 2012 (d) | | | 50,000 | | | 7,563 |
| Station Casinos, Inc., 6.5%, 2014 (d) | | | 150,000 | | | 750 |
| Station Casinos, Inc., 6.875%, 2016 (d) | | | 140,000 | | | 700 |
| Wyndham Worldwide Corp., 6%, 2016 | | | 90,000 | | | 83,843 |
| | | | | | |
| | | | | $ | 1,060,157 |
| | | | | | |
| Industrial – 0.6% | | | | | | |
| Altra Holdings, Inc., 8.125%, 2016 (z) | | $ | 35,000 | | $ | 35,919 |
| Aquilex Corp., 11.125%, 2016 (z) | | | 10,000 | | | 9,975 |
| Baldor Electric Co., 8.625%, 2017 | | | 60,000 | | | 61,350 |
| Great Lakes Dredge & Dock Corp., 7.75%, 2013 | | | 45,000 | | | 44,775 |
| Johnsondiversey Holdings, Inc., 8.25%, 2019 (n) | | | 30,000 | | | 30,375 |
| Steelcase, Inc., 6.5%, 2011 | | | 117,000 | | | 119,645 |
| | | | | | |
| | | | | $ | 302,039 |
| | | | | | |
| Insurance – 2.7% | | | | | | |
| Allianz AG, 5.5% to 2014, FRN to 2049 | | EUR | 248,000 | | $ | 327,968 |
| ING Groep N.V., 5.775% to 2015, FRN to 2049 | | $ | 490,000 | | | 361,959 |
| Metropolitan Life Global Funding, 2.875%, 2012 (n) | | | 160,000 | | | 161,256 |
| Metropolitan Life Global Funding, 5.125%, 2014 (n) | | | 80,000 | | | 84,664 |
| Principal Financial Group, Inc., 8.875%, 2019 | | | 130,000 | | | 149,957 |
| Prudential Financial, Inc., 6.2%, 2015 | | | 130,000 | | | 139,863 |
| Unum Group, 7.125%, 2016 | | | 160,000 | | | 165,775 |
| | | | | | |
| | | | | $ | 1,391,442 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Insurance – Property & Casualty – 0.7% | | | |
| AXIS Capital Holdings Ltd., 5.75%, 2014 | | $ | 205,000 | | $ | 206,351 |
| Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2058 (n) | | | 65,000 | | | 68,900 |
| USI Holdings Corp., 9.75%, 2015 (z) | | | 75,000 | | | 68,344 |
| | | | | | |
| | | | | $ | 343,595 |
| | | | | | |
| International Market Quasi-Sovereign – 1.7% | | | |
| Canada Housing Trust, 4.6%, 2011 (n) | | CAD | 120,000 | | $ | 120,843 |
| EDF Energies Nouvelles S.A., 6.5%, 2019 (n) | | $ | 230,000 | | | 258,202 |
| ING Bank N.V., 3.9%, 2014 (n) | | | 190,000 | | | 195,561 |
| LeasePlan Corp. N.V., 3%, 2012 (n) | | | 90,000 | | | 92,153 |
| Swedbank AB, 2.8%, 2012 (n) | | | 100,000 | | | 102,155 |
| Westpac Banking Corp., 3.45%, 2014 (n) | | | 100,000 | | | 100,658 |
| | | | | | |
| | | | | $ | 869,572 |
| | | | | | |
| International Market Sovereign – 14.2% | | | |
| Federal Republic of Germany, 5.25%, 2010 | | EUR | 212,000 | | $ | 310,976 |
| Federal Republic of Germany, 3.75%, 2015 | | EUR | 375,000 | | | 568,035 |
| Federal Republic of Germany, 4.25%, 2018 | | EUR | 188,000 | | | 289,939 |
| Federal Republic of Germany, 6.25%, 2030 | | EUR | 139,000 | | | 254,382 |
| Government of Canada, 4.5%, 2015 | | CAD | 92,000 | | | 95,054 |
| Government of Canada, 5.75%, 2033 | | CAD | 17,000 | | | 20,018 |
| Government of Japan, 1.5%, 2012 | | JPY | 21,000,000 | | | 232,722 |
| Government of Japan, 1.3%, 2014 | | JPY | 45,000,000 | | | 501,770 |
| Government of Japan, 1.7%, 2017 | | JPY | 63,000,000 | | | 717,783 |
| Government of Japan, 2.2%, 2027 | | JPY | 20,000,000 | | | 221,900 |
| Government of Japan, 2.4%, 2037 | | JPY | 21,000,000 | | | 232,558 |
| Kingdom of Belgium, 5.5%, 2017 | | EUR | 124,000 | | | 202,584 |
| Kingdom of Netherlands, 3.75%, 2014 | | EUR | 164,000 | | | 247,864 |
| Kingdom of Netherlands, 5.5%, 2028 | | EUR | 38,000 | | | 63,348 |
| Kingdom of Spain, 5.35%, 2011 | | EUR | 484,000 | | | 740,742 |
| Kingdom of Spain, 4.6%, 2019 | | EUR | 45,000 | | | 67,718 |
| Republic of Austria, 4.65%, 2018 | | EUR | 85,000 | | | 131,326 |
| Republic of France, 4.75%, 2012 | | EUR | 138,000 | | | 213,735 |
| Republic of France, 6%, 2025 | | EUR | 116,000 | | | 202,884 |
| Republic of France, 4.75%, 2035 | | EUR | 156,000 | | | 240,690 |
| Republic of Ireland, 4.6%, 2016 | | EUR | 177,000 | | | 261,635 |
| Republic of Italy, 4.75%, 2013 | | EUR | 281,000 | | | 432,121 |
| Republic of Italy, 5.25%, 2017 | | EUR | 319,000 | | | 510,368 |
| Republic of Portugal, 4.45%, 2018 | | EUR | 57,000 | | | 84,703 |
| United Kingdom Treasury, 8%, 2015 | | GBP | 144,000 | | | 292,753 |
| United Kingdom Treasury, 8%, 2021 | | GBP | 54,000 | | | 117,712 |
| United Kingdom Treasury, 4.25%, 2036 | | GBP | 75,000 | | | 117,124 |
| | | | | | |
| | | | | $ | 7,372,444 |
| | | | | | |
| Local Authorities – 0.6% | | | | | | |
| Louisiana Gas & Fuels Tax Rev., FRN, 3%, 2043 | | $ | 160,000 | | $ | 158,618 |
| Province of Ontario, 5.45%, 2016 | | | 145,000 | | | 157,799 |
| | | | | | |
| | | | | $ | 316,417 |
| | | | | | |
11
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Machinery & Tools – 0.7% | | | | | | |
| Atlas Copco AB, 5.6%, 2017 (n) | | $ | 214,000 | | $ | 215,746 |
| Case New Holland, Inc., 7.125%, 2014 | | | 75,000 | | | 76,125 |
| Rental Service Corp., 9.5%, 2014 | | | 70,000 | | | 70,088 |
| | | | | | |
| | | | | $ | 361,959 |
| | | | | | |
| Major Banks – 4.4% | | | | | | |
| BAC Capital Trust XIV, 5.63% to 2012, FRN to 2049 | | $ | 460,000 | | $ | 317,400 |
| Bank of America Corp., 7.375%, 2014 | | | 65,000 | | | 73,756 |
| Bank of America Corp., 8% to 2018, FRN to 2049 | | | 70,000 | | | 67,392 |
| BNP Paribas, 5.186% to 2015, FRN to 2049 (n) | | | 108,000 | | | 89,037 |
| BNP Paribas, 7.195% to 2037, FRN to 2049 (n) | | | 100,000 | | | 92,000 |
| Commonwealth Bank of Australia, 5%, 2019 (n) | | | 140,000 | | | 138,996 |
| Credit Suisse New York, 5.5%, 2014 | | | 130,000 | | | 141,076 |
| Goldman Sachs Group, Inc., 6%, 2014 | | | 90,000 | | | 98,439 |
| Goldman Sachs Group, Inc., 7.5%, 2019 | | | 153,000 | | | 178,368 |
| JPMorgan Chase Capital XXVII, 7%, 2039 | | | 140,000 | | | 141,192 |
| Merrill Lynch & Co., Inc., 6.4%, 2017 | | | 90,000 | | | 94,714 |
| Morgan Stanley, 6.75%, 2011 | | | 150,000 | | | 158,922 |
| Morgan Stanley, 6%, 2014 | | | 100,000 | | | 107,520 |
| Morgan Stanley, 7.3%, 2019 | | | 100,000 | | | 112,293 |
| Morgan Stanley, 5.625%, 2019 | | | 100,000 | | | 100,731 |
| UniCredito Italiano Capital Trust II, 9.2% to 2010, FRN to 2049 (n) | | | 290,000 | | | 269,700 |
| Wells Fargo & Co., 7.98% to 2018, FRN to 2049 | | | 78,000 | | | 78,195 |
| | | | | | |
| | | | | $ | 2,259,731 |
| | | | | | |
| Medical & Health Technology & Services – 3.8% | | | |
| Biomet, Inc., 10%, 2017 | | $ | 60,000 | | $ | 65,175 |
| Biomet, Inc., 11.625%, 2017 | | | 85,000 | | | 93,925 |
| Cardinal Health, Inc., 5.8%, 2016 | | | 201,000 | | | 202,175 |
| Community Health Systems, Inc., 8.875%, 2015 | | | 125,000 | | | 129,375 |
| Cooper Cos., Inc., 7.125%, 2015 | | | 55,000 | | | 53,488 |
| DaVita, Inc., 6.625%, 2013 | | | 33,000 | | | 33,083 |
| DaVita, Inc., 7.25%, 2015 | | | 119,000 | | | 119,298 |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 35,000 | | | 38,500 |
| HCA, Inc., 6.375%, 2015 | | | 60,000 | | | 56,625 |
| HCA, Inc., 9.25%, 2016 | | | 220,000 | | | 236,225 |
| HCA, Inc., 8.5%, 2019 (n) | | | 40,000 | | | 43,100 |
| HealthSouth Corp., 8.125%, 2020 | | | 45,000 | | | 44,325 |
| Hospira, Inc., 5.55%, 2012 | | | 110,000 | | | 117,245 |
| Hospira, Inc., 6.05%, 2017 | | | 100,000 | | | 104,662 |
| McKesson Corp., 5.7%, 2017 | | | 90,000 | | | 94,399 |
| Owens & Minor, Inc., 6.35%, 2016 | | | 170,000 | | | 155,495 |
| Psychiatric Solutions, Inc., 7.75%, 2015 | | | 45,000 | | | 43,538 |
| Psychiatric Solutions, Inc., 7.75%, 2015 (n) | | | 10,000 | | | 9,425 |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 35,000 | | | 37,275 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Medical & Health Technology & Services – continued | | | |
| U.S. Oncology, Inc., 10.75%, 2014 | | $ | 75,000 | | $ | 78,750 |
| United Surgical Partners International, Inc., 8.875%, 2017 | | | 5,000 | | | 5,150 |
| United Surgical Partners International, Inc., 9.25%, 2017 (p) | | | 25,000 | | | 25,500 |
| Universal Hospital Services, Inc., 8.5%, 2015 (p) | | | 75,000 | | | 73,875 |
| Universal Hospital Services, Inc., FRN, 3.859%, 2015 | | | 20,000 | | | 16,850 |
| VWR Funding, Inc., 10.25%, 2015 (p) | | | 80,000 | | | 78,925 |
| | | | | | |
| | | | | $ | 1,956,383 |
| | | | | | |
| Metals & Mining – 2.0% | | | | | | |
| Arch Western Finance LLC, 6.75%, 2013 | | $ | 95,000 | | $ | 94,288 |
| Bumi Capital Pte Ltd., 12%, 2016 (n) | | | 142,000 | | | 140,580 |
| Cloud Peak Energy, Inc., 8.25%, 2017 (n) | | | 45,000 | | | 45,000 |
| Cloud Peak Energy, Inc., 8.5%, 2019 (n) | | | 45,000 | | | 45,900 |
| FMG Finance Ltd., 10.625%, 2016 (n) | | | 75,000 | �� | | 82,969 |
| Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017 | | | 120,000 | | | 131,400 |
| Freeport-McMoRan Copper & Gold, Inc., FRN, 3.881%, 2015 | | | 55,000 | | | 54,691 |
| Gerdau Holdings, Inc., 7%, 2020 (n) | | | 137,000 | | | 140,768 |
| Peabody Energy Corp., 7.375%, 2016 | | | 15,000 | | | 15,469 |
| Peabody Energy Corp., “B”, 6.875%, 2013 | | | 100,000 | | | 101,125 |
| Rio Tinto Finance USA Ltd., 5.875%, 2013 | | | 40,000 | | | 43,161 |
| Vale Overseas Ltd., 6.875%, 2039 | | | 131,000 | | | 131,881 |
| | | | | | |
| | | | | $ | 1,027,232 |
| | | | | | |
| Mortgage Backed – 0.8% | | | | | | |
| Fannie Mae, 6.5%, 2032 | | $ | 163,085 | | $ | 176,234 |
| Fannie Mae, 5.5%, 2034 (f) | | | 231,662 | | | 243,487 |
| | | | | | |
| | | | | $ | 419,721 |
| | | | | | |
| Natural Gas – Distribution – 0.6% | | | | | | |
| AmeriGas Partners LP, 7.125%, 2016 | | $ | 100,000 | | $ | 100,000 |
| EQT Corp., 8.125%, 2019 | | | 110,000 | | | 127,091 |
| Inergy LP, 6.875%, 2014 | | | 85,000 | | | 83,938 |
| | | | | | |
| | | | | $ | 311,029 |
| | | | | | |
| Natural Gas – Pipeline – 2.3% | | | | | | |
| Atlas Pipeline Partners LP, 8.125%, 2015 | | $ | 50,000 | | $ | 44,250 |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 65,000 | | | 57,525 |
| CenterPoint Energy, Inc., 7.875%, 2013 | | | 228,000 | | | 256,813 |
| Deutsche Bank (El Paso Performance-Linked Trust, CLN), 7.75%, 2011 (n) | | | 80,000 | | | 82,013 |
| El Paso Corp., 8.25%, 2016 | | | 55,000 | | | 58,713 |
| Kinder Morgan Finance Corp., 5.35%, 2011 | | | 262,000 | | | 264,620 |
| MarkWest Energy Partners LP, 6.875%, 2014 | | | 45,000 | | | 42,525 |
| Spectra Energy Capital LLC, 8%, 2019 | | | 164,000 | | | 191,933 |
| Williams Cos., Inc., FRN, 2.25%, 2010 (z) | | | 120,000 | | | 119,930 |
| Williams Partners LP, 7.25%, 2017 | | | 65,000 | | | 65,662 |
| | | | | | |
| | | | | $ | 1,183,984 |
| | | | | | |
12
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Network & Telecom – 3.0% | | | | | | |
| AT&T, Inc., 5.8%, 2019 | | $ | 150,000 | | $ | 159,894 |
| CenturyTel, Inc., 7.6%, 2039 | | | 150,000 | | | 153,726 |
| Cincinnati Bell, Inc., 8.375%, 2014 | | | 120,000 | | | 122,100 |
| Deutsche Telekom International Finance B.V., 8.5%, 2010 | | | 137,000 | | | 141,579 |
| France Telecom, 4.375%, 2014 | | | 120,000 | | | 125,395 |
| Nordic Telephone Co. Holdings, 8.875%, 2016 (n) | | | 115,000 | | | 121,613 |
| Qwest Communications International, Inc., 7.25%, 2011 | | | 10,000 | | | 10,150 |
| Qwest Communications International, Inc., 8%, 2015 (n) | | | 20,000 | | | 20,550 |
| Qwest Corp., 7.5%, 2014 | | | 140,000 | | | 145,425 |
| Telecom Italia Capital, 4.875%, 2010 | | | 60,000 | | | 61,410 |
| Telefonica S.A., 5.877%, 2019 | | | 150,000 | | | 160,775 |
| Verizon Communications, Inc., 8.75%, 2018 | | | 140,000 | | | 174,863 |
| Verizon New England, Inc., 6.5%, 2011 | | | 80,000 | | | 85,269 |
| Windstream Corp., 8.625%, 2016 | | | 70,000 | | | 71,225 |
| | | | | | |
| | | | | $ | 1,553,974 |
| | | | | | |
| Oil Services – 0.5% | | | | | | |
| Allis-Chalmers Energy, Inc., 8.5%, 2017 | | $ | 30,000 | | $ | 25,950 |
| Basic Energy Services, Inc., 7.125%, 2016 | | | 20,000 | | | 16,650 |
| Smith International, Inc., 9.75%, 2019 | | | 160,000 | | | 202,676 |
| Trico Shipping A.S., 11.875%, 2014 (n) | | | 15,000 | | | 15,619 |
| | | | | | |
| | | | | $ | 260,895 |
| | | | | | |
| Oils – 0.0% | | | | | | |
| Holly Corp., 9.875%, 2017 (n) | | $ | 15,000 | | $ | 15,788 |
| | | | | | |
| Other Banks & Diversified Financials – 3.9% | | | |
| Banco BMG S.A., 9.95%, 2019 (n) | | $ | 152,000 | | $ | 151,178 |
| Bosphorus Financial Services Ltd., FRN, 2.072%, 2012 (z) | | | 112,500 | | | 107,360 |
| Capital One Financial Corp., 8.8%, 2019 | | | 250,000 | | | 295,417 |
| Capital One Financial Corp., 10.25%, 2039 | | | 130,000 | | | 151,125 |
| Citigroup, Inc., 6.375%, 2014 | | | 120,000 | | | 125,629 |
| Citigroup, Inc., 5.5%, 2014 | | | 100,000 | | | 101,253 |
| Citigroup, Inc., 8.5%, 2019 | | | 88,000 | | | 101,618 |
| Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) | | | 157,000 | | | 172,970 |
| Resona Bank Ltd., 5.85% to 2016, FRN to 2049 (n) | | | 100,000 | | | 87,278 |
| Svenska Handelsbanken AB, 4.875%, 2014 (n) | | | 180,000 | | | 188,613 |
| Swedbank AB, 9% to 2010, FRN to 2049 (n) | | | 190,000 | | | 180,500 |
| UBS Preferred Funding Trust V, 6.243% to 2016, FRN to 2049 | | | 270,000 | | | 211,275 |
| UFJ Finance Aruba AEC, 6.75%, 2013 | | | 159,000 | | | 177,024 |
| | | | | | |
| | | | | $ | 2,051,240 |
| | | | | | |
| Pharmaceuticals – 0.2% | | | | | | |
| Teva Pharmaceutical Finance LLC, 5.55%, 2016 | | $ | 87,000 | | $ | 91,835 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Pollution Control – 0.7% | | | | | | |
| Allied Waste North America, Inc., 7.125%, 2016 | | $ | 205,000 | | $ | 218,325 |
| Republic Services, Inc., 5.25%, 2021 (n) | | | 130,000 | | | 127,820 |
| | | | | | |
| | | | | $ | 346,145 |
| | | | | | |
| Precious Metals & Minerals – 0.4% | | | | | | |
| Teck Resources Ltd., 9.75%, 2014 | | $ | 20,000 | | $ | 23,075 |
| Teck Resources Ltd., 10.25%, 2016 | | | 15,000 | | | 17,475 |
| Teck Resources Ltd., 10.75%, 2019 | | | 45,000 | | | 53,775 |
| Teck Resources Ltd., 6.125%, 2035 | | | 137,000 | | | 122,615 |
| | | | | | |
| | | | | $ | 216,940 |
| | | | | | |
| Printing & Publishing – 0.7% | | | | | | |
| American Media Operations, Inc., 9%, 2013 (p)(z) | | $ | 6,167 | | $ | 3,847 |
| American Media Operations, Inc., 14%, 2013 (p)(z) | | | 65,939 | | | 40,534 |
| Dex Media West LLC, 9.875%, 2013 (d) | | | 68,000 | | | 21,420 |
| Nielsen Finance LLC, 10%, 2014 | | | 95,000 | | | 99,038 |
| Nielsen Finance LLC, 11.5%, 2016 | | | 40,000 | | | 44,700 |
| Nielsen Finance LLC, 0% to 2011, 12.5% to 2016 | | | 134,000 | | | 122,275 |
| Tribune Co., 5.25%, 2015 (d) | | | 60,000 | | | 14,700 |
| | | | | | |
| | | | | $ | 346,514 |
| | | | | | |
| Railroad & Shipping – 0.2% | | | | | | |
| Kansas City Southern Railway, 8%, 2015 | | $ | 25,000 | | $ | 25,906 |
| Panama Canal Railway Co., 7%, 2026 (n) | | | 96,400 | | | 76,156 |
| | | | | | |
| | | | | $ | 102,062 |
| | | | | | |
| Real Estate – 0.7% | | | | | | |
| Kimco Realty Corp., REIT, 6.875%, 2019 | | $ | 36,000 | | $ | 36,607 |
| Simon Property Group, Inc., REIT, 6.1%, 2016 | | | 230,000 | | | 234,724 |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 110,000 | | | 118,112 |
| | | | | | |
| | | | | $ | 389,443 |
| | | | | | |
| Retailers – 2.3% | | | | | | |
| AutoZone, Inc., 6.5%, 2014 | | $ | 230,000 | | $ | 253,514 |
| Couche-Tard, Inc., 7.5%, 2013 | | | 135,000 | | | 137,363 |
| Dollar General Corp., 11.875%, 2017 (p) | | | 28,000 | | | 32,340 |
| Limited Brands, Inc., 5.25%, 2014 | | | 165,000 | | | 159,225 |
| Macy’s Retail Holdings, Inc., 5.75%, 2014 | | | 50,000 | | | 50,125 |
| Macy’s Retail Holdings, Inc., 8.875%, 2015 | | | 200,000 | | | 220,500 |
| Neiman Marcus Group, Inc., 10.375%, 2015 | | | 25,000 | | | 24,500 |
| Sally Beauty Holdings, Inc., 10.5%, 2016 | | | 40,000 | | | 43,000 |
| Staples, Inc., 9.75%, 2014 | | | 140,000 | | | 170,583 |
| Toys “R” Us, Inc., 7.625%, 2011 | | | 20,000 | | | 20,325 |
| Toys “R” Us, Inc., 10.75%, 2017 (n) | | | 50,000 | | | 54,750 |
| Toys “R” Us, Inc., 8.5%, 2017 (n) | | | 30,000 | | | 30,525 |
| | | | | | |
| | | | | $ | 1,196,750 |
| | | | | | |
| Specialty Stores – 0.1% | | | | | | |
| Payless ShoeSource, Inc., 8.25%, 2013 | | $ | 76,000 | | $ | 77,140 |
| | | | | | |
13
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Supermarkets – 0.6% | | | | | | |
| Delhaize Group, 5.875%, 2014 | | $ | 150,000 | | $ | 161,102 |
| Safeway, Inc., 4.95%, 2010 | | | 112,000 | | | 114,950 |
| SUPERVALU, Inc., 8%, 2016 | | | 35,000 | | | 35,525 |
| | | | | | |
| | | | | $ | 311,577 |
| | | | | | |
| Supranational – 0.6% | | | | | | |
| Central American Bank, 4.875%, 2012 (n) | | $ | 305,000 | | $ | 308,877 |
| | | | | | |
| Telecommunications – Wireless – 2.1% | | | | | | |
| American Tower Corp., 4.625%, 2015 (n) | | $ | 80,000 | | $ | 80,916 |
| Cricket Communications, Inc., 7.75%, 2016 | | | 35,000 | | | 34,913 |
| Crown Castle International Corp., 9%, 2015 | | | 35,000 | | | 37,275 |
| Crown Castle International Corp., 7.75%, 2017 (n) | | | 25,000 | | | 26,625 |
| Crown Castle International Corp., 7.125%, 2019 | | | 85,000 | | | 84,150 |
| Nextel Communications, Inc., 6.875%, 2013 | | | 50,000 | | | 48,500 |
| NII Holdings, Inc., 10%, 2016 (n) | | | 50,000 | | | 52,375 |
| Rogers Cable, Inc., 5.5%, 2014 | | | 164,000 | | | 175,730 |
| Sprint Nextel Corp., 8.375%, 2012 | | | 120,000 | | | 124,200 |
| Sprint Nextel Corp., 8.375%, 2017 | | | 20,000 | | | 20,400 |
| Sprint Nextel Corp., 8.75%, 2032 | | | 30,000 | | | 28,275 |
| Vodafone Group PLC, 5.375%, 2015 | | | 270,000 | | | 290,158 |
| Wind Acquisition Finance S.A., 12%, 2015 (n) | | | 106,000 | | | 113,420 |
| | | | | | |
| | | | | $ | 1,116,937 |
| | | | | | |
| Telephone Services – 0.2% | | | | | | |
| Frontier Communications Corp., 8.25%, 2014 | | $ | 50,000 | | $ | 52,125 |
| Frontier Communications Corp., 8.125%, 2018 | | | 30,000 | | | 30,375 |
| | | | | | |
| | | | | $ | 82,500 |
| | | | | | |
| Tobacco – 1.2% | | | | | | |
| Alliance One International, Inc., 10%, 2016 (n) | | $ | 35,000 | | $ | 36,750 |
| Altria Group, Inc., 9.25%, 2019 | | | 210,000 | | | 255,912 |
| Lorillard Tobacco Co., 8.125%, 2019 | | | 63,000 | | | 69,261 |
| Reynolds American, Inc., 6.75%, 2017 | | | 240,000 | | | 248,545 |
| | | | | | |
| | | | | $ | 610,468 |
| | | | | | |
| Transportation – 0.3% | | | | | | |
| IIRSA Norte Finance Ltd., 8.75%, 2024 | | $ | 135,214 | | $ | 141,975 |
| | | | | | |
| Transportation – Services – 0.8% | | | | | | |
| Commercial Barge Line Co., 12.5%, 2017 (n) | | $ | 60,000 | | $ | 62,400 |
| Erac USA Finance Co., 6.375%, 2017 (n) | | | 180,000 | | | 181,812 |
| Hertz Corp., 8.875%, 2014 | | | 115,000 | | | 117,588 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 (z) | | | 50,000 | | | 51,938 |
| | | | | | |
| | | | | $ | 413,738 |
| | | | | | |
| U.S. Government Agencies and Equivalents – 1.5% | | | |
| Small Business Administration, 4.34%, 2024 | | $ | 248,336 | | $ | 254,824 |
| Small Business Administration, 4.77%, 2024 | | | 194,254 | | | 202,031 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| U.S. Government Agencies and Equivalents – continued | | | |
| Small Business Administration, 4.625%, 2025 | | $ | 149,409 | | $ | 154,763 |
| Small Business Administration, 5.11%, 2025 | | | 139,758 | | | 147,211 |
| | | | | | |
| | | | | $ | 758,829 |
| | | | | | |
| U.S. Treasury Obligations – 0.0% | | | | | | |
| U.S. Treasury Bonds, 4.5%, 2036 | | $ | 12,000 | | $ | 11,820 |
| | | | | | |
| Utilities – Electric Power – 4.1% | | | | | | |
| AES Corp., 8%, 2017 | | $ | 105,000 | | $ | 107,756 |
| Allegheny Energy, Inc., 5.75%, 2019 (n) | | | 150,000 | | | 145,699 |
| Beaver Valley Funding Corp., 9%, 2017 | | | 339,000 | | | 370,513 |
| Calpine Corp., 8%, 2016 (n) | | | 55,000 | | | 56,650 |
| Dynegy Holdings, Inc., 7.5%, 2015 (z) | | | 35,000 | | | 32,200 |
| Dynegy Holdings, Inc., 7.5%, 2015 | | | 70,000 | | | 65,450 |
| Dynegy Holdings, Inc., 7.75%, 2019 | | | 15,000 | | | 13,013 |
| Edison Mission Energy, 7%, 2017 | | | 105,000 | | | 82,950 |
| Enel Finance International S.A., 5.125%, 2019 (n) | | | 287,000 | | | 288,773 |
| Exelon Generation Co. LLC, 5.2%, 2019 | | | 70,000 | | | 70,031 |
| Exelon Generation Co. LLC, 6.25%, 2039 | | | 130,000 | | | 132,448 |
| FirstEnergy Corp., 6.45%, 2011 | | | 9,000 | | | 9,650 |
| Mirant North America LLC, 7.375%, 2013 | | | 110,000 | | | 108,763 |
| NRG Energy, Inc., 7.375%, 2016 | | | 135,000 | | | 135,169 |
| Pacific Gas & Electric Co., 4.2%, 2011 | | | 125,000 | | | 128,991 |
| PSEG Power LLC, 7.75%, 2011 | | | 170,000 | | | 181,908 |
| Texas Competitive Electric Holdings LLC, 10.25%, 2015 | | | 255,000 | | | 206,550 |
| | | | | | |
| | | | | $ | 2,136,514 |
| | | | | | |
Total Bonds
(Identified Cost, $49,101,081) | | | | | $ | 49,442,281 |
| | | | | | |
|
| FLOATING RATE LOANS (g)(r) – 1.5% |
| Automotive – 0.5% | | | | | | |
| Accuride Corp., Term Loan, 9.25%, 2013 | | $ | 10,170 | | $ | 10,134 |
| Allison Transmission, Inc., Term Loan B, 3.01%, 2014 | | | 84,461 | | | 77,303 |
| Federal-Mogul Corp., Term Loan B, 2.16%, 2014 | | | 83,191 | | | 69,673 |
| Ford Motor Co., Term Loan, 3.28%, 2013 (o) | | | 80,275 | | | 74,054 |
| | | | | | |
| | | | | $ | 231,164 |
| | | | | | |
| Broadcasting – 0.2% | | | | | | |
| Gray Television, Inc., Term Loan B, 3.79%, 2014 | | $ | 38,047 | | $ | 32,942 |
| Young Broadcasting, Inc., Incremental Term Loan, 4.75%, 2012 (d) | | | 32,339 | | | 23,785 |
| Young Broadcasting, Inc., Term Loan, 4.75%, 2012 (d) | | | 61,672 | | | 45,360 |
| | | | | | |
| | | | | $ | 102,087 |
| | | | | | |
| Building – 0.0% | | | | | | |
| Building Materials Holding Corp., Term Loan, 3%, 2014 | | $ | 11,236 | | $ | 10,372 |
14
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| FLOATING RATE LOANS (g)(r) – continued |
| Chemicals – 0.2% | | | | | | |
| LyondellBasell, DIP Term Loan, 9.16%, 2010 (q) | | $ | 12,923 | | $ | 13,440 |
| LyondellBasell, DIP Term Loan B-3, 5.79%, 2010 | | | 12,898 | | | 13,317 |
| LyondellBasell, Dutch Tranche Revolving Credit Loan, 3.73%, 2014 | | | 2,031 | | | 1,498 |
| LyondellBasell, Dutch Tranche Term Loan, 3.73%, 2014 | | | 4,596 | | | 3,392 |
| LyondellBasell, German Tranche Term Loan B-1, 3.98%, 2014 | | | 5,830 | | | 4,302 |
| LyondellBasell, German Tranche Term Loan B-2, 3.98%, 2014 | | | 5,830 | | | 4,302 |
| LyondellBasell, German Tranche Term Loan B-3, 3.98%, 2014 | | | 5,830 | | | 4,302 |
| LyondellBasell, U.S. Tranche Revolving Credit Loan, 3.73%, 2014 | | | 7,615 | | | 5,619 |
| LyondellBasell, U.S. Tranche Term Loan, 3.73%, 2014 | | | 14,509 | | | 10,705 |
| LyondellBasell, U.S. Tranche Term Loan B-1, 7%, 2014 | | | 25,297 | | | 18,666 |
| LyondellBasell, U.S. Tranche Term Loan B-2, 7%, 2014 | | | 25,297 | | | 18,666 |
| LyondellBasell, U.S. Tranche Term Loan B-3, 7%, 2014 | | | 25,297 | | | 18,666 |
| | | | | | |
| | | | | $ | 116,875 |
| | | | | | |
| Gaming & Lodging – 0.1% | | | | | | |
| Green Valley Ranch Gaming LLC, Second Lien Term Loan, 3.5%, 2014 | | $ | 74,178 | | $ | 11,127 |
| MGM Mirage, Term Loan B, 6%, 2011 (o) | | | 46,839 | | | 43,560 |
| | | | | | |
| | | | | $ | 54,687 |
| | | | | | |
| Printing & Publishing – 0.1% | | | | | | |
| Tribune Co., Incremental Term Loan B, 5.25%, 2014 (d) | | $ | 128,174 | | $ | 65,422 |
| | | | | | |
| Specialty Stores – 0.1% | | | | | | |
| Michaels Stores, Inc., Term Loan B1, 2.56%, 2013 | | $ | 20,375 | | $ | 18,344 |
| Michaels Stores, Inc., Term Loan B2, 4.81%, 2016 | | | 26,866 | | | 25,235 |
| | | | | | |
| | | | | $ | 43,579 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| FLOATING RATE LOANS (g)(r) – continued |
| Utilities – Electric Power – 0.3% | | | | | | |
| Calpine Corp., DIP Term Loan, 3.13%, 2014 | | $ | 38,484 | | $ | 36,348 |
| Texas Competitive Electric Holdings Co. LLC, Term Loan B-3, 3.73%, 2014 | | | 112,980 | | | 91,006 |
| | | | | | |
| | | | | $ | 127,354 |
| | | | | | |
Total Floating Rate Loans
(Identified Cost, $799,233) | | | | | $ | 751,540 |
| | | | | | |
| | |
| COMMON STOCKS – 0.1% | | | | | | |
| Construction – 0.1% | | | | | | |
| Nortek, Inc. (a) | | | 944 | | $ | 33,040 |
| | | | | | |
| Printing & Publishing – 0.0% | | | | | | |
| American Media, Inc. (a) | | | 1,130 | | $ | 3,242 |
| Idearc, Inc. (a) | | | 46 | | | 1,564 |
| World Color Press, Inc. (a) | | | 348 | | | 3,236 |
| | | | | | |
| | | | | $ | 8,042 |
| | | | | | |
Total Common Stocks
(Identified Cost, $127,620) | | | | | $ | 41,082 |
| | | | | | |
|
| PREFERRED STOCKS – 0.0% |
| Financial Institutions – 0.0% | | | | | | |
GMAC, Inc., 7%
(Identified Cost, $29,260) (z) | | | 38 | | $ | 25,047 |
| | | | | | |
| | | | | | | | | | |
| | | Strike
Price | | First
Exercise | | | | |
| | | | | | | | | | |
| WARRANTS – 0.0% | | | | | | | | | | |
| Printing & Publishing – 0.0% | | | | | | | |
| World Color Press, Inc. (1 share for 1 warrant) (a) | | $ | 13.00 | | 8/26/09 | | 197 | | $ | 827 |
| World Color Press, Inc. (1 share for 1 warrant) (a) | | | 16.30 | | 8/26/09 | | 197 | | | 577 |
| | | | | | | | | | |
Total Warrants
(Identified Cost, $6,351) | | | | | | $ | 1,404 |
| | | | | | | | | | |
| | | | | |
| | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.5% | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 751,282 | | $ | 751,282 |
| | | | | |
Total Investments
(Identified Cost, $50,814,827) | | | | $ | 51,012,636 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.6% | | | | | 852,461 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 51,865,097 |
| | | | | |
15
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| (a) | | Non-income producing security. |
| (d) | | Non-income producing security – in default. |
| (f) | | All or a portion of the security has been segregated as collateral for open futures contracts. |
| (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 $10,488,140, representing 20.22% 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 |
| ARCap REIT, Inc., CDO, “H”, 6.08%, 2045 | | 9/21/04 | | $174,193 | | $7,500 |
| Altra Holdings, Inc., 8.125%, 2016 | | 11/16/09-11/17/09 | | 34,963 | | 35,919 |
| American Media Operations, Inc., 9%, 2013 | | 1/29/09-10/15/09 | | 4,202 | | 3,847 |
| American Media Operations, Inc., 14%, 2013 | | 1/29/09-10/15/09 | | 39,092 | | 40,534 |
| Anthracite Ltd., CDO, 6%, 2037 | | 5/14/02 | | 175,249 | | 14,000 |
| Aquilex Corp., 11.125%, 2016 | | 12/16/09 | | 9,596 | | 9,975 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.031%, 2040 | | 3/01/06 | | 202,271 | | 86,006 |
| Bosphorus Financial Services Ltd., FRN, 2.072%, 2012 | | 3/08/05 | | 112,500 | | 107,360 |
| Brazilian Merchant Voucher Receivables Ltd., 5.911%, 2011 | | 3/08/07 | | 111,184 | | 112,090 |
| Cascades, Inc., 7.75%, 2017 | | 11/18/09 | | 14,782 | | 15,150 |
| Cemex Finance Europe BV, 9.625%, 2017 | | 12/09/09 | | 73,650 | | 74,258 |
| Chase Commercial Mortgage Securities Corp., 6.6%, 2029 | | 6/07/00 | | 109,778 | | 113,333 |
| DLJ Commercial Mortgage Corp., 6.04%, 2031 | | 7/23/04 | | 261,463 | | 268,965 |
| DuPont Fabros Technology, Inc., 8.5%, 2017 | | 12/11/09 | | 25,000 | | 25,406 |
| Dynegy Holdings, Inc., 7.5%, 2015 | | 12/02/09 | | 30,667 | | 32,200 |
| Falcon Franchise Loan LLC, 6.5%, 2014 | | 7/15/05 | | 231,238 | | 85,000 |
| Falcon Franchise Loan LLC, FRN, 3.038%, 2023 | | 1/18/02 | | 24,013 | | 19,568 |
| Falcon Franchise Loan LLC, FRN, 3.669%, 2025 | | 1/29/03 | | 60,840 | | 39,555 |
| GMAC LLC, FRN, 6.02%, 2033 | | 11/17/00 | | 341,227 | | 320,783 |
| GMAC, Inc., 7% (Preferred Stock) | | 12/26/08 | | 29,260 | | 25,047 |
| LBI Media, Inc., 8.5%, 2017 | | 7/18/07 | | 54,248 | | 45,650 |
| Local TV Finance LLC, 10%, 2015 | | 11/09/07-11/30/09 | | 128,464 | | 56,117 |
| Morgan Stanley Capital I, Inc., FRN, 1.276%, 2039 | | 7/20/04 | | 64,168 | | 37,103 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 | | 10/22/09 | | 49,686 | | 51,938 |
| Norcraft Cos., LP, 10.5%, 2015 | | 12/02/09 | | 19,677 | | 20,500 |
| Prudential Securities Secured Financing Corp., FRN, 7.27%, 2013 | | 12/06/04 | | 429,256 | | 363,639 |
| Salomon Brothers Mortgage Securities, Inc., FRN, 6.843%, 2032 | | 1/07/05 | | 221,721 | | 218,874 |
| TriMas Corp., 9.75%, 2017 | | 12/17/09 | | 4,900 | | 4,906 |
16
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | |
| Restricted Securities – continued | | Acquisition
Date | | Cost | | Current
Market Value |
| Triumph Group, Inc., 8%, 2017 | | 11/10/09 | | $9,857 | | $10,088 |
| USI Holdings Corp., 9.75%, 2015 | | 4/26/07-6/08/07 | | 75,645 | | 68,344 |
| Williams Cos., Inc., FRN, 2.25%, 2010 | | 8/06/09 | | 119,507 | | 119,930 |
| Total Restricted Securities | | | | | | $2,433,585 |
| % of Net Assets | | | | | | 4.7% |
The following abbreviations are used in this report and are defined:
| CDO | | Collateralized Debt 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:
| CNY | | Chinese Yuan Renminbi |
Derivative Contracts at 12/31/09
Forward Foreign Currency Exchange Contracts at 12/31/09
| | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | Contracts
at Value | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | BRL | | Deutsche Bank AG | | 376,000 | | 1/5/10-2/2/10 | | $ | 215,074 | | $ | 215,319 | | $ | 245 | |
| | BUY | | BRL | | HSBC Bank | | 91,000 | | 2/2/10 | | | 51,914 | | | 51,955 | | | 41 | |
| | SELL | | EUR | | HSBC Bank | | 50,000 | | 1/13/10 | | | 73,615 | | | 71,677 | | | 1,938 | |
| | SELL | | EUR | | UBS AG | | 2,091,611 | | 3/15/10 | | | 3,055,843 | | | 2,998,104 | | | 57,739 | |
| | SELL | | JPY | | JPMorgan Chase Bank | | 39,606,080 | | 1/13/10 | | | 440,844 | | | 425,272 | | | 15,572 | |
| | BUY | | KRW | | Merrill Lynch International Bank | | 92,150,000 | | 1/12/10 | | | 79,058 | | | 79,118 | | | 60 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 75,595 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | BRL | | HSBC Bank | | 91,000 | | 1/5/10 | | $ | 52,329 | | $ | 52,269 | | $ | (60 | ) |
| | SELL | | BRL | | Deutsche Bank AG | | 188,000 | | 1/5/10 | | | 107,860 | | | 107,984 | | | (124 | ) |
| | SELL | | BRL | | HSBC Bank | | 91,000 | | 1/5/10 | | | 52,224 | | | 52,269 | | | (45 | ) |
| | SELL | | CAD | | UBS AG | | 260,734 | | 3/10/10 | | | 247,038 | | | 249,301 | | | (2,263 | ) |
| | BUY | | CNY | | Deutsche Bank AG | | 590,000 | | 5/17/10 | | | 87,772 | | | 86,559 | | | (1,213 | ) |
| | BUY | | CNY | | HSBC Bank | | 1,176,000 | | 5/17/10 | | | 174,922 | | | 172,532 | | | (2,390 | ) |
| | BUY | | EUR | | UBS AG | | 35,733 | | 1/13/10 | | | 53,887 | | | 51,225 | | | (2,662 | ) |
| | SELL | | GBP | | Barclays Bank PLC | | 167,283 | | 1/13/10 | | | 265,699 | | | 270,183 | | | (4,484 | ) |
| | SELL | | GBP | | Deutsche Bank AG | | 167,283 | | 1/13/10 | | | 265,712 | | | 270,183 | | | (4,471 | ) |
| | BUY | | KRW | | JPMorgan Chase Bank | | 91,599,000 | | 2/11/10 | | | 78,673 | | | 78,573 | | | (100 | ) |
| | BUY | | SEK | | HSBC Bank | | 63,821 | | 1/28/10 | | | 9,390 | | | 8,920 | | | (470 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (18,282 | ) |
| | | | | | | | | | | | | | | | | | | | |
17
MFS Strategic Income Portfolio
Portfolio of Investments – continued
Futures Contracts Outstanding at 12/31/09
| | | | | | | | | | | |
| Description | | Currency | | Contracts | | Value | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | |
| U.S. Treasury Note 2 yr (Short) | | USD | | 1 | | $216,266 | | Mar-10 | | $1,012 | |
| | | | | | | | | | | |
| | | | | |
| Liability Derivatives | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Long) | | USD | | 3 | | $346,359 | | Mar-10 | | $(8,659 | ) |
| U.S. Treasury Note 5 yr (Long) | | USD | | 18 | | 2,058,891 | | Mar-10 | | (40,282 | ) |
| | | | | | | | | | | |
| | | | | | | | | | $(48,941 | ) |
| | | | | | | | | | | |
Swap Agreements at 12/31/09
| | | | | | | | | | | | | |
| Expiration | | Notional
Amount | | | Counterparty | | Cash Flows to
Receive | | Cash Flows
to Pay | | Fair
Value |
| Asset Derivatives | | | | | | | | | | | |
| Credit Default Swaps | | | | | | | | | |
| 9/20/10 | | USD | | 270,000 | | | Merrill Lynch International | | (1) | | 0.68% (fixed rate) | | $2,608 |
| 9/20/14 | | USD | | 250,000 | (a) | | Goldman Sachs International | | 1.00% (fixed rate) | | (2) | | 3,726 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | $6,334 |
| | | | | | | | | | | | | |
| (1) | | Fund, as protection buyer, to receive notional amount upon a defined credit event by Lennar Corp., 5.95%, 3/01/13. |
| (2) | | Fund, as protection seller, to pay notional amount upon a defined credit event by Cargill Inc., 7.375%, 10/01/25, an A2 rated bond. The fund entered into the contract to gain issuer exposure. |
| (a) | | Net unamortized premiums received by the fund amounted to $541. |
The credit ratings presented here are an indicator of the current payment/performance risk of the related swap, the reference obligation for which may be either a single security or, in case of a credit default index, a basket of securities issued by corporate or sovereign issuers. Each reference security, including each individual security within a reference basket of securities, is assigned a rating from Moody’s Investor Service. If not rated by Moody’s, the rating will be that assigned by Standard & Poor’s. Likewise, if not assigned by Standard & Poor’s, it will be based on the rating assigned by Fitch, Inc. The ratings for a credit default index are calculated by MFS as a weighted average of the external credit ratings of the individual securities that compose the index’s reference basket of securities.
At December 31, 2009, the fund had sufficient cash and/or other liquid securities to cover any commitments under these contracts.
See Notes to Financial Statements
18
MFS Strategic Income Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $50,063,545) | | $50,261,354 | | | |
Underlying funds, at cost and value | | 751,282 | | | |
Total investments, at value (identified cost, $50,814,827) | | $51,012,636 | | | |
Cash | | $9,294 | | | |
Receivables for | | | | | |
Forward foreign currency exchange contracts | | 75,595 | | | |
Investments sold | | 84,347 | | | |
Fund shares sold | | 2,662 | | | |
Interest | | 846,938 | | | |
Swaps, at value (net unamortized premiums received, $541) | | 6,334 | | | |
Receivable from investment adviser | | 1,330 | | | |
Other assets | | 2,439 | | | |
Total assets | | | | | $52,041,575 |
Liabilities | | | | | |
Payables for | | | | | |
Forward foreign currency exchange contracts | | $18,282 | | | |
Daily variation margin on open futures contracts | | 6,188 | | | |
Investments purchased | | 102,573 | | | |
Fund shares reacquired | | 7,125 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 1,994 | | | |
Distribution and/or service fees | | 160 | | | |
Administrative services fee | | 113 | | | |
Payable for Trustees’ compensation | | 57 | | | |
Accrued expenses and other liabilities | | 39,986 | | | |
Total liabilities | | | | | $176,478 |
Net assets | | | | | $51,865,097 |
Net assets consist of | | | | | |
Paid-in capital | | $54,302,575 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 214,332 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (4,770,390 | ) | | |
Undistributed net investment income | | 2,118,580 | | | |
Net assets | | | | | $51,865,097 |
Shares of beneficial interest outstanding | | | | | 5,490,279 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $40,221,336 | | 4,251,960 | | $9.46 |
Service Class | | 11,643,761 | | 1,238,319 | | 9.40 |
See Notes to Financial Statements
19
MFS Strategic Income Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Interest | | $3,337,307 | | | | |
Dividends | | 2,388 | | | | |
Dividends from underlying funds | | 1,056 | | | | |
Foreign taxes withheld | | (1,537 | ) | | | |
Total investment income | | | | | $3,339,214 | |
Expenses | | | | | | |
Management fee | | $350,488 | | | | |
Distribution and/or service fees | | 28,747 | | | | |
Administrative services fee | | 19,454 | | | | |
Trustees’ compensation | | 6,802 | | | | |
Custodian fee | | 30,719 | | | | |
Shareholder communications | | 6,600 | | | | |
Auditing fees | | 44,715 | | | | |
Legal fees | | 8,717 | | | | |
Miscellaneous | | 13,909 | | | | |
Total expenses | | | | | $510,151 | |
Fees paid indirectly | | (3 | ) | | | |
Reduction of expenses by investment adviser | | (59,950 | ) | | | |
Net expenses | | | | | $450,198 | |
Net investment income | | | | | $2,889,016 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(1,394,703 | ) | | | |
Futures contracts | | 131,958 | | | | |
Swap transactions | | 111,918 | | | | |
Foreign currency transactions | | (286,908 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(1,437,735 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $10,102,897 | | | | |
Futures contracts | | (63,154 | ) | | | |
Swap transactions | | (159,925 | ) | | | |
Translation of assets and liabilities in foreign currencies | | (59,622 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $9,820,196 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $8,382,461 | |
Change in net assets from operations | | | | | $11,271,477 | |
See Notes to Financial Statements
20
MFS Strategic Income Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $2,889,016 | | | $3,406,631 | |
Net realized gain (loss) on investments and foreign currency transactions | | (1,437,735 | ) | | (1,183,673 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 9,820,196 | | | (9,451,615 | ) |
Change in net assets from operations | | $11,271,477 | | | $(7,228,657 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(4,831,795 | ) | | $(4,650,368 | ) |
Change in net assets from fund share transactions | | $3,074,206 | | | $(14,583,449 | ) |
Total change in net assets | | $9,513,888 | | | $(26,462,474 | ) |
Net assets | | | | | | |
At beginning of period | | 42,351,209 | | | 68,813,683 | |
At end of period (including undistributed net investment income of $2,118,580 and
$3,932,347, respectively) | | $51,865,097 | | | $42,351,209 | |
See Notes to Financial Statements
21
MFS Strategic Income Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.36 | | | $10.40 | | | $10.61 | | | $10.71 | | | $11.42 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.55 | | | $0.58 | | | $0.60 | | | $0.57 | | | $0.58 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.54 | | | (1.82 | ) | | (0.23 | ) | | 0.11 | | | (0.39 | ) |
Total from investment operations | | $2.09 | | | $(1.24 | ) | | $0.37 | | | $0.68 | | | $0.19 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.99 | ) | | $(0.80 | ) | | $(0.58 | ) | | $(0.66 | ) | | $(0.80 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.12 | ) | | (0.10 | ) |
Total distributions declared to shareholders | | $(0.99 | ) | | $(0.80 | ) | | $(0.58 | ) | | $(0.78 | ) | | $(0.90 | ) |
Net asset value, end of period | | $9.46 | | | $8.36 | | | $10.40 | | | $10.61 | | | $10.71 | |
Total return (%) (k)(r)(s) | | 27.52 | | | (12.94 | ) | | 3.49 | | | 6.71 | | | 1.89 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.03 | | | 1.02 | | | 0.95 | | | 0.97 | | | 0.97 | |
Expenses after expense reductions (f) | | 0.90 | | | 0.90 | | | 0.90 | | | 0.95 | | | N/A | |
Net investment income | | 6.23 | | | 6.07 | | | 5.70 | | | 5.44 | | | 5.33 | |
Portfolio turnover | | 63 | | | 38 | | | 49 | | | 64 | | | 66 | |
Net assets at end of period (000 omitted) | | $40,221 | | | $31,159 | | | $49,582 | | | $54,423 | | | $59,707 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $8.30 | | | $10.33 | | | $10.54 | | | $10.64 | | | $11.35 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.52 | | | $0.55 | | | $0.57 | | | $0.54 | | | $0.55 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.54 | | | (1.80 | ) | | (0.23 | ) | | 0.11 | | | (0.39 | ) |
Total from investment operations | | $2.06 | | | $(1.25 | ) | | $0.34 | | | $0.65 | | | $0.16 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.96 | ) | | $(0.78 | ) | | $(0.55 | ) | | $(0.63 | ) | | $(0.77 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.12 | ) | | (0.10 | ) |
Total distributions declared to shareholders | | $(0.96 | ) | | $(0.78 | ) | | $(0.55 | ) | | $(0.75 | ) | | $(0.87 | ) |
Net asset value, end of period | | $9.40 | | | $8.30 | | | $10.33 | | | $10.54 | | | $10.64 | |
Total return (%) (k)(r)(s) | | 27.24 | | | (13.21 | ) | | 3.24 | | | 6.45 | | | 1.61 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.28 | | | 1.26 | | | 1.20 | | | 1.22 | | | 1.22 | |
Expenses after expense reductions (f) | | 1.15 | | | 1.15 | | | 1.15 | | | 1.19 | | | N/A | |
Net investment income | | 6.02 | | | 5.82 | | | 5.45 | | | 5.19 | | | 5.08 | |
Portfolio turnover | | 63 | | | 38 | | | 49 | | | 64 | | | 66 | |
Net assets at end of period (000 omitted) | | $11,644 | | | $11,192 | | | $19,232 | | | $21,949 | | | $22,643 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
22
MFS Strategic Income Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Strategic Income Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is 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 exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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. 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
23
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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 affect 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 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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | Level 3 | | Total | |
| Equity Securities | | $39,244 | | | $25,047 | | $3,242 | | $67,533 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | — | | | 770,649 | | — | | 770,649 | |
| Non-U.S. Sovereign Debt | | — | | | 10,652,608 | | — | | 10,652,608 | |
| Corporate Bonds | | — | | | 26,634,234 | | — | | 26,634,234 | |
| Residential Mortgage-Backed Securities | | — | | | 419,955 | | — | | 419,955 | |
| Commercial Mortgage-Backed Securities | | — | | | 1,836,472 | | — | | 1,836,472 | |
| Asset-Backed Securities (including CDOs) | | — | | | 382,578 | | — | | 382,578 | |
| Foreign Bonds | | — | | | 8,663,772 | | — | | 8,663,772 | |
| Floating Rate Loans | | — | | | 751,540 | | — | | 751,540 | |
| Other Fixed Income Securities | | — | | | 82,013 | | — | | 82,013 | |
| Mutual Funds | | 751,282 | | | — | | — | | 751,282 | |
| Total Investments | | $790,526 | | | $50,218,868 | | $3,242 | | $51,012,636 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | |
| Futures | | $(47,929 | ) | | $— | | $— | | $(47,929 | ) |
| Swaps | | — | | | 6,334 | | — | | 6,334 | |
| Forward Currency Contracts | | — | | | 57,313 | | — | | 57,313 | |
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 12/31/08 | | $— |
Accrued discounts/premiums | | — |
Realized gain (loss) | | — |
Change in unrealized appreciation (depreciation) | | 824 |
Net purchases (sales) | | 2,418 |
Transfers in and/or out of Level 3 | | — |
| Balance as of 12/31/09 | | $3,242 |
24
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
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.
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.
ASC 815 also requires sellers of credit derivatives to make disclosures that will enable financial statement users to assess the potential effects of those credit derivatives on an entity’s financial position, financial performance and cash flows. As defined by ASC 815, a credit derivative is a derivative instrument (a) in which one or more of the derivative’s underlyings are related to the credit risk of a specified entity (or group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the derivative contract. The seller (or writer) is the party that provides the credit protection and assumes the credit risk on a credit derivatives contract, such as a credit default swap. Accordingly, appropriate disclosures have been included within the Swap Agreements table in the Portfolio of Investments and Significant Accounting Policies.
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.
25
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | | | | | | | |
| | | | | Asset Derivatives | | | Liability Derivatives | |
| | | | | Location on Statement of Assets and
Liabilities | | Fair Value | | | Location on Statement of Assets and
Liabilities | | Fair Value | |
| Interest Rate Contracts | | Interest Rate Futures | | Unrealized appreciation on investments and translation of assets and liabilities in foreign currencies | | $1,012(a | ) | | Unrealized depreciation on investments and translation of assets and liabilities in foreign currencies | | $(48,941 | )(a) |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts | | Receivable for forward foreign currency exchange contracts | | 75,595 | | | Payable for forward foreign currency exchange contracts | | (18,282 | ) |
| Credit Contracts | | Credit Default Swaps | | Swaps, at value | | 6,334 | | | Swaps, at value | | — | |
Total Derivatives Not
Accounted For as Hedging
Instruments Under ASC 815 | | | | | | $82,941 | | | | | $(67,223 | ) |
| (a) | Includes cumulative appreciation/depreciation of futures contracts as reported in the fund’s Portfolio of Investments. Only the current day’s variation margin for futures contracts is 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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | | | | | |
| | | Investment
Transactions (i.e.,
Purchased
Options) | | | Futures Contracts | | Foreign Currency
Transactions | | | Swap Transactions | | Total | |
| Interest Rate Contracts | | $— | | | $131,958 | | $— | | | $— | | $131,958 | |
| Foreign Exchange Contracts | | (1,581 | ) | | — | | (278,184 | ) | | — | | (279,765 | ) |
| Credit Contracts | | — | | | — | | — | | | 111,918 | | 111,918 | |
Total | | $(1,581 | ) | | $131,958 | | $(278,184 | ) | | $111,918 | | $(35,889 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| | | Futures Contracts | | | Translation
of Assets
and
Liabilities
in Foreign
Currencies | | | Swap Transactions | | | Total | |
| Interest Rate Contracts | | $(63,154 | ) | | $— | | | $— | | | $(63,154 | ) |
| Foreign Exchange Contracts | | — | | | (67,778 | ) | | — | | | (67,778 | ) |
| Credit Contracts | | — | | | — | | | (159,925 | ) | | (159,925 | ) |
Total | | $(63,154 | ) | | $(67,778 | ) | | $(159,925 | ) | | $(290,857 | ) |
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
26
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
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 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.
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.
27
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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.
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.
Credit default swaps are considered to have credit-risk-related contingent features since they trigger payment by the protection seller to the protection buyer upon the occurrence of a defined credit event. The aggregate fair value of credit default swaps in a net liability position, if any, as of December 31, 2009 is disclosed in the footnotes to the Portfolio of Investments. As discussed earlier in this note, any collateral requirements for these swaps are based generally on the market value of the swap netted against collateral requirements for other types of over-the-counter derivatives traded under each counterparty’s ISDA Master Agreement. The maximum amount of future, undiscounted payments that the fund, as protection seller, could be required to make is equal to the swap’s notional amount. The protection seller’s payment obligation would be offset to the extent of the value of the contract’s deliverable obligation. At December 31, 2009, the fund did not hold any credit default swaps at an unrealized loss where it is the protection seller.
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.
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.
28
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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 December 31, 2009, the portfolio had unfunded loan commitments of $4,306, 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. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity. 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 the fund. This amount, for the year ended December 31, 2009, 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, defaulted bonds, straddle loss deferrals, and derivative transactions.
29
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $4,831,795 | | $4,650,368 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $51,149,304 | |
| Gross appreciation | | 2,753,427 | |
| Gross depreciation | | (2,890,095 | ) |
| Net unrealized appreciation (depreciation) | | $(136,668 | ) |
| Undistributed ordinary income | | 2,806,711 | |
| Capital loss carryforwards | | (4,420,342 | ) |
| Other temporary differences | | (687,179 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/14 | | $(500,150 | ) |
| 12/31/15 | | (121,618 | ) |
| 12/31/16 | | (2,156,556 | ) |
| 12/31/17 | | (1,642,018 | ) |
| | $(4,420,342 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $3,605,134 | | $3,387,697 |
| Service Class | | 1,226,661 | | 1,262,671 |
| Total | | $4,831,795 | | $4,650,368 |
| (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 billion of average daily net assets | | 0.75% |
| Average daily net assets in excess of $1 billion | | 0.65% |
The investment adviser has agreed in writing to reduce its management fee to 0.70% for the first $1 billion of average daily net assets. This written agreement will continue until modified or rescinded by the fund’s shareholders, but such agreement will continue at least until April 30, 2010. This management fee reduction amounted to $23,366, which is shown as a reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.70% of the fund’s average daily net assets.
The investment adviser 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 operating expenses do not exceed 0.90% of average daily net assets for the Initial Class shares and 1.15% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2011. For the year ended December 31, 2009, this reduction amounted to $36,584 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
30
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0416% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $846 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 purchased option transactions, and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $— | | $768,352 |
| Investments (non-U.S. Government securities) | | $29,294,533 | | $28,163,239 |
31
MFS Strategic Income Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 615,780 | | | $5,390,270 | | | 213,383 | | | $2,018,276 | |
Service Class | | 159,835 | | | 1,350,527 | | | 77,715 | | | 714,237 | |
| | 775,615 | | | $6,740,797 | | | 291,098 | | | $2,732,513 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 463,981 | | | $3,605,134 | | | 349,608 | | | $3,387,697 | |
Service Class | | 158,483 | | | 1,226,661 | | | 130,982 | | | 1,262,671 | |
| | 622,464 | | | $4,831,795 | | | 480,590 | | | $4,650,368 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (556,450 | ) | | $(4,823,570 | ) | | (1,603,861 | ) | | $(15,258,299 | ) |
Service Class | | (428,155 | ) | | (3,674,816 | ) | | (722,969 | ) | | (6,708,031 | ) |
| | (984,605 | ) | | $(8,498,386 | ) | | (2,326,830 | ) | | $(21,966,330 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 523,311 | | | $4,171,834 | | | (1,040,870 | ) | | $(9,852,326 | ) |
Service Class | | (109,837 | ) | | (1,097,628 | ) | | (514,272 | ) | | (4,731,123 | ) |
| | 413,474 | | | $3,074,206 | | | (1,555,142 | ) | | $(14,583,449 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $702 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 | | — | | 13,894,398 | | (13,143,116 | ) | | 751,282 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $1,056 | | | $751,282 |
32
MFS Strategic Income Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Strategic Income Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Strategic Income Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Strategic Income Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
33
MFS Strategic Income Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
34
MFS Strategic Income Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
35
MFS Strategic Income Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers John Addeo James Calmas Robert Persons Matthew Ryan Erik Weisman | | |
36
MFS Strategic Income Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 4th quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was adequate.
37
MFS Strategic Income Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees noted that MFS agreed to reduce its advisory fee on a permanent basis, requiring shareholder approval for any modification or termination, and they accepted MFS’ offer to continue the expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
38
MFS Strategic Income Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
39
MFS Strategic Income Portfolio
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.
40
MFS® GLOBAL GOVERNMENTS PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Governments Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Global Governments Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Fixed income sectors (i) | | |
| Non-U.S. Government Bonds | | 66.5% |
| U.S. Treasury Securities | | 11.5% |
| Emerging Markets Bonds | | 6.9% |
| Mortgage-Backed Securities | | 3.5% |
| U.S. Government Agencies | | 2.2% |
| Commercial Mortgage-Backed Securities | | 1.8% |
| High Grade Corporates | | 0.9% |
| | |
| Credit quality of bonds (a)(r) | | |
| AAA | | 47.9% |
| AA | | 45.8% |
| A | | 1.7% |
| BBB | | 4.0% |
| BB | | 0.6% |
| | |
| Portfolio facts | | |
| Average Duration (d)(i) | | 6.2 |
| Average Effective Maturity (i)(m) | | 8.1 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a) | | AA+ |
| | |
| Country weightings (i) | | |
| Japan | | 21.3% |
| United States | | 20.2% |
| Italy | | 13.9% |
| France | | 8.8% |
| Spain | | 5.7% |
| United Kingdom | | 5.5% |
| Germany | | 4.6% |
| Netherlands | | 3.8% |
| Ireland | | 3.2% |
| Other Countries | | 13.0% |
| (a) | 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. 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. 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. Also excluded from the calculation are convertible bonds, inverse floaters, currencies, futures, options, swaps, cash, and cash-equivalents. Average ratings are converted to the S&P scale and are subject to change. |
| (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 any derivative holdings, if applicable. |
| (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 investments as of 12/31/09. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Global Governments Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Global Governments Portfolio (the “fund”) provided a total return of 4.06%, while Service Class shares of the fund provided a total return of 3.77%. These compare with a return of 1.90% for the fund’s benchmark, the JPMorgan Global Government Bond Index (Unhedged).
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.
Contributors to Performance
Relative to the JPMorgan Global Government Bond Index (Unhedged), the fund’s increased exposure to Treasury Inflation Protected Securities (TIPS), high-quality commercial mortgage-backed securities, and U.S. dollar denominated emerging markets debt securities were the key contributors to outperformance as bonds in all of these sectors performed exceptionally well over the reporting period. A greater exposure to Euroland versus U.S. bonds and European sovereign debt of Greece, Portugal, and Ireland also aided relative results.
The fund’s long U.S. dollar currency position in the first quarter of the year, and short U.S. dollar position for much of the rest of the year, was another positive factor for relative performance. Our exposure to Japanese yen, Norwegian krone, and Australian dollar also boosted relative returns.
The fund’s return from yield, which was greater than that of the benchmark, contributed to relative performance. Yield curve (y) positioning, particularly our lesser exposure to the long end of the curve, also helped.
Detractors from Performance
During the reporting period, the fund’s long positions in U.K., Canadian, Australian, and Swedish bonds detracted from relative performance.
The fund’s Euro and Swiss franc exposure also held back relative performance.
Respectfully,
| | |
| Matthew Ryan | | Erik Weisman |
| Portfolio Manager | | Portfolio Manager |
3
MFS Global Governments Portfolio
Management Review – continued
| (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.
4
MFS Global Governments Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/16/88 | | 4.06% | | 4.00% | | 6.34% | | N/A | | |
| | | Service Class | | 8/24/01 | | 3.77% | | 3.73% | | N/A | | 7.12% | | |
| | | | | | |
| Comparative benchmark | | | | | | | | | | | | |
| | | JPMorgan Global Government Bond Index (Unhedged) (f) | | 1.90% | | 4.60% | | 6.70% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
JPMorgan Global Government Bond Index (Unhedged) – measures developed government bond markets around the world.
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Global Governments Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period, July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 1.00% | | $1,000.00 | | $1,052.63 | | $5.17 |
| | Hypothetical (h) | | 1.00% | | $1,000.00 | | $1,020.16 | | $5.09 |
| Service Class | | Actual | | 1.25% | | $1,000.00 | | $1,051.15 | | $6.46 |
| | Hypothetical (h) | | 1.25% | | $1,000.00 | | $1,018.90 | | $6.36 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
6
MFS Global Governments Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – 92.0% | | | | | | |
| Foreign Bonds – 72.7% | | | | | | |
| Belgium – 2.0% | | | | | | |
| Kingdom of Belgium, 5.5%, 2017 | | EUR | 444,000 | | $ | 725,383 |
| | | | | | |
| Brazil – 1.2% | | | | | | |
| Banco do Brasil S.A., 8.5%, 2049 (n) | | $ | 100,000 | | $ | 106,500 |
| Petrobras International Finance Co., 7.875%, 2019 | | | 99,000 | | | 114,128 |
| Petrobras International Finance Co., 6.875%, 2040 | | | 100,000 | | | 102,760 |
| Republic of Brazil, 5.625%, 2041 | | | 100,000 | | | 94,250 |
| | | | | | |
| | | | | $ | 417,638 |
| | | | | | |
| Canada – 2.0% | | | | | | |
| Bayview Commercial Asset Trust, FRN, 0.895%, 2023 (z) | | CAD | 150,000 | | $ | 104,906 |
| Canada Housing Trust, 4.6%, 2011 (n) | | CAD | 280,000 | | | 281,968 |
| Government of Canada, 4.5%, 2015 | | CAD | 179,000 | | | 184,942 |
| Government of Canada, 4.25%, 2018 | | CAD | 91,000 | | | 91,809 |
| Government of Canada, 5.75%, 2033 | | CAD | 47,000 | | | 55,343 |
| | | | | | |
| | | | | $ | 718,968 |
| | | | | | |
| Chile – 0.3% | | | | | | |
| Empresa Nacional del Petroleo, 6.25%, 2019 (n) | | $ | 100,000 | | $ | 103,971 |
| | | | | | |
| Croatia – 0.3% | | | | | | |
| Republic of Croatia, 6.75%, 2019 (n) | | $ | 100,000 | | $ | 107,708 |
| | | | | | |
| Finland – 1.4% | | | | | | |
| Republic of Finland, 3.875%, 2017 | | EUR | 338,000 | | $ | 503,359 |
| | | | | | |
| France – 2.7% | | | | | | |
| Republic of France, 6%, 2025 | | EUR | 353,000 | | $ | 617,398 |
| Republic of France, 4.75%, 2035 | | EUR | 225,000 | | | 347,150 |
| | | | | | |
| | | | | $ | 964,548 |
| | | | | | |
| Germany – 4.4% | | | | | | |
| Federal Republic of Germany, 5%, 2011 | | EUR | 140,000 | | $ | 212,277 |
| Federal Republic of Germany, 3.75%, 2013 | | EUR | 243,000 | | | 368,846 |
| Federal Republic of Germany, 6.25%, 2030 | | EUR | 535,000 | | | 979,095 |
| | | | | | |
| | | | | $ | 1,560,218 |
| | | | | | |
| Indonesia – 0.3% | | | | | | |
| Majapahit Holding B.V., 7.75%, 2020 (n) | | $ | 100,000 | | $ | 104,750 |
| | | | | | |
| Ireland – 3.1% | | | | | | |
| Republic of Ireland, 4.6%, 2016 | | EUR | 741,000 | | $ | 1,095,318 |
| | | | | | |
| Italy – 13.7% | | | | | | |
| Republic of Italy, 4.75%, 2013 | | EUR | 1,883,000 | | $ | 2,895,673 |
| Republic of Italy, 5.25%, 2017 | | EUR | 1,232,000 | | | 1,971,076 |
| | | | | | |
| | | | | $ | 4,866,749 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Foreign Bonds – continued | | | | | | |
| Japan – 21.2% | | | | | | |
| Government of Japan, 1.3%, 2014 | | JPY | 53,000,000 | | $ | 590,974 |
| Government of Japan, 1.7%, 2017 | | JPY | 369,450,000 | | | 4,209,286 |
| Government of Japan, 2.1%, 2024 | | JPY | 119,000,000 | | | 1,331,179 |
| Government of Japan, 2.2%, 2027 | | JPY | 92,000,000 | | | 1,020,742 |
| Government of Japan, 2.4%, 2037 | | JPY | 37,000,000 | | | 409,746 |
| | | | | | |
| | | | | $ | 7,561,927 |
| | | | | | |
| Kazakhstan – 0.7% | �� | | | | | |
| KazMunaiGaz Finance B.V., 11.75%, 2015 (n) | | $ | 200,000 | | $ | 241,000 |
| | | | | | |
| Mexico – 0.3% | | | | | | |
| Pemex Project Funding Master Trust, 5.75%, 2018 | | $ | 95,000 | | $ | 96,057 |
| | | | | | |
| Netherlands – 3.7% | | | | | | |
| Kingdom of Netherlands, 3.75%, 2014 | | EUR | 658,000 | | $ | 994,477 |
| Kingdom of Netherlands, 5.5%, 2028 | | EUR | 196,000 | | | 326,741 |
| | | | | | |
| | | | | $ | 1,321,218 |
| | | | | | |
| Panama – 0.3% | | | | | | |
| Republic of Panama, 5.2%, 2020 | | $ | 100,000 | | $ | 100,250 |
| | | | | | |
| Peru – 0.6% | | | | | | |
| Republic of Peru, 7.125%, 2019 | | $ | 84,000 | | $ | 96,600 |
| Republic of Peru, 7.35%, 2025 | | | 100,000 | | | 114,500 |
| | | | | | |
| | | | | $ | 211,100 |
| | | | | | |
| Poland – 0.3% | | | | | | |
| Republic of Poland, 6.375%, 2019 | | $ | 109,000 | | $ | 118,557 |
| | | | | | |
| Qatar – 1.4% | | | | | | |
| Qtel International Finance Ltd., 7.875%, 2019 (n) | | $ | 100,000 | | $ | 112,097 |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 6.75%, 2019 (n) | | | 250,000 | | | 270,481 |
| State of Qatar, 6.55%, 2019 (n) | | | 100,000 | | | 111,250 |
| | | | | | |
| | | | | $ | 493,828 |
| | | | | | |
| Russia – 0.6% | | | | | | |
| Eurasian Development Bank, 7.375%, 2014 (n) | | $ | 100,000 | | $ | 103,875 |
| Gaz Capital S.A., 8.125%, 2014 (n) | | | 102,000 | | | 108,120 |
| | | | | | |
| | | | | $ | 211,995 |
| | | | | | |
| South Korea – 0.3% | | | | | | |
| Korea National Oil Corp., 5.375%, 2014 | | $ | 100,000 | | $ | 105,714 |
| | | | | | |
| Spain – 5.6% | | | | | | |
| Kingdom of Spain, 5%, 2012 | | EUR | 918,000 | | $ | 1,414,567 |
| Kingdom of Spain, 4.6%, 2019 | | EUR | 386,000 | | | 580,872 |
| | | | | | |
| | | | | $ | 1,995,439 |
| | | | | | |
| Sweden – 0.5% | | | | | | |
| Kingdom of Sweden, 4.5%, 2015 | | SEK | 1,170,000 | | $ | 178,007 |
| | | | | | |
7
MFS Global Governments Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Foreign Bonds – continued | | | | | | |
| Trinidad & Tobago – 0.3% | | | | | | |
| Petroleum Co. of Trinidad & Tobago Ltd., 6%, 2022 | | $ | 110,000 | | $ | 102,300 |
| | | | | | |
| United Kingdom – 5.5% | | | | | | |
| United Kingdom Treasury, 8%, 2015 | | GBP | 443,000 | | $ | 900,621 |
| United Kingdom Treasury, 8%, 2021 | | GBP | 261,000 | | | 568,939 |
| United Kingdom Treasury, 4.25%, 2036 | | GBP | 313,000 | | | 488,799 |
| | | | | | |
| | | | | $ | 1,958,359 |
| | | | | | |
| Total Foreign Bonds | | | | | $ | 25,864,361 |
| | | | | | |
| U.S. Bonds – 19.3% | | | | | | |
| Asset Backed & Securitized – 1.4% | | | |
| Commercial Mortgage Asset Trust, FRN, 0.85%, 2032 (i)(z) | | $ | 5,529,416 | | $ | 150,666 |
| Commercial Mortgage Pass-Through Certificates, FRN, 0.423%, 2017 (n) | | | 331,000 | | | 309,383 |
| First Union National Bank Commercial Mortgage Trust, FRN, 0.896%, 2043 (i)(n) | | | 7,701,072 | | | 58,057 |
| | | | | | |
| | | | | $ | 518,106 |
| | | | | | |
| Local Authorities – 0.9% | | | | | | |
| Metropolitan Transportation Authority, NY (Build America Bonds), 7.336%, 2039 | | $ | 100,000 | | $ | 111,425 |
| University of California Rev. (Build America Bonds), 5.77%, 2043 | | | 70,000 | | | 67,908 |
| Utah Transit Authority Sales Tax Rev. (Build America Bonds), “B”, 5.937%, 2039 | | | 130,000 | | | 130,846 |
| | | | | | |
| | | | | $ | 310,179 |
| | | | | | |
| Mortgage Backed – 3.5% | | | | | | |
| Fannie Mae, 4.77%, 2012 | | $ | 177,168 | | $ | 186,244 |
| Fannie Mae, 5.37%, 2013 | | | 95,063 | | | 101,519 |
| Fannie Mae, 4.78%, 2015 | | | 70,084 | | | 73,292 |
| Fannie Mae, 4.856%, 2015 | | | 44,911 | | | 46,808 |
| Fannie Mae, 5.5%, 2015 | | | 40,000 | | | 43,328 |
| Fannie Mae, 5.09%, 2016 | | | 59,000 | | | 62,186 |
| Fannie Mae, 5.424%, 2016 | | | 69,921 | | | 75,251 |
| Fannie Mae, 5.05%, 2017 | | | 54,000 | | | 56,793 |
| Fannie Mae, 5.161%, 2018 | | | 118,970 | | | 126,467 |
| Fannie Mae, 5.1%, 2019 | | | 53,592 | | | 55,903 |
| Fannie Mae, 5.18%, 2019 | | | 53,599 | | | 56,191 |
| Fannie Mae, 6.16%, 2019 | | | 48,766 | | | 53,421 |
| Freddie Mac, 5.085%, 2019 | | | 33,000 | | | 34,143 |
| Freddie Mac, 5%, 2025 - 2028 | | | 267,490 | | | 275,829 |
| | | | | | |
| | | | | $ | 1,247,375 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| U.S. Bonds – continued | | | | | | |
| U.S. Government Agencies and Equivalents – 2.2% |
| Aid-Egypt, 4.45%, 2015 | | $ | 252,000 | | $ | 264,378 |
| Small Business Administration, 5.09%, 2025 | | | 41,201 | | | 43,350 |
| Small Business Administration, 5.21%, 2026 | | | 452,475 | | | 474,182 |
| | | | | | |
| | | | | $ | 781,910 |
| | | | | | |
| U.S. Treasury Obligations – 11.3% | | | | | | |
| U.S. Treasury Bonds, 4.75%, 2017 | | $ | 842,000 | | $ | 913,637 |
| U.S. Treasury Bonds, 8%, 2021 | | | 135,000 | | | 183,832 |
| U.S. Treasury Bonds, 6.875%, 2025 | | | 222,000 | | | 281,767 |
| U.S. Treasury Notes, 4.75%, 2012 | | | 1,130,000 | | | 1,212,719 |
| U.S. Treasury Notes, 4.125%, 2015 | | | 239,000 | | | 254,834 |
| U.S. Treasury Notes, TIPS, 2%, 2016 | | | 1,115,320 | | | 1,177,796 |
| | | | | | |
| | | | | $ | 4,024,585 |
| | | | | | |
| Total U.S. Bonds | | | | | $ | 6,882,155 |
| | | | | | |
Total Bonds
(Identified Cost, $31,734,002) | | | | | $ | 32,746,516 |
| | | | | | |
| |
| SHORT-TERM OBLIGATIONS (y) – 6.0% | | | |
BNP Paribas Finance, Inc.,
0.05%, due 1/04/10 | | $ | 1,073,000 | | $ | 1,072,996 |
Societe Generale North America, Inc.,
0.02%, due 1/04/10 | | | 1,073,000 | | | 1,072,998 |
| | | | | | |
| Total Short-Term Obligations, at Amortized Cost and Value | | | | | $ | 2,145,994 |
| | | | | | |
| |
| REPURCHASE AGREEMENTS – 1.0% | | | |
| Goldman Sachs, 0.01%, dated 12/31/09, due 1/04/10, total to be received $376,000.42 (secured by U.S. Treasury and Federal Agency obligations and Mortgage Backed securities valued at $383,521 in a jointly traded account), at Cost | | $ | 376,000 | | $ | 376,000 |
| | | | | | |
Total Investments
(Identified Cost, $34,255,996) | | | | | $ | 35,268,510 |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.0% | | | | | | 338,527 |
| | | | | | |
| Net Assets – 100.0% | | | | | $ | 35,607,037 |
| | | | | | |
8
MFS Global Governments Portfolio
Portfolio of Investments – continued
| (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 $2,019,160, representing 5.7% of net assets. |
| (y) | The rate shown represents an annualized yield at time of purchase. |
| (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 |
| Bayview Commercial Asset Trust, FRN, 0.895%, 2023 | | 5/25/06 | | $135,624 | | $104,906 |
| Commercial Mortgage Asset Trust, FRN, 0.85%, 2032 | | 8/25/03 | | 167,479 | | 150,666 |
| Total Restricted Securities | | | | | | $255,572 |
| % of Net Assets | | | | | | 0.7% |
The following abbreviations are used in this report and are defined:
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| TIPS | | Treasury Inflation Protected Security |
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 12/31/09
Forward Foreign Currency Exchange Contracts at 12/31/09
| | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | Contracts
at Value | | Net Unrealized
Appreciation
(Depreciation) |
| Asset Derivatives | | | | | | | | | | | | | | | |
| | SELL | | AUD | | Credit Suisse Group | | 82,000 | | 1/13/10 | | $ | 74,262 | | $ | 73,597 | | $ | 665 |
| | BUY | | BRL | | HSBC Bank | | 50,000 | | 1/05/10 | | | 28,716 | | | 28,719 | | | 3 |
| | BUY | | CAD | | Credit Suisse Group | | 95,672 | | 1/13/10-3/10/10 | | | 90,481 | | | 91,478 | | | 997 |
| | SELL | | DKK | | UBS AG | | 119,000 | | 1/29/10 | | | 23,742 | | | 22,918 | | | 824 |
| | SELL | | EUR | | Barclays Bank PLC | | 233,000 | | 1/13/10-3/15/10 | | | 340,365 | | | 333,986 | | | 6,379 |
| | SELL | | EUR | | Credit Suisse Group | | 49,000 | | 1/13/10 | | | 72,915 | | | 70,243 | | | 2,672 |
| | SELL | | EUR | | UBS AG | | 1,710,702 | | 3/15/10 | | | 2,499,335 | | | 2,452,111 | | | 47,224 |
| | SELL | | EUR | | Goldman Sachs International | | 23,000 | | 1/13/10 | | | 34,432 | | | 32,971 | | | 1,461 |
| | BUY | | GBP | | Deutsche Bank | | 17,151 | | 1/13/10 | | | 27,243 | | | 27,701 | | | 458 |
| | BUY | | GBP | | Barclays Bank PLC | | 21,151 | | 1/13/10-3/15/10 | | | 33,638 | | | 34,159 | | | 521 |
| | BUY | | GBP | | UBS AG | | 35,770 | | 3/15/10 | | | 57,597 | | | 57,750 | | | 153 |
| | SELL | | GBP | | Barclays Bank PLC | | 55,000 | | 1/13/10 | | | 91,477 | | | 88,832 | | | 2,645 |
| | SELL | | GBP | | Goldman Sachs International | | 9,000 | | 1/13/10 | | | 14,655 | | | 14,536 | | | 119 |
| | SELL | | JPY | | Barclays Bank PLC | | 49,521,000 | | 1/13/10 | | | 566,137 | | | 531,734 | | | 34,403 |
| | SELL | | JPY | | Citibank N.A. | | 5,961,000 | | 1/13/10 | | | 65,894 | | | 64,007 | | | 1,887 |
9
MFS Global Governments Portfolio
Portfolio of Investments – continued
| | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | Contracts
at Value | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives (continued) | | | | | | | | | | | | | | |
| | SELL | | JPY | | JPMorgan Chase Bank | | 10,072,196 | | 1/13/10 | | $ | 110,641 | | $ | 108,151 | | $ | 2,490 | |
| | SELL | | JPY | | Merrill Lynch International Bank | | 3,144,016 | | 1/13/10 | | | 34,675 | | | 33,759 | | | 916 | |
| | SELL | | JPY | | UBS AG | | 4,877,000 | | 1/13/10 | | | 53,248 | | | 52,367 | | | 881 | |
| | SELL | | MXN | | Barclays Bank PLC | | 941,000 | | 1/19/10 | | | 72,919 | | | 71,815 | | | 1,104 | |
| | SELL | | NOK | | Barclays Bank PLC | | 969,000 | | 1/25/10 | | | 168,305 | | | 167,219 | | | 1,086 | |
| | SELL | | NOK | | UBS AG | | 608,000 | | 1/13/10 | | | 107,319 | | | 104,976 | | | 2,343 | |
| | BUY | | PHP | | JPMorgan Chase Bank | | 2,615,000 | | 1/07/10 | | | 56,431 | | | 56,552 | | | 121 | |
| | SELL | | SEK | | Goldman Sachs International | | 260,000 | | 1/28/10 | | | 36,576 | | | 36,344 | | | 232 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 109,584 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | AUD | | Citibank N.A. | | 49,000 | | 2/25/10 | | $ | 44,932 | | $ | 43,786 | | $ | (1,146 | ) |
| | BUY | | AUD | | UBS AG | | 255,866 | | 2/25/10 | | | 234,693 | | | 228,638 | | | (6,055 | ) |
| | BUY | | BRL | | HSBC Bank | | 51,000 | | 1/05/10 | | | 29,318 | | | 29,294 | | | (24 | ) |
| | BUY | | BRL | | Barclays Bank PLC | | 51,000 | | 1/05/10 | | | 29,421 | | | 29,294 | | | (127 | ) |
| | SELL | | BRL | | Barclays Bank PLC | | 51,000 | | 1/05/10 | | | 29,291 | | | 29,294 | | | (3 | ) |
| | SELL | | BRL | | HSBC Bank | | 101,000 | | 1/05/10 | | | 57,468 | | | 58,013 | | | (545 | ) |
| | BUY | | CAD | | Barclays Bank PLC | | 78,000 | | 1/13/10 | | | 75,825 | | | 74,581 | | | (1,244 | ) |
| | SELL | | CAD | | Barclays Bank PLC | | 103,000 | | 1/13/10 | | | 97,167 | | | 98,485 | | | (1,318 | ) |
| | SELL | | CAD | | UBS AG | | 95,783 | | 3/10/10 | | | 90,752 | | | 91,583 | | | (831 | ) |
| | BUY | | DKK | | UBS AG | | 1,330,922 | | 1/29/10 | | | 264,337 | | | 256,321 | | | (8,016 | ) |
| | BUY | | EUR | | Citibank N.A. | | 53,000 | | 1/13/10 | | | 78,947 | | | 75,978 | | | (2,969 | ) |
| | BUY | | EUR | | Barclays Bank PLC | | 145,000 | | 1/13/10 | | | 217,844 | | | 207,863 | | | (9,981 | ) |
| | BUY | | EUR | | JPMorgan Chase Bank | | 347,692 | | 1/13/10 | | | 511,102 | | | 498,430 | | | (12,672 | ) |
| | BUY | | EUR | | UBS AG | | 74,785 | | 1/13/10 | | | 107,347 | | | 107,208 | | | (139 | ) |
| | BUY | | GBP | | Barclays Bank PLC | | 139,458 | | 1/13/10 | | | 232,412 | | | 225,242 | | | (7,170 | ) |
| | BUY | | GBP | | Citibank N.A. | | 28,000 | | 1/13/10 | | | 46,996 | | | 45,224 | | | (1,772 | ) |
| | BUY | | JPY | | HSBC Bank | | 17,342,000 | | 1/13/10 | | | 193,273 | | | 186,211 | | | (7,062 | ) |
| | BUY | | JPY | | Goldman Sachs International | | 3,104,000 | | 1/13/10 | | | 34,968 | | | 33,329 | | | (1,639 | ) |
| | BUY | | JPY | | Barclays Bank PLC | | 25,439,000 | | 1/13/10 | | | 287,243 | | | 273,152 | | | (14,091 | ) |
| | BUY | | JPY | | JPMorgan Chase Bank | | 320,899,753 | | 1/13/10 | | | 3,571,844 | | | 3,445,677 | | | (126,167 | ) |
| | BUY | | KRW | | JPMorgan Chase Bank | | 84,683,000 | | 2/11/10 | | | 72,733 | | | 72,640 | | | (93 | ) |
| | BUY | | MXN | | Citibank N.A. | | 942,000 | | 1/19/10 | | | 74,335 | | | 71,891 | | | (2,444 | ) |
| | BUY | | NOK | | Citibank N.A. | | 1,578,797 | | 1/25/10 | | | 282,159 | | | 272,451 | | | (9,708 | ) |
| | BUY | | SEK | | Citibank N.A. | | 344,000 | | 1/28/10 | | | 50,621 | | | 48,087 | | | (2,534 | ) |
| | BUY | | SEK | | HSBC Bank | | 6,606 | | 1/28/10 | | | 972 | | | 923 | | | (49 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | (217,799 | ) |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2009, the fund had sufficient cash and/or securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
10
MFS Global Governments Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments, at value (identified cost, $34,255,996) | | $35,268,510 | | | |
Cash | | 604 | | | |
Foreign currency, at value (identified cost, $118) | | 119 | | | |
Receivables for | | | | | |
Forward foreign currency exchange contracts | | 109,584 | | | |
Investments sold | | 107,345 | | | |
Fund shares sold | | 50,007 | | | |
Interest | | 481,054 | | | |
Receivable from investment adviser | | 6,707 | | | |
Other assets | | 1,813 | | | |
Total assets | | | | | $36,025,743 |
Liabilities | | | | | |
Payables for | | | | | |
Forward foreign currency exchange contracts | | $217,799 | | | |
Fund shares reacquired | | 146,162 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 1,471 | | | |
Distribution and/or service fees | | 48 | | | |
Administrative services fee | | 84 | | | |
Payable for Trustees’ compensation | | 40 | | | |
Accrued expenses and other liabilities | | 53,102 | | | |
Total liabilities | | | | | $418,706 |
Net assets | | | | | $35,607,037 |
Net assets consist of | | | | | |
Paid-in capital | | $35,076,155 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 899,859 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (56,973 | ) | | |
Accumulated distributions in excess of net investment income | | (312,004 | ) | | |
Net assets | | | | | $35,607,037 |
Shares of beneficial interest outstanding | | | | | 3,363,828 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $32,034,185 | | 3,022,904 | | $10.60 |
Service Class | | 3,572,852 | | 340,924 | | 10.48 |
See Notes to Financial Statements
11
MFS Global Governments Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Interest | | $1,150,724 | | | | |
Dividends from underlying funds | | 686 | | | | |
Total investment income | | | | | $1,151,410 | |
Expenses | | | | | | |
Management fee | | $280,692 | | | | |
Distribution and/or service fees | | 10,649 | | | | |
Administrative services fee | | 15,978 | | | | |
Trustees’ compensation | | 6,840 | | | | |
Custodian fee | | 38,768 | | | | |
Shareholder communications | | 11,133 | | | | |
Auditing fees | | 57,892 | | | | |
Legal fees | | 6,968 | | | | |
Miscellaneous | | 15,453 | | | | |
Total expenses | | | | | $444,373 | |
Fees paid indirectly | | (2 | ) | | | |
Reduction of expenses by investment adviser | | (58,879 | ) | | | |
Net expenses | | | | | $385,492 | |
Net investment income | | | | | $765,918 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $110,013 | | | | |
Futures contracts | | 11,890 | | | | |
Foreign currency transactions | | (430,634 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(308,731 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $1,008,756 | | | | |
Futures contracts | | (26,075 | ) | | | |
Translation of assets and liabilities in foreign currencies | | (256,111 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $726,570 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $417,839 | |
Change in net assets from operations | | | | | $1,183,757 | |
See Notes to Financial Statements
12
MFS Global Governments Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $765,918 | | | $1,006,429 | |
Net realized gain (loss) on investments and foreign currency transactions | | (308,731 | ) | | 3,558,151 | |
Net unrealized gain (loss) on investments and foreign currency translation | | 726,570 | | | (540,991 | ) |
Change in net assets from operations | | $1,183,757 | | | $4,023,589 | |
| Distributions declared to shareholders | | | | | | |
From net investment income | | $(4,466,015 | ) | | $(3,548,686 | ) |
Change in net assets from fund share transactions | | $(4,294,763 | ) | | $2,087,593 | |
Total change in net assets | | $(7,577,021 | ) | | $2,562,496 | |
| Net assets | | | | | | |
At beginning of period | | 43,184,058 | | | 40,621,562 | |
At end of period (including accumulated distributions in excess of net investment income of $312,004 and
undistributed net investment income of $4,099,593, respectively) | | $35,607,037 | | | $43,184,058 | |
See Notes to Financial Statements
13
MFS Global Governments Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $11.59 | | | $11.43 | | | $10.70 | | | $10.29 | | | $12.40 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.22 | | | $0.26 | | | $0.36 | | | $0.34 | | | $0.29 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 0.13 | | | 0.84 | | | 0.58 | | | 0.17 | | | (1.10 | ) |
Total from investment operations | | $0.35 | | | $1.10 | | | $0.94 | | | $0.51 | | | $(0.81 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(1.34 | ) | | $(0.94 | ) | | $(0.21 | ) | | $— | | | $(1.23 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.10 | ) | | (0.07 | ) |
Total distributions declared to shareholders | | $(1.34 | ) | | $(0.94 | ) | | $(0.21 | ) | | $(0.10 | ) | | $(1.30 | ) |
Net asset value, end of period | | $10.60 | | | $11.59 | | | $11.43 | | | $10.70 | | | $10.29 | |
Total return (%) (k)(r)(s) | | 4.06 | | | 10.12 | | | 8.99 | | | 4.97 | | | (7.20 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.16 | | | 1.09 | | | 1.08 | | | 1.13 | | | 1.03 | |
Expenses after expense reductions (f) | | 1.00 | | | 1.00 | | | 1.00 | | | 1.00 | | | 1.00 | |
Net investment income | | 2.08 | | | 2.31 | | | 3.33 | | | 3.21 | | | 2.64 | |
Portfolio turnover | | 84 | | | 113 | | | 134 | | | 122 | | | 137 | |
Net assets at end of period (000 omitted) | | $32,034 | | | $36,813 | | | $36,559 | | | $39,637 | | | $48,203 | |
See Notes to Financial Statements
14
MFS Global Governments Portfolio
Financial Statements – continued
| | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $11.47 | | | $11.32 | | | $10.60 | | | $10.22 | | | $12.33 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.19 | | | $0.23 | | | $0.33 | | | $0.31 | | | $0.27 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 0.12 | | | 0.84 | | | 0.58 | | | 0.17 | | | (1.11 | ) |
Total from investment operations | | $0.31 | | | $1.07 | | | $0.91 | | | $0.48 | | | $(0.84 | ) |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(1.30 | ) | | $(0.92 | ) | | $(0.19 | ) | | $— | | | $(1.20 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.10 | ) | | (0.07 | ) |
Total distributions declared to shareholders | | $(1.30 | ) | | $(0.92 | ) | | $(0.19 | ) | | $(0.10 | ) | | $(1.27 | ) |
Net asset value, end of period | | $10.48 | | | $11.47 | | | $11.32 | | | $10.60 | | | $10.22 | |
Total return (%) (k)(r)(s) | | 3.77 | | | 9.93 | | | 8.67 | | | 4.70 | | | (7.49 | ) |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.41 | | | 1.35 | | | 1.33 | | | 1.38 | | | 1.28 | |
Expenses after expense reductions (f) | | 1.25 | | | 1.25 | | | 1.25 | | | 1.25 | | | 1.25 | |
Net investment income | | 1.78 | | | 2.03 | | | 3.08 | | | 2.96 | | | 2.39 | |
Portfolio turnover | | 84 | | | 113 | | | 134 | | | 122 | | | 137 | |
Net assets at end of period (000 omitted) | | $3,573 | | | $6,371 | | | $4,063 | | | $3,793 | | | $4,238 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
15
MFS Global Governments Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Governments Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010, which is the date that the financial statements were issued. 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. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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. 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. 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. 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
16
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | | Level 3 | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | $— | | $4,806,495 | | | $— | | $4,806,495 | |
| Non-U.S. Sovereign Debt | | — | | 25,759,455 | | | — | | 25,759,455 | |
| Corporate Bonds | | — | | 310,179 | | | — | | 310,179 | |
| Residential Mortgage-Backed Securities | | — | | 1,247,375 | | | — | | 1,247,375 | |
| Commercial Mortgage-Backed Securities | | — | | 623,012 | | | — | | 623,012 | |
| Short Term Securities | | — | | 2,521,994 | | | — | | 2,521,994 | |
| Total Investments | | $— | | $35,268,510 | | | $— | | $35,268,510 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | |
| Forward Currency Contracts | | $— | | $(108,215 | ) | | $— | | $(108,215 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
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.
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
17
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | | | | | | |
| | | | | Asset Derivatives | | Liability Derivatives | |
| | | | | Location on Statement of
Assets and
Liabilities | | Fair Value | | Location on Statement of
Assets and
Liabilities | | Fair Value | |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts Not Accounted For as Hedging Instruments Under ASC 815 | | Receivable for forward foreign currency exchange contracts | | $109,584 | | Payable for forward foreign currency exchange contracts | | $(217,799 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | | |
| | | Investment
Transactions (i.e.,
Purchased
Options) | | Futures Contracts | | Foreign Currency
Transactions | | | Total | |
| Interest Rate Contracts | | $(3,533) | | $11,890 | | $— | | | $8,357 | |
| Foreign Exchange Contracts | | (1,138) | | — | | (419,320 | ) | | (420,458 | ) |
Total | | $(4,671) | | $11,890 | | $(419,320 | ) | | $(412,101 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | | |
| | | Futures Contracts | | | Translation of
Assets and
Liabilities in
Foreign Currencies | | | Total | |
| Interest Rate Contracts | | $(26,075 | ) | | $— | | | $(26,075 | ) |
| Foreign Exchange Contracts | | — | | | (260,980 | ) | | (260,980 | ) |
Total | | $(26,075 | ) | | $(260,980 | ) | | $(287,055 | ) |
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
18
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
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 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.
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.
19
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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.
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. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity.
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 December 31, 2009, 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 net operating losses, amortization and accretion of debt securities, straddle loss deferrals, foreign currency transactions, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $4,466,015 | | $3,548,686 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $34,542,645 | |
| Gross appreciation | | 1,401,749 | |
| Gross depreciation | | (675,884 | ) |
| Net unrealized appreciation (depreciation) | | $ 725,865 | |
| Undistributed ordinary income | | 52,205 | |
| Undistributed long-term capital gain | | 219,032 | |
| Post-October capital loss deferral | | (14,335 | ) |
| Other temporary differences | | (451,885 | ) |
20
MFS Global Governments Portfolio
Notes to Financial Statements – continued
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $3,886,577 | | $3,124,520 |
| Service Class | | 579,438 | | 424,166 |
| Total | | $4,466,015 | | $3,548,686 |
| (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 $300 million of average daily net assets | | 0.75% |
| Average daily net assets in excess of $300 million | | 0.675% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, brokerage commissions, and extraordinary expenses, such that total annual operating expenses of the fund do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s operating expense is contained in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval. In addition, the investment advisor has voluntarily agreed to pay a portion of the fund’s total operating expenses, exclusive of interest, taxes, brokerage commissions and extraordinary expenses, such that the total annual operating expenses do not exceed 1.00% of the fund’s average daily net assets attributable to Initial Class shares. This voluntary agreement may be changed or rescinded at any time by MFS. For the year ended December 31, 2009, this reduction amounted to $58,879 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, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0427% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
21
MFS Global Governments Portfolio
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $686 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 purchased option transactions, and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $6,210,713 | | $7,325,166 |
| Investments (non-U.S. Government securities) | | $21,852,478 | | $23,648,015 |
| (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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 242,056 | | | $2,577,485 | | | 772,478 | | | $8,906,496 | |
Service Class | | 57,701 | | | 608,695 | | | 451,093 | | | 5,027,476 | |
| | 299,757 | | | $3,186,180 | | | 1,223,571 | | | $13,933,972 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 401,092 | | | $3,886,577 | | | 284,565 | | | $3,124,520 | |
Service Class | | 60,358 | | | 579,438 | | | 38,986 | | | 424,166 | |
| | 461,450 | | | $4,466,015 | | | 323,551 | | | $3,548,686 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (795,387 | ) | | $(8,483,737 | ) | | (1,081,689 | ) | | $(12,174,656 | ) |
Service Class | | (332,428 | ) | | (3,463,221 | ) | | (293,668 | ) | | (3,220,409 | ) |
| | (1,127,815 | ) | | $(11,946,958 | ) | | (1,375,357 | ) | | $(15,395,065 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (152,239 | ) | | $(2,019,675 | ) | | (24,646 | ) | | $(143,640 | ) |
Service Class | | (214,369 | ) | | (2,275,088 | ) | | 196,411 | | | 2,231,233 | |
| | (366,608 | ) | | $(4,294,763 | ) | | 171,765 | | | $2,087,593 | |
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 December 31, 2009, the fund’s commitment fee and interest expense were $588 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
22
MFS Global Governments Portfolio
Notes to Financial Statements – continued
| (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 | | — | | 7,302,746 | | (7,302,746 | ) | | — |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $686 | | | $— |
23
MFS Global Governments Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Global Governments Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Governments Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Global Governments Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
24
MFS Global Governments Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
25
MFS Global Governments Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
26
MFS Global Governments Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Matthew Ryan Erik Weisman | | |
27
MFS Global Governments Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the 2nd quintile for the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
28
MFS Global Governments Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
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MFS Global Governments Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
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MFS Global Governments Portfolio
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.
31
MFS® HIGH YIELD PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS High Yield Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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.
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MFS High Yield Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top five industries (i) | | |
| Energy – Independent | | 7.2% |
| Medical & Health Technology & Services | | 7.2% |
| Gaming & Lodging | | 6.4% |
| Utilities – Electric Power | | 5.8% |
| Broadcasting | | 5.4% |
| | |
| Credit quality of bonds (a)(r) | | |
| AAA | | 1.7% |
| AA | | 0.7% |
| BBB | | 2.6% |
| BB | | 25.2% |
| B | | 42.6% |
| CCC | | 19.5% |
| CC | | 2.5% |
| C | | 0.5% |
| D | | 1.2% |
| Not Rated | | 3.5% |
| | |
| Portfolio facts | | |
| Average Duration (d)(i) | | 3.9 |
| Average Effective Maturity (i)(m) | | 5.7 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a) | | B |
| (a) | 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. 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. 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. Also excluded from the calculation are convertible bonds, inverse floaters, currencies, futures, options, swaps, cash, and cash-equivalents. Average ratings are converted to the S&P scale and are subject to change. |
| (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 any derivative holdings, if applicable. |
| (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 investments as of 12/31/09. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS High Yield Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS High Yield Portfolio (the “fund”) provided a total return of 50.00%, while Service Class shares of the fund provided a total return of 49.97%. These compare with a return of 58.21% 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 lower exposure to “BB” and “CCC” rated (r) securities detracted from performance. Bonds in these quality segments performed exceptionally well 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. Among individual securities, holdings of power generation companies NRG Energy and Edison Mission were among the fund’s top relative detractors for the reporting period. Debt holdings of hospital operators Hospital Corporation of America and Community Health Systems, airline carrier Continental Airlines, and casino operator Station Casinos also hurt.
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 holdings of Spanish-language network television operator Univision, flash memory products maker Spansion, oil and natural gas company Chaparral Energy, auto maker Ford Motor Company, finance company Nuveen Investments, used car auction company KAR Holdings, automatic transmission manufacturer Allison Transmission, and television broadcaster Allbritton Communications.
Respectfully,
| | |
| John Addeo | | David Cole |
| Portfolio Manager | | Portfolio Manager |
3
MFS High Yield Portfolio
Management Review – continued
| (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, else ratings by Fitch, Inc. For securities which are not rated by any of the three 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.
4
MFS High Yield Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 6/12/85 | | 50.00% | | 3.99% | | 4.66% | | N/A | | |
| | | Service Class | | 8/24/01 | | 49.97% | | 3.75% | | N/A | | 5.94% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Barclays Capital U.S. High-Yield Corporate Bond Index (f) | | 58.21% | | 6.46% | | 6.72% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
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
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.
5
MFS High Yield Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS High Yield Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.79% | | $1,000.00 | | $1,219.36 | | $4.42 |
| | Hypothetical (h) | | 0.79% | | $1,000.00 | | $1,021.22 | | $4.02 |
| Service Class | | Actual | | 1.04% | | $1,000.00 | | $1,218.62 | | $5.82 |
| | Hypothetical (h) | | 1.04% | | $1,000.00 | | $1,019.96 | | $5.30 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS High Yield Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – 89.7% | | | | | | |
| Aerospace – 1.0% | | | | | | |
| Bombardier, Inc., 6.3%, 2014 (n) | | $ | 585,000 | | $ | 579,150 |
| Hawker Beechcraft Acquisition Co. LLC, 8.5%, 2015 | | | 1,016,000 | | | 716,280 |
| Spirit AeroSystems Holdings, Inc., 7.5%, 2017 (n) | | | 330,000 | | | 325,050 |
| Triumph Group, Inc., 8%, 2017 (z) | | | 190,000 | | | 191,663 |
| Vought Aircraft Industries, Inc., 8%, 2011 | | | 420,000 | | | 414,225 |
| | | | | | |
| | | | | $ | 2,226,368 |
| | | | | | |
| Airlines – 1.8% | | | | | | |
| American Airlines Pass-Through Trust, 6.817%, 2011 | | $ | 960,000 | | $ | 921,600 |
| AMR Corp., 7.858%, 2011 | | | 550,000 | | | 550,000 |
| Continental Airlines, Inc., 7.339%, 2014 | | | 1,835,000 | | | 1,697,375 |
| Continental Airlines, Inc., 6.9%, 2017 | | | 217,041 | | | 202,933 |
| Continental Airlines, Inc., 6.748%, 2017 | | | 152,353 | | | 135,594 |
| Delta Air Lines, Inc., 7.111%, 2011 | | | 400,000 | | | 403,500 |
| Delta Air Lines, Inc., 7.711%, 2011 | | | 335,000 | | | 329,975 |
| | | | | | |
| | | | | $ | 4,240,977 |
| | | | | | |
| Apparel Manufacturers – 0.3% | | | | | | |
| Hanes Brand, Inc., 8%, 2016 | | $ | 205,000 | | $ | 208,844 |
| Levi Strauss & Co., 9.75%, 2015 | | | 480,000 | | | 504,000 |
| | | | | | |
| | | | | $ | 712,844 |
| | | | | | |
| Asset Backed & Securitized – 3.4% | | | | | | |
| Airlie LCDO Ltd., CDO, FRN, 2.15%, 2011 (a)(d)(z) | | $ | 701,221 | | $ | 343,598 |
| Anthracite Ltd., CDO, 6%, 2037 (z) | | | 1,300,000 | | | 91,000 |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.583%, 2038 (z) | | | 613,671 | | | 24,547 |
| Babson Ltd., CLO, “D”, FRN, 1.784%, 2018 (n) | | | 670,000 | | | 380,225 |
| Banc of America Commercial Mortgage, Inc., 5.772%, 2051 | | | 2,075,160 | | | 1,473,161 |
| Banc of America Commercial Mortgage, Inc., FRN, 5.811%, 2051 | | | 486,385 | | | 351,060 |
| Citigroup Commercial Mortgage Trust, FRN, 5.699%, 2049 | | | 952,699 | | | 180,386 |
| Credit Suisse Mortgage Capital Certificate, 5.343%, 2039 | | | 472,183 | | | 357,049 |
| CWCapital Cobalt Ltd., CDO, 6.23%, 2045 (a)(d)(z) | | | 1,010,582 | | | 20,212 |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.582%, 2050 (z) | | | 500,000 | | | 10,000 |
| First Union National Bank Commercial Mortgage Trust, 6.75%, 2032 | | | 855,000 | | | 599,071 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.062%, 2051 | | | 690,000 | | | 214,984 |
| Merrill Lynch Mortgage Trust, FRN, 5.828%, 2050 | | | 690,000 | | | 189,387 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, 5.204%, 2049 | | | 1,576,549 | | | 1,136,593 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Asset Backed & Securitized – continued | | | |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.748%, 2050 | | $ | 404,000 | | $ | 292,646 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.748%, 2050 | | | 990,000 | | | 829,880 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.752%, 2047 | | | 557,306 | | | 89,872 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.902%, 2051 | | | 1,571,863 | | | 1,102,509 |
| Wachovia Credit, CDO, FRN, 1.6%, 2026 (z) | | | 376,000 | | | 15,040 |
| | | | | | |
| | | | | $ | 7,701,220 |
| | | | | | |
| Automotive – 3.1% | | | | | | |
| Accuride Corp., 8.5%, 2015 (d) | | $ | 425,000 | | $ | 361,250 |
| Allison Transmission, Inc., 11%, 2015 (n) | | | 1,475,000 | | | 1,548,750 |
| Allison Transmission, Inc., 11.25%, 2015 (n)(p) | | | 376,300 | | | 393,234 |
| FCE Bank PLC, 7.125%, 2012 | | EUR | 1,300,000 | | | 1,826,343 |
| Ford Motor Credit Co. LLC, 9.75%, 2010 | | $ | 285,000 | | | 294,077 |
| Ford Motor Credit Co. LLC, 12%, 2015 | | | 1,626,000 | | | 1,885,555 |
| Goodyear Tire & Rubber Co., 9%, 2015 | | | 500,000 | | | 520,000 |
| Goodyear Tire & Rubber Co., 10.5%, 2016 | | | 195,000 | | | 215,475 |
| | | | | | |
| | | | | $ | 7,044,684 |
| | | | | | |
| Basic Industry – 0.1% | | | | | | |
| TriMas Corp., 9.75%, 2017 (z) | | $ | 135,000 | | $ | 132,469 |
| | | | | | |
| Broadcasting – 4.5% | | | | | | |
| Allbritton Communications Co., 7.75%, 2012 | | $ | 1,078,000 | | $ | 1,060,482 |
| Bonten Media Acquisition Co., 9%, 2015 (p)(z) | | | 918,396 | | | 333,397 |
| CanWest MediaWorks LP, 9.25%, 2015 (d)(n) | | | 1,005,000 | | | 149,494 |
| Inmarsat Finance PLC, 7.375%, 2017 (n) | | | 130,000 | | | 132,925 |
| Intelsat Jackson Holdings Ltd., 9.5%, 2016 | | | 1,165,000 | | | 1,246,550 |
| Lamar Media Corp., 6.625%, 2015 | | | 1,005,000 | | | 974,850 |
| Lamar Media Corp., “C”, 6.625%, 2015 | | | 355,000 | | | 340,800 |
| LBI Media, Inc., 8.5%, 2017 (z) | | | 640,000 | | | 531,200 |
| LIN TV Corp., 6.5%, 2013 | | | 825,000 | | | 796,125 |
| Local TV Finance LLC, 9.25%, 2015 (p)(z) | | | 1,708,875 | | | 724,848 |
| Newport Television LLC, 13%, 2017 (n)(p) | | | 1,458,656 | | | 581,791 |
| Nexstar Broadcasting Group, Inc., 0.5% to 2011, 7% to 2014 (n)(p) | | | 1,289,305 | | | 965,564 |
| Nexstar Broadcasting Group, Inc., 7%, 2014 | | | 426,000 | | | 320,032 |
| Salem Communications Corp., 9.625%, 2016 (n) | | | 240,000 | | | 251,400 |
| Sinclair Broadcast Group, Inc., 9.25%, 2017 (n) | | | 400,000 | | | 416,000 |
| Univision Communications, Inc., 12%, 2014 (n) | | | 405,000 | | | 446,006 |
8
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Broadcasting – continued | | | | | | |
| Univision Communications, Inc., 10.5%, 2015 (n)(p) | | $ | 1,293,687 | | $ | 1,091,710 |
| Young Broadcasting, Inc., 8.75%, 2014 (d) | | | 525,000 | | | 1,837 |
| | | | | | |
| | | | | $ | 10,365,011 |
| | | | | | |
| Brokerage & Asset Managers – 0.6% | | | |
| Janus Capital Group, Inc., 6.95%, 2017 | | $ | 825,000 | | $ | 777,607 |
| Nuveen Investments, Inc., 10.5%, 2015 | | | 595,000 | | | 539,963 |
| | | | | | |
| | | | | $ | 1,317,570 |
| | | | | | |
| Building – 2.5% | | | | | | |
| Associated Materials, Inc., 11.25%, 2014 | | $ | 775,000 | | $ | 747,875 |
| Building Materials Corp. of America, 7.75%, 2014 | | | 855,000 | | | 846,450 |
| Cemex Finance Europe BV, 9.625%, 2017 (z) | | EUR | 435,000 | | | 646,044 |
| Norcraft Cos., LP, 10.5%, 2015 (z) | | $ | 275,000 | | | 281,875 |
| Nortek, Inc., 11%, 2013 | | | 1,340,933 | | | 1,401,275 |
| Owens Corning, 9%, 2019 | | | 760,000 | | | 847,536 |
| Ply Gem Industries, Inc., 11.75%, 2013 | | | 770,000 | | | 770,000 |
| USG Corp., 9.75%, 2014 (n) | | | 145,000 | | | 154,788 |
| | | | | | |
| | | | | $ | 5,695,843 |
| | | | | | |
| Business Services – 2.6% | | | | | | |
| First Data Corp., 9.875%, 2015 | | $ | 1,790,000 | | $ | 1,669,175 |
| First Data Corp., 11.25%, 2016 | | | 1,090,000 | | | 931,950 |
| Iron Mountain, Inc., 6.625%, 2016 | | | 870,000 | | | 852,600 |
| Iron Mountain, Inc., 8.375%, 2021 | | | 415,000 | | | 428,488 |
| SunGard Data Systems, Inc., 9.125%, 2013 | | | 705,000 | | | 722,625 |
| SunGard Data Systems, Inc., 10.25%, 2015 | | | 1,077,000 | | | 1,147,005 |
| Terremark Worldwide, Inc., 12%, 2017 (n) | | | 160,000 | | | 176,800 |
| | | | | | |
| | | | | $ | 5,928,643 |
| | | | | | |
| Cable TV – 3.5% | | | | | | |
| CCO Holdings LLC, 8.75%, 2013 | | $ | 2,045,000 | | $ | 2,098,681 |
| Charter Communications, Inc., 8.375%, 2014 (n) | | | 720,000 | | | 739,800 |
| Charter Communications, Inc., 10.875%, 2014 (n) | | | 365,000 | | | 408,800 |
| CSC Holdings, Inc., 6.75%, 2012 | | | 139,000 | | | 143,517 |
| CSC Holdings, Inc., 8.5%, 2014 (n) | | | 1,095,000 | | | 1,166,175 |
| DIRECTV Holdings LLC, 7.625%, 2016 | | | 685,000 | | | 748,362 |
| Mediacom LLC, 9.125%, 2019 (n) | | | 400,000 | | | 408,000 |
| Videotron LTEE, 6.875%, 2014 | | | 510,000 | | | 512,550 |
| Virgin Media Finance PLC, 9.125%, 2016 | | | 1,275,000 | | | 1,343,531 |
| Virgin Media Finance PLC, 9.5%, 2016 | | | 425,000 | | | 456,344 |
| | | | | | |
| | | | | $ | 8,025,760 |
| | | | | | |
| Chemicals – 2.7% | | | | | | |
| Ashland, Inc., 9.125%, 2017 (n) | | $ | 1,450,000 | | $ | 1,591,375 |
| Hexion Specialty Chemicals, Inc., 9.75%, 2014 | | | 295,000 | | | 289,100 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Chemicals – continued | | | | | | |
| Huntsman International LLC, 5.5%, 2016 (n) | | $ | 540,000 | | $ | 479,250 |
| Innophos Holdings, Inc., 8.875%, 2014 | | | 735,000 | | | 746,025 |
| Lumena Resources Corp., 12%, 2014 (n) | | | 1,190,000 | | | 1,037,912 |
| Momentive Performance Materials, Inc., 12.5%, 2014 (n) | | | 946,000 | | | 1,040,600 |
| Momentive Performance Materials, Inc., 11.5%, 2016 | | | 491,000 | | | 434,535 |
| Nalco Co., 8.875%, 2013 | | | 195,000 | | | 200,850 |
| NOVA Chemicals Corp., 8.375%, 2016 (n) | | | 335,000 | | | 340,025 |
| | | | | | |
| | | | | $ | 6,159,672 |
| | | | | | |
| Computer Software – Systems – 0.2% | | | |
| DuPont Fabros Technology, Inc., 8.5%, 2017 (z) | | $ | 405,000 | | $ | 411,581 |
| | | | | | |
| Construction – 0.2% | | | | | | |
| Lennar Corp., 12.25%, 2017 | | $ | 380,000 | | $ | 457,900 |
| | | | | | |
| Consumer Products – 0.7% | | | | | | |
| ACCO Brands Corp., 10.625%, 2015 (n) | | $ | 100,000 | | $ | 110,000 |
| ACCO Brands Corp., 7.625%, 2015 | | | 360,000 | | | 334,800 |
| Jarden Corp., 7.5%, 2017 | | | 665,000 | | | 663,337 |
| Visant Holding Corp., 8.75%, 2013 | | | 555,000 | | | 570,262 |
| | | | | | |
| | | | | $ | 1,678,399 |
| | | | | | |
| Consumer Services – 2.0% | | | | | | |
| Corrections Corp. of America, 6.25%, 2013 | | $ | 520,000 | | $ | 522,600 |
| KAR Holdings, Inc., 10%, 2015 | | | 490,000 | | | 524,300 |
| KAR Holdings, Inc., FRN, 4.28%, 2014 | | | 525,000 | | | 489,562 |
| Service Corp. International, 7.375%, 2014 | | | 700,000 | | | 703,500 |
| Service Corp. International, 7%, 2017 | | | 1,510,000 | | | 1,464,700 |
| Ticketmaster Entertainment, Inc., 10.75%, 2016 | | | 910,000 | | | 980,525 |
| | | | | | |
| | | | | $ | 4,685,187 |
| | | | | | |
| Containers – 1.7% | | | | | | |
| Crown Americas LLC, 7.625%, 2013 | | $ | 392,000 | | $ | 404,740 |
| Graham Packaging Holdings Co., 9.875%, 2014 | | | 1,365,000 | | | 1,392,300 |
| Greif, Inc., 6.75%, 2017 | | | 855,000 | | | 837,900 |
| Owens-Brockway Glass Container, Inc., 8.25%, 2013 | | | 545,000 | | | 559,987 |
| Owens-Illinois, Inc., 7.375%, 2016 | | | 345,000 | | | 356,213 |
| Reynolds Group, 7.75%, 2016 (n) | | | 325,000 | | | 332,313 |
| | | | | | |
| | | | | $ | 3,883,453 |
| | | | | | |
| Defense Electronics – 0.4% | | | | | | |
| L-3 Communications Corp., 6.125%, 2014 | | $ | 825,000 | | $ | 830,156 |
| | | | | | |
| Electronics – 1.0% | | | | | | |
| Avago Technologies Ltd., 11.875%, 2015 | | $ | 455,000 | | $ | 501,069 |
| Flextronics International Ltd., 6.25%, 2014 | | | 206,000 | | | 202,910 |
| Freescale Semiconductor, Inc., 8.875%, 2014 | | | 990,000 | | | 908,325 |
| Jabil Circuit, Inc., 7.75%, 2016 | | | 700,000 | | | 735,000 |
| | | | | | |
| | | | | $ | 2,347,304 |
| | | | | | |
9
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Emerging Market Sovereign – 0.1% | | | | | | |
| Republic of Argentina, FRN, 0.943%, 2012 | | $ | 361,125 | | $ | 330,298 |
| | | | | | |
| Energy – Independent – 7.1% | | | | | | |
| Chaparral Energy, Inc., 8.875%, 2017 | | $ | 990,000 | | $ | 873,675 |
| Chesapeake Energy Corp., 7%, 2014 | | | 644,000 | | | 652,050 |
| Chesapeake Energy Corp., 9.5%, 2015 | | | 295,000 | | | 323,763 |
| Chesapeake Energy Corp., 6.375%, 2015 | | | 780,000 | | | 764,400 |
| Forest Oil Corp., 8.5%, 2014 (n) | | | 180,000 | | | 188,100 |
| Forest Oil Corp., 7.25%, 2019 | | | 585,000 | | | 577,687 |
| Hilcorp Energy I LP, 9%, 2016 (n) | | | 1,020,000 | | | 1,035,300 |
| Mariner Energy, Inc., 8%, 2017 | | | 740,000 | | | 710,400 |
| McMoRan Exploration Co., 11.875%, 2014 | | | 405,000 | | | 415,125 |
| Newfield Exploration Co., 6.625%, 2014 | | | 725,000 | | | 732,250 |
| OPTI Canada, Inc., 8.25%, 2014 | | | 840,000 | | | 691,950 |
| Penn Virginia Corp., 10.375%, 2016 | | | 980,000 | | | 1,068,200 |
| Petrohawk Energy Corp., 10.5%, 2014 | | | 405,000 | | | 442,463 |
| Pioneer Natural Resource Co., 6.875%, 2018 | | | 740,000 | | | 732,171 |
| Pioneer Natural Resource Co., 7.5%, 2020 | | | 485,000 | | | 485,220 |
| Plains Exploration & Production Co., 7%, 2017 | | | 1,585,000 | | | 1,557,262 |
| Quicksilver Resources, Inc., 8.25%, 2015 | | | 1,200,000 | | | 1,230,000 |
| Range Resources Corp., 8%, 2019 | | | 1,085,000 | | | 1,160,950 |
| SandRidge Energy, Inc., 9.875%, 2016 (n) | | | 260,000 | | | 273,650 |
| SandRidge Energy, Inc., 8%, 2018 (n) | | | 1,535,000 | | | 1,508,138 |
| Southwestern Energy Co., 7.5%, 2018 | | | 740,000 | | | 784,400 |
| Swift Energy Co., 8.875%, 2020 | | | 130,000 | | | 133,250 |
| | | | | | |
| | | | | $ | 16,340,404 |
| | | | | | |
| Entertainment – 1.0% | | | | | | |
| AMC Entertainment, Inc., 11%, 2016 | | $ | 950,000 | | $ | 992,750 |
| AMC Entertainment, Inc., 8.75%, 2019 | | | 740,000 | | | 754,800 |
| Cinemark USA, Inc., 8.625%, 2019 (n) | | | 535,000 | | | 556,400 |
| | | | | | |
| | | | | $ | 2,303,950 |
| | | | | | |
| Financial Institutions – 2.3% | | | | | | |
| CIT Group, Inc., 7%, 2017 | | $ | 470,000 | | $ | 407,725 |
| GMAC LLC, 6.875%, 2011 (n) | | | 2,181,000 | | | 2,148,285 |
| GMAC LLC, 7%, 2012 (n) | | | 560,000 | | | 551,600 |
| GMAC LLC, 6.75%, 2014 (n) | | | 880,000 | | | 836,000 |
| GMAC LLC, 8%, 2031 (n) | | | 214,000 | | | 192,600 |
| International Lease Finance Corp., 5.625%, 2013 | | | 1,550,000 | | | 1,215,837 |
| | | | | | |
| | | | | $ | 5,352,047 |
| | | | | | |
| Food & Beverages – 2.0% | | | | | | |
| ARAMARK Corp., 8.5%, 2015 | | $ | 535,000 | | $ | 551,050 |
| B&G Foods, Inc., 8%, 2011 | | | 1,190,000 | | | 1,210,825 |
| Dean Foods Co., 7%, 2016 | | | 415,000 | | | 406,700 |
| Del Monte Foods Co., 6.75%, 2015 | | | 850,000 | | | 867,000 |
| Michael Foods, Inc., 8%, 2013 | | | 950,000 | | | 972,562 |
| Pinnacle Foods Finance LLC, 9.25%, 2015 | | | 545,000 | | | 553,175 |
| | | | | | |
| | | | | $ | 4,561,312 |
| | | | | | |
| Forest & Paper Products – 2.1% | | | | | | |
| Buckeye Technologies, Inc., 8.5%, 2013 | | $ | 887,000 | | $ | 905,849 |
| Cascades, Inc., 7.75%, 2017 (z) | | | 240,000 | | | 242,400 |
| Georgia-Pacific Corp., 7.125%, 2017 (n) | | | 635,000 | | | 642,938 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Forest & Paper Products – continued | | | | | | |
| Georgia-Pacific Corp., 8%, 2024 | | $ | 490,000 | | $ | 499,800 |
| Graphic Packaging International Corp., 9.5%, 2013 | | | 695,000 | | | 717,587 |
| Jefferson Smurfit Corp., 8.25%, 2012 (d) | | | 275,000 | | | 242,000 |
| JSG Funding PLC, 7.75%, 2015 | | | 190,000 | | | 182,637 |
| Millar Western Forest Products Ltd., 7.75%, 2013 | | | 1,465,000 | | | 1,069,450 |
| Smurfit Kappa Group PLC, 7.75%, 2019 (n) | | EUR | 180,000 | | | 253,957 |
| | | | | | |
| | | | | $ | 4,756,618 |
| | | | | | |
| Gaming & Lodging – 5.5% | | | | | | |
| Ameristar Casinos, Inc., 9.25%, 2014 (n) | | $ | 400,000 | | $ | 415,000 |
| Boyd Gaming Corp., 6.75%, 2014 | | | 1,175,000 | | | 1,058,969 |
| Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (d)(n) | | | 1,270,000 | | | 12,700 |
| Harrah’s Operating Co., Inc., 11.25%, 2017 (n) | | | 605,000 | | | 632,981 |
| Harrah’s Operating Co., Inc., 10%, 2018 (n) | | | 1,927,000 | | | 1,546,418 |
| Harrah’s Operating Co., Inc., 10%, 2018 (n) | | | 353,000 | | | 283,283 |
| Host Hotels & Resorts, Inc., 7.125%, 2013 | | | 10,000 | | | 10,162 |
| Host Hotels & Resorts, Inc., 6.75%, 2016 | | | 1,155,000 | | | 1,149,225 |
| Host Hotels & Resorts, Inc., 9%, 2017 (n) | | | 200,000 | | | 216,250 |
| MGM Mirage, 6.75%, 2013 | | | 230,000 | | | 198,375 |
| MGM Mirage, 10.375%, 2014 (n) | | | 150,000 | | | 162,750 |
| MGM Mirage, 7.5%, 2016 | | | 1,255,000 | | | 978,900 |
| MGM Mirage, 11.125%, 2017 (n) | | | 370,000 | | | 409,775 |
| MGM Mirage, 11.375%, 2018 (n) | | | 655,000 | | | 586,225 |
| Penn National Gaming, Inc., 8.75%, 2019 (n) | | | 745,000 | | | 761,763 |
| Pinnacle Entertainment, Inc., 7.5%, 2015 | | | 1,535,000 | | | 1,412,200 |
| Royal Caribbean Cruises Ltd., 7%, 2013 | | | 615,000 | | | 613,462 |
| Royal Caribbean Cruises Ltd., 11.875%, 2015 | | | 750,000 | | | 867,188 |
| Starwood Hotels & Resorts Worldwide, Inc., 6.75%, 2018 | | | 385,000 | | | 385,962 |
| Station Casinos, Inc., 6%, 2012 (d) | | | 1,283,000 | | | 194,054 |
| Station Casinos, Inc., 6.5%, 2014 (d) | | | 2,020,000 | | | 10,100 |
| Station Casinos, Inc., 6.875%, 2016 (d) | | | 2,495,000 | | | 12,475 |
| Station Casinos, Inc., 7.75%, 2016 (d) | | | 452,000 | | | 70,625 |
| Wyndham Worldwide Corp., 6%, 2016 | | | 745,000 | | | 694,037 |
| | | | | | |
| | | | | $ | 12,682,879 |
| | | | | | |
| Industrial – 1.2% | | | | | | |
| Altra Holdings, Inc., 8.125%, 2016 (z) | | $ | 480,000 | | $ | 492,600 |
| Aquilex Corp., 11.125%, 2016 (z) | | | 180,000 | | | 179,550 |
| Baldor Electric Co., 8.625%, 2017 | | | 915,000 | | | 935,587 |
| Great Lakes Dredge & Dock Corp., 7.75%, 2013 | | | 575,000 | | | 572,125 |
| Johnsondiversey Holdings, Inc., 8.25%, 2019 (n) | | | 475,000 | | | 480,938 |
| | | | | | |
| | | | | $ | 2,660,800 |
| | | | | | |
10
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Insurance – 0.7% | | | | | | |
| ING Groep N.V., 5.775% to 2015, FRN to 2049 | | $ | 925,000 | | $ | 683,289 |
| MetLife, Inc., 9.25% to 2038, FRN to 2068 (n) | | | 800,000 | | | 904,000 |
| | | | | | |
| | | | | $ | 1,587,289 |
| | | | | | |
| Insurance – Property & Casualty – 1.0% | | | |
| Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2058 (n) | | $ | 880,000 | | $ | 932,800 |
| USI Holdings Corp., 9.75%, 2015 (z) | | | 990,000 | | | 902,138 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 (z) | | | 645,000 | | | 574,050 |
| | | | | | |
| | | | | $ | 2,408,988 |
| | | | | | |
| Machinery & Tools – 0.6% | | | | | | |
| Case New Holland, Inc., 7.125%, 2014 | | $ | 455,000 | | $ | 461,825 |
| Rental Service Corp., 9.5%, 2014 | | | 930,000 | | | 931,162 |
| | | | | | |
| | | | | $ | 1,392,987 |
| | | | | | |
| Major Banks – 1.3% | | | | | | |
| Bank of America Corp., 8% to 2018, FRN to 2049 | | $ | 1,620,000 | | $ | 1,559,639 |
| JPMorgan Chase & Co., 7.9% to 2018, FRN to 2049 | | | 1,435,000 | | | 1,480,145 |
| | | | | | |
| | | | | $ | 3,039,784 |
| | | | | | |
| Medical & Health Technology & Services – 7.1% | | | |
| Biomet, Inc., 10%, 2017 | | $ | 895,000 | | $ | 972,194 |
| Biomet, Inc., 11.625%, 2017 | | | 575,000 | | | 635,375 |
| Community Health Systems, Inc., 8.875%, 2015 | | | 1,690,000 | | | 1,749,150 |
| Cooper Cos., Inc., 7.125%, 2015 | | | 370,000 | | | 359,825 |
| DaVita, Inc., 7.25%, 2015 | | | 536,000 | | | 537,340 |
| Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n) | | | 595,000 | | | 654,500 |
| HCA, Inc., 6.375%, 2015 | | | 1,550,000 | | | 1,462,812 |
| HCA, Inc., 9.25%, 2016 | | | 2,880,000 | | | 3,092,400 |
| HCA, Inc., 8.5%, 2019 (n) | | | 625,000 | | | 673,438 |
| HealthSouth Corp., 8.125%, 2020 | | | 710,000 | | | 699,350 |
| Psychiatric Solutions, Inc., 7.75%, 2015 | | | 405,000 | | | 391,837 |
| Psychiatric Solutions, Inc., 7.75%, 2015 (n) | | | 275,000 | | | 259,188 |
| Tenet Healthcare Corp., 9.25%, 2015 | | | 470,000 | | | 500,550 |
| U.S. Oncology, Inc., 10.75%, 2014 | | | 1,020,000 | | | 1,071,000 |
| United Surgical Partners International, Inc., 8.875%, 2017 | | | 65,000 | | | 66,950 |
| United Surgical Partners International, Inc., 9.25%, 2017 (p) | | | 335,000 | | | 341,700 |
| Universal Hospital Services, Inc., 8.5%, 2015 (p) | | | 1,195,000 | | | 1,177,075 |
| Universal Hospital Services, Inc., FRN, 3.859%, 2015 | | | 290,000 | | | 244,325 |
| VWR Funding, Inc., 11.25%, 2015 (p) | | | 1,325,000 | | | 1,307,195 |
| | | | | | |
| | | | | $ | 16,196,204 |
| | | | | | |
| Metals & Mining – 2.7% | | | | | | |
| Arch Western Finance LLC, 6.75%, 2013 | | $ | 1,145,000 | | $ | 1,136,412 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Metals & Mining – continued | | | | | | |
| Cloud Peak Energy, Inc., 8.25%, 2017 (n) | | $ | 580,000 | | $ | 580,000 |
| Cloud Peak Energy, Inc., 8.5%, 2019 (n) | | | 580,000 | | | 591,600 |
| FMG Finance Ltd., 10.625%, 2016 (n) | | | 1,045,000 | | | 1,156,031 |
| Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017 | | | 1,095,000 | | | 1,199,025 |
| Freeport-McMoRan Copper & Gold, Inc., FRN, 3.881%, 2015 | | | 500,000 | | | 497,190 |
| Peabody Energy Corp., 5.875%, 2016 | | | 710,000 | | | 692,250 |
| Peabody Energy Corp., 7.375%, 2016 | | | 445,000 | | | 458,906 |
| | | | | | |
| | | | | $ | 6,311,414 |
| | | | | | |
| Natural Gas – Distribution – 0.9% | | | | | | |
| AmeriGas Partners LP, 7.125%, 2016 | | $ | 1,055,000 | | $ | 1,055,000 |
| Inergy LP, 6.875%, 2014 | | | 910,000 | | | 898,625 |
| | | | | | |
| | | | | $ | 1,953,625 |
| | | | | | |
| Natural Gas – Pipeline – 2.3% | | | | | | |
| Atlas Pipeline Partners LP, 8.125%, 2015 | | $ | 1,000,000 | | $ | 885,000 |
| Atlas Pipeline Partners LP, 8.75%, 2018 | | | 905,000 | | | 800,925 |
| Deutsche Bank (El Paso Performance-Linked Trust, CLN), 7.75%, 2011 (n) | | | 1,115,000 | | | 1,143,055 |
| El Paso Corp., 8.25%, 2016 | | | 545,000 | | | 581,788 |
| MarkWest Energy Partners LP, 6.875%, 2014 | | | 730,000 | | | 689,850 |
| MarkWest Energy Partners LP, 8.75%, 2018 | | | 180,000 | | | 185,400 |
| Williams Partners LP, 7.25%, 2017 | | | 935,000 | | | 944,529 |
| | | | | | |
| | | | | $ | 5,230,547 |
| | | | | | |
| Network & Telecom – 2.8% | | | | | | |
| Cincinnati Bell, Inc., 8.375%, 2014 | | $ | 1,660,000 | | $ | 1,689,050 |
| Nordic Telephone Co. Holdings, 8.875%, 2016 (n) | | | 1,120,000 | | | 1,184,400 |
| Qwest Communications International, Inc., 7.25%, 2011 | | | 145,000 | | | 147,175 |
| Qwest Communications International, Inc., 8%, 2015 (n) | | | 335,000 | | | 344,213 |
| Qwest Corp., 7.875%, 2011 | | | 530,000 | | | 555,175 |
| Qwest Corp., 8.875%, 2012 | | | 895,000 | | | 962,125 |
| Qwest Corp., 8.375%, 2016 | | | 368,000 | | | 394,680 |
| Windstream Corp., 8.625%, 2016 | | | 1,205,000 | | | 1,226,087 |
| | | | | | |
| | | | | $ | 6,502,905 |
| | | | | | |
| Oil Services – 0.4% | | | | | | |
| Allis-Chalmers Energy, Inc., 8.5%, 2017 | | $ | 365,000 | | $ | 315,725 |
| Basic Energy Services, Inc., 7.125%, 2016 | | | 275,000 | | | 228,937 |
| Expro Finance Luxembourg, 8.5%, 2016 (z) | | | 210,000 | | | 208,425 |
| Trico Shipping A.S., 11.875%, 2014 (n) | | | 235,000 | | | 244,694 |
| | | | | | |
| | | | | $ | 997,781 |
| | | | | | |
| Oils – 0.3% | | | | | | |
| Holly Corp., 9.875%, 2017 (n) | | $ | 265,000 | | $ | 278,913 |
| Petroplus Holdings AG, 9.375%, 2019 (n) | | | 335,000 | | | 333,325 |
| | | | | | |
| | | | | $ | 612,238 |
| | | | | | |
| Precious Metals & Minerals – 0.7% | | | | | | |
| Teck Resources Ltd., 9.75%, 2014 | | $ | 375,000 | | $ | 432,656 |
| Teck Resources Ltd., 10.25%, 2016 | | | 205,000 | | | 238,825 |
| Teck Resources Ltd., 10.75%, 2019 | | | 725,000 | | | 866,375 |
| | | | | | |
| | | | | $ | 1,537,856 |
| | | | | | |
11
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Printing & Publishing – 1.2% | | | | | | |
| American Media Operations, Inc., 9%, 2013 (p)(z) | | $ | 78,310 | | $ | 48,846 |
| American Media Operations, Inc., 14%, 2013 (p)(z) | | | 837,142 | | | 514,610 |
| Dex Media West LLC, 9.875%, 2013 (d) | | | 895,000 | | | 281,925 |
| Nielsen Finance LLC, 10%, 2014 | | | 1,160,000 | | | 1,209,300 |
| Nielsen Finance LLC, 11.5%, 2016 | | | 340,000 | | | 379,950 |
| Nielsen Finance LLC, 0% to 2011, 12.5% to 2016 | | | 216,000 | | | 197,100 |
| Tribune Co., 5.25%, 2015 (d) | | | 755,000 | | | 184,975 |
| | | | | | |
| | | | | $ | 2,816,706 |
| | | | | | |
| Railroad & Shipping – 0.3% | | | | | | |
| Kansas City Southern Railway, 8%, 2015 | | $ | 470,000 | | $ | 487,038 |
| TFM S.A. de C.V., 9.375%, 2012 | | | 145,000 | | | 150,437 |
| | | | | | |
| | | | | $ | 637,475 |
| | | | | | |
| Real Estate – 0.1% | | | | | | |
| CB Richard Ellis Group, Inc., 11.625%, 2017 | | $ | 285,000 | | $ | 316,350 |
| | | | | | |
| Retailers – 2.5% | | | | | | |
| Couche-Tard, Inc., 7.5%, 2013 | | $ | 350,000 | | $ | 356,125 |
| Dollar General Corp., 11.875%, 2017 (p) | | | 378,000 | | | 436,590 |
| Limited Brands, Inc., 5.25%, 2014 | | | 705,000 | | | 680,325 |
| Macy’s Retail Holdings, Inc., 5.35%, 2012 | | | 330,000 | | | 337,012 |
| Macy’s Retail Holdings, Inc., 5.75%, 2014 | | | 1,055,000 | | | 1,057,637 |
| Neiman Marcus Group, Inc., 10.375%, 2015 | | | 490,000 | | | 480,200 |
| Sally Beauty Holdings, Inc., 10.5%, 2016 | | | 725,000 | | | 779,375 |
| Toys “R” Us, Inc., 7.625%, 2011 | | | 290,000 | | | 294,712 |
| Toys “R” Us, Inc., 10.75%, 2017 (n) | | | 865,000 | | | 947,175 |
| Toys “R” Us, Inc., 8.5%, 2017 (n) | | | 440,000 | | | 447,700 |
| | | | | | |
| | | | | $ | 5,816,851 |
| | | | | | |
| Specialty Stores – 0.4% | | | | | | |
| Payless ShoeSource, Inc., 8.25%, 2013 | | $ | 937,000 | | $ | 951,055 |
| | | | | | |
| Supermarkets – 0.2% | | | | | | |
| SUPERVALU, Inc., 8%, 2016 | | $ | 460,000 | | $ | 466,900 |
| | | | | | |
| Telecommunications – Wireless – 3.7% | | | |
| Cricket Communications, Inc., 7.75%, 2016 | | $ | 580,000 | | $ | 578,550 |
| Crown Castle International Corp., 9%, 2015 | | | 750,000 | | | 798,750 |
| Crown Castle International Corp., 7.75%, 2017 (n) | | | 385,000 | | | 410,025 |
| Crown Castle International Corp., 7.125%, 2019 | �� | | 525,000 | | | 519,750 |
| Digicel Group Ltd., 12%, 2014 (n) | | | 140,000 | | | 155,400 |
| Digicel Group Ltd., 8.25%, 2017 (n) | | | 760,000 | | | 741,000 |
| Nextel Communications, Inc., 6.875%, 2013 | | | 730,000 | | | 708,100 |
| NII Holdings, Inc., 10%, 2016 (n) | | | 675,000 | | | 707,063 |
| SBA Communications Corp., 8%, 2016 (n) | | | 255,000 | | | 266,475 |
| SBA Communications Corp., 8.25%, 2019 (n) | | | 220,000 | | | 233,200 |
| Sprint Nextel Corp., 8.375%, 2012 | | | 450,000 | | | 465,750 |
| Sprint Nextel Corp., 8.375%, 2017 | | | 280,000 | | | 285,600 |
| Sprint Nextel Corp., 8.75%, 2032 | | | 700,000 | | | 659,750 |
| Wind Acquisition Finance S.A., 12%, 2015 (n) | | | 1,830,000 | | | 1,958,100 |
| | | | | | |
| | | | | $ | 8,487,513 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Telephone Services – 0.5% | | | | | | |
| Frontier Communications Corp., 8.25%, 2014 | | $ | 710,000 | | $ | 740,175 |
| Frontier Communications Corp., 8.125%, 2018 | | | 485,000 | | | 491,063 |
| | | | | | |
| | | | | $ | 1,231,238 |
| | | | | | |
| Tobacco – 0.3% | | | | | | |
| Alliance One International, Inc., 10%, 2016 (n) | | $ | 640,000 | | $ | 672,000 |
| | | | | | |
| Transportation – Services – 1.2% | | | | | | |
| Commercial Barge Line Co., 12.5%, 2017 (n) | | $ | 825,000 | | $ | 858,000 |
| Hertz Corp., 8.875%, 2014 | | | 1,030,000 | | | 1,053,175 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 (z) | | | 750,000 | | | 779,063 |
| | | | | | |
| | | | | $ | 2,690,238 |
| | | | | | |
| Utilities – Electric Power – 4.9% | | | | | | |
| AES Corp., 8%, 2017 | | $ | 1,470,000 | | $ | 1,508,587 |
| Calpine Corp., 8%, 2016 (n) | | | 770,000 | | | 793,100 |
| Dynegy Holdings, Inc., 7.5%, 2015 | | | 745,000 | | | 696,575 |
| Dynegy Holdings, Inc., 7.75%, 2019 | | | 390,000 | | | 338,325 |
| Edison Mission Energy, 7%, 2017 | | | 1,400,000 | | | 1,106,000 |
| Mirant Americas Generation LLC, 8.3%, 2011 | | | 800,000 | | | 820,000 |
| Mirant North America LLC, 7.375%, 2013 | | | 505,000 | | | 499,319 |
| NRG Energy, Inc., 7.375%, 2016 | | | 3,010,000 | | | 3,013,762 |
| RRI Energy, Inc., 7.875%, 2017 | | | 362,000 | | | 355,665 |
| Texas Competitive Electric Holdings LLC, 10.25%, 2015 | | | 2,680,000 | | | 2,170,800 |
| | | | | | |
| | | | | $ | 11,302,133 |
| | | | | | |
Total Bonds
(Identified Cost, $213,707,295) | | | | | $ | 205,993,426 |
| | | | | | |
| |
| FLOATING RATE LOANS (g)(r) – 5.5% | | | |
| Aerospace – 0.2% | | | | | | |
| Hawker Beechcraft Acquisition Co. LLC, Term Loan, 10.5%, 2014 | | $ | 470,840 | | $ | 444,159 |
| | | | | | |
| Automotive – 1.6% | | | | | | |
| Accuride Corp., Term Loan, 9.25%, 2013 | | $ | 136,626 | | $ | 136,142 |
| Federal-Mogul Corp., Term Loan B, 2.16%, 2014 | | | 1,184,462 | | | 991,987 |
| Ford Motor Co., Term Loan, 3.28%, 2013 (o) | | | 2,749,753 | | | 2,536,647 |
| | | | | | |
| | | | | $ | 3,664,776 |
| | | | | | |
| Broadcasting – 0.7% | | | | | | |
| Gray Television, Inc., Term Loan B, 3.79%, 2014 | | $ | 520,137 | | $ | 450,352 |
| Local TV Finance LLC, Term Loan B, 2.26%, 2013 | | | 69,008 | | | 57,535 |
| Young Broadcasting, Inc., Incremental Term Loan, 4.75%, 2012 (d) | | | 438,565 | | | 322,565 |
| Young Broadcasting, Inc., Term Loan, 4.75%, 2012 (d) | | | 1,179,835 | | | 867,769 |
| | | | | | |
| | | | | $ | 1,698,221 |
| | | | | | |
12
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| FLOATING RATE LOANS (g)(r) – continued | | | |
| Building – 0.1% | | | | | | |
| Building Materials Holding Corp., Term Loan, 3%, 2014 | | $ | 160,826 | | $ | 148,463 |
| | | | | | |
| Chemicals – 0.7% | | | | | | |
| LyondellBasell, DIP Term Loan, 9.16%, 2010 (q) | | $ | 170,475 | | $ | 177,294 |
| LyondellBasell, DIP Term Loan B-3, 5.79%, 2010 | | | 170,139 | | | 175,668 |
| LyondellBasell, Dutch Tranche Revolving Credit Loan, 3.73%, 2014 | | | 29,342 | | | 21,650 |
| LyondellBasell, Dutch Tranche Term Loan, 3.73%, 2014 | | | 66,416 | | | 49,006 |
| LyondellBasell, German Tranche Term Loan B-1, 3.98%, 2014 | | | 84,237 | | | 62,155 |
| LyondellBasell, German Tranche Term Loan B-2, 3.98%, 2014 | | | 84,237 | | | 62,155 |
| LyondellBasell, German Tranche Term Loan B-3, 3.98%, 2014 | | | 84,237 | | | 62,155 |
| LyondellBasell, U.S. Tranche Revolving Credit Loan, 3.73%, 2014 | | | 110,031 | | | 81,188 |
| LyondellBasell, U.S. Tranche Term Loan, 3.73%, 2014 | | | 209,640 | | | 154,685 |
| LyondellBasell, U.S. Tranche Term Loan B-1, 7%, 2014 | | | 365,528 | | | 269,708 |
| LyondellBasell, U.S. Tranche Term Loan B-2, 7%, 2014 | | | 365,528 | | | 269,708 |
| LyondellBasell, U.S. Tranche Term Loan B-3, 7%, 2014 | | | 365,528 | | | 269,708 |
| | | | | | |
| | | | | $ | 1,655,080 |
| | | | | | |
| Gaming & Lodging – 0.6% | | | | | | |
| Green Valley Ranch Gaming LLC, Second Lien Term Loan, 3.5%, 2014 | | $ | 1,601,789 | | $ | 240,268 |
| MGM Mirage, Term Loan B, 6%, 2011 (o) | | | 652,512 | | | 606,836 |
| Motorcity Casino, Term Loan B, 8.5%, 2012 | | | 489,740 | | | 476,272 |
| | | | | | |
| | | | | $ | 1,323,376 |
| | | | | | |
| Printing & Publishing – 0.4% | | | | | | |
| Tribune Co., Incremental Term Loan B, 5.25%, 2014 (d) | | $ | 1,825,983 | | $ | 932,013 |
| | | | | | |
| Specialty Stores – 0.4% | | | | | | |
| Michaels Stores, Inc., Term Loan B1, 2.56%, 2013 | | $ | 459,050 | | $ | 413,288 |
| Michaels Stores, Inc., Term Loan B2, 4.81%, 2016 | | | 605,290 | | | 568,540 |
| | | | | | |
| | | | | $ | 981,828 |
| | | | | | |
| Utilities – Electric Power – 0.8% | | | | | | |
| Calpine Corp., DIP Term Loan, 3.13%, 2014 | | $ | 546,052 | | $ | 515,746 |
| Texas Competitive Electric Holdings Co. LLC, Term Loan B-3, 3.73%, 2014 | | | 1,547,866 | | | 1,246,806 |
| | | | | | |
| | | | | $ | 1,762,552 |
| | | | | | |
Total Floating Rate Loans
(Identified Cost, $13,625,549) | | | | | $ | 12,610,468 |
| | | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 1.2% | | | | | |
| Automotive – 0.0% | | | | | |
Mark IV Industries LLC, Common Units Class A | | 663 | | $ | 8,288 |
| Oxford Automotive, Inc. (a) | | 21 | | | 0 |
| | | | | |
| | | | $ | 8,288 |
| | | | | |
| Cable TV – 0.4% | | | | | |
| Cablevision Systems Corp., “A” | | 13,700 | | $ | 353,734 |
| Comcast Corp., “A” | | 23,200 | | | 391,152 |
| Time Warner Cable, Inc. | | 5,800 | | | 240,062 |
| | | | | |
| | | | $ | 984,948 |
| | | | | |
| Construction – 0.2% | | | | | |
| Nortek, Inc. (a) | | 13,860 | | $ | 485,100 |
| | | | | |
| Energy – Integrated – 0.1% | | | | | |
| Chevron Corp. | | 2,700 | | $ | 207,873 |
| | | | | |
| Gaming & Lodging – 0.2% | | | | | |
| Ameristar Casinos, Inc. | | 9,100 | | $ | 138,593 |
| Pinnacle Entertainment, Inc. (a) | | 33,400 | | | 299,932 |
| | | | | |
| | | | $ | 438,525 |
| | | | | |
| Printing & Publishing – 0.1% | | | | | |
| American Media, Inc. (a) | | 14,342 | | $ | 41,163 |
| Golden Books Family Entertainment, Inc. (a) | | 17,708 | | | 0 |
| Idearc, Inc. (a) | | 1,043 | | | 35,462 |
| World Color Press, Inc. (a) | | 5,075 | | | 47,198 |
| | | | | |
| | | | $ | 123,823 |
| | | | | |
| Telephone Services – 0.2% | | | | | |
| Windstream Corp. | | 49,400 | | $ | 542,906 |
| | | | | |
Total Common Stocks
(Identified Cost, $6,261,844) | | | | $ | 2,791,463 |
| | | | | |
| | |
| PREFERRED STOCKS – 0.6% | | | | | |
| Financial Institutions – 0.2% | | | | | |
| GMAC, Inc., 7% (a)(z) | | 556 | | $ | 366,474 |
| | | | | |
| Major Banks – 0.4% | | | | | |
| Bank of America Corp., 8.625% | | 37,500 | | $ | 920,250 |
| | | | | |
Total Preferred Stocks
(Identified Cost, $1,365,620) | | | | $ | 1,286,724 |
| | | | | |
| | | | | | | | | | |
| | | Strike
Price | | First Exercise | | | | |
| WARRANTS – 0.0% | | | | | | | | | | |
| Printing & Publishing – 0.0% | | | | | | | |
| World Color Press, Inc. (1 share for 1 warrant) (a) | | $ | 13.00 | | 8/26/09 | | 2,876 | | $ | 12,079 |
| World Color Press, Inc. (1 share for 1 warrant) (a) | | $ | 16.30 | | 8/26/09 | | 2,876 | | | 8,427 |
| | | | | | | | | | |
Total Warrants
(Identified Cost, $93,295) | | | | | | | | | $ | 20,506 |
| | | | | | | | | | |
13
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| MONEY MARKET FUNDS (v) – 1.4% | | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | 3,286,982 | | $ | 3,286,982 |
| | | | | |
Total Investments
(Identified Cost, $238,340,585) | | | | $ | 225,989,569 |
| | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.6% | | | | | 3,644,153 |
| | | | | |
| Net Assets – 100.0% | | | | $ | 229,633,722 |
| | | | | |
| (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. |
| (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 $46,411,583, representing 20.21% of net assets. |
| (o) | | All or a portion of this position has not settled. Upon settlement date, interest rates will be determined. The rate shown represents a weighted average coupon rate on the full position, including unsettled positions which have no current coupon. |
| (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 |
| Airlie LCDO Ltd., CDO, FRN, 2.15%, 2011 | | 10/13/06 | | $701,221 | | $343,598 |
| Altra Holdings, Inc., 8.125%, 2016 | | 11/16/09-11/17/09 | | 478,865 | | 492,600 |
| American Media Operations, Inc., 9%, 2013 | | 1/29/09-10/15/09 | | 53,347 | | 48,846 |
| American Media Operations, Inc., 14%, 2013 | | 1/29/09-10/15/09 | | 496,290 | | 514,610 |
| Anthracite Ltd., CDO, 6%, 2037 | | 5/14/02 | | 1,111,602 | | 91,000 |
| Aquilex Corp., 11.125%, 2016 | | 12/16/09 | | 172,724 | | 179,550 |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.583%, 2038 | | 12/20/05 | | 613,671 | | 24,547 |
| Bonten Media Acquisition Co., 9%, 2015 | | 5/22/07-11/15/09 | | 919,995 | | 333,397 |
| CWCapital Cobalt Ltd., CDO, 6.23%, 2045 | | 3/20/06 | | 960,090 | | 20,212 |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.582%, 2050 | | 4/12/06 | | 500,000 | | 10,000 |
| Cascades, Inc., 7.75%, 2017 | | 11/18/09 | | 236,507 | | 242,400 |
| Cemex Finance Europe BV, 9.625%, 2017 | | 12/09/09 | | 640,755 | | 646,044 |
| DuPont Fabros Technology, Inc., 8.5%, 2017 | | 12/11/09 | | 405,000 | | 411,581 |
| Expro Finance Luxembourg, 8.5%, 2016 | | 12/14/09 | | 202,060 | | 208,425 |
| GMAC, Inc., 7% (Preferred Stock) | | 12/26/08 | | 428,120 | | 366,474 |
| LBI Media, Inc., 8.5%, 2017 | | 7/18/07 | | 631,247 | | 531,200 |
| Local TV Finance LLC, 9.25%, 2015 | | 11/09/07-11/30/09 | | 1,653,254 | | 724,848 |
| Navios Maritime Holdings, Inc., 8.875%, 2017 | | 10/22/09 | | 744,442 | | 779,063 |
| Norcraft Cos., LP, 10.5%, 2015 | | 12/02/09 | | 270,552 | | 281,875 |
| TriMas Corp., 9.75%, 2017 | | 12/17/09 | | 132,291 | | 132,469 |
| Triumph Group, Inc., 8%, 2017 | | 11/10/09 | | 187,292 | | 191,663 |
14
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | |
| Restricted Securities – continued | | Acquisition
Date | | Cost | | Current
Market Value |
| USI Holdings Corp., 9.75%, 2015 | | 4/26/07-6/08/07 | | $998,545 | | $902,138 |
| Wachovia Credit, CDO, FRN, 1.6%, 2026 | | 6/08/06 | | 376,000 | | 15,040 |
| ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 | | 12/16/09 | | 564,378 | | 574,050 |
| Total Restricted Securities | | | | | | $8,065,630 |
| % of Net Assets | | | | | | 3.5% |
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 |
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 12/31/09
Forward Foreign Currency Exchange Contracts at 12/31/09
| | | | | | | | | | | | | | | | | | | | |
| | | 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 | | 904,000 | | 3/15/10 | | $ | 1,323,464 | | $ | 1,295,789 | | $ | 27,675 | |
| | SELL | | EUR | | HSBC BANKUSA | | 435,000 | | 1/13/10 | | | 640,451 | | | 623,590 | | | 16,861 | |
| | SELL | | EUR | | UBS AG | | 993,810 | | 3/15/10 | | | 1,451,956 | | | 1,424,522 | | | 27,434 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 71,970 | |
| | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| | BUY | | EUR | | UBS AG | | 464,531 | | 1/13/10 | | $ | 700,526 | | $ | 665,923 | | $ | (34,603 | ) |
| | | | | | | | | | | | | | | | | | | | |
At December 31, 2009, the fund had sufficient cash and/or securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
15
MFS High Yield Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $235,053,603) | | $222,702,587 | | | |
Underlying funds, at cost and value | | 3,286,982 | | | |
Total investments, at value (identified cost, $238,340,585) | | $225,989,569 | | | |
Cash | | 347,825 | | | |
Receivables for | | | | | |
Forward foreign currency exchange contracts | | 71,970 | | | |
Investments sold | | 2,659,526 | | | |
Fund shares sold | | 294 | | | |
Interest and dividends | | 4,108,244 | | | |
Other assets | | 9,398 | | | |
Total assets | | | | | $233,186,826 |
Liabilities | | | | | |
Payables for | | | | | |
Forward foreign currency exchange contracts | | $34,603 | | | |
Investments purchased | | 3,140,483 | | | |
Fund shares reacquired | | 283,639 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 8,814 | | | |
Distribution and/or service fees | | 1,483 | | | |
Administrative services fee | | 438 | | | |
Payable for Trustees’ compensation | | 255 | | | |
Accrued expenses and other liabilities | | 83,389 | | | |
Total liabilities | | | | | $3,553,104 |
Net assets | | | | | $229,633,722 |
Net assets consist of | | | | | |
Paid-in capital | | $316,099,716 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | (12,309,141 | ) | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (94,230,020 | ) | | |
Undistributed net investment income | | 20,073,167 | | | |
Net assets | | | | | $229,633,722 |
Shares of beneficial interest outstanding | | | | | 40,638,758 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $121,416,227 | | 21,400,151 | | $5.67 |
Service Class | | 108,217,495 | | 19,238,607 | | 5.63 |
See Notes to Financial Statements
16
MFS High Yield Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | | |
| Year ended 12/31/09 | | | | | | |
| Net investment income | | | | | | |
Income | | | | | | |
Interest | | $21,281,934 | | | | |
Dividends | | 304,858 | | | | |
Dividends from underlying funds | | 8,643 | | | | |
Total investment income | | | | | $21,595,435 | |
Expenses | | | | | | |
Management fee | | $1,609,967 | | | | |
Distribution and/or service fees | | 264,731 | | | | |
Administrative services fee | | 86,424 | | | | |
Trustees’ compensation | | 31,636 | | | | |
Custodian fee | | 22,464 | | | | |
Shareholder communications | | 30,087 | | | | |
Auditing fees | | 57,954 | | | | |
Legal fees | | 10,472 | | | | |
Miscellaneous | | 25,457 | | | | |
Total expenses | | | | | $2,139,192 | |
Fees paid indirectly | | (23 | ) | | | |
Reduction of expenses by investment adviser | | (107,313 | ) | | | |
Net expenses | | | | | $2,031,856 | |
Net investment income | | | | | $19,563,579 | |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | |
Investment transactions | | $(9,775,438 | ) | | | |
Swap transactions | | (3,311,002 | ) | | | |
Foreign currency transactions | | (8,296 | ) | | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $(13,094,736 | ) |
Change in unrealized appreciation (depreciation) | | | | | | |
Investments | | $75,816,273 | | | | |
Swap transactions | | 2,993,001 | | | | |
Translation of assets and liabilities in foreign currencies | | (25,812 | ) | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $78,783,462 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $65,688,726 | |
Change in net assets from operations | | | | | $85,252,305 | |
See Notes to Financial Statements
17
MFS High Yield Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
| From operations | | | | | | |
Net investment income | | $19,563,579 | | | $22,757,728 | |
Net realized gain (loss) on investments and foreign currency transactions | | (13,094,736 | ) | | (22,749,813 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 78,783,462 | | | (78,706,953 | ) |
Change in net assets from operations | | $85,252,305 | | | $(78,699,038 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(21,199,945 | ) | | $(25,133,394 | ) |
Change in net assets from fund share transactions | | $(34,192,945 | ) | | $(20,962,942 | ) |
Total change in net assets | | $29,859,415 | | | $(124,795,374 | ) |
Net assets | | | | | | |
At beginning of period | | 199,774,307 | | | 324,569,681 | |
At end of period (including undistributed net investment income of $20,073,167 and
$23,865,922, respectively) | | $229,633,722 | | | $199,774,307 | |
See Notes to Financial Statements
18
MFS High Yield Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $4.25 | | | $6.56 | | | $6.93 | | | $6.83 | | | $7.32 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.44 | | | $0.49 | | | $0.49 | | | $0.48 | | | $0.49 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.49 | | | (2.26 | ) | | (0.34 | ) | | 0.19 | | | (0.36 | ) |
Total from investment operations | | $1.93 | | | $(1.77 | ) | | $0.15 | | | $0.67 | | | $0.13 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.51 | ) | | $(0.54 | ) | | $(0.52 | ) | | $(0.57 | ) | | $(0.62 | ) |
Net asset value, end of period | | $5.67 | | | $4.25 | | | $6.56 | | | $6.93 | | | $6.83 | |
Total return (%) (k)(r)(s) | | 50.00 | | | (29.50 | ) | | 1.93 | | | 10.39 | | | 2.19 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 0.87 | | | 0.89 | | | 0.84 | | | 0.85 | | | 0.86 | |
Expenses after expense reductions (f) | | 0.82 | | | 0.84 | | | 0.79 | | | 0.83 | | | N/A | |
Net investment income | | 9.21 | | | 8.60 | | | 7.25 | | | 7.14 | | | 7.06 | |
Portfolio turnover | | 58 | | | 63 | | | 69 | | | 92 | | | 53 | |
Net assets at end of period (000 omitted) | | $121,416 | | | $96,605 | | | $175,408 | | | $224,412 | | | $255,999 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $4.21 | | | $6.50 | | | $6.88 | | | $6.79 | | | $7.28 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.43 | | | $0.47 | | | $0.47 | | | $0.46 | | | $0.47 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.49 | | | (2.24 | ) | | (0.35 | ) | | 0.19 | | | (0.36 | ) |
Total from investment operations | | $1.92 | | | $(1.77 | ) | | $0.12 | | | $0.65 | | | $0.11 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.50 | ) | | $(0.52 | ) | | $(0.50 | ) | | $(0.56 | ) | | $(0.60 | ) |
Net asset value, end of period | | $5.63 | | | $4.21 | | | $6.50 | | | $6.88 | | | $6.79 | |
Total return (%) (k)(r)(s) | | 49.97 | | | (29.64 | ) | | 1.56 | | | 10.04 | | | 1.93 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | 1.12 | | | 1.14 | | | 1.09 | | | 1.10 | | | 1.11 | |
Expenses after expense reductions (f) | | 1.07 | | | 1.09 | | | 1.04 | | | 1.08 | | | N/A | |
Net investment income | | 9.01 | | | 8.38 | | | 7.01 | | | 6.89 | | | 6.81 | |
Portfolio turnover | | 58 | | | 63 | | | 69 | | | 92 | | | 53 | |
Net assets at end of period (000 omitted) | | $108,217 | | | $103,169 | | | $149,162 | | | $131,839 | | | $111,348 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (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. |
See Notes to Financial Statements
19
MFS High Yield Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS High Yield Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is 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 exchange on which such securities are primarily traded. 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 affect 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
20
MFS High Yield Portfolio
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | Level 3 | | Total |
| Domestic Equity | | $3,682,767 | | $374,763 | | $41,163 | | $4,098,693 |
| Non-U.S. Sovereign Debt | | — | | 330,298 | | — | | 330,298 |
| Corporate Bonds | | — | | 173,431,945 | | — | | 173,431,945 |
| Residential Mortgage-Backed Securities | | — | | 24,547 | | — | | 24,547 |
| Commercial Mortgage-Backed Securities | | — | | 6,816,596 | | — | | 6,816,596 |
| Asset-Backed Securities (including CDOs) | | — | | 516,477 | | 343,598 | | 860,075 |
| Foreign Bonds | | — | | 23,386,911 | | — | | 23,386,911 |
| Floating Rate Loans | | — | | 12,610,468 | | — | | 12,610,468 |
| Other Fixed Income Securities | | — | | 1,143,054 | | — | | 1,143,054 |
| Mutual Funds | | 3,286,982 | | — | | — | | 3,286,982 |
| Total Investments | | $6,969,749 | | $218,635,059 | | $384,761 | | $225,989,569 |
| | | | |
| Other Financial Instruments | | | | | | | | |
| Forward Currency Contracts | | $— | | $37,367 | | $— | | $37,367 |
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.
| | | | | | |
| | | Domestic
Equity | | Asset-Backed Securities | | Total |
| Balance as of 12/31/08 | | $— | | $— | | $— |
Accrued discounts/premiums | | — | | — | | — |
Realized gain (loss) | | — | | — | | — |
Change in unrealized appreciation (depreciation) | | 10,471 | | 151,901 | | 162,372 |
Net purchases (sales) | | 30,692 | | 36,220 | | 66,912 |
Transfers in and/or out of Level 3 | | — | | 155,477 | | 155,477 |
| Balance as of 12/31/09 | | $41,163 | | $343,598 | | $384,761 |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
21
MFS High Yield Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009:
| | | | | | | | | | | |
| | | | | Asset Derivatives | | Liability Derivatives | |
| | | | | Location on Statement of
Assets and
Liabilities | | Fair Value | | Location on Statement of
Assets and
Liabilities | | Fair Value | |
| Foreign Exchange Contracts | | Forward Foreign Currency Exchange Contracts | | Receivable for forward foreign currency exchange contracts | | $71,970 | | Payable for forward foreign currency exchange contracts | | $(34,603 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | |
| | | Foreign
Currency
Transactions | | Swap
Transactions | | | Total | |
| Foreign Exchange Contracts | | $8,613 | | $— | | | $8,613 | |
| Credit Contracts | | — | | (3,311,002 | ) | | (3,311,002 | ) |
Total | | $8,613 | | $(3,311,002 | ) | | $(3,302,389 | ) |
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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | | |
| | | Translation of
Assets and
Liabilities in
Foreign
Currencies | | | Swap
Transactions | | Total | |
| Foreign Exchange Contracts | | $(36,249 | ) | | $— | | $(36,249 | ) |
| Credit Contracts | | — | | | 2,993,001 | | 2,993,001 | |
Total | | $(36,249 | ) | | $2,993,001 | | $2,956,752 | |
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
22
MFS High Yield Portfolio
Notes to Financial Statements – continued
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.
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.
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
23
MFS High Yield Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009, the portfolio had unfunded loan commitments of $56,807, 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 the fund. This amount, for the year ended December 31, 2009, 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.
24
MFS High Yield Portfolio
Notes to Financial Statements – continued
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.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $21,199,945 | | $25,133,394 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $239,290,944 | |
| Gross appreciation | | 12,277,276 | |
| Gross depreciation | | (25,578,651 | ) |
| Net unrealized appreciation (depreciation) | | $(13,301,375 | ) |
| Undistributed ordinary income | | 20,656,881 | |
| Capital loss carryforwards | | (93,279,661 | ) |
| Other temporary differences | | (541,839 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/10 | | $(46,740,625 | ) |
| 12/31/13 | | (5,089,839 | ) |
| 12/31/14 | | (7,011,353 | ) |
| 12/31/16 | | (23,243,372 | ) |
| 12/31/17 | | (11,194,472 | ) |
| | $(93,279,661 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $10,861,982 | | $13,147,666 |
| Service Class | | 10,337,963 | | 11,985,728 |
| Total | | $21,199,945 | | $25,133,394 |
| (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 0.75% of the fund’s average daily net assets. The investment adviser has agreed in writing to reduce its management fee to 0.70% for the first $1 billion of average daily net assets and 0.65% of average daily net assets in excess of $1 billion. This written agreement will continue until modified or rescinded by the fund’s shareholders, but such agreement will continue at least until April 30, 2010. This management fee reduction amounted to $107,313, which is shown as a reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.70% of the fund’s average daily net assets.
25
MFS High Yield Portfolio
Notes to Financial Statements – continued
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, and brokerage commissions, such that total annual fund operating expenses do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s total annual operating expenses is contained in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval. In addition, the investment adviser has voluntarily agreed to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, and brokerage commissions, such that total annual operating expenses do not exceed 1.00% of the fund’s average daily net assets attributable to Initial Class shares. This voluntary agreement may be changed or rescinded at any time by MFS. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay a portion of the fund’s expenses.
In addition, the investment adviser 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 operating expenses do not exceed 1.00% of average daily net assets for the Initial Class shares and 1.25% of average daily net assets for the Service Class shares. This written agreement will continue until April 30, 2010. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund’s expenses.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0402% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $3,892 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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.
26
MFS High Yield Portfolio
Notes to Financial Statements – continued
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $119,584,581 and $137,824,343, 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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 1,528,393 | | | $6,890,150 | | | 2,668,236 | | | $13,260,670 | |
Service Class | | 1,358,723 | | | 6,068,280 | | | 5,487,552 | | | 24,860,434 | |
| | 2,887,116 | | | $12,958,430 | | | 8,155,788 | | | $38,121,104 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 2,642,818 | | | $10,861,982 | | | 2,151,827 | | | $13,147,666 | |
Service Class | | 2,533,814 | | | 10,337,963 | | | 1,974,585 | | | 11,985,728 | |
| | 5,176,632 | | | $21,199,945 | | | 4,126,412 | | | $25,133,394 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (5,492,264 | ) | | $(25,876,431 | ) | | (8,850,420 | ) | | $(51,391,122 | ) |
Service Class | | (9,130,838 | ) | | (42,474,889 | ) | | (5,915,569 | ) | | (32,826,318 | ) |
| | (14,623,102 | ) | | $(68,351,320 | ) | | (14,765,989 | ) | | $(84,217,440 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,321,053 | ) | | $(8,124,299 | ) | | (4,030,357 | ) | | $(24,982,786 | ) |
Service Class | | (5,238,301 | ) | | (26,068,646 | ) | | 1,546,568 | | | 4,019,844 | |
| | (6,559,354 | ) | | $(34,192,945 | ) | | (2,483,789 | ) | | $(20,962,942 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $3,218 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 | | — | | 71,925,699 | | (68,638,717 | ) | | 3,286,982 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $8,643 | | | $3,286,982 |
27
MFS High Yield Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS High Yield Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS High Yield Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
28
MFS High Yield Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
29
MFS High Yield Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
30
MFS High Yield Portfolio
Trustees and Officers – continued
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers John Addeo David Cole | | |
31
MFS High Yield Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 5th quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS and MFS’ explanation of steps taken to improve performance, including changes to the portfolio management team, the Board of Trustees concluded that the Fund’s performance was adequate.
32
MFS High Yield Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further noted that MFS agreed to reduce its advisory fee on a permanent basis, requiring shareholder approval for any modification or termination, and they accepted MFS’ offer to continue the total expense limitation for the next year. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the reduced fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
33
MFS High Yield Portfolio
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.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
34
MFS High Yield Portfolio
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.
35
MFS® BOND PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Bond Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Bond Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Fixed income sectors (i) | | |
| High Grade Corporates | | 61.1% |
| High Yield Corporates | | 23.8% |
| Emerging Markets Bonds | | 6.7% |
| Commercial Mortgage-Backed Securities | | 4.7% |
| Non-U.S. Government Bonds | | 0.5% |
| Asset-Backed Securities | | 0.2% |
| Collateralized Debt Obligations | | 0.2% |
| Mortgage-Backed Securities | | 0.2 % |
| | |
| Credit quality of bonds (a)(r) | | |
| AAA | | 2.2% |
| AA | | 6.4% |
| A | | 18.4% |
| BBB | | 47.5% |
| BB | | 19.0% |
| B | | 5.7% |
| CCC | | 0.5% |
| CC | | 0.3% |
| D (o) | | 0.0% |
| |
| Portfolio facts | | |
| Average Duration (d)(i) | | 5.0 |
| Average Effective Maturity (i)(m) | | 7.4 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a) | | BBB |
| (a) | 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. 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. 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. Also excluded from the calculation are convertible bonds, inverse floaters, currencies, futures, options, swaps, cash, and cash-equivalents. Average ratings are converted to the S&P scale and are subject to change. |
| (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 any derivative holdings, if applicable. |
| (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 investments as of 12/31/09. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Bond Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Bond Portfolio (the “fund”) provided a total return of 27.96%, while Service Class shares of the fund provided a total return of 27.66%. These compare with a return of 16.04% for the fund’s benchmark, the Barclays Capital U.S. Credit Bond Index. Effective May 1, 2009, the fund changed its benchmark from the Barclays Capital U.S. Government/Credit Bond Index to the Barclays Capital U.S. Credit Bond Index because it is believed that it more closely corresponds to the investment objective and policies of the fund. For the twelve months ended December 31, 2009, the Barclays Capital U.S. Government/Credit Bond Index generated a return of 4.52%.
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.
Contributors to Performance
Relative to the Barclays Capital U.S Credit Bond Index, the fund’s greater exposure to “BBB” rated (r) and below-investment-grade securities was a key driver of positive outperformance. Bonds within these credit quality sectors outperformed higher-quality issues over the reporting period as investors appeared to be recovering their appetite for risk in an improving economy. The benchmark holds only investment-grade (“BBB” rated and above) securities.
The fund’s return from yield, which was greater than that of the benchmark, was another positive contributor to performance.
Security selection also boosted relative results. Top individual contributors during the reporting period included the fund’s holdings of financial services providers UniCredito Italiano and Barclays, hotel and resort operator Wyndham Worldwide, and real estate investment trusts (REITs) Simon Property Group, HRPT Properties Trust, and ProLogis.
The fund’s greater exposure to corporate bonds in the financial sector also contributed to relative returns as holdings within this sector exhibited strong returns for the reporting period.
A greater exposure to commercial mortgage-backed securities was another factor that benefited relative returns.
Detractors from Performance
During the reporting period, the fund’s lesser exposure to investment-grade corporate bonds in the industrial sector detracted from relative performance.
The fund’s exposure to U.S. Treasury securities also held back relative results as the performance of treasury securities significantly lagged the benchmark return.
3
MFS Bond Portfolio
Management Review – continued
Among individual securities, significant price deterioration of two structured finance bonds, Bayview Financial and Falcon Franchise Loan, detracted from performance. Additionally, our purchase of protection on Weyerhaeuser (h) in the credit default swap market underperformed as its spreads tightened during the year.
Respectfully,
| | | | |
| Richard Hawkins | | Robert Persons | | |
| 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, 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.
4
MFS Bond Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Return through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/06/98 | | 27.96% | | 4.87% | | 6.77% | | N/A | | |
| | | Service Class | | 8/24/01 | | 27.66% | | 4.62% | | N/A | | 5.83% | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | Barclays Capital U.S. Credit Bond Index (f) | | 16.04% | | 4.68% | | 6.64% | | N/A | | |
| | | Barclays Capital U.S. Government/Credit Bond Index (e)(f) | | 4.52% | | 4.70% | | 6.34% | | N/A | | |
| (e) | Effective May 1, 2009, the fund changed its benchmark from the Barclays Capital U.S. Government/Credit Bond Index to the Barclays Capital U.S. Credit Bond Index because it is believed that it more closely corresponds to the investment objective and policies of the fund. |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definitions
Barclays Capital U.S. Credit Bond Index – a market capitalization-weighted index that measures the performance of publicly issued, SEC-registered, U.S. corporate and specified foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.
Barclays Capital U.S. Government/Credit Bond Index – a market capitalization-weighted index that measures the performance of investment-grade debt obligations of the U.S. Treasury and U.S. government agencies, as well as U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements.
It is not possible to invest directly in an index.
5
MFS Bond Portfolio
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Bond Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.72% | | $1,000.00 | | $1,127.99 | | $3.86 |
| | Hypothetical (h) | | 0.72% | | $1,000.00 | | $1,021.58 | | $3.67 |
| Service Class | | Actual | | 0.97% | | $1,000.00 | | $1,126.70 | | $5.20 |
| | Hypothetical (h) | | 0.97% | | $1,000.00 | | $1,020.32 | | $4.94 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Bond Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – 95.8% | | | | | | |
| Aerospace – 0.7% | | | | | | |
| Bombardier, Inc., 6.3%, 2014 (n) | | $ | 1,275,000 | | $ | 1,262,250 |
| | | | | | |
| Airlines – 1.5% | | | | | | |
| Continental Airlines, Inc., 7.25%, 2019 | | $ | 750,000 | | $ | 763,125 |
| Delta Air Lines, Inc., 7.57%, 2010 | | | 1,045,000 | | | 1,059,369 |
| Delta Air Lines, Inc., 7.75%, 2019 | | | 966,000 | | | 985,320 |
| | | | | | |
| | | | | $ | 2,807,814 |
| | | | | | |
| Asset Backed & Securitized – 5.2% | | | | | | |
ARCap REIT, Inc., CDO, “G”,
6.08%, 2045 (z) | | $ | 350,000 | | $ | 28,875 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.031%, 2040 (z) | | | 380,270 | | | 161,691 |
| Brazilian Merchant Voucher Receivables Ltd., 5.911%, 2011 (z) | | | 328,671 | | | 331,958 |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 2049 | | | 514,266 | | | 446,271 |
| Commercial Mortgage Acceptance Corp., FRN, 1.605%, 2030 (i) | | | 1,344,972 | | | 78,728 |
| Commercial Mortgage Pass-Through Certificates, 5.306%, 2046 | | | 397,355 | | | 339,130 |
| Countrywide Asset-Backed Certificates, FRN, 4.575%, 2035 | | | 737 | | | 733 |
| Credit Suisse Mortgage Capital Certificate, 5.311%, 2039 | | | 454,000 | | | 378,734 |
| Credit Suisse Mortgage Capital Certificate, 5.343%, 2039 | | | 890,177 | | | 673,122 |
DLJ Commercial Mortgage Corp.,
6.04%, 2031 (z) | | | 625,000 | | | 634,351 |
| Falcon Franchise Loan LLC, 6.5%, 2014 (z) | | | 440,000 | | | 149,600 |
Falcon Franchise Loan LLC, FRN,
3.675%, 2025 (i)(z) | | | 1,895,145 | | | 132,471 |
| First Union-Lehman Brothers Commercial Mortgage Trust, 7%, 2029 (n) | | | 379,460 | | | 397,349 |
GE Commercial Mortgage Corp., FRN,
5.335%, 2044 | | | 440,000 | | | 346,275 |
| GMAC LLC, FRN, 6.02%, 2033 (z) | | | 800,000 | | | 733,219 |
| GMAC LLC, FRN, 7.656%, 2034 (n) | | | 825,000 | | | 705,721 |
| Greenwich Capital Commercial Funding Corp., FRN, 5.918%, 2038 | | | 350,000 | | | 286,362 |
| JPMorgan Chase Commercial Mortgage Securities Corp., 5.42%, 2049 | | | 1,020,006 | | | 860,432 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.342%, 2042 (n) | | | 765,072 | | | 241,906 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.818%, 2049 | | | 195,039 | | | 169,850 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.99%, 2051 | | | 410,000 | | | 401,840 |
| KKR Financial CLO Ltd., “C”, CDO, FRN, 1.722%, 2021 (n) | | | 524,715 | | | 338,441 |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 0.819%, 2030 (i) | | | 1,673,955 | | | 51,225 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Asset Backed & Securitized – continued |
Merrill Lynch Mortgage Trust, FRN,
5.828%, 2050 | | $ | 234,000 | | $ | 55,546 |
| Morgan Stanley Capital I, Inc., 5.72%, 2032 | | | 19,054 | | | 19,445 |
Morgan Stanley Capital I, Inc., FRN,
0.905%, 2030 (i)(n) | | | 3,624,604 | | | 134,724 |
Mortgage Capital Funding, Inc., FRN,
2.009%, 2031 (i) | | | 111,070 | | | 41 |
PNC Mortgage Acceptance Corp., FRN,
7.1%, 2032 (z) | | | 800,000 | | | 795,500 |
| Prudential Securities Secured Financing Corp., FRN, 7.27%, 2013 (z) | | | 567,000 | | | 501,662 |
| Spirit Master Funding LLC, 5.05%, 2023 (z) | | | 394,697 | | | 326,473 |
| | | | | | |
| | | | | $ | 9,721,675 |
| | | | | | |
| Automotive – 0.3% | | | | | | |
| Ford Motor Credit Co. LLC, 9.75%, 2010 | | $ | 530,000 | | $ | 546,880 |
| | | | | | |
| Broadcasting – 1.3% | | | | | | |
| Inmarsat Finance PLC, 7.375%, 2017 (n) | | $ | 1,104,000 | | $ | 1,128,840 |
| News America, Inc., 8.5%, 2025 | | | 770,000 | | | 907,005 |
| WPP Finance, 8%, 2014 | | | 366,000 | | | 416,237 |
| | | | | | |
| | | | | $ | 2,452,082 |
| | | | | | |
| Brokerage & Asset Managers – 0.8% | | | | | | |
Abbey National Treasury Services PLC,
4.15%, 2014 | | $ | 855,000 | | $ | 842,968 |
| BlackRock, Inc., 5%, 2019 | | | 680,000 | | | 668,223 |
| | | | | | |
| | | | | $ | 1,511,191 |
| | | | | | |
| Building – 0.8% | | | | | | |
| CEMEX Finance LLC, 9.5%, 2016 (z) | | $ | 102,000 | | $ | 106,845 |
| CRH PLC, 8.125%, 2018 | | | 477,000 | | | 556,344 |
| Hanson PLC, 7.875%, 2010 | | | 380,000 | | | 393,767 |
| Odebrecht Finance Ltd., 7%, 2020 (n) | | | 453,000 | | | 458,096 |
| | | | | | |
| | | | | $ | 1,515,052 |
| | | | | | |
| Cable TV – 2.9% | | | | | | |
| Cox Communications, Inc., 4.625%, 2013 | | $ | 994,000 | | $ | 1,033,649 |
| Cox Communications, Inc., 6.25%, 2018 (n) | | | 261,000 | | | 277,805 |
| DIRECTV Holdings LLC, 7.625%, 2016 | | | 1,000,000 | | | 1,092,500 |
| DIRECTV Holdings LLC, 5.875%, 2019 (n) | | | 490,000 | | | 498,377 |
| TCI Communications, Inc., 9.8%, 2012 | | | 439,000 | | | 496,862 |
| Time Warner Cable, Inc., 8.25%, 2019 | | | 850,000 | | | 1,012,430 |
| Time Warner Cable, Inc., 5%, 2020 | | | 860,000 | | | 833,969 |
Time Warner Entertainment Co. LP,
8.375%, 2033 | | | 266,000 | | | 317,987 |
| | | | | | |
| | | | | $ | 5,563,579 |
| | | | | | |
| Chemicals – 1.7% | | | | | | |
| Ashland, Inc., 9.125%, 2017 (n) | | $ | 685,000 | | $ | 751,788 |
| Dow Chemical Co., 8.55%, 2019 | | | 490,000 | | | 584,641 |
8
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Chemicals – continued | | | | | | |
| Dow Chemical Co., 9.4%, 2039 | | $ | 408,000 | | $ | 539,438 |
| Nalco Co., 8.25%, 2017 (z) | | | 1,283,000 | | | 1,363,188 |
| | | | | | |
| | | | | $ | 3,239,055 |
| | | | | | |
| Computer Software – 0.6% | | | | | | |
Seagate Technology HDD Holdings,
6.375%, 2011 | | $ | 1,070,000 | | $ | 1,088,725 |
| | | | | | |
| Conglomerates – 0.5% | | | | | | |
| American Standard Cos., Inc., 7.625%, 2010 | | $ | 302,000 | | $ | 303,737 |
| Kennametal, Inc., 7.2%, 2012 | | | 526,000 | | | 551,072 |
| | | | | | |
| | | | | $ | 854,809 |
| | | | | | |
| Construction – 0.4% | | | | | | |
| D.R. Horton, Inc., 7.875%, 2011 | | $ | 764,000 | | $ | 806,020 |
| | | | | | |
| Consumer Products – 1.7% | | | | | | |
| Clorox Co., 5%, 2013 | | $ | 700,000 | | $ | 748,266 |
Controladora Mabe S.A. de C.V.,
7.875%, 2019 (n) | | | 375,000 | | | 375,938 |
| Fortune Brands, Inc., 5.125%, 2011 | | | 914,000 | | | 942,692 |
| Hasbro, Inc., 6.125%, 2014 | | | 370,000 | | | 402,837 |
| Newell Rubbermaid, Inc., 5.5%, 2013 | | | 702,000 | | | 725,940 |
| | | | | | |
| | | | | $ | 3,195,673 |
| | | | | | |
| Consumer Services – 1.7% | | | | | | |
| Corrections Corp. of America, 7.75%, 2017 | | $ | 1,100,000 | | $ | 1,133,000 |
| Service Corp. International, 7.375%, 2014 | | | 820,000 | | | 824,100 |
| Western Union Co., 5.4%, 2011 | | | 1,133,000 | | | 1,209,685 |
| | | | | | |
| | | | | $ | 3,166,785 |
| | | | | | |
| Containers – 1.0% | | | | | | |
| Crown Americas LLC, 7.625%, 2017 (z) | | $ | 956,000 | | $ | 991,850 |
| Owens-Illinois, Inc., 7.375%, 2016 | | | 850,000 | | | 877,625 |
| | | | | | |
| | | | | $ | 1,869,475 |
| | | | | | |
| Defense Electronics – 1.7% | | | | | | |
| BAE Systems Holdings, Inc., 6.375%, 2019 (n) | | $ | 635,000 | | $ | 683,050 |
| L-3 Communications Corp., 6.375%, 2015 | | | 2,439,000 | | | 2,448,146 |
| | | | | | |
| | | | | $ | 3,131,196 |
| | | | | | |
| Electronics – 0.6% | | | | | | |
| Tyco Electronics Group S.A., 6.55%, 2017 | | $ | 360,000 | | $ | 372,226 |
| Tyco Electronics Group S.A., 7.125%, 2037 | | | 700,000 | | | 721,799 |
| | | | | | |
| | | | | $ | 1,094,025 |
| | | | | | |
| Emerging Market Quasi-Sovereign – 1.9% | | | |
| BNDES Participacoes S.A., 6.5%, 2019 (n) | | $ | 444,000 | | $ | 477,300 |
| Export-Import Bank of Korea, 5.875%, 2015 | | | 253,000 | | | 271,497 |
| Gaz Capital S.A., 8.125%, 2014 (n) | | | 583,000 | | | 617,980 |
KazMunaiGaz Finance B.V.,
8.375%, 2013 (n) | | | 137,000 | | | 146,419 |
KazMunaiGaz Finance B.V.,
11.75%, 2015 (n) | | | 403,000 | | | 485,615 |
| Majapahit Holding B.V., 7.75%, 2020 (n) | | | 814,000 | | | 852,665 |
Qtel International Finance Ltd.,
7.875%, 2019 (n) | | | 367,000 | | | 411,397 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Emerging Market Quasi-Sovereign – continued | | | |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 6.75%, 2019 (n) | | $ | 300,000 | | $ | 324,577 |
| | | | | | |
| | | | | $ | 3,587,450 |
| | | | | | |
| Emerging Market Sovereign – 1.3% | | | | | | |
| Republic of Croatia, 6.75%, 2019 (n) | | $ | 584,000 | | $ | 629,012 |
| Republic of Uruguay, 8%, 2022 | | | 311,000 | | | 356,095 |
| Republic of Uruguay, 6.875%, 2025 | | | 260,000 | | | 273,000 |
| State of Qatar, 4%, 2015 (n) | | | 620,000 | | | 621,550 |
| State of Qatar, 5.25%, 2020 (n) | | | 618,000 | | | 622,635 |
| | | | | | |
| | | | | $ | 2,502,292 |
| | | | | | |
| Energy – Independent – 3.0% | | | | | | |
| Anadarko Petroleum Corp., 6.45%, 2036 | | $ | 800,000 | | $ | 835,495 |
| Newfield Exploration Co., 6.625%, 2016 | | | 1,100,000 | | | 1,102,750 |
| Nexen, Inc., 6.4%, 2037 | | | 652,000 | | | 656,901 |
| Pioneer Natural Resource Co., 7.5%, 2020 | | | 518,000 | | | 518,235 |
| Pioneer Natural Resources Co., 6.65%, 2017 | | | 1,100,000 | | | 1,084,894 |
| Questar Market Resources, Inc., 6.8%, 2020 | | | 699,000 | | | 728,571 |
| Talisman Energy, Inc., 7.75%, 2019 | | | 590,000 | | | 692,900 |
| | | | | | |
| | | | | $ | 5,619,746 |
| | | | | | |
| Energy – Integrated – 0.3% | | | | | | |
| Hess Corp., 8.125%, 2019 | | $ | 440,000 | | $ | 530,621 |
| | | | | | |
| Financial Institutions – 1.0% | | | | | | |
| General Electric Capital Corp., 3.75%, 2014 | | $ | 413,000 | | $ | 412,279 |
| GMAC LLC, 7.25%, 2011 (z) | | | 609,000 | | | 602,910 |
International Lease Finance Corp.,
6.375%, 2013 | | | 453,000 | | | 372,448 |
International Lease Finance Corp.,
5.875%, 2013 | | | 606,000 | | | 481,689 |
| | | | | | |
| | | | | $ | 1,869,326 |
| | | | | | |
| Food & Beverages – 5.1% | | | | | | |
| Anheuser-Busch Cos., Inc., 7.2%, 2014 (n) | | $ | 280,000 | | $ | 317,565 |
| Anheuser-Busch Cos., Inc., 7.75%, 2019 (n) | | | 610,000 | | | 714,185 |
| Anheuser-Busch Cos., Inc., 5.375%, 2020 (n) | | | 1,000,000 | | | 1,020,259 |
| Del Monte Foods Co., 7.5%, 2019 (z) | | | 1,485,000 | | | 1,529,550 |
| Diageo Capital PLC, 5.5%, 2016 | | | 1,070,000 | | | 1,143,207 |
Dr. Pepper Snapple Group, Inc.,
6.82%, 2018 | | | 656,000 | | | 735,913 |
| General Mills, Inc., 5.65%, 2012 | | | 374,000 | | | 406,866 |
| Kraft Foods, Inc., 6.125%, 2018 | | | 920,000 | | | 970,002 |
| Miller Brewing Co., 5.5%, 2013 (n) | | | 1,724,000 | | | 1,835,610 |
| Tyson Foods, Inc., 7.85%, 2016 | | | 950,000 | | | 973,750 |
| | | | | | |
| | | | | $ | 9,646,907 |
| | | | | | |
| Food & Drug Stores – 0.4% | | | | | | |
| CVS Caremark Corp., 5.75%, 2017 | | $ | 664,000 | | $ | 700,795 |
| | | | | | |
| Forest & Paper Products – 0.5% | | | | | | |
| Georgia-Pacific Corp., 7.125%, 2017 (n) | | $ | 1,000,000 | | $ | 1,012,500 |
| | | | | | |
| Gaming & Lodging – 1.1% | | | | | | |
| Royal Caribbean Cruises Ltd., 8%, 2010 | | $ | 705,000 | | $ | 717,338 |
| Wyndham Worldwide Corp., 6%, 2016 | | | 1,530,000 | | | 1,425,339 |
| | | | | | |
| | | | | $ | 2,142,677 |
| | | | | | |
9
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Insurance – 2.2% | | | | | | |
ING Groep N.V., 5.775% to 2015,
FRN to 2049 | | $ | 792,000 | | $ | 585,043 |
Metropolitan Life Global Funding,
5.125%, 2013 (n) | | | 600,000 | | | 635,634 |
Metropolitan Life Global Funding,
5.125%, 2014 (n) | | | 370,000 | | | 391,570 |
| Prudential Financial, Inc., 4.75%, 2015 | | | 631,000 | | | 639,843 |
| Prudential Financial, Inc., 6%, 2017 | | | 600,000 | | | 619,023 |
| UnumProvident Corp., 6.85%, 2015 (n) | | | 1,340,000 | | | 1,363,769 |
| | | | | | |
| | | | | $ | 4,234,882 |
| | | | | | |
| Insurance – Health – 1.1% | | | | | | |
| Humana, Inc., 7.2%, 2018 | | $ | 754,000 | | $ | 771,144 |
| WellPoint, Inc., 6.8%, 2012 | | | 1,241,000 | | | 1,369,221 |
| | | | | | |
| | | | | $ | 2,140,365 |
| | | | | | |
| Insurance – Property & Casualty – 0.7% |
| AXIS Capital Holdings Ltd., 5.75%, 2014 | | $ | 855,000 | | $ | 860,635 |
| Chubb Corp., 6.375% to 2017, FRN to 2067 | | | 279,000 | | | 259,470 |
ZFS Finance USA Trust V, 6.5% to 2017,
FRN to 2037 (n) | | | 146,000 | | | 123,370 |
| | | | | | |
| | | | | $ | 1,243,475 |
| | | | | | |
| International Market Quasi-Sovereign – 0.2% |
Achmea Hypotheekbank N.V.,
3.2%, 2014 (n) | | $ | 413,000 | | $ | 412,200 |
| | | | | | |
| Machinery & Tools – 0.5% | | | | | | |
Case New Holland, Inc.,
7.75%, 2013 (z) | | $ | 902,000 | | $ | 922,295 |
| | | | | | |
| Major Banks – 11.0% | | | | | | |
Abbey National Treasury Services PLC,
3.875%, 2014 (n) | | $ | 413,000 | | $ | 414,470 |
BAC Capital Trust XIV, 5.63% to 2012,
FRN to 2049 | | | 320,000 | | | 220,800 |
| Banco Santander Chile, 2.875%, 2012 (z) | | | 1,047,000 | | | 1,054,704 |
| Bank of America Corp., 5.65%, 2018 | | | 580,000 | | | 589,055 |
| Bank of America Corp., 7.625%, 2019 | | | 990,000 | | | 1,145,279 |
Bank of America Corp., 8% to 2018,
FRN to 2049 | | | 533,000 | | | 513,140 |
Barclays Bank PLC, 8.55% to 2011,
FRN to 2049 (n) | | | 882,000 | | | 811,440 |
BNP Paribas, 7.195% to 2037,
FRN to 2049 (n) | | | 700,000 | | | 644,000 |
Commonwealth Bank of Australia,
5%, 2019 (n) | | | 1,400,000 | | | 1,389,963 |
| Credit Suisse (USA), Inc., 4.875%, 2010 | | | 1,389,000 | | | 1,426,672 |
| Credit Suisse (USA), Inc., 6%, 2018 | | | 180,000 | | | 188,341 |
| Goldman Sachs Group, Inc., 5.625%, 2017 | | | 1,123,000 | | | 1,146,987 |
| Goldman Sachs Group, Inc., 7.5%, 2019 | | | 910,000 | | | 1,060,881 |
| JPMorgan Chase & Co., 6%, 2017 | | | 1,000,000 | | | 1,070,674 |
| JPMorgan Chase Capital XXVII, 7%, 2039 | | | 960,000 | | | 968,172 |
| Merrill Lynch & Co., Inc., 6.15%, 2013 | | | 500,000 | | | 535,079 |
| Merrill Lynch & Co., Inc., 6.05%, 2016 | | | 349,000 | | | 352,140 |
| Morgan Stanley, 5.75%, 2016 | | | 906,000 | | | 940,031 |
| Morgan Stanley, 6.625%, 2018 | | | 701,000 | | | 757,899 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Major Banks – continued | | | | | | |
| Morgan Stanley, 7.3%, 2019 | | $ | 540,000 | | $ | 606,382 |
MUFG Capital Finance 1 Ltd.,
6.346% to 2016, FRN to 2049 | | | 441,000 | | | 401,374 |
| PNC Funding Corp., 5.625%, 2017 | | | 1,095,000 | | | 1,085,062 |
UniCredito Italiano Capital Trust II,
9.2% to 2010, FRN to 2049 (n) | | | 851,000 | | | 791,430 |
UniCredito Luxembourg Finance S.A.,
6%, 2017 (n) | | | 1,020,000 | | | 1,010,945 |
| Wachovia Corp., 6.605%, 2025 | | | 1,270,000 | | | 1,239,488 |
Wells Fargo & Co., 7.98% to 2018,
FRN to 2049 | | | 348,000 | | | 348,870 |
| | | | | | |
| | | | | $ | 20,713,278 |
| | | | | | |
| Medical & Health Technology & Services – 3.3% |
| CareFusion Corp., 6.375%, 2019 (n) | | $ | 340,000 | | $ | 363,977 |
| DaVita, Inc., 7.25%, 2015 | | | 1,400,000 | | | 1,403,500 |
Fisher Scientific International, Inc.,
6.125%, 2015 | | | 1,440,000 | | | 1,485,000 |
| HCA, Inc., 8.75%, 2010 | | | 948,000 | | | 970,515 |
| Hospira, Inc., 5.55%, 2012 | | | 210,000 | | | 223,832 |
| Hospira, Inc., 6.05%, 2017 | | | 760,000 | | | 795,427 |
| McKesson Corp., 5.7%, 2017 | | | 770,000 | | | 807,639 |
| McKesson Corp., 7.5%, 2019 | | | 120,000 | | | 142,306 |
| | | | | | |
| | | | | $ | 6,192,196 |
| | | | | | |
| Metals & Mining – 3.6% |
| ArcelorMittal, 6.125%, 2018 | | $ | 750,000 | | $ | 773,877 |
Freeport-McMoRan Copper & Gold, Inc.,
8.25%, 2015 | | | 1,380,000 | | | 1,504,200 |
| Gerdau Holdings, Inc., 7%, 2020 (n) | | | 678,000 | | | 696,645 |
| International Steel Group, Inc., 6.5%, 2014 | | | 945,000 | | | 1,008,594 |
| Peabody Energy Corp., 5.875%, 2016 | | | 500,000 | | | 487,500 |
| Peabody Energy Corp., “B”, 6.875%, 2013 | | | 850,000 | | | 859,563 |
| Rio Tinto Finance USA Ltd., 5.875%, 2013 | | | 540,000 | | | 582,680 |
| Vale Overseas Ltd., 6.875%, 2039 | | | 902,000 | | | 908,065 |
| | | | | | |
| | | | | $ | 6,821,124 |
| | | | | | |
| Mortgage Backed – 0.2% |
| Fannie Mae, 7.5%, 2030 - 2031 | | $ | 187,714 | | $ | 211,829 |
| Freddie Mac, 5%, 2025 | | | 114,272 | | | 116,011 |
| | | | | | |
| | | | | $ | 327,840 |
| | | | | | |
| Natural Gas – Distribution – 0.6% |
| EQT Corp., 8.125%, 2019 | | $ | 980,000 | | $ | 1,132,266 |
| | | | | | |
| Natural Gas – Pipeline – 3.5% |
| CenterPoint Energy, Inc., 7.875%, 2013 | | $ | 1,383,000 | | $ | 1,557,775 |
| Energy Transfer Partners LP, 8.5%, 2014 | | | 176,000 | | | 203,156 |
| Energy Transfer Partners LP, 9.7%, 2019 | | | 480,000 | | | 592,849 |
Enterprise Products Operating LP,
5.65%, 2013 | | | 354,000 | | | 377,187 |
| Enterprise Products Partners LP, 6.3%, 2017 | | | 540,000 | | | 581,322 |
| Kinder Morgan Energy Partners, 6.85%, 2020 | | | 370,000 | | | 410,432 |
Kinder Morgan Energy Partners LP,
5.125%, 2014 | | | 410,000 | | | 430,347 |
10
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Natural Gas – Pipeline – continued |
Kinder Morgan Energy Partners LP,
7.4%, 2031 | | $ | 581,000 | | $ | 634,960 |
| Spectra Energy Capital LLC, 8%, 2019 | | | 942,000 | | | 1,102,443 |
| Williams Cos., Inc., 7.125%, 2011 | | | 675,000 | | | 721,377 |
| | | | | | |
| | | | | $ | 6,611,848 |
| | | | | | |
| Network & Telecom – 3.2% |
| AT&T, Inc., 5.1%, 2014 | | $ | 1,026,000 | | $ | 1,103,627 |
| CenturyTel, Inc., 7.6%, 2039 | | | 870,000 | | | 891,608 |
| Qwest Corp., 7.875%, 2011 | | | 1,010,000 | | | 1,057,975 |
| Qwest Corp., 8.375%, 2016 | | | 70,000 | | | 75,075 |
| Telefonica Europe B.V., 7.75%, 2010 | | | 981,000 | | | 1,026,232 |
| Telemar Norte Leste S.A., 9.5%, 2019 (n) | | | 321,000 | | | 383,595 |
| Verizon New York, Inc., 6.875%, 2012 | | | 635,000 | | | 690,890 |
| Windstream Corp., 8.625%, 2016 | | | 800,000 | | | 814,000 |
| | | | | | |
| | | | | $ | 6,043,002 |
| | | | | | |
| Oil Services – 0.1% |
| Smith International, Inc., 9.75%, 2019 | | $ | 190,000 | | $ | 240,678 |
| | | | | | |
| Other Banks & Diversified Financials – 5.4% |
American Express Centurion Bank,
5.55%, 2012 | | $ | 590,000 | | $ | 630,963 |
| American Express Co., 8.125%, 2019 | | | 720,000 | | | 853,244 |
| Banco Bradesco S.A., 6.75%, 2019 (n) | | | 786,000 | | | 819,405 |
| Capital One Financial Corp., 8.8%, 2019 | | | 1,000,000 | | | 1,181,667 |
| Capital One Financial Corp., 10.25%, 2039 | | | 510,000 | | | 592,875 |
| Citigroup, Inc., 6.125%, 2018 | | | 635,000 | | | 638,434 |
| Citigroup, Inc., 8.5%, 2019 | | | 428,000 | | | 494,234 |
| Citigroup, Inc., 8.125%, 2039 | | | 760,000 | | | 857,772 |
Nordea Bank AB, 5.424% to 2015,
FRN to 2049 (n) | | | 412,000 | | | 327,981 |
Resona Bank Ltd., 5.85% to 2016,
FRN to 2049 (n) | | | 1,051,000 | | | 917,290 |
Svenska Handelsbanken AB,
4.875%, 2014 (n) | | | 990,000 | | | 1,037,370 |
UBS Preferred Funding Trust V,
6.243% to 2016, FRN to 2049 | | | 547,000 | | | 428,028 |
| UFJ Finance Aruba AEC, 6.75%, 2013 | | | 1,028,000 | | | 1,144,531 |
| Woori America Bank, 7%, 2015 (n) | | | 263,000 | | | 288,230 |
| | | | | | |
| | | | | $ | 10,212,024 |
| | | | | | |
| Pollution Control – 1.1% |
Allied Waste North America, Inc.,
6.875%, 2017 | | $ | 1,110,000 | | $ | 1,177,988 |
| Republic Services, Inc., 5.25%, 2021 (n) | | | 860,000 | | | 845,575 |
| | | | | | |
| | | | | $ | 2,023,563 |
| | | | | | |
| Precious Metals & Minerals – 0.7% |
| Teck Resources Ltd., 10.25%, 2016 | | $ | 790,000 | | $ | 920,350 |
| Teck Resources Ltd., 6.125%, 2035 | | | 409,000 | | | 366,055 |
| | | | | | |
| | | | | $ | 1,286,405 |
| | | | | | |
| Printing & Publishing – 0.1% |
| Pearson PLC, 5.5%, 2013 (n) | | $ | 260,000 | | $ | 272,929 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Railroad & Shipping – 0.7% |
| CSX Corp., 6.3%, 2012 | | $ | 826,000 | | $ | 893,677 |
| CSX Corp., 7.375%, 2019 | | | 165,000 | | | 188,499 |
| Kansas City Southern, 7.375%, 2014 | | | 330,000 | | | 321,750 |
| | | | | | |
| | | | | $ | 1,403,926 |
| | | | | | |
| Real Estate – 2.8% |
| HRPT Properties Trust, REIT, 6.25%, 2016 | | $ | 1,027,000 | | $ | 971,916 |
| Kimco Realty Corp., REIT, 6.875%, 2019 | | | 402,000 | | | 408,776 |
| Liberty Property LP, REIT, 5.5%, 2016 | | | 660,000 | | | 609,281 |
| ProLogis, REIT, 5.75%, 2016 | | | 655,000 | | | 615,202 |
Simon Property Group, Inc., REIT,
6.35%, 2012 | | | 629,000 | | | 671,416 |
Simon Property Group, Inc., REIT,
5.75%, 2015 | | | 1,200,000 | | | 1,223,702 |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 740,000 | | | 794,570 |
| | | | | | |
| | | | | $ | 5,294,863 |
| | | | | | |
| Restaurants – 0.3% |
| YUM! Brands, Inc., 8.875%, 2011 | | $ | 466,000 | | $ | 504,246 |
| | | | | | |
| Retailers – 1.1% |
| J.C. Penney Corp., Inc., 8%, 2010 | | $ | 81,000 | | $ | 81,911 |
| Macy’s, Inc., 6.625%, 2011 | | | 1,236,000 | | | 1,274,625 |
| Staples, Inc., 7.75%, 2011 | | | 370,000 | | | 397,606 |
| Staples, Inc., 9.75%, 2014 | | | 335,000 | | | 408,181 |
| | | | | | |
| | | | | $ | 2,162,323 |
| | | | | | |
| Supermarkets – 0.2% |
| Delhaize America, Inc., 9%, 2031 | | $ | 360,000 | | $ | 460,909 |
| | | | | | |
| Supranational – 0.5% |
Corporacion Andina de Fomento,
6.875%, 2012 | | $ | 481,000 | | $ | 515,487 |
Eurasian Development Bank,
7.375%, 2014 (n) | | | 433,000 | | | 449,779 |
| | | | | | |
| | | | | $ | 965,266 |
| | | | | | |
| Telecommunications – Wireless – 1.7% |
| American Tower Corp., 4.625%, 2015 (n) | | $ | 770,000 | | $ | 778,820 |
Crown Castle International Corp.,
7.75%, 2017 (n) | | | 960,000 | | | 1,022,400 |
Crown Castle International Corp.,
7.125%, 2019 | | | 215,000 | | | 212,850 |
| Rogers Cable, Inc., 5.5%, 2014 | | | 364,000 | | | 390,036 |
| Rogers Wireless, Inc., 7.25%, 2012 | | | 535,000 | | | 602,816 |
| Vodafone Group PLC, 5.625%, 2017 | | | 201,000 | | | 213,496 |
| | | | | | |
| | | | | $ | 3,220,418 |
| | | | | | |
| Telephone Services – 0.7% |
| Embarq Corp., 7.082%, 2016 | | $ | 540,000 | | $ | 596,472 |
Frontier Communications Corp.,
8.25%, 2014 | | | 700,000 | | | 729,750 |
| | | | | | |
| | | | | $ | 1,326,222 |
| | | | | | |
| Tobacco – 3.4% |
| Altria Group, Inc., 9.7%, 2018 | | $ | 414,000 | | $ | 511,773 |
| Altria Group, Inc., 9.95%, 2038 | | | 1,510,000 | | | 1,968,300 |
11
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Tobacco – continued |
BAT International Finance PLC,
9.5%, 2018 (n) | | $ | 600,000 | | $ | 761,933 |
| Lorillard Tobacco Co., 8.125%, 2019 | | | 920,000 | | | 1,011,435 |
| Reynolds American, Inc., 7.25%, 2012 | | | 881,000 | | | 968,495 |
| Reynolds American, Inc., 6.75%, 2017 | | | 1,100,000 | | | 1,139,167 |
| | | | | | |
| | | | | $ | 6,361,103 |
| | | | | | |
| Transportation – Services – 0.9% |
| Erac USA Finance Co., 6.375%, 2017 (n) | | $ | 200,000 | | $ | 202,013 |
| Erac USA Finance Co., 7%, 2037 (n) | | | 1,509,000 | | | 1,477,021 |
| | | | | | |
| | | | | $ | 1,679,034 |
| | | | | | |
| Utilities – Electric Power – 8.0% |
| AES Corp., 9.75%, 2016 (n) | | $ | 725,000 | | $ | 793,875 |
Allegheny Energy Supply Co. LLC,
8.25%, 2012 (n) | | | 1,110,000 | | | 1,214,420 |
| Beaver Valley Funding Corp., 9%, 2017 | | | 815,000 | | | 890,762 |
| CenterPoint Energy, Inc., 5.95%, 2017 | | | 800,000 | | | 793,465 |
| DPL, Inc., 6.875%, 2011 | | | 614,000 | | | 656,198 |
| Duke Energy Corp., 5.65%, 2013 | | | 930,000 | | | 997,620 |
| EDP Finance B.V., 6%, 2018 (n) | | | 1,010,000 | | | 1,078,923 |
Enel Finance International S.A.,
5.125%, 2019 (n) | | | 990,000 | | | 996,114 |
| Enersis S.A., 7.375%, 2014 | | | 686,000 | | | 764,722 |
| Exelon Generation Co. LLC, 5.2%, 2019 | | | 200,000 | | | 200,089 |
| Exelon Generation Co. LLC, 6.25%, 2039 | | | 800,000 | | | 815,065 |
Mirant Americas Generation LLC,
8.3%, 2011 | | | 1,210,000 | | | 1,240,250 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Utilities – Electric Power – continued |
| NiSource Finance Corp., 7.875%, 2010 | | $ | 773,000 | | $ | 810,382 |
| NorthWestern Corp., 5.875%, 2014 | | | 680,000 | | | 705,354 |
| NRG Energy, Inc., 7.375%, 2016 | | | 920,000 | | | 921,150 |
| Oncor Electric Delivery Co., 6.8%, 2018 | | | 561,000 | | | 623,147 |
| PSEG Power LLC, 5.32%, 2016 (n) | | | 288,000 | | | 296,314 |
System Energy Resources, Inc.,
5.129%, 2014 (z) | | | 496,996 | | | 493,313 |
| Waterford 3 Funding Corp., 8.09%, 2017 | | | 757,209 | | | 752,276 |
| | | | | | |
| | | | | $ | 15,043,439 |
| | | | | | |
Total Bonds
(Identified Cost, $175,317,880) | | | | | $ | 180,690,719 |
| | | | | | |
|
| PREFERRED STOCKS – 0.1% |
| Financial Institutions – 0.1% |
GMAC, Inc., 7%
(Identified Cost, $99,330) (a)(z) | | | 129 | | $ | 85,027 |
| | | | | | |
|
| MONEY MARKET FUNDS (v) – 2.7% |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | | 5,163,314 | | $ | 5,163,314 |
| | | | | | |
Total Investments
(Identified Cost, $180,580,524) | | $ | 185,939,060 |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.4% | | | 2,598,398 |
| | | | | | |
| Net Assets – 100.0% | | $ | 188,537,458 |
| | | | | | |
| (a) | | Non-income producing security. |
| (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 $41,151,524, representing 21.8% of net assets. |
| (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 |
| ARCap REIT, Inc., CDO, “G”, 6.08%, 2045 | | 9/21/04 | | $330,130 | | $28,875 |
| Banco Santander Chile, 2.875%, 2012 | | 11/09/09 | | 1,045,548 | | 1,054,704 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.031%, 2040 | | 3/01/06 | | 380,270 | | 161,691 |
| Brazilian Merchant Voucher Receivables Ltd., 5.911%, 2011 | | 7/02/03-3/08/07 | | 329,129 | | 331,958 |
| CEMEX Finance LLC, 9.5%, 2016 | | 12/09/09 | | 102,000 | | 106,845 |
| Case New Holland, Inc., 7.75%, 2013 | | 8/11/09-8/12/09 | | 879,523 | | 922,295 |
| Crown Americas LLC, 7.625%, 2017 | | 10/16/09-10/20/09 | | 980,766 | | 991,850 |
| DLJ Commercial Mortgage Corp., 6.04%, 2031 | | 7/23/04 | | 616,657 | | 634,351 |
| Del Monte Foods Co., 7.5%, 2019 | | 9/17/09-9/21/09 | | 1,487,981 | | 1,529,550 |
| Falcon Franchise Loan LLC, 6.5%, 2014 | | 7/15/05 | | 406,979 | | 149,600 |
| Falcon Franchise Loan LLC, FRN, 3.675%, 2025 | | 1/29/03 | | 203,754 | | 132,471 |
| GMAC LLC, 7.25%, 2011 | | 12/26/08 | | 559,865 | | 602,910 |
12
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | |
| Restricted Securities – continued | | Acquisition
Date | | Cost | | Current
Market Value |
| GMAC LLC, FRN, 6.02%, 2033 | | 3/20/02 | | $780,852 | | $733,219 |
| GMAC, Inc., 7% (Preferred Stock) | | 12/26/08 | | 99,330 | | 85,027 |
| Nalco Co., 8.25%, 2017 | | 12/17/09-12/18/09 | | 1,365,933 | | 1,363,188 |
| PNC Mortgage Acceptance Corp., FRN, 7.1%, 2032 | | 3/25/08 | | 800,000 | | 795,500 |
| Prudential Securities Secured Financing Corp., FRN, 7.27%, 2013 | | 12/06/04 | | 592,184 | | 501,662 |
| Spirit Master Funding LLC, 5.05%, 2023 | | 10/04/05 | | 390,433 | | 326,473 |
| System Energy Resources, Inc., 5.129%, 2014 | | 4/16/04-9/08/04 | | 497,126 | | 493,313 |
| Total Restricted Securities | | | | | | $10,945,482 |
| % of Net Assets | | | | | | 5.8% |
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 |
Derivative Contracts at 12/31/09
Swap Agreements at 12/31/09
| | | | | | | | | | | | | |
| Expiration | | Notional
Amount | | Counterparty | | Cash Flows to
Receive | | Cash Flows
to Pay | | Fair Value | |
| Liability Derivatives | | | | | | | | | |
| Credit Default Swaps | | | | | | | | | |
| 12/20/12 | | USD | | 910,000 | | Merrill Lynch International | | 1.0% (fixed rate) | | (1) | | $(565,423 | ) |
| | | | | | | | | | | | | |
| (1) | | Fund, as protection seller, to pay notional amount upon a defined credit event by MBIA, Inc., 0.643%, 10/06/10, a BB+ rated bond. The fund entered into the contract to gain issuer exposure. |
The credit ratings presented here are an indicator of the current payment/performance risk of the related swap, the reference obligation for which may be either a single security or, in case of a credit default index, a basket of securities issued by corporate or sovereign issuers. Each reference security, including each individual security within a reference basket of securities, is assigned a rating from Moody’s Investor Service. If not rated by Moody’s, the rating will be that assigned by Standard & Poor’s. Likewise, if not assigned by Standard & Poor’s, it will be based on the rating assigned by Fitch, Inc. The ratings for a credit default index are calculated by MFS as a weighted average of the external credit ratings of the individual securities that compose the index’s reference basket of securities.
At December 31, 2009, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
13
MFS Bond Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $175,417,210) | | $180,775,746 | | | |
Underlying funds, at cost and value | | 5,163,314 | | | |
Total investments, at value (identified cost, $180,580,524) | | $185,939,060 | | | |
Restricted cash | | $550,000 | | | |
Receivables for | | | | | |
Fund shares sold | | 190,234 | | | |
Interest | | 2,670,873 | | | |
Other assets | | 7,391 | | | |
Total assets | | | | | $189,357,558 |
Liabilities | | | | | |
Payables for | | | | | |
Fund shares reacquired | | $189,036 | | | |
Swaps, at value | | 565,423 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 6,204 | | | |
Distribution and/or service fees | | 1,318 | | | |
Administrative services fee | | 363 | | | |
Payable for Trustees’ compensation | | 205 | | | |
Accrued expenses and other liabilities | | 57,551 | | | |
Total liabilities | | | | | $820,100 |
Net assets | | | | | $188,537,458 |
Net assets consist of | | | | | |
Paid-in capital | | $185,002,581 | | | |
Unrealized appreciation (depreciation) on investments | | 4,793,113 | | | |
Accumulated net realized gain (loss) on investments | | (10,862,780 | ) | | |
Undistributed net investment income | | 9,604,544 | | | |
Net assets | | | | | $188,537,458 |
Shares of beneficial interest outstanding | | | | | 17,453,011 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $92,244,126 | | 8,507,848 | | $10.84 |
Service Class | | 96,293,332 | | 8,945,163 | | 10.76 |
See Notes to Financial Statements
14
MFS Bond Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
| Year ended 12/31/09 | | | | | |
| Net investment income | | | | | |
Income | | | | | |
Interest | | $10,181,816 | | | |
Dividends | | 8,047 | | | |
Dividends from underlying funds | | 8,869 | | | |
Total investment income | | | | | $10,198,732 |
Expenses | | | | | |
Management fee | | $918,229 | | | |
Distribution and/or service fees | | 177,386 | | | |
Administrative services fee | | 61,093 | | | |
Trustees’ compensation | | 19,894 | | | |
Custodian fee | | 33,676 | | | |
Shareholder communications | | 14,186 | | | |
Auditing fees | | 56,938 | | | |
Legal fees | | 8,473 | | | |
Miscellaneous | | 20,821 | | | |
Total expenses | | | | | $1,310,696 |
Fees paid indirectly | | (5 | ) | | |
Net expenses | | | | | $1,310,691 |
Net investment income | | | | | $8,888,041 |
Realized and unrealized gain (loss) on investments | | | | | |
Realized gain (loss) (identified cost basis) | | | | | |
Investment transactions | | $22,742 | | | |
Swap transactions | | 58,555 | | | |
Net realized gain (loss) on investments | | | | | $81,297 |
Change in unrealized appreciation (depreciation) | | | | | |
Investments | | $28,234,097 | | | |
Swap transactions | | (258,232 | ) | | |
Net unrealized gain (loss) on investments | | | | | $27,975,865 |
Net realized and unrealized gain (loss) on investments | | | | | $28,057,162 |
Change in net assets from operations | | | | | $36,945,203 |
See Notes to Financial Statements
15
MFS Bond Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $8,888,041 | | | $8,702,282 | |
Net realized gain (loss) on investments | | 81,297 | | | (5,215,473 | ) |
Net unrealized gain (loss) on investments | | 27,975,865 | | | (20,000,533 | ) |
Change in net assets from operations | | $36,945,203 | | | $(16,513,724 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(9,101,368 | ) | | $(10,791,358 | ) |
Change in net assets from fund share transactions | | $38,151,700 | | | $(33,294,978 | ) |
Total change in net assets | | $65,995,535 | | | $(60,600,060 | ) |
Net assets | | | | | | |
At beginning of period | | 122,541,923 | | | 183,141,983 | |
At end of period (including undistributed net investment income of $9,604,544 and
$9,406,365, respectively) | | $188,537,458 | | | $122,541,923 | |
See Notes to Financial Statements
16
MFS Bond Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.11 | | | $10.89 | | | $11.19 | | | $11.40 | | | $12.15 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.59 | | | $0.57 | | | $0.60 | | | $0.59 | | | $0.59 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.81 | | | (1.64 | ) | | (0.21 | ) | | (0.04 | ) | | (0.39 | ) |
Total from investment operations | | $2.40 | | | $(1.07 | ) | | $0.39 | | | $0.55 | | | $0.20 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.67 | ) | | $(0.71 | ) | | $(0.69 | ) | | $(0.69 | ) | | $(0.74 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.07 | ) | | (0.21 | ) |
Total distributions declared to shareholders | | $(0.67 | ) | | $(0.71 | ) | | $(0.69 | ) | | $(0.76 | ) | | $(0.95 | ) |
Net asset value, end of period | | $10.84 | | | $9.11 | | | $10.89 | | | $11.19 | | | $11.40 | |
Total return (%) (k)(s) | | 27.96 | | | (10.53 | ) | | 3.53 | | | 5.20 | | | 1.75 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.74 | | | 0.74 | | | 0.71 | | | 0.71 | | | 0.72 | |
Net investment income | | 5.93 | | | 5.64 | | | 5.50 | | | 5.32 | | | 5.05 | |
Portfolio turnover | | 71 | | | 46 | | | 42 | | | 47 | | | 52 | |
Net assets at end of period (000 omitted) | | $92,244 | | | $70,504 | | | $105,554 | | | $120,991 | | | $143,680 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $9.04 | | | $10.81 | | | $11.11 | | | $11.33 | | | $12.07 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.56 | | | $0.54 | | | $0.57 | | | $0.56 | | | $0.56 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | 1.80 | | | (1.63 | ) | | (0.21 | ) | | (0.05 | ) | | (0.38 | ) |
Total from investment operations | | $2.36 | | | $(1.09 | ) | | $0.36 | | | $0.51 | | | $0.18 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.64 | ) | | $(0.68 | ) | | $(0.66 | ) | | $(0.66 | ) | | $(0.71 | ) |
From net realized gain on investments | | — | | | — | | | — | | | (0.07 | ) | | (0.21 | ) |
Total distributions declared to shareholders | | $(0.64 | ) | | $(0.68 | ) | | $(0.66 | ) | | $(0.73 | ) | | $(0.92 | ) |
Net asset value, end of period | | $10.76 | | | $9.04 | | | $10.81 | | | $11.11 | | | $11.33 | |
Total return (%) (k)(s) | | 27.66 | | | (10.77 | ) | | 3.28 | | | 4.87 | | | 1.59 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.99 | | | 0.99 | | | 0.96 | | | 0.96 | | | 0.97 | |
Net investment income | | 5.64 | | | 5.39 | | | 5.25 | | | 5.07 | | | 4.81 | |
Portfolio turnover | | 71 | | | 46 | | | 42 | | | 47 | | | 52 | |
Net assets at end of period (000 omitted) | | $96,293 | | | $52,038 | | | $77,588 | | | $76,471 | | | $75,776 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
17
MFS Bond Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Bond Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. 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 exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. 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 affect 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 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
18
MFS Bond Portfolio
Notes to Financial Statements – continued
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | | | |
| Investments at Value | | Level 1 | | Level 2 | | | Level 3 | | Total | |
| Equity Securities | | $— | | $85,027 | | | $— | | $85,027 | |
| Non-U.S. Sovereign Debt | | — | | 7,467,208 | | | — | | 7,467,208 | |
| Corporate Bonds | | — | | 133,179,461 | | | — | | 133,179,461 | |
| Residential Mortgage-Backed Securities | | — | | 328,573 | | | — | | 328,573 | |
| Commercial Mortgage-Backed Securities | | — | | 8,859,976 | | | — | | 8,859,976 | |
| Asset-Backed Securities | | — | | 860,965 | | | — | | 860,965 | |
| Foreign Bonds | | — | | 29,994,536 | | | — | | 29,994,536 | |
| Mutual Funds | | 5,163,314 | | — | | | — | | 5,163,314 | |
| Total Investments | | $5,163,314 | | $180,775,746 | | | $— | | $185,939,060 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | |
| Swaps | | $— | | $(565,423 | ) | | $— | | $(565,423 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund may enter into repurchase agreements with approved counterparties. Each repurchase agreement is recorded at cost. The fund requires that the securities collateral in a repurchase transaction be transferred to a custodian. The fund monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the fund under each such repurchase agreement. The fund and other funds managed by MFS may utilize a joint trading account for the purpose of entering into one or more repurchase agreements.
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.
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.
ASC 815 also requires sellers of credit derivatives to make disclosures that will enable financial statement users to assess the potential effects of those credit derivatives on an entity’s financial position, financial performance and cash flows. As defined by ASC 815, a credit derivative is a derivative instrument (a) in which one or more of the derivative’s underlyings are related to the credit risk of a specified entity (or group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the derivative contract. The seller (or writer) is the party that provides the credit protection and assumes the credit risk on a credit derivatives contract, such as a credit default swap. Accordingly, appropriate disclosures have been included within the Swap Agreements table in the Portfolio of Investments and Significant Accounting Policies.
19
MFS Bond Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | | |
| | | | | Liability Derivatives | |
| | | | | Location on
Statement of
Assets and Liabilities | | Fair Value | |
| Credit Contracts Not Accounted For as Hedging Instruments Under ASC 815 | | Credit Default
Swaps | | Swaps, at value | | $(565,423 | ) |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for year ended December 31, 2009 as reported in the Statement of Operations:
| | |
| | | Swap
Transactions |
| Credit Contracts | | $58,555 |
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 December 31, 2009 as reported in the Statement of Operations:
| | | |
| | | Swap
Transactions | |
| Credit Contracts | | $(258,232 | ) |
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.
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.
20
MFS Bond Portfolio
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.
Credit default swaps are considered to have credit-risk-related contingent features since they trigger payment by the protection seller to the protection buyer upon the occurrence of a defined credit event. The aggregate fair value of credit default swaps in a net liability position as of December 31, 2009 is disclosed in the footnotes to the Portfolio of Investments. As discussed earlier in this note, collateral requirements for these swaps are based generally on the market value of the swap netted against collateral requirements for other types of over-the-counter derivatives traded under each counterparty’s ISDA Master Agreement. The maximum amount of future, undiscounted payments that the fund, as protection seller, could be required to make is equal to the swap’s notional amount. The protection seller’s payment obligation would be offset to the extent of the value of the contract’s deliverable obligation. If a defined credit event had occurred as of December 31, 2009, the swaps’ credit-risk-related contingent features would have been triggered and, for those swaps in a net liability position for which the fund is the protection seller, the fund in order to settle these swaps would have been required to either (1) pay the swap’s notional value of $910,000 less the value of the contracts’ related deliverable obligations as decided through an ISDA auction or (2) pay the notional value of the swaps in return for physical receipt of the deliverable obligations.
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.
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. 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.
21
MFS Bond Portfolio
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 December 31, 2009, 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 and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $9,101,368 | | $10,791,358 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $181,748,630 | |
| Gross appreciation | | 9,053,283 | |
| Gross depreciation | | (4,862,853 | ) |
| Net unrealized appreciation (depreciation) | | $4,190,430 | |
| Undistributed ordinary income | | 9,038,818 | |
| Capital loss carryforwards | | (9,694,371 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/14 | | $(2,113,205 | ) |
| 12/31/15 | | (1,256,685 | ) |
| 12/31/16 | | (5,876,744 | ) |
| 12/31/17 | | (447,737 | ) |
| | $(9,694,371 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $5,289,494 | | $6,244,633 |
| Service Class | | 3,811,874 | | 4,546,725 |
| Total | | $9,101,368 | | $10,791,358 |
| (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 0.60% of the fund’s average daily net assets.
22
MFS Bond Portfolio
Notes to Financial Statements – continued
The investment adviser has agreed in writing to reduce its management fee to 0.50% of average daily net assets in excess of $1 billion. This written agreement will continue until modified or rescinded by the fund’s shareholders, but such agreement will continue at least until April 30, 2010. For the year ended December 31, 2009, the fund’s average daily net assets did not exceed $1 billion and therefore, the management fee was not reduced. The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.60% of the fund’s average daily net assets.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0399% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $2,761 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 purchased option transactions, and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $4,599,174 | | $13,636,666 |
| Investments (non-U.S. Government securities) | | $134,563,759 | | $91,303,572 |
23
MFS Bond Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 1,165,319 | | | $11,304,830 | | | 314,028 | | | $3,103,635 | |
Service Class | | 3,840,207 | | | 37,713,447 | | | 508,752 | | | 5,148,811 | |
| | 5,005,526 | | | $49,018,277 | | | 822,780 | | | $8,252,446 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 593,658 | | | $5,289,494 | | | 609,828 | | | $6,244,633 | |
Service Class | | 430,234 | | | 3,811,874 | | | 446,633 | | | 4,546,725 | |
| | 1,023,892 | | | $9,101,368 | | | 1,056,461 | | | $10,791,358 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (989,878 | ) | | $(9,727,338 | ) | | (2,877,063 | ) | | $(29,003,530 | ) |
Service Class | | (1,078,796 | ) | | (10,240,607 | ) | | (2,376,422 | ) | | (23,335,252 | ) |
| | (2,068,674 | ) | | $(19,967,945 | ) | | (5,253,485 | ) | | $(52,338,782 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | 769,099 | | | $6,866,986 | | | (1,953,207 | ) | | $(19,655,262 | ) |
Service Class | | 3,191,645 | | | 31,284,714 | | | (1,421,037 | ) | | (13,639,716 | ) |
| | 3,960,744 | | | $38,151,700 | | | (3,374,244 | ) | | $(33,294,978 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $2,258 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 | | — | | 81,359,214 | | (76,195,900 | ) | | 5,163,314 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $8,869 | | | $5,163,314 |
24
MFS Bond Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of
MFS Bond Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Bond Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians 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 Bond Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
25
MFS Bond Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
26
MFS Bond Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
27
MFS Bond Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Richard Hawkins Robert Persons | | |
28
MFS Bond Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 4th quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was adequate.
29
MFS Bond Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. The Trustees further noted that MFS agreed to reduce its advisory fee on average daily net assets over $1 billion on a permanent basis, requiring shareholder approval for any modification or termination, and concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
30
MFS Bond Portfolio
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.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS fund 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 “Variable Insurance Portfolios — VIT II” in the “Products and Performance” section of mfs.com.
31
MFS Bond Portfolio
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.
32
MFS® GOVERNMENT SECURITIES PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Government Securities Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Government Securities Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Fixed income sectors (i) | | |
| Mortgage-Backed Securities | | 57.4% |
| U.S. Treasury Securities | | 23.6% |
| U.S. Government Agencies | | 9.6% |
| Municipal Bonds | | 3.2% |
| Commercial Mortgage-Backed Securities | | 1.0% |
High Grade Corporates
| | 0.2% |
| | |
| Credit quality of bonds (a)(r) | | |
| AAA | | 96.8% |
| AA | | 2.9% |
| Not Rated | | 0.3% |
| |
| Portfolio facts | | |
| Average Duration (d)(i) | | 3.9 |
| Average Effective Maturity (i)(m) | | 5.4 yrs. |
| Average Credit Quality of Rated Securities (long-term) (a) | | AAA |
| (a) | 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. 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. 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. Also excluded from the calculation are convertible bonds, inverse floaters, currencies, futures, options, swaps, cash, and cash-equivalents. Average ratings are converted to the S&P scale and are subject to change. |
| (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 any derivative holdings, if applicable. |
| (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 investments as of 12/31/09. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Government Securities Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Government Securities Portfolio (the “fund”) provided a total return of 4.49%, while Service Class shares of the fund provided a total return of 4.23%. These compare with a return of 1.96% for the fund’s benchmark, the Barclays Capital U.S. Government/Mortgage 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.
Contributors to Performance
Relative to the Barclays Capital U.S. Government/Mortgage Bond Index, the fund’s yield curve(y) positioning, particularly a lesser exposure to the long end of the curve, was a key contributor to relative outperformance.
The fund’s greater exposure to commercial mortgage-backed securities and municipal bonds, neither of which are represented in the benchmark, also enhanced relative returns as both sectors performed exceptionally well over the reporting period.
Detractors from Performance
The fund’s lower exposure to pure pass-through mortgage-backed securities held back relative performance as these bonds outperformed the benchmark return over the reporting period.
Respectfully,
Geoffrey Schechter
Portfolio Manager
| (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 manager 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.
3
MFS Government Securities Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 6/12/85 | | 4.49% | | 5.22% | | 6.10% | | N/A | | |
| | | Service Class | | 8/24/01 | | 4.23% | | 4.96% | | N/A | | 4.92% | | |
| | | | | |
| Comparative benchmark | | | | | | | | | | |
| | | Barclays Capital U.S. Government/Mortgage Bond Index (f) | | 1.96% | | 5.32% | | 6.32% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
Benchmark Definition
Barclays Capital U.S. Government/Mortgage Bond Index - measures debt issued by the U.S. Government, and its agencies, as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
It is not possible to invest directly in an index.
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS Government Securities Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.62% | | $1,000.00 | | $1,023.36 | | $3.16 |
| | Hypothetical (h) | | 0.62% | | $1,000.00 | | $1,022.08 | | $3.16 |
| Service Class | | Actual | | 0.87% | | $1,000.00 | | $1,022.71 | | $4.44 |
| | Hypothetical (h) | | 0.87% | | $1,000.00 | | $1,020.82 | | $4.43 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
5
MFS Government Securities Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – 91.1% | | | | | | |
| Agency – Other – 4.3% | | | | | | |
| Financing Corp., 9.4%, 2018 | | $ | 5,475,000 | | $ | 7,332,262 |
| Financing Corp., 9.8%, 2018 | | | 7,760,000 | | | 10,584,593 |
| Financing Corp., 10.35%, 2018 | | | 3,415,000 | | | 4,809,693 |
| Financing Corp., STRIPS, 0%, 2017 | | | 8,940,000 | | | 6,309,941 |
| | | | | | |
| | | | | $ | 29,036,489 |
| | | | | | |
| Asset Backed & Securitized – 1.0% | | | | | | |
| Commercial Mortgage Pass-Through Certificates, 5.306%, 2046 | | $ | 3,445,785 | | $ | 2,940,871 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.818%, 2049 | | | 2,026,008 | | | 1,764,351 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.99%, 2051 | | | 1,981,480 | | | 1,942,044 |
| | | | | | |
| | | | | $ | 6,647,266 |
| | | | | | |
| Local Authorities – 0.2% | | | | | | |
| University of California Rev. (Build America Bonds), 5.77%, 2043 | | $ | 1,220,000 | | $ | 1,183,546 |
| Utah Transit Authority Sales Tax Rev. (Build America Bonds), “B”, 5.937%, 2039 | | | 345,000 | | | 347,246 |
| | | | | | |
| | | | | $ | 1,530,792 |
| | | | | | |
| Mortgage Backed – 57.2% | | | | | | |
| Fannie Mae, 6.022%, 2010 | | $ | 400,000 | | $ | 416,862 |
| Fannie Mae, 5.503%, 2011 | | | 649,000 | | | 688,655 |
| Fannie Mae, 6.088%, 2011 | | | 1,020,000 | | | 1,073,840 |
| Fannie Mae, 4.73%, 2012 | | | 882,415 | | | 928,388 |
| Fannie Mae, 4.79%, 2012 - 2015 | | | 7,226,741 | | | 7,557,597 |
| Fannie Mae, 4.791%, 2012 | | | 401,814 | | | 422,119 |
| Fannie Mae, 6.005%, 2012 | | | 267,812 | | | 285,393 |
| Fannie Mae, 4.517%, 2013 | | | 797,099 | | | 833,413 |
| Fannie Mae, 4.542%, 2013 | | | 1,423,681 | | | 1,493,215 |
| Fannie Mae, 4.845%, 2013 | | | 1,690,463 | | | 1,785,833 |
| Fannie Mae, 5.06%, 2013 | | | 860,108 | | | 900,631 |
| Fannie Mae, 5.098%, 2013 | | | 2,960,388 | | | 3,151,804 |
| Fannie Mae, 5.37%, 2013 | | | 1,533,362 | | | 1,637,494 |
| Fannie Mae, 4.582%, 2014 | | | 1,135,935 | | | 1,189,706 |
| Fannie Mae, 4.6%, 2014 | | | 819,586 | | | 857,930 |
| Fannie Mae, 4.61%, 2014 | | | 3,201,493 | | | 3,354,646 |
| Fannie Mae, 4.77%, 2014 | | | 702,807 | | | 739,941 |
| Fannie Mae, 4.82%, 2014 | | | 719,884 | | | 758,082 |
| Fannie Mae, 4.84%, 2014 | | | 4,780,123 | | | 5,035,644 |
| Fannie Mae, 4.872%, 2014 | | | 3,060,459 | | | 3,220,805 |
| Fannie Mae, 4.88%, 2014 - 2020 | | | 902,596 | | | 947,398 |
| Fannie Mae, 5.1%, 2014 | | | 885,058 | | | 940,660 |
| Fannie Mae, 4.56%, 2015 | | | 1,060,462 | | | 1,100,627 |
| Fannie Mae, 4.62%, 2015 | | | 1,481,418 | | | 1,544,118 |
| Fannie Mae, 4.665%, 2015 | | | 716,659 | | | 747,153 |
| Fannie Mae, 4.69%, 2015 | | | 584,715 | | | 610,651 |
| Fannie Mae, 4.7%, 2015 | | | 1,061,247 | | | 1,107,917 |
| Fannie Mae, 4.74%, 2015 | | | 671,714 | | | 701,871 |
| Fannie Mae, 4.78%, 2015 | | | 932,578 | | | 975,274 |
| Fannie Mae, 4.81%, 2015 | | | 936,241 | | | 983,181 |
| Fannie Mae, 4.815%, 2015 | | | 824,000 | | | 863,297 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| Mortgage Backed – continued | | | | | | |
| Fannie Mae, 4.85%, 2015 | | $ | 586,214 | | $ | 615,962 |
| Fannie Mae, 4.856%, 2015 | | | 318,120 | | | 331,556 |
| Fannie Mae, 4.87%, 2015 | | | 617,379 | | | 648,003 |
| Fannie Mae, 4.89%, 2015 | | | 697,537 | | | 733,628 |
| Fannie Mae, 4.921%, 2015 | | | 2,187,550 | | | 2,305,411 |
| Fannie Mae, 4.997%, 2015 | | | 163,172 | | | 172,355 |
| Fannie Mae, 5.466%, 2015 | | | 3,109,693 | | | 3,349,270 |
| Fannie Mae, 4.5%, 2016 - 2029 | | | 21,570,640 | | | 22,386,643 |
| Fannie Mae, 5.157%, 2016 | | | 1,266,201 | | | 1,353,336 |
| Fannie Mae, 5.424%, 2016 | | | 1,922,829 | | | 2,069,392 |
| Fannie Mae, 6.5%, 2016 - 2037 | | | 8,632,103 | | | 9,343,055 |
| Fannie Mae, 4.989%, 2017 | | | 3,496,937 | | | 3,695,158 |
| Fannie Mae, 5.5%, 2017 - 2038 | | | 81,356,630 | | | 85,456,307 |
| Fannie Mae, 6%, 2017 - 2037 | | | 16,505,092 | | | 17,498,011 |
| Fannie Mae, 5.16%, 2018 | | | 1,439,759 | | | 1,530,496 |
| Fannie Mae, 4.67%, 2019 | | | 525,000 | | | 530,314 |
| Fannie Mae, 4.83%, 2019 | | | 399,220 | | | 407,726 |
| Fannie Mae, 4.874%, 2019 | | | 2,411,249 | | | 2,539,258 |
| Fannie Mae, 5%, 2019 - 2039 | | | 33,054,278 | | | 34,207,740 |
| Fannie Mae, 5.05%, 2019 | | | 333,793 | | | 346,078 |
| Fannie Mae, 7.5%, 2022 - 2031 | | | 822,581 | | | 927,832 |
| Freddie Mac, 4.5%, 2010 - 2026 | | | 8,290,636 | | | 8,480,697 |
| Freddie Mac, 4.375%, 2015 | | | 1,509,232 | | | 1,548,244 |
| Freddie Mac, 5%, 2016 - 2039 | | | 21,596,082 | | | 22,377,227 |
| Freddie Mac, 4.186%, 2019 | | | 814,000 | | | 792,921 |
| Freddie Mac, 5.085%, 2019 | | | 2,879,000 | | | 2,978,714 |
| Freddie Mac, 6%, 2021 - 2038 | | | 27,807,770 | | | 29,663,730 |
| Freddie Mac, 5.5%, 2022 - 2036 | | | 43,940,574 | | | 46,007,806 |
| Freddie Mac, 4%, 2024 | | | 261,501 | | | 262,659 |
| Freddie Mac, 5.25%, 2026 | | | 1,893,676 | | | 1,930,289 |
| Freddie Mac, 6.5%, 2032 - 2037 | | | 4,905,022 | | | 5,278,814 |
| Ginnie Mae, 5.5%, 2033 - 2038 | | | 15,830,873 | | | 16,655,754 |
| Ginnie Mae, 5.612%, 2058 | | | 4,880,514 | | | 5,211,462 |
| Ginnie Mae, 6.357%, 2058 | | | 2,855,845 | | | 3,073,045 |
| | | | | | |
| | | | | $ | 381,563,038 |
| | | | | | |
| Municipals – 3.2% | | | | | | |
| California Educational Facilities Authority Rev. (Stanford University), “T-1”, 5%, 2039 | | $ | 6,165,000 | | $ | 6,989,939 |
| Massachusetts Bay Transportation Authority, Sales Tax Rev., “A-1”, 5.25%, 2028 | | | 2,995,000 | | | 3,480,849 |
| Massachusetts Health & Educational Facilities Authority Rev. (Boston College), 5.5%, 2027 | | | 2,125,000 | | | 2,477,941 |
| Massachusetts Health & Educational Facilities Authority Rev. (Massachusetts Institute of Technology), “K”, 5.5%, 2032 | | | 2,445,000 | | | 2,985,541 |
| Massachusetts Water Pollution Abatement Trust, 5.25%, 2033 | | | 1,020,000 | | | 1,197,857 |
| Massachusetts Water Resources Authority Rev., “B”, FSA, 5.25%, 2035 | | | 3,775,000 | | | 4,141,552 |
| | | | | | |
| | | | | $ | 21,273,679 |
| | | | | | |
6
MFS Government Securities Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| U.S. Government Agencies and Equivalents – 5.1% | | | |
| Aid-Egypt, 4.45%, 2015 | | $ | 4,000,000 | | $ | 4,196,480 |
Empresa Energetica Cornito Ltd.,
6.07%, 2010 | | | 1,385,000 | | | 1,408,503 |
| Farmer Mac, 5.5%, 2011 (n) | | | 5,370,000 | | | 5,670,376 |
Small Business Administration,
6.35%, 2021 | | | 1,234,912 | | | 1,328,221 |
Small Business Administration,
6.34%, 2021 | | | 1,262,392 | | | 1,357,774 |
Small Business Administration,
6.44%, 2021 | | | 1,524,278 | | | 1,643,036 |
Small Business Administration,
6.625%, 2021 | | | 1,937,133 | | | 2,095,982 |
Small Business Administration,
6.07%, 2022 | | | 1,486,294 | | | 1,593,711 |
Small Business Administration,
4.98%, 2023 | | | 1,249,386 | | | 1,295,393 |
Small Business Administration,
4.77%, 2024 | | | 2,130,467 | | | 2,215,763 |
Small Business Administration,
5.52%, 2024 | | | 1,693,689 | | | 1,785,554 |
Small Business Administration,
5.11%, 2025 | | | 1,682,375 | | | 1,758,153 |
| U.S. Department of Housing & Urban Development, 6.36%, 2016 | | | 6,000,000 | | | 6,382,668 |
| U.S. Department of Housing & Urban Development, 6.59%, 2016 | | | 1,206,000 | | | 1,209,944 |
| | | | | | |
| | | | | $ | 33,941,558 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | | | | |
| U.S. Treasury Obligations – 20.1% | | | | | | |
| U.S. Treasury Bonds, 7.875%, 2021 | | $ | 114,000 | | $ | 153,223 |
| U.S. Treasury Bonds, 6.25%, 2023 | | | 2,875,000 | | | 3,433,828 |
| U.S. Treasury Bonds, 6%, 2026 | | | 2,699,000 | | | 3,157,409 |
| U.S. Treasury Bonds, 6.75%, 2026 | | | 1,829,000 | | | 2,307,684 |
| U.S. Treasury Bonds, 5.25%, 2029 | | | 11,548,000 | | | 12,511,542 |
| U.S. Treasury Bonds, 5%, 2037 | | | 4,802,000 | | | 5,099,873 |
| U.S. Treasury Bonds, 4.375%, 2038 | | | 348,000 | | | 334,080 |
| U.S. Treasury Notes, 3.125%, 2013 (f) | | | 55,320,000 | | | 57,493,910 |
| U.S. Treasury Notes, 3.75%, 2018 | | | 34,990,000 | | | 34,987,271 |
| U.S. Treasury Notes, 6.375%, 2027 | | | 6,594,000 | | | 8,052,922 |
| U.S. Treasury Notes, TIPS, 1.625%, 2015 | | | 6,361,495 | | | 6,615,954 |
| | | | | | |
| | | | | $ | 134,147,696 |
| | | | | | |
Total Bonds
(Identified Cost, $589,549,976) | | | | | $ | 608,140,518 |
| | | | | | |
|
| MONEY MARKET FUNDS (v) – 8.3% |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | | 55,015,709 | | $ | 55,015,709 |
| | | | | | |
Total Investments
(Identified Cost, $644,565,685) | | | | | $ | 663,156,227 |
| | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.6% | | | | | | 4,239,698 |
| | | | | | |
| Net Assets – 100.0% | | | | | $ | 667,395,925 |
| | | | | | |
| (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 $5,670,376, representing 0.8% of net assets. |
| (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. |
The following abbreviations are used in this report and are defined:
| FRN | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
| STRIPS | Separate Trading of Registered Interest and Principal of Securities |
| TIPS | Treasury Inflation Protected Security |
| | | | | | |
| Insurers | | |
| FSA | | Financial Security Assurance, Inc. | | | | |
Derivative Contracts at 12/31/09
Futures Contracts Outstanding at 12/31/09
| | | | | | | | | | | |
| Description | | Currency | | Contracts | | Value | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | |
| U.S. Treasury Bond 30 yr (Short) | | USD | | 18 | | $2,076,750 | | Mar-10 | | $88,953 | |
| | | | | | | | | | | |
| | | | | |
| Liability Derivatives | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | |
| U.S. Treasury Note 2 yr (Long) | | USD | | 110 | | $23,789,219 | | Mar-10 | | $(112,104 | ) |
| | | | | | | | | | | |
At December 31, 2009, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.
See Notes to Financial Statements
7
MFS Government Securities Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
At 12/31/09 | | | | | |
Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $589,549,976) | | $608,140,518 | | | |
Underlying funds, at cost and value | | 55,015,709 | | | |
Total investments, at value (identified cost, $644,565,685) | | $663,156,227 | | | |
Cash | | $2,840 | | | |
Receivables for | | | | | |
Fund shares sold | | 462,056 | | | |
Interest | | 4,427,207 | | | |
Other assets | | 24,651 | | | |
Total assets | | | | | $668,072,981 |
Liabilities | | | | | |
Payables for | | | | | |
Daily variation margin on open futures contracts | | $11,625 | | | |
Fund shares reacquired | | 545,623 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 20,146 | | | |
Distribution and/or service fees | | 5,719 | | | |
Administrative services fee | | 1,238 | | | |
Payable for Trustees’ compensation | | 730 | | | |
Accrued expenses and other liabilities | | 91,975 | | | |
Total liabilities | | | | | $677,056 |
Net assets | | | | | $667,395,925 |
Net assets consist of | | | | | |
Paid-in capital | | $631,113,255 | | | |
Unrealized appreciation (depreciation) on investments | | 18,567,391 | | | |
Accumulated net realized gain (loss) on investments | | (5,669,075 | ) | | |
Undistributed net investment income | | 23,384,354 | | | |
Net assets | | | | | $667,395,925 |
Shares of beneficial interest outstanding | | | | | 50,982,423 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $250,132,522 | | 19,030,862 | | $13.14 |
Service Class | | 417,263,403 | | 31,951,561 | | 13.06 |
See Notes to Financial Statements
8
MFS Government Securities Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
Year ended 12/31/09 | | | | | |
Net investment income | | | | | |
Income | | | | | |
Interest | | $26,480,226 | | | |
Dividends from underlying funds | | 75,914 | | | |
Total investment income | | | | | $26,556,140 |
Expenses | | | | | |
Management fee | | $3,276,455 | | | |
Distribution and/or service fees | | 842,007 | | | |
Administrative services fee | | 237,758 | | | |
Trustees’ compensation | | 86,770 | | | |
Custodian fee | | 81,457 | | | |
Shareholder communications | | 25,962 | | | |
Auditing fees | | 48,607 | | | |
Legal fees | | 7,037 | | | |
Miscellaneous | | 54,867 | | | |
Total expenses | | | | | $4,660,920 |
Fees paid indirectly | | (4 | ) | | |
Net expenses | | | | | $4,660,916 |
Net investment income | | | | | $21,895,224 |
Realized and unrealized gain (loss) on investments | | | | | |
Realized gain (loss) (identified cost basis) | | | | | |
Investment transactions | | $2,289,603 | | | |
Futures contracts | | 687,290 | | | |
Net realized gain (loss) on investments | | | | | $2,976,893 |
Change in unrealized appreciation (depreciation) | | | | | |
Investments | | $113,571 | | | |
Futures contracts | | 385,548 | | | |
Net unrealized gain (loss) on investments | | | | | $499,119 |
Net realized and unrealized gain (loss) on investments | | | | | $3,476,012 |
Change in net assets from operations | | | | | $25,371,236 |
See Notes to Financial Statements
9
MFS Government Securities Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $21,895,224 | | | $24,530,991 | |
Net realized gain (loss) on investments | | 2,976,893 | | | 12,898,623 | |
Net unrealized gain (loss) on investments | | 499,119 | | | 10,210,135 | |
Change in net assets from operations | | $25,371,236 | | | $47,639,749 | |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(26,160,014 | ) | | $(31,001,486 | ) |
Change in net assets from fund share transactions | | $130,962,885 | | | $(99,982,211 | ) |
Total change in net assets | | $130,174,107 | | | $(83,343,948 | ) |
Net assets | | | | | | |
At beginning of period | | 537,221,818 | | | 620,565,766 | |
At end of period (including undistributed net investment income of $23,384,354 and
$26,155,041, respectively) | | $667,395,925 | | | $537,221,818 | |
See Notes to Financial Statements
10
MFS Government Securities Portfolio
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
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.23 | | | $12.89 | | | $12.65 | | | $12.84 | | | $13.16 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.50 | | | $0.55 | | | $0.56 | | | $0.56 | | | $0.56 | |
Net realized and unrealized gain (loss) on investments | | 0.08 | | | 0.51 | | | 0.31 | | | (0.12 | ) | | (0.26 | ) |
Total from investment operations | | $0.58 | | | $1.06 | | | $0.87 | | | $0.44 | | | $0.30 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.67 | ) | | $(0.72 | ) | | $(0.63 | ) | | $(0.63 | ) | | $(0.62 | ) |
Net asset value, end of period | | $13.14 | | | $13.23 | | | $12.89 | | | $12.65 | | | $12.84 | |
Total return (%) (k)(s) | | 4.49 | | | 8.55 | | | 7.18 | | | 3.68 | | | 2.30 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.64 | | | 0.65 | | | 0.63 | | | 0.63 | | | 0.63 | |
Net investment income | | 3.85 | | | 4.31 | | | 4.48 | | | 4.47 | | | 4.32 | |
Portfolio turnover | | 36 | | | 52 | | | 39 | | | 29 | | | 75 | |
Net assets at end of period (000 omitted) | | $250,133 | | | $266,170 | | | $299,871 | | | $351,906 | | | $425,740 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.15 | | | $12.81 | | | $12.58 | | | $12.77 | | | $13.10 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.46 | | | $0.52 | | | $0.53 | | | $0.53 | | | $0.53 | |
Net realized and unrealized gain (loss) on investments | | 0.08 | | | 0.50 | | | 0.31 | | | (0.12 | ) | | (0.27 | ) |
Total from investment operations | | $0.54 | | | $1.02 | | | $0.84 | | | $0.41 | | | $0.26 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.63 | ) | | $(0.68 | ) | | $(0.61 | ) | | $(0.60 | ) | | $(0.59 | ) |
Net asset value, end of period | | $13.06 | | | $13.15 | | | $12.81 | | | $12.58 | | | $12.77 | |
Total return (%) (k)(s) | | 4.23 | | | 8.29 | | | 6.91 | | | 3.47 | | | 2.01 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.89 | | | 0.90 | | | 0.88 | | | 0.88 | | | 0.88 | |
Net investment income | | 3.54 | | | 4.06 | | | 4.23 | | | 4.22 | | | 4.10 | |
Portfolio turnover | | 36 | | | 52 | | | 39 | | | 29 | | | 75 | |
Net assets at end of period (000 omitted) | | $417,263 | | | $271,052 | | | $320,695 | | | $309,162 | | | $241,128 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
11
MFS Government Securities Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Government Securities Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. The fund may invest a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae.
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. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. 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. Foreign currency options are generally valued using an external pricing model that uses market data from a third-party source. 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.
12
MFS Government Securities Portfolio
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 December 31, 2009 in valuing the fund’s assets or liabilities carried at market value:
| | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | Level 3 | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | $— | | | $197,125,743 | | $— | | $197,125,743 | |
| Municipal Bonds | | — | | | 21,273,679 | | — | | 21,273,679 | |
| Corporate Bonds | | — | | | 1,530,792 | | — | | 1,530,792 | |
| Residential Mortgage-Backed Securities | | — | | | 381,563,038 | | — | | 381,563,038 | |
| Commercial Mortgage-Backed Securities | | — | | | 6,647,266 | | — | | 6,647,266 | |
| Mutual Funds | | 55,015,709 | | | — | | — | | 55,015,709 | |
| Total Investments | | $55,015,709 | | | $608,140,518 | | $— | | $663,156,227 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | |
| Futures | | $(23,151 | ) | | $— | | $— | | $(23,151 | ) |
For further information regarding security characteristics, see the Portfolio of Investments.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The fund may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security’s original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation.
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.
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.
13
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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 December 31, 2009:
| | | | | | | | | | | | |
| | | | | Asset Derivatives | | | Liability Derivatives | |
| | | | | Location on Statement of Assets and
Liabilities | | Fair Value | | | Location on Statement of Assets and
Liabilities | | Fair Value | |
| Interest Rate Contracts | | Interest Rate Futures Not Accounted For as Hedging Instruments Under ASC 815 | | Unrealized appreciation on investments | | $88,953(a | ) | | Unrealized depreciation on investments | | $(112,104 | )(a) |
| (a) | Includes cumulative appreciation/depreciation of futures contracts as reported in the fund’s Portfolio of Investments. Only the current day’s variation margin for futures contracts is 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 December 31, 2009 as reported in the Statement of Operations:
| | | | | | | |
| | | Investment
Transactions (i.e.,
Purchased
Options) | | | Futures Contracts | | Total |
| Interest Rate Contracts | | $(255,254 | ) | | $687,290 | | $432,036 |
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 December 31, 2009 as reported in the Statement of Operations:
| | |
| | | Futures Contracts |
| Interest Rate Contracts | | $385,548 |
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.
Purchased Options – The fund may purchase call or put options for a premium. Purchased options entitle the holder to buy or sell a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities or currency.
The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased options which have expired are
14
MFS Government Securities Portfolio
Notes to Financial Statements – continued
treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased option, the premium paid is either added to the cost of the security or financial instrument in the case of a call option, or offset against the proceeds on the sale of the underlying security or financial instrument in the case of a put option, in order to determine the realized gain or loss on investments.
The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, 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.
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 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.
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. Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted upward or downward to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase or decrease in the principal amount of an inflation-indexed bond is generally recorded as an increase or decrease in interest income, respectively, even though the adjusted principal is not received until maturity.
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.
The fund may enter into “TBA” (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date. Although the unit price has been established, the principal value has not been finalized. However, the principal amount of the commitments will not fluctuate more than 0.01%. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to settlement date, which is in addition to the risk of decline in the value of the fund’s other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities.
The fund may enter into “TBA” (to be announced) sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as “cover” for the transaction.
15
MFS Government Securities Portfolio
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 December 31, 2009, 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 and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $26,160,014 | | $31,001,486 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $648,802,716 | |
| Gross appreciation | | 18,087,352 | |
| Gross depreciation | | (3,733,841 | ) |
| Net unrealized appreciation (depreciation) | | $14,353,511 | |
| Undistributed ordinary income | | 23,384,354 | |
| Capital loss carryforwards | | (1,385,462 | ) |
| Other temporary differences | | (69,733 | ) |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $12,895,028 | | $15,631,404 |
| Service Class | | 13,264,986 | | 15,370,082 |
| Total | | $26,160,014 | | $31,001,486 |
| (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 billion of average daily net assets | | 0.55% |
| Average daily net assets in excess of $1 billion | | 0.50% |
16
MFS Government Securities Portfolio
Notes to Financial Statements – continued
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.55% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, brokerage commissions, and extraordinary expenses, such that total annual operating expenses of the fund do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s operating expense is contained in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval. In addition, the investment advisor has voluntarily agreed to pay a portion of the fund’s total operating expenses, exclusive of interest, taxes, brokerage commissions and extraordinary expenses, such that the total annual operating expenses do not exceed 1.00% of the fund’s average daily net assets attributable to Initial Class shares. This voluntary agreement may be changed or rescinded at any time by MFS. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment advisor did not pay a portion of the fund’s expenses.
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0399% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $10,806 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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.
17
MFS Government Securities Portfolio
Notes to Financial Statements – continued
Purchases and sales of investments, other than purchased option transactions, and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $256,576,468 | | $172,017,401 |
| Investments (non-U.S. Government securities) | | $22,609,603 | | $30,562,967 |
| (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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 2,063,849 | | | $26,840,152 | | | 3,062,068 | | | $39,366,748 | |
Service Class | | 13,292,413 | | | 171,590,407 | | | 3,775,423 | | | 47,971,366 | |
| | 15,356,262 | | | $198,430,559 | | | 6,837,491 | | | $87,338,114 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 1,004,286 | | | $12,895,028 | | | 1,250,512 | | | $15,631,404 | |
Service Class | | 1,037,949 | | | 13,264,986 | | | 1,235,537 | | | 15,370,082 | |
| | 2,042,235 | | | $26,160,014 | | | 2,486,049 | | | $31,001,486 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (4,149,064 | ) | | $(54,363,397 | ) | | (7,462,745 | ) | | $(96,129,042 | ) |
Service Class | | (2,989,941 | ) | | (39,264,291 | ) | | (9,434,584 | ) | | (122,192,769 | ) |
| | (7,139,005 | ) | | $(93,627,688 | ) | | (16,897,329 | ) | | $(218,321,811 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (1,080,929 | ) | | $(14,628,217 | ) | | (3,150,165 | ) | | $(41,130,890 | ) |
Service Class | | 11,340,421 | | | 145,591,102 | | | (4,423,624 | ) | | (58,851,321 | ) |
| | 10,259,492 | | | $130,962,885 | | | (7,573,789 | ) | | $(99,982,211 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $9,129 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 | | 3,177,340 | | 334,492,767 | | (282,654,398 | ) | | 55,015,709 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $75,914 | | | $55,015,709 |
18
MFS Government Securities Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS Government Securities Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Government Securities Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MFS Government Securities Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
19
MFS Government Securities Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director ( 2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
20
MFS Government Securities Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
21
MFS Government Securities Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Manager Geoffrey Schechter | | |
22
MFS Government Securities Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENTS
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was also in the 1st quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
23
MFS Government Securities Portfolio
Board Review of Investment Advisory Agreements – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate was above the median and total expense ratio was approximately at the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. The Trustees further concluded that the existing breakpoint was sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios – VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
24
MFS Government Securities Portfolio
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.
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 “Variable Insurance Portfolios – VIT II” in the “Products and Performance” section of mfs.com.
25
MFS Government Securities Portfolio
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.
26
MFS® TOTAL RETURN PORTFOLIO
The report is prepared for the general information of contract owners. 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 Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Total Return Portfolio
LETTER FROM THE CEO
Dear Contract Owners:
There remains some question as to when the global economy will achieve a sustainable recovery. While some economists and market watchers are optimistic that the worst is behind us, a number also agree with U.S. Federal Reserve Board Chairman Ben Bernanke who said in September that “even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time.”
Have we in fact turned the corner? We have seen tremendous rallies in the markets over the past six months. The Fed has cut interest rates aggressively toward zero to support credit markets, global deleveraging has helped diminish inflationary concerns, and stimulus measures have put more money in the hands of the government and individuals to keep the economy moving. Still, unemployment remains high, consumer confidence and spending continue to waiver, and the housing market, while improving, has a long way to go to recover.
Regardless of lingering market uncertainties, MFS® is confident that the fundamental principles of long-term investing will always apply. We encourage investors to speak with their advisors to identify and research long-term investment opportunities thoroughly. Global research continues to be one of the hallmarks of MFS, along with a unique collaboration between our portfolio managers and sector analysts, who regularly discuss potential investments before making both buy and sell decisions.
As we continue to dig out from the worst financial crisis in decades, keep in mind that while the road back to sustainable recovery will be slow, gradual, and even bumpy at times, conditions are significantly better than they were six months ago.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
February 16, 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
MFS Total Return Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | |
| Top ten holdings (i) | | |
| U.S. Treasury Notes, 3.125%, 2013 | | 2.9% |
| Fannie Mae, 5.5%, 30 years | | 2.5% |
| JPMorgan Chase & Co. | | 2.0% |
| Lockheed Martin Corp. | | 1.9% |
| AT&T, Inc. | | 1.9% |
| Fannie Mae, 6.0%, 30 years | | 1.7% |
| Exxon Mobil Corp. | | 1.6% |
| Philip Morris International, Inc. | | 1.4% |
| Bank of New York Mellon Corp. | | 1.4% |
| U.S. Treasury Notes, 1.875%, 2014 | | 1.4% |
| | |
| Equity sectors | | |
| Financial Services | | 12.1% |
| Energy | | 8.0% |
| Consumer Staples | | 6.9% |
| Utilities & Communications | | 6.7% |
| Health Care | | 6.2% |
| Industrial Goods & Services | | 5.7% |
| Retailing | | 3.7% |
| Technology | | 3.3% |
| Basic Materials | | 2.2% |
| Leisure | | 1.8% |
| Special Products & Services | | 1.4% |
| Autos & Housing | | 0.7% |
| Transportation | | 0.3% |
| |
| Fixed income sectors (i) | | |
| Mortgage-Backed Securities | | 14.7% |
| U.S. Treasury Securities | | 11.5% |
| High Grade Corporates | | 9.2% |
| Commercial Mortgage-Backed Securities | | 2.1% |
| U.S. Government Agencies | | 0.8% |
| Non-U.S. Government Bonds | | 0.6% |
| Emerging Markets Bonds | | 0.5% |
| Municipal Bonds | | 0.3% |
| Asset-Backed Securities | | 0.3% |
| High Yield Corporates | | 0.2% |
| Residential Mortgage-Backed Securities (o) | | 0.0% |
| (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 any derivative holdings, if applicable. |
Percentages are based on net assets as of 12/31/09, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
2
MFS Total Return Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2009, Initial Class shares of the MFS Total Return Portfolio (the “fund”) provided a total return of 18.09%, while Service Class shares of the fund provided a total return of 17.81%. These compare with returns of 26.46% and 5.93% for the fund’s benchmarks, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the Barclays Capital U.S. Aggregate Bond Index (“Barclays Capital Index”), respectively. The fund’s other benchmark, the Total Return Blended Index (“Blended Index”), generated a return of 18.40%. The Blended Index reflects the blended returns of the equity and fixed income market indices, with percentage allocations to each index designed to resemble the equity and fixed income allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
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 to almost 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
Within the equity portion of the fund, an underweighted position in the technology sector was the primary factor holding down the fund’s performance relative to the S&P 500 Index. Not owning strong-performing computer and electronics maker Apple and software giant Microsoft were significant factors in this result. The fund’s underweighted position in internet search engine Google also held back relative results as the stock significantly outperformed the benchmark.
Stock selection in the financial services sector had a negative impact on relative performance. Holdings of insurance companies, AllState and Metlife, and financial services firm Bank of New York Mellon were among the fund’s top detractors. Although Bank of New York Mellon performed better than competitors during the downturn, the company’s shares lagged the S&P 500 Index during the market recovery. The firm’s earnings rebound was not as strong as other firms that had suffered much larger credit market losses. The fund’s positioning in financial services firm Bank of America also hindered relative results.
A combination of an overweighted position and stock selection in the industrial goods and services sector dampened relative returns. The fund’s overweighted position in poor-performing defense contractor Lockheed Martin was a top detractor over the reporting period. Uncharacteristically weaker-than-expected results reported in July 2009 due to project delays and lower award fees in its information systems business, followed by October guidance for much higher pension expenses going forward, pressured Lockheed Martin’s shares throughout the period. This, coupled with increased worries about the prospects for future defense budget cuts in the face of increasingly large and growing U.S. budget deficits, caused the company’s shares to decline in a period of strong absolute returns for the market.
Elsewhere, holdings of grocery chain Kroger held back the fund’s relative returns.
The fund’s cash position was also a detractor. The fund holds cash to buy new holdings and to provide liquidity. In a period when equity markets rose, as measured by the fund’s benchmark, holding cash hurt performance versus the benchmark, which has no cash position.
3
MFS Total Return Portfolio
Management Review – continued
Within the fixed income portion of the fund, there were no factors that materially detracted from relative performance as this portion of the fund performed very well relative to the Barclays Capital Index.
Contributors to Performance
Within the equity portion of the fund, a combination of stock selection and an underweighted position in the health care sector helped relative performance. The fund’s underweighted position in pharmaceutical company Pfizer was a positive factor as this stock underperformed the S&P 500 Index.
Stock selection in the energy sector had a positive impact on relative results. An underweighted position in poor-performing integrated oil and gas company Exxon Mobil aided relative returns.
Stocks in other sectors that contributed to relative performance included financial services firms Goldman Sachs and JPMorgan Chase, retailer Macy’s, and chemical company PPG Industries. Shares of Goldman Sachs climbed as the environment for fixed income trading improved and mergers and acquisitions activity increased. The fund’s positioning in industrial conglomerate General Electric (h) and underweighting in consumer products company Procter & Gamble and discount retailer Wal-Mart Stores, all of which underperformed the benchmark, boosted relative results. Not owning poor-performing financial services company Citigroup was another positive factor for relative performance.
During the reporting period, the fund’s currency exposure contributed to relative performance. All of MFS’ investment decisions are driven by the fundamentals of each individual opportunity and as such, it is common for our funds to have different currency exposures than the benchmark.
Within the fixed income portion of the fund, the primary positive factors in performance relative to the Barclays Capital Index were the fund’s overweighted positions in the finance and industrial sectors, along with a greater exposure to “BBB” and “A” rated (r) securities. The fund’s return from yield, which was greater than that of the fixed income benchmark, also aided relative results.
Respectfully,
| | | | | | | | |
| Nevin Chitkara | | William Douglas | | Steven Gorham | | Richard Hawkins | | Joshua Marston |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | | |
| Michael Roberge | | Brooks Taylor | | | | | | |
| 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, 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.
4
MFS Total Return Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/09
The following chart illustrates the historical performance of the fund in comparison to its benchmark(s). Benchmarks are unmanaged and may not be invested in directly. Benchmark returns do not reflect any fees or expenses. The performance of other share classes will be greater than or less than that of the class depicted below. (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 units, 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 contract holder would pay on fund distributions or the redemption of contract units. The returns for the fund shown also do not reflect the deduction of expenses associated with variable products, such as mortality and expense risk charges, separate account charges, and sales charges imposed by the insurance company separate accounts. Such expenses would reduce the overall returns shown.
Growth of a Hypothetical $10,000 Investment
Total Returns through 12/31/09
Average annual total returns
| | | | | | | | | | | | | | |
| | | Share class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | Life (t) | | |
| | | Initial Class | | 5/11/88 | | 18.09% | | 2.24% | | 4.91% | | N/A | | |
| | | Service Class | | 8/24/01 | | 17.81% | | 2.00% | | N/A | | 3.71% | | |
| | | | | |
| Comparative benchmarks | | | | | | | | | | |
| | | Barclays Capital U.S. Aggregate Bond Index (f) | | 5.93% | | 4.97% | | 6.33% | | N/A | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 26.46% | | 0.42% | | (0.95)% | | N/A | | |
| | | Total Return Blended Index (f)(x) | | 18.40% | | 2.53% | | 2.25% | | N/A | | |
| (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 information is provided for “life” periods. (See Notes to Performance Summary.) |
| (x) | Total Return Blended Index consists of 60% Standard & Poor’s 500 Stock Index and 40% Barclays Capital U.S. Aggregate Bond Index. |
Benchmark Definitions
Barclays Capital U.S. Aggregate Bond Index – a market capitalization-weighted index that measures the performance of the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities with at least one year to final maturity.
Standard & Poor’s 500 Stock Index – a market capitalization-weighted index of 500 widely held equity securities, designed to measure broad U.S. equity performance.
It is not possible to invest directly in an index.
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
5
MFS Total Return Portfolio
Performance Summary – continued
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. All results are historical and assume the reinvestment of any dividends and capital gains distributions.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
6
MFS Total Return Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2009 through December 31, 2009
As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or 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 July 1, 2009 through December 31, 2009.
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 the fund’s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher.
| | | | | | | | | | |
| Share Class | | | | Annualized
Expense Ratio | | Beginning
Account Value
7/01/09 | | Ending
Account Value
12/31/09 | | Expenses Paid
During Period (p)
7/01/09-12/31/09 |
| Initial Class | | Actual | | 0.73% | | $1,000.00 | | $1,132.32 | | $3.92 |
| | Hypothetical (h) | | 0.73% | | $1,000.00 | | $1,021.53 | | $3.72 |
| Service Class | | Actual | | 0.98% | | $1,000.00 | | $1,131.20 | | $5.26 |
| | Hypothetical (h) | | 0.98% | | $1,000.00 | | $1,020.27 | | $4.99 |
| (h) | 5% class return per year before expenses. |
| (p) | Expenses paid is equal to each class’ annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. |
7
MFS Total Return Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/09
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – 59.0% | | | | | |
| Aerospace – 4.2% | | | | | |
| Goodrich Corp. | | 24,330 | | $ | 1,563,202 |
| Lockheed Martin Corp. | | 365,590 | | | 27,547,206 |
| Northrop Grumman Corp. | | 265,740 | | | 14,841,578 |
| United Technologies Corp. | | 258,010 | | | 17,908,473 |
| | | | | |
| | | | $ | 61,860,459 |
| | | | | |
| Alcoholic Beverages – 0.8% | | | | | |
| Diageo PLC | | 540,862 | | $ | 9,432,293 |
| Heineken N.V. | | 53,410 | | | 2,530,752 |
| | | | | |
| | | | $ | 11,963,045 |
| | | | | |
| Apparel Manufacturers – 0.8% | | | | | |
| NIKE, Inc., “B” | | 183,800 | | $ | 12,143,665 |
| | | | | |
| Automotive – 0.2% | | | | | |
| Johnson Controls, Inc. | | 106,280 | | $ | 2,895,066 |
| | | | | |
| Biotechnology – 0.2% | | | | | |
| Genzyme Corp. (a) | | 46,090 | | $ | 2,258,870 |
| | | | | |
| Broadcasting – 1.3% | | | | | |
| Omnicom Group, Inc. | | 211,930 | | $ | 8,297,059 |
| Walt Disney Co. | | 335,210 | | | 10,810,522 |
| | | | | |
| | | | $ | 19,107,581 |
| | | | | |
| Brokerage & Asset Managers – 0.6% | | | | | |
| Charles Schwab Corp. | | 190,760 | | $ | 3,590,102 |
| Deutsche Boerse AG | | 25,440 | | | 2,115,232 |
| Franklin Resources, Inc. | | 24,960 | | | 2,629,536 |
| | | | | |
| | | | $ | 8,334,870 |
| | | | | |
| Business Services – 1.2% | | | | | |
| Accenture Ltd., “A” | | 223,210 | | $ | 9,263,215 |
| Dun & Bradstreet Corp. | | 18,420 | | | 1,554,095 |
| Visa, Inc., “A” | | 27,990 | | | 2,448,005 |
| Western Union Co. | | 200,150 | | | 3,772,828 |
| | | | | |
| | | | $ | 17,038,143 |
| | | | | |
| Cable TV – 0.2% | | | | | |
| Comcast Corp., “Special A” | | 155,870 | | $ | 2,495,479 |
| | | | | |
| Chemicals – 1.5% | | | | | |
| 3M Co. | | 125,480 | | $ | 10,373,432 |
| Monsanto Co. | | 27,360 | | | 2,236,680 |
| PPG Industries, Inc. | | 170,120 | | | 9,958,825 |
| | | | | |
| | | | $ | 22,568,937 |
| | | | | |
| Computer Software – 0.7% | | | | | |
| Oracle Corp. | | 432,090 | | $ | 10,603,489 |
| | | | | |
| Computer Software – Systems – 1.4% | | | |
| Dell, Inc. (a) | | 130,930 | | $ | 1,880,155 |
| Hewlett-Packard Co. | | 172,120 | | | 8,865,901 |
| International Business Machines Corp. | | 73,370 | | | 9,604,133 |
| | | | | |
| | | | $ | 20,350,189 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Construction – 0.5% | | | | | |
| Black & Decker Corp. | | 24,650 | | $ | 1,598,060 |
| Pulte Homes, Inc. (a) | | 155,200 | | | 1,552,000 |
| Sherwin-Williams Co. | | 65,810 | | | 4,057,187 |
| | | | | |
| | | | $ | 7,207,247 |
| | | | | |
| Consumer Products – 1.2% | | | | | |
| Clorox Co. | | 45,620 | | $ | 2,782,820 |
| Kimberly-Clark Corp. | | 21,940 | | | 1,397,797 |
| Procter & Gamble Co. | | 215,361 | | | 13,057,337 |
| | | | | |
| | | | $ | 17,237,954 |
| | | | | |
| Consumer Services – 0.2% | | | | | |
| Apollo Group, Inc., “A” (a) | | 39,540 | | $ | 2,395,333 |
| | | | | |
| Electrical Equipment – 0.9% | | | | | |
| Danaher Corp. | | 89,810 | | $ | 6,753,712 |
| Tyco Electronics Ltd. | | 127,230 | | | 3,123,497 |
| W.W. Grainger, Inc. | | 35,690 | | | 3,455,863 |
| | | | | |
| | | | $ | 13,333,072 |
| | | | | |
| Electronics – 0.8% | | | | | |
| Agilent Technologies, Inc. (a) | | 51,260 | | $ | 1,592,648 |
| Intel Corp. | | 450,380 | | | 9,187,752 |
| National Semiconductor Corp. | | 81,460 | | | 1,251,226 |
| | | | | |
| | | | $ | 12,031,626 |
| | | | | |
| Energy – Independent – 2.8% | | | | | |
| Anadarko Petroleum Corp. | | 66,060 | | $ | 4,123,465 |
| Apache Corp. | | 172,460 | | | 17,792,698 |
| Devon Energy Corp. | | 69,620 | | | 5,117,070 |
| EOG Resources, Inc. | | 67,860 | | | 6,602,778 |
| Noble Energy, Inc. | | 62,560 | | | 4,455,523 |
| Occidental Petroleum Corp. | | 38,740 | | | 3,151,499 |
| | | | | |
| | | | $ | 41,243,033 |
| | | | | |
| Energy – Integrated – 4.7% | | | | | |
| Chevron Corp. | | 191,237 | | $ | 14,723,337 |
| ConocoPhillips | | 39,350 | | | 2,009,605 |
| Exxon Mobil Corp. | | 349,496 | | | 23,832,132 |
| Hess Corp. | | 125,940 | | | 7,619,370 |
| Marathon Oil Corp. | | 130,080 | | | 4,061,098 |
| TOTAL S.A., ADR | | 259,480 | | | 16,617,099 |
| | | | | |
| | | | $ | 68,862,641 |
| | | | | |
| Engineering – Construction – 0.2% | | | | | |
| Fluor Corp. | | 53,520 | | $ | 2,410,541 |
| | | | | |
| Food & Beverages – 3.2% | | | | | |
| Campbell Soup Co. | | 90,430 | | $ | 3,056,534 |
| General Mills, Inc. | | 83,500 | | | 5,912,635 |
| Groupe Danone | | 38,166 | | | 2,324,282 |
| J.M. Smucker Co. | | 65,051 | | | 4,016,899 |
| Kellogg Co. | | 67,990 | | | 3,617,068 |
| Nestle S.A. | | 348,651 | | | 16,938,441 |
| PepsiCo, Inc. | | 185,860 | | | 11,300,288 |
| | | | | |
| | | | $ | 47,166,147 |
| | | | | |
8
MFS Total Return Portfolio
Portfolio of Investments – continued
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Food & Drug Stores – 1.3% | | | | | |
| CVS Caremark Corp. | | 326,022 | | $ | 10,501,169 |
| Kroger Co. | | 236,600 | | | 4,857,398 |
| Walgreen Co. | | 113,860 | | | 4,180,939 |
| | | | | |
| | | | $ | 19,539,506 |
| | | | | |
| Gaming & Lodging – 0.1% | | | |
| Starwood Hotels & Resorts Worldwide, Inc. | | 24,130 | | $ | 882,434 |
| | | | | |
| General Merchandise – 0.8% | | | |
| Macy’s, Inc. | | 95,450 | | $ | 1,599,742 |
| Target Corp. | | 90,110 | | | 4,358,621 |
| Wal-Mart Stores, Inc. | | 96,340 | | | 5,149,373 |
| | | | | |
| | | | $ | 11,107,736 |
| | | | | |
| Health Maintenance Organizations – 0.1% | | | |
| WellPoint, Inc. (a) | | 36,250 | | $ | 2,113,013 |
| | | | | |
| Insurance – 3.6% | | | |
| Aflac, Inc. | | 39,810 | | $ | 1,841,213 |
| Allstate Corp. | | 375,570 | | | 11,282,123 |
| Aon Corp. | | 89,160 | | | 3,418,394 |
| Chubb Corp. | | 55,880 | | | 2,748,178 |
| MetLife, Inc. | | 517,440 | | | 18,291,504 |
| Prudential Financial, Inc. | | 97,380 | | | 4,845,629 |
| Travelers Cos., Inc. | | 196,150 | | | 9,780,039 |
| | | | | |
| | | | $ | 52,207,080 |
| | | | | |
| Internet – 0.2% | | | |
| Google, Inc., “A” (a) | | 3,820 | | $ | 2,368,324 |
| | | | | |
| Leisure & Toys – 0.2% | | | |
| Hasbro, Inc. | | 96,940 | | $ | 3,107,896 |
| | | | | |
| Machinery & Tools – 0.4% | | | |
| Eaton Corp. | | 80,100 | | $ | 5,095,962 |
| | | | | |
| Major Banks – 7.9% | | | |
| Bank of America Corp. | | 297,100 | | $ | 4,474,326 |
| Bank of America Corp., EU | | 429,280 | | | 6,404,858 |
| Bank of New York Mellon Corp. | | 729,065 | | | 20,391,948 |
| Goldman Sachs Group, Inc. | | 117,210 | | | 19,789,736 |
| JPMorgan Chase & Co. | | 704,302 | | | 29,348,264 |
| PNC Financial Services Group, Inc. | | 118,570 | | | 6,259,310 |
| Regions Financial Corp. | | 514,070 | | | 2,719,430 |
| State Street Corp. | | 255,900 | | | 11,141,886 |
| Wells Fargo & Co. | | 491,130 | | | 13,255,599 |
| | | | | |
| | | | $ | 113,785,357 |
| | | | | |
| Medical Equipment – 1.8% | | | |
| Becton, Dickinson & Co. | | 87,230 | | $ | 6,878,958 |
| Medtronic, Inc. | | 230,770 | | | 10,149,265 |
| St. Jude Medical, Inc. (a) | | 91,250 | | | 3,356,175 |
| Thermo Fisher Scientific, Inc. (a) | | 31,730 | | | 1,513,204 |
| Waters Corp. (a) | | 73,400 | | | 4,547,864 |
| | | | | |
| | | | $ | 26,445,466 |
| | | | | |
| Metals & Mining – 0.1% | | | |
| United States Steel Corp. | | 29,230 | | $ | 1,611,158 |
| | | | | |
| | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | |
| COMMON STOCKS – continued | | | |
| Natural Gas – Distribution – 0.2% | | | |
| Sempra Energy | | 56,470 | | $ | 3,161,191 |
| | | | | |
| Natural Gas – Pipeline – 0.2% | | | |
| Williams Cos., Inc. | | 122,360 | | $ | 2,579,349 |
| | | | | |
| Network & Telecom – 0.2% | | | |
| Cisco Systems, Inc. (a) | | 64,170 | | $ | 1,536,230 |
| Nokia Corp., ADR | | 156,070 | | | 2,005,500 |
| | | | | |
| | | | $ | 3,541,730 |
| | | | | |
| Oil Services – 0.5% | | | |
| Halliburton Co. | | 54,620 | | $ | 1,643,516 |
| National Oilwell Varco, Inc. | | 72,470 | | | 3,195,202 |
| Noble Corp. | | 44,800 | | | 1,823,360 |
| | | | | |
| | | | $ | 6,662,078 |
| | | | | |
| Other Banks & Diversified Financials – 0.1% | | | |
| Northern Trust Corp. | | 31,630 | | $ | 1,657,412 |
| | | | | |
| Pharmaceuticals – 4.1% | | | |
| Abbott Laboratories | | 236,720 | | $ | 12,780,513 |
| GlaxoSmithKline PLC | | 97,220 | | | 2,059,427 |
| Johnson & Johnson | | 273,000 | | | 17,583,930 |
| Merck & Co., Inc. | | 302,830 | | | 11,065,408 |
| Pfizer, Inc. | | 818,231 | | | 14,883,622 |
| Roche Holding AG | | 9,790 | | | 1,665,437 |
| | | | | |
| | | | $ | 60,038,337 |
| | | | | |
| Railroad & Shipping – 0.1% | | | |
| Canadian National Railway Co. | | 23,480 | | $ | 1,276,373 |
| | | | | |
| Specialty Chemicals – 0.5% | | | |
| Air Products & Chemicals, Inc. | | 97,700 | | $ | 7,919,562 |
| | | | | |
| Specialty Stores – 0.8% | | | |
| Advance Auto Parts, Inc. | | 110,950 | | $ | 4,491,256 |
| Home Depot, Inc. | | 66,120 | | | 1,912,852 |
| Staples, Inc. | | 203,520 | | | 5,004,557 |
| | | | | |
| | | | $ | 11,408,665 |
| | | | | |
| Telecommunications – Wireless – 0.8% | | | |
| Vodafone Group PLC | | 5,097,640 | | $ | 11,804,609 |
| | | | | |
| Telephone Services – 2.2% | | | |
| AT&T, Inc. | | 976,256 | | $ | 27,364,456 |
| CenturyTel, Inc. | | 80,573 | | | 2,917,548 |
| Royal KPN N.V. | | 117,650 | | | 1,996,901 |
| | | | | |
| | | | $ | 32,278,905 |
| | | | | |
| Tobacco – 1.7% | | | |
| Altria Group, Inc. | | 45,960 | | $ | 902,195 |
| Lorillard, Inc. | | 36,470 | | | 2,925,988 |
| Philip Morris International, Inc. | | 436,120 | | | 21,016,623 |
| | | | | |
| | | | $ | 24,844,806 |
| | | | | |
| Trucking – 0.2% | | | |
| United Parcel Service, Inc., “B” | | 45,850 | | $ | 2,630,415 |
| | | | | |
| Utilities – Electric Power – 3.3% | | | |
| Allegheny Energy, Inc. | | 60,510 | | $ | 1,420,775 |
| American Electric Power Co., Inc. | | 87,080 | | | 3,029,513 |
9
MFS Total Return Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| COMMON STOCKS – continued | | | |
| Utilities – Electric Power – continued | | | |
| CMS Energy Corp. | | | 78,650 | | $ | 1,231,659 |
| Dominion Resources, Inc. | | | 242,848 | | | 9,451,644 |
| Entergy Corp. | | | 33,100 | | | 2,708,904 |
| FPL Group, Inc. | | | 124,950 | | | 6,599,859 |
| Northeast Utilities | | | 30,910 | | | 797,169 |
| NRG Energy, Inc. (a) | | | 106,310 | | | 2,509,979 |
| PG&E Corp. | | | 124,300 | | | 5,549,995 |
| PPL Corp. | | | 170,540 | | | 5,510,147 |
| Progress Energy, Inc. | | | 48,640 | | | 1,994,726 |
| Public Service Enterprise Group, Inc. | | | 240,460 | | | 7,995,295 |
| | | | | | |
| | | | | $ | 48,799,665 |
| | | | | | |
Total Common Stocks
(Identified Cost, $818,484,599) | | | | | $ | 860,374,416 |
| | | | | | |
| |
| BONDS – 39.9% | | | |
| Agency – Other – 0.0% | | | |
| Financing Corp., 9.65%, 2018 | | $ | 490,000 | | $ | 668,271 |
| | | | | | |
| Asset Backed & Securitized – 2.4% | | | |
| Banc of America Commercial Mortgage, Inc., “A4”, 5.634%, 2046 | | $ | 397,000 | | $ | 371,915 |
| Banc of America Commercial Mortgage, Inc., FRN, 5.744%, 2017 | | | 800,000 | | | 705,604 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.034%, 2040 (z) | | | 1,496,805 | | | 636,442 |
| BlackRock Capital Finance LP, 7.75%, 2026 (n) | | | 153,524 | | | 22,261 |
| Citigroup Commercial Mortgage Trust, FRN, 5.699%, 2017 | | | 4,050,000 | | | 3,612,915 |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 2049 | | | 1,360,000 | | | 1,180,183 |
| Countrywide Asset-Backed Certificates, FRN, 4.575%, 2035 | | | 501 | | | 499 |
| Countrywide Asset-Backed Certificates, FRN, 4.823%, 2035 | | | 69,543 | | | 68,708 |
| Countrywide Asset-Backed Certificates, FRN, 5.689%, 2046 | | | 1,120,000 | | | 659,688 |
| Credit Suisse Commercial Mortgage Trust, 5.509%, 2039 | | | 1,449,204 | | | 1,115,402 |
| Credit Suisse Mortgage Capital Certificate, 5.695%, 2017 | | | 1,881,580 | | | 1,501,183 |
| GE Commercial Mortgage Corp., FRN, 5.335%, 2044 | | | 1,330,000 | | | 1,046,693 |
| GMAC Mortgage Corp. Loan Trust, FRN, 5.805%, 2036 | | | 1,285,971 | | | 614,093 |
| JPMorgan Chase Commercial Mortgage Securities Corp., 4.78%, 2042 | | | 1,620,000 | | | 1,289,581 |
| JPMorgan Chase Commercial Mortgage Securities Corp., 5.552%, 2045 | | | 1,034,871 | | | 983,662 |
| JPMorgan Chase Commercial Mortgage Securities Corp., 5.42%, 2049 | | | 845,539 | | | 713,260 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.236%, 2041 | | | 1,985,000 | | | 1,975,371 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.475%, 2043 | | | 2,438,368 | | | 2,346,239 |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Asset Backed & Securitized – continued | | | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.874%, 2045 | | $ | 2,420,000 | | $ | 2,332,008 |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.818%, 2049 | | | 1,300,000 | | | 1,132,106 |
| Merrill Lynch Mortgage Trust, FRN, 5.828%, 2050 | | | 999,000 | | | 237,137 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.468%, 2039 | | | 1,140,000 | | | 904,923 |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.748%, 2050 | | | 1,881,580 | | | 1,577,257 |
| Morgan Stanley Capital I, Inc., FRN, 0.905%, 2030 (i)(n) | | | 10,070,552 | | | 374,314 |
| Nomura Asset Securities Corp., FRN, 9.755%, 2027 (z) | | | 2,191,272 | | | 2,238,792 |
| Residential Asset Mortgage Products, Inc., FRN, 4.97%, 2034 | | | 931,000 | | | 712,966 |
| Residential Funding Mortgage Securities, Inc., 5.32%, 2035 | | | 1,405,000 | | | 452,011 |
| Spirit Master Funding LLC, 5.05%, 2023 (z) | | | 1,420,908 | | | 1,175,304 |
| Structured Asset Securities Corp., FRN, 4.67%, 2035 | | | 851,175 | | | 746,255 |
| Wachovia Bank Commercial Mortgage Trust, 4.75%, 2044 | | | 2,500,000 | | | 2,101,334 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.902%, 2017 | | | 1,300,000 | | | 1,067,608 |
| Wachovia Bank Commercial Mortgage Trust, FRN, 5.795%, 2045 | | | 766,291 | | | 574,744 |
| | | | | | |
| | | | | $ | 34,470,458 |
| | | | | | |
| Broadcasting – 0.1% | | | |
| News America, Inc., 8.5%, 2025 | | $ | 1,154,000 | | $ | 1,359,330 |
| | | | | | |
| Brokerage & Asset Managers – 0.0% | | | |
| BlackRock, Inc., 5%, 2019 | | $ | 480,000 | | $ | 471,687 |
| | | | | | |
| Building – 0.1% | | | |
| CRH America, Inc., 6.95%, 2012 | | $ | 1,647,000 | | $ | 1,784,047 |
| | | | | | |
| Cable TV – 0.2% | | | |
| Cox Communications, Inc., 4.625%, 2013 | | $ | 1,167,000 | | $ | 1,213,549 |
| DIRECTV Holdings LLC, 5.875%, 2019 (n) | | | 330,000 | | | 335,642 |
| Time Warner Entertainment Co. LP, 8.375%, 2033 | | | 1,330,000 | | | 1,589,937 |
| | | | | | |
| | | | | $ | 3,139,128 |
| | | | | | |
| Conglomerates – 0.1% | | | |
| Kennametal, Inc., 7.2%, 2012 | | $ | 1,780,000 | | $ | 1,864,844 |
| | | | | | |
| Consumer Products – 0.1% | | | |
| Fortune Brands, Inc., 5.125%, 2011 | | $ | 1,625,000 | | $ | 1,676,012 |
| | | | | | |
| Consumer Services – 0.1% | | | |
| Western Union Co., 5.4%, 2011 | | $ | 1,877,000 | | $ | 2,004,041 |
| | | | | | |
| Defense Electronics – 0.1% | | | |
| BAE Systems Holdings, Inc., 5.2%, 2015 (n) | | $ | 753,000 | | $ | 775,732 |
| | | | | | |
10
MFS Total Return Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Electronics – 0.1% | | | |
| Tyco Electronics Group S.A., 6.55%, 2017 | | $ | 1,492,000 | | $ | 1,542,670 |
| | | | | | |
| Emerging Market Quasi-Sovereign – 0.2% | | | |
| Petróleos Mexicanos, 8%, 2019 | | $ | 852,000 | | $ | 986,190 |
| Qtel International Finance Ltd., 7.875%, 2019 (n) | | | 957,000 | | | 1,072,771 |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 5.832%, 2016 (n) | | | 1,130,000 | | | 1,183,347 |
| | | | | | |
| | | | | $ | 3,242,308 |
| | | | | | |
| Emerging Market Sovereign – 0.0% | | | |
| Republic of Peru, 7.35%, 2025 | | $ | 103,000 | | $ | 117,935 |
| | | | | | |
| Energy – Independent – 0.3% | | | |
| Anadarko Petroleum Corp., 6.45%, 2036 | | $ | 1,510,000 | | $ | 1,576,997 |
| Ocean Energy, Inc., 7.25%, 2011 | | | 2,246,000 | | | 2,450,377 |
| | | | | | |
| | | | | $ | 4,027,374 |
| | | | | | |
| Energy – Integrated – 0.3% | | | |
| Hess Corp., 8.125%, 2019 | | $ | 330,000 | | $ | 397,966 |
| Husky Energy, Inc., 5.9%, 2014 | | | 875,000 | | | 953,794 |
| Husky Energy, Inc., 7.25%, 2019 | | | 888,000 | | | 1,026,172 |
| Petro-Canada, 6.05%, 2018 | | | 1,794,000 | | | 1,928,502 |
| | | | | | |
| | | | | $ | 4,306,434 |
| | | | | | |
| Financial Institutions – 0.1% | | | |
| General Electric Capital Corp., 5.45%, 2013 | | $ | 179,000 | | $ | 190,292 |
| HSBC Finance Corp., 5.25%, 2011 | | | 1,510,000 | | | 1,563,297 |
| | | | | | |
| | | | | $ | 1,753,589 |
| | | | | | |
| Food & Beverages – 0.4% | | | |
| Anheuser-Busch Cos., Inc., 8%, 2039 (n) | | $ | 1,450,000 | | $ | 1,805,128 |
| Diageo Finance B.V., 5.5%, 2013 | | | 1,329,000 | | | 1,431,528 |
| Dr. Pepper Snapple Group, Inc., 6.12%, 2013 | | | 450,000 | | | 492,489 |
| Dr. Pepper Snapple Group, Inc., 6.82%, 2018 | | | 571,000 | | | 640,558 |
| Miller Brewing Co., 5.5%, 2013 (n) | | | 1,475,000 | | | 1,570,490 |
| | | | | | |
| | | | | $ | 5,940,193 |
| | | | | | |
| Food & Drug Stores – 0.1% | | | |
| CVS Caremark Corp., 6.125%, 2016 | | $ | 1,140,000 | | $ | 1,227,588 |
| | | | | | |
| Gaming & Lodging – 0.1% | | | |
| Wyndham Worldwide Corp., 6%, 2016 | | $ | 1,146,000 | | $ | 1,067,607 |
| | | | | | |
| Insurance – 0.1% | | | |
| ING Groep N.V., 5.775% to 2015, FRN to 2049 | | $ | 1,405,000 | | $ | 1,037,861 |
| Metropolitan Life Global Funding, 5.125%, 2013 (n) | | | 590,000 | | | 625,040 |
| Metropolitan Life Global Funding, 5.125%, 2014 (n) | | | 640,000 | | | 677,310 |
| | | | | | |
| | | | | $ | 2,340,211 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Insurance – Property & Casualty – 0.3% | | | |
| Allstate Corp., 6.125%, 2032 | | $ | 1,617,000 | | $ | 1,620,066 |
| Chubb Corp., 6.375% to 2017, FRN to 2067 | | | 2,340,000 | | | 2,176,200 |
| ZFS Finance USA Trust IV, 5.875% to 2012, FRN to 2032 (n) | | | 146,000 | | | 118,174 |
| ZFS Finance USA Trust V, 6.5% to 2017, FRN to 2037 (n) | | | 524,000 | | | 442,780 |
| | | | | | |
| | | | | $ | 4,357,220 |
| | | | | | |
| International Market Quasi-Sovereign – 0.5% | | | |
| Achmea Hypotheekbank N.V., 3.2%, 2014 (n) | | $ | 980,000 | | $ | 978,103 |
| ING Bank N.V., 3.9%, 2014 (n) | | | 1,450,000 | | | 1,492,443 |
| KFW International Finance, Inc., 4.875%, 2019 | | | 1,460,000 | | | 1,542,817 |
| Royal Bank of Scotland Group PLC, 2.625%, 2012 (n) | | | 2,610,000 | | | 2,647,367 |
| Societe Financement de l’ Economie Francaise, 3.375%, 2014 (n) | | | 793,000 | | | 808,432 |
| | | | | | |
| | | | | $ | 7,469,162 |
| | | | | | |
| Local Authorities – 0.2% | | | |
| Metropolitan Transportation Authority, NY (Build America Bonds), 7.336%, 2039 | | $ | 1,225,000 | | $ | 1,364,956 |
| New Jersey Turnpike Authority Rev. (Build America Bonds), “F”, 7.414%, 2040 | | | 1,190,000 | | | 1,332,514 |
| | | | | | |
| | | | | $ | 2,697,470 |
| | | | | | |
| Machinery & Tools – 0.1% | | | |
| Atlas Copco AB, 5.6%, 2017 (n) | | $ | 1,760,000 | | $ | 1,774,358 |
| | | | | | |
| Major Banks – 1.6% | | | |
| Bank of America Corp., 7.375%, 2014 | | $ | 550,000 | | $ | 624,093 |
| Bank of America Corp., 5.49%, 2019 | | | 729,000 | | | 688,766 |
| Bank of America Corp., 7.625%, 2019 | | | 780,000 | | | 902,341 |
| Barclays Bank PLC, 5%, 2016 | | | 520,000 | | | 531,342 |
| BNP Paribas, 7.195% to 2037, FRN to 2049 (n) | | | 700,000 | | | 644,000 |
| Commonwealth Bank of Australia, 5%, 2019 (n) | | | 780,000 | | | 774,408 |
| Credit Suisse New York, 5.5%, 2014 | | | 1,600,000 | | | 1,736,322 |
| DBS Group Holdings Ltd., 7.657% to 2011, FRN to 2049 (n) | | | 998,000 | | | 1,005,485 |
| Goldman Sachs Group, Inc., 6%, 2014 | | | 910,000 | | | 995,329 |
| Goldman Sachs Group, Inc., 5.625%, 2017 | | | 1,446,000 | | | 1,476,887 |
| JPMorgan Chase & Co., 6.3%, 2019 | | | 1,310,000 | | | 1,441,101 |
| JPMorgan Chase Capital XXVII, 7%, 2039 | | | 800,000 | | | 806,810 |
| Merrill Lynch & Co., Inc., 6.15%, 2013 | | | 1,220,000 | | | 1,305,592 |
| Merrill Lynch & Co., Inc., 6.11%, 2037 | | | 1,440,000 | | | 1,327,568 |
| Morgan Stanley, 5.75%, 2016 | | | 1,145,000 | | | 1,188,008 |
| Morgan Stanley, 6.625%, 2018 | | | 1,650,000 | | | 1,783,927 |
| Morgan Stanley, 7.3%, 2019 | | | 380,000 | | | 426,713 |
| MUFG Capital Finance 1 Ltd., 6.346% to 2016, FRN to 2049 | | | 625,000 | | | 568,841 |
11
MFS Total Return Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Major Banks – continued | | | |
| PNC Funding Corp., 5.625%, 2017 | | $ | 1,180,000 | | $ | 1,169,290 |
| UniCredito Italiano Capital Trust II, 9.2% to 2010, FRN to 2049 (n) | | | 1,509,000 | | | 1,403,370 |
| UniCredito Luxembourg Finance S.A., 6%, 2017 (n) | | | 1,610,000 | | | 1,595,708 |
| Wachovia Corp., 5.25%, 2014 | | | 787,000 | | | 814,750 |
| | | | | | |
| | | | | $ | 23,210,651 |
| | | | | | |
| Medical & Health Technology & Services – 0.3% | | | |
| Cardinal Health, Inc., 5.8%, 2016 | | $ | 856,000 | | $ | 861,003 |
| CareFusion Corp., 6.375%, 2019 (n) | | | 1,300,000 | | | 1,391,677 |
| Hospira, Inc., 5.55%, 2012 | | | 570,000 | | | 607,544 |
| Hospira, Inc., 6.05%, 2017 | | | 1,071,000 | | | 1,120,925 |
| | | | | | |
| | | | | $ | 3,981,149 |
| | | | | | |
| Metals & Mining – 0.2% | | | |
| ArcelorMittal, 6.125%, 2018 | | $ | 1,820,000 | | $ | 1,877,942 |
| Vale Overseas Ltd., 6.875%, 2039 | | | 607,000 | | | 611,081 |
| | | | | | |
| | | | | $ | 2,489,023 |
| | | | | | |
| Mortgage Backed – 14.7% | | | |
| Fannie Mae, 4.01%, 2013 | | $ | 181,350 | | $ | 187,364 |
| Fannie Mae, 4.6%, 2014 | | | 950,470 | | | 995,462 |
| Fannie Mae, 4.63%, 2014 | | | 453,784 | | | 475,346 |
| Fannie Mae, 4.84%, 2014 | | | 766,511 | | | 807,485 |
| Fannie Mae, 4.88%, 2014 | | | 308,048 | | | 324,764 |
| Fannie Mae, 4.56%, 2015 | | | 302,022 | | | 313,461 |
| Fannie Mae, 4.7%, 2015 | | | 651,072 | | | 679,704 |
| Fannie Mae, 4.78%, 2015 | | | 431,714 | | | 451,480 |
| Fannie Mae, 4.856%, 2015 | | | 308,763 | | | 321,804 |
| Fannie Mae, 4.997%, 2015 | | | 135,593 | | | 143,224 |
| Fannie Mae, 5.1%, 2015 | | | 480,000 | | | 514,974 |
| Fannie Mae, 5.09%, 2016 | | | 460,000 | | | 484,842 |
| Fannie Mae, 5.27%, 2016 | | | 545,000 | | | 578,581 |
| Fannie Mae, 5.5%, 2016 - 2035 | | | 38,341,458 | | | 40,346,027 |
| Fannie Mae, 5.661%, 2016 | | | 444,379 | | | 483,217 |
| Fannie Mae, 5.05%, 2017 | | | 460,000 | | | 483,795 |
| Fannie Mae, 6%, 2017 - 2037 | | | 26,455,315 | | | 28,220,209 |
| Fannie Mae, 4.5%, 2018 - 2035 | | | 4,717,079 | | | 4,807,651 |
| Fannie Mae, 5%, 2018 - 2038 | | | 24,655,634 | | | 25,492,935 |
| Fannie Mae, 5.37%, 2018 | | | 600,000 | | | 638,669 |
| Fannie Mae, 7.5%, 2030 - 2031 | | | 244,911 | | | 276,367 |
| Fannie Mae, 6.5%, 2031 - 2037 | | | 7,727,613 | | | 8,326,183 |
| Freddie Mac, 6%, 2016 - 2037 | | | 11,654,070 | | | 12,440,108 |
| Freddie Mac, 5%, 2017 - 2039 | | | 30,281,149 | | | 31,182,005 |
| Freddie Mac, 4.5%, 2018 - 2039 | | | 14,715,516 | | | 15,013,015 |
| Freddie Mac, 5.085%, 2019 | | | 1,417,000 | | | 1,466,078 |
| Freddie Mac, 5.5%, 2019 - 2037 | | | 13,219,207 | | | 13,937,827 |
| Freddie Mac, 6.5%, 2034 - 2037 | | | 3,657,094 | | | 3,926,456 |
| Ginnie Mae, 4.5%, 2033 - 2034 | | | 1,226,107 | | | 1,234,449 |
| Ginnie Mae, 5%, 2033 - 2039 | | | 9,682,175 | | | 9,981,278 |
| Ginnie Mae, 5.5%, 2033 - 2035 | | | 4,837,433 | | | 5,103,725 |
| Ginnie Mae, 6%, 2033 - 2038 | | | 4,161,431 | | | 4,425,278 |
| | | | | | |
| | | | | $ | 214,063,763 |
| | | | | | |
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Municipals – 0.3% | | | |
| California Educational Facilities Authority Rev. (Stanford University), “T-1”, 5%, 2039 | | $ | 765,000 | | $ | 867,365 |
| Massachusetts Health & Educational Facilities Authority Rev. (Boston College), 5.5%, 2030 | | | 795,000 | | | 908,439 |
| Massachusetts Health & Educational Facilities Authority Rev. (Massachusetts Institute of Technology), “K”, 5.5%, 2032 | | | 2,500,000 | | | 3,052,700 |
| | | | | | |
| | | | | $ | 4,828,504 |
| | | | | | |
| Natural Gas – Pipeline – 0.4% | | | |
| CenterPoint Energy, Inc., 7.875%, 2013 | | $ | 1,285,000 | | $ | 1,447,391 |
| Enterprise Products Operating LLC, 6.5%, 2019 | | | 966,000 | | | 1,042,063 |
| Kinder Morgan Energy Partners LP, 6.75%, 2011 | | | 740,000 | | | 782,577 |
| Kinder Morgan Energy Partners LP, 7.4%, 2031 | | | 804,000 | | | 878,671 |
| Kinder Morgan Energy Partners LP, 7.75%, 2032 | | | 590,000 | | | 665,396 |
| Spectra Energy Capital LLC, 8%, 2019 | | | 987,000 | | | 1,155,108 |
| | | | | | |
| | | | | $ | 5,971,206 |
| | | | | | |
| Network & Telecom – 0.5% | | | |
| AT&T, Inc., 6.55%, 2039 | | $ | 1,390,000 | | $ | 1,464,590 |
| BellSouth Corp., 6.55%, 2034 | | | 1,472,000 | | | 1,509,889 |
| Telecom Italia Capital, 5.25%, 2013 | | | 752,000 | | | 790,947 |
| Telefonica Europe B.V., 7.75%, 2010 | | | 563,000 | | | 588,959 |
| Verizon New York, Inc., 6.875%, 2012 | | | 2,443,000 | | | 2,658,021 |
| | | | | | |
| | | | | $ | 7,012,406 |
| | | | | | |
| Oils – 0.1% | | | |
| Valero Energy Corp., 6.875%, 2012 | | $ | 1,193,000 | | $ | 1,302,614 |
| | | | | | |
| Other Banks & Diversified Financials – 1.0% | | | |
| American Express Co., 5.5%, 2016 | | $ | 2,171,000 | | $ | 2,218,037 |
| Banco Bradesco S.A., 6.75%, 2019 (n) | | | 681,000 | | | 709,943 |
| Capital One Financial Corp., 6.15%, 2016 | | | 1,540,000 | | | 1,546,953 |
| Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n) | | | 1,494,000 | | | 1,645,970 |
| Nordea Bank AB, 5.424% to 2015, FRN to 2049 (n) | | | 599,000 | | | 476,847 |
| Svenska Handelsbanken AB, 4.875%, 2014 (n) | | | 2,000,000 | | | 2,095,696 |
| UBS Preferred Funding Trust V, 6.243% to 2016, FRN to 2049 | | | 2,370,000 | | | 1,854,525 |
| UFJ Finance Aruba AEC, 6.75%, 2013 | | | 1,624,000 | | | 1,808,092 |
| Woori Bank, 6.125% to 2011, FRN to 2016 (n) | | | 2,715,000 | | | 2,703,426 |
| | | | | | |
| | | | | $ | 15,059,489 |
| | | | | | |
| Pharmaceuticals – 0.3% | | | |
| Allergan, Inc., 5.75%, 2016 | | $ | 1,720,000 | | $ | 1,854,764 |
| Pfizer, Inc., 7.2%, 2039 | | | 590,000 | | | 720,943 |
| Roche Holdings, Inc., 6%, 2019 (n) | | | 1,980,000 | | | 2,175,725 |
| | | | | | |
| | | | | $ | 4,751,432 |
| | | | | | |
12
MFS Total Return Portfolio
Portfolio of Investments – continued
| | | | | | |
| Issuer | | Shares/Par | | Value ($) |
| | | | | | |
| BONDS – continued | | | |
| Railroad & Shipping – 0.0% | | | |
| CSX Corp., 6.75%, 2011 | | $ | 72,000 | | $ | 76,469 |
| | | | | | |
| Real Estate – 0.3% | | | |
| Boston Properties, Inc., REIT, 5%, 2015 | | $ | 369,000 | | $ | 368,472 |
| HRPT Properties Trust, REIT, 6.25%, 2016 | | | 1,945,000 | | | 1,840,678 |
| ProLogis, REIT, 5.75%, 2016 | | | 323,000 | | | 303,374 |
| Simon Property Group, Inc., REIT, 5.875%, 2017 | | | 1,131,000 | | | 1,132,586 |
| Vornado Realty Trust, REIT, 4.75%, 2010 | | | 189,000 | | | 193,314 |
| WEA Finance LLC, REIT, 6.75%, 2019 (n) | | | 426,000 | | | 457,415 |
| | | | | | |
| | | | | $ | 4,295,839 |
| | | | | | |
| Retailers – 0.3% | | | |
| Home Depot, Inc., 5.875%, 2036 | | $ | 550,000 | | $ | 530,891 |
| Limited Brands, Inc., 5.25%, 2014 | | | 1,123,000 | | | 1,083,695 |
| Wal-Mart Stores, Inc., 5.25%, 2035 | | | 2,241,000 | | | 2,203,618 |
| | | | | | |
| | | | | $ | 3,818,204 |
| | | | | | |
| Supranational – 0.1% | | | |
| Asian Development Bank, 2.75%, 2014 | | $ | 1,040,000 | | $ | 1,038,152 |
| | | | | | |
| Telecommunications – Wireless – 0.2% | | | |
| Cingular Wireless LLC, 6.5%, 2011 | | $ | 693,000 | | $ | 753,518 |
| Rogers Communications, Inc., 6.8%, 2018 | | | 1,554,000 | | | 1,740,360 |
| | | | | | |
| | | | | $ | 2,493,878 |
| | | | | | |
| Tobacco – 0.1% | | | |
| Philip Morris International, Inc., 4.875%, 2013 | | $ | 898,000 | | $ | 947,979 |
| | | | | | |
| Transportation – Services – 0.1% | | | |
| Erac USA Finance Co., 7%, 2037 (n) | | $ | 1,325,000 | | $ | 1,296,921 |
| | | | | | |
| U.S. Government Agencies and Equivalents – 0.8% | | | |
| Fannie Mae, 6.625%, 2010 | | $ | 4,445,000 | | $ | 4,680,372 |
| Fannie Mae, 6%, 2011 | | | 1,539,000 | | | 1,647,636 |
| Small Business Administration, 4.77%, 2024 | | | 675,290 | | | 702,326 |
| Small Business Administration, 5.18%, 2024 | | | 1,093,422 | | | 1,146,210 |
| Small Business Administration, 4.99%, 2024 | | | 985,208 | | | 1,027,680 |
| Small Business Administration, 5.11%, 2025 | | | 2,249,022 | | | 2,368,969 |
| | | | | | |
| | | | | $ | 11,573,193 |
| | | | | | |
| U.S. Treasury Obligations – 11.4% | | | |
| U.S. Treasury Bonds, 2.375%, 2010 | | $ | 16,882,000 | | $ | 17,105,551 |
| U.S. Treasury Bonds, 2%, 2013 | | | 2,348,000 | | | 2,335,527 |
| U.S. Treasury Bonds, 4.75%, 2017 | | | 2,210,000 | | | 2,398,022 |
| U.S. Treasury Bonds, 8.5%, 2020 | | | 2,554,000 | | | 3,539,285 |
| U.S. Treasury Bonds, 8%, 2021 | | | 320,000 | | | 435,750 |
| U.S. Treasury Bonds, 6%, 2026 | | | 651,000 | | | 761,568 |
| U.S. Treasury Bonds, 6.75%, 2026 | | | 2,451,000 | | | 3,092,473 |
| U.S. Treasury Bonds, 5.375%, 2031 | | | 4,988,000 | | | 5,511,740 |
| U.S. Treasury Bonds, 5%, 2037 | | | 7,630,000 | | | 8,103,297 |
| U.S. Treasury Notes, 1.5%, 2010 | | | 6,348,000 | | | 6,404,040 |
| U.S. Treasury Notes, 0.875%, 2011 | | | 7,515,000 | | | 7,533,201 |
| | | | | | | |
| Issuer | | Shares/Par | | Value ($) | |
| | | | | | | |
| BONDS – continued | | | | |
| U.S. Treasury Obligations – continued | | | | |
| U.S. Treasury Notes, 5.125%, 2011 | | $ | 357,000 | | $ | 379,354 | |
| U.S. Treasury Notes, 4.5%, 2012 | | | 1,924,000 | | | 2,062,738 | |
| U.S. Treasury Notes, 4.625%, 2012 | | | 1,800,000 | | | 1,944,000 | |
| U.S. Treasury Notes, 4.125%, 2012 | | | 8,753,000 | | | 9,357,500 | |
| U.S. Treasury Notes, 3.125%, 2013 | | | 40,447,000 | | | 42,036,446 | |
| U.S. Treasury Notes, 2.75%, 2013 | | | 1,080,000 | | | 1,106,072 | |
| U.S. Treasury Notes, 1.5%, 2013 | | | 5,082,000 | | | 4,948,201 | |
| U.S. Treasury Notes, 1.875%, 2014 | | | 20,248,000 | | | 19,831,964 | |
| U.S. Treasury Notes, 4.125%, 2015 | | | 4,512,000 | | | 4,810,920 | |
| U.S. Treasury Notes, 2.625%, 2016 | | | 868,000 | | | 844,401 | |
| U.S. Treasury Notes, 5.125%, 2016 | | | 488,000 | | | 544,272 | |
| U.S. Treasury Notes, 3.75%, 2018 | | | 15,204,000 | | | 15,202,814 | |
| U.S. Treasury Notes, TIPS, 1.625%, 2015 | | | 5,355,022 | | | 5,569,223 | |
| | | | | | | |
| | | | | $ | 165,858,359 | |
| | | | | | | |
| Utilities – Electric Power – 1.2% | | | | |
| Bruce Mansfield Unit, 6.85%, 2034 | | $ | 2,558,752 | | $ | 2,407,826 | |
| EDP Finance B.V., 6%, 2018 (n) | | | 1,139,000 | | | 1,216,727 | |
| Enel Finance International S.A., 6.25%, 2017 (n) | | | 1,595,000 | | | 1,753,661 | |
| Exelon Generation Co. LLC, 6.2%, 2017 | | | 930,000 | | | 996,904 | |
| Exelon Generation Co. LLC, 5.2%, 2019 | | | 720,000 | | | 720,322 | |
| Exelon Generation Co. LLC, 6.25%, 2039 | | | 1,110,000 | | | 1,130,902 | |
| MidAmerican Energy Holdings Co., 5.875%, 2012 | | | 535,000 | | | 582,664 | |
| MidAmerican Funding LLC, 6.927%, 2029 | | | 2,762,000 | | | 2,995,881 | |
| Oncor Electric Delivery Co., 7%, 2022 | | | 1,582,000 | | | 1,758,945 | |
| PSEG Power LLC, 6.95%, 2012 | | | 1,177,000 | | | 1,285,819 | |
| PSEG Power LLC, 5.32%, 2016 (n) | | | 923,000 | | | 949,646 | |
| System Energy Resources, Inc., 5.129%, 2014 (z) | | | 605,511 | | | 601,024 | |
| Waterford 3 Funding Corp., 8.09%, 2017 | | | 1,811,617 | | | 1,799,814 | |
| | | | | | | |
| | | | | $ | 18,200,135 | |
| | | | | | | |
Total Bonds
(Identified Cost, $576,638,780) | | | | | $ | 582,347,035 | |
| | | | | | | |
| |
| MONEY MARKET FUNDS (v) – 1.2% | | | | |
| MFS Institutional Money Market Portfolio, 0.12%, at Cost and Net Asset Value | | | 17,588,859 | | $ | 17,588,859 | |
| | | | | | | |
Total Investments
(Identified Cost, $1,412,712,238) | | | | | $ | 1,460,310,310 | |
| | | | | | | |
| OTHER ASSETS, LESS LIABILITIES – (0.1)% | | | | | | (1,004,227 | ) |
| | | | | | | |
| Net Assets – 100.0% | | | | | $ | 1,459,306,083 | |
| | | | | | | |
13
MFS Total Return Portfolio
Portfolio of Investments – continued
| (a) | | Non-income producing security. |
| (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 $39,000,317, representing 2.7% of net assets. |
| (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 |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.034%, 2040 | | 3/01/06 | | $1,496,805 | | $636,442 |
| Nomura Asset Securities Corp., FRN, 9.755%, 2027 | | 7/16/07 | | 2,392,970 | | 2,238,792 |
| Spirit Master Funding LLC, 5.05%, 2023 | | 10/04/05 | | 1,405,560 | | 1,175,304 |
| System Energy Resources, Inc., 5.129%, 2014 | | 4/16/04 | | 605,511 | | 601,024 |
| Total Restricted Securities | | | | | | $4,651,562 |
| % of Net Assets | | | | | | 0.3% |
The following abbreviations are used in this report and are defined:
| ADR | | American Depository Receipt |
| 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 |
| TIPS | | Treasury Inflation Protected Security |
See Notes to Financial Statements
14
MFS Total Return Portfolio
FINANCIAL STATEMENTS | STATEMENT OF ASSETS AND LIABILITIES
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| | | | | |
| At 12/31/09 | | | | | |
| Assets | | | | | |
Investments – | | | | | |
Non-affiliated issuers, at value (identified cost, $1,395,123,379) | | $1,442,721,451 | | | |
Underlying funds, at cost and value | | 17,588,859 | | | |
Total investments, at value (identified cost, $1,412,712,238) | | $1,460,310,310 | | | |
Cash | | $11,034 | | | |
Receivables for | | | | | |
Investments sold | | 28,229,430 | | | |
Fund shares sold | | 564,655 | | | |
Interest and dividends | | 6,406,222 | | | |
Other assets | | 51,462 | | | |
Total assets | | | | | $1,495,573,113 |
Liabilities | | | | | |
Payables for | | | | | |
Investments purchased | | $35,019,471 | | | |
Fund shares reacquired | | 1,041,119 | | | |
Payable to affiliates | | | | | |
Investment adviser | | 53,605 | | | |
Distribution and/or service fees | | 11,775 | | | |
Administrative services fee | | 2,697 | | | |
Payable for Trustees’ compensation | | 1,589 | | | |
Accrued expenses and other liabilities | | 136,774 | | | |
Total liabilities | | | | | $36,267,030 |
Net assets | | | | | $1,459,306,083 |
Net assets consist of | | | | | |
Paid-in capital | | $1,559,222,893 | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | 47,598,190 | | | |
Accumulated net realized gain (loss) on investments and foreign currency transactions | | (184,983,127 | ) | | |
Undistributed net investment income | | 37,468,127 | | | |
Net assets | | | | | $1,459,306,083 |
Shares of beneficial interest outstanding | | | | | 93,700,881 |
| | | | | | |
| | | Net assets | | Shares
outstanding | | Net asset value
per share |
Initial Class | | $604,213,901 | | 38,588,225 | | $15.66 |
Service Class | | 855,092,182 | | 55,112,656 | | 15.52 |
See Notes to Financial Statements
15
MFS Total Return Portfolio
FINANCIAL STATEMENTS | STATEMENT OF OPERATIONS
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.
| | | | | |
| Year ended 12/31/09 | | | | | |
| Net investment income | | | | | |
Income | | | | | |
Interest | | $25,822,668 | | | |
Dividends | | 22,365,486 | | | |
Dividends from underlying funds | | 47,697 | | | |
Foreign taxes withheld | | (279,648 | ) | | |
Total investment income | | | | | $47,956,203 |
Expenses | | | | | |
Management fee | | $8,940,885 | | | |
Distribution and/or service fees | | 1,871,001 | | | |
Administrative services fee | | 530,467 | | | |
Trustees’ compensation | | 209,754 | | | |
Custodian fee | | 126,762 | | | |
Shareholder communications | | 33,097 | | | |
Auditing fees | | 55,044 | | | |
Legal fees | | 8,345 | | | |
Miscellaneous | | 123,013 | | | |
Total expenses | | | | | $11,898,368 |
Fees paid indirectly | | (12 | ) | | |
Net expenses | | | | | $11,898,356 |
Net investment income | | | | | $36,057,847 |
Realized and unrealized gain (loss) on investments and foreign currency transactions | | | | | |
Realized gain (loss) (identified cost basis) | | | | | |
Investment transactions | | 14,128,238 | | | |
Foreign currency transactions | | (4,124 | ) | | |
Net realized gain (loss) on investments and foreign currency transactions | | | | | $14,124,114 |
Change in unrealized appreciation (depreciation) | | | | | |
Investments | | $170,933,953 | | | |
Translation of assets and liabilities in foreign currencies | | 47,625 | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | $170,981,578 |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | $185,105,692 |
Change in net assets from operations | | | | | $221,163,539 |
See Notes to Financial Statements
16
MFS Total Return Portfolio
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.
| | | | | | |
For years ended 12/31 | | 2009 | | | 2008 | |
Change in net assets | | | | | | |
From operations | | | | | | |
Net investment income | | $36,057,847 | | | $47,072,360 | |
Net realized gain (loss) on investments and foreign currency transactions | | 14,124,114 | | | (163,491,919 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | 170,981,578 | | | (280,660,952 | ) |
Change in net assets from operations | | $221,163,539 | | | $(397,080,511 | ) |
Distributions declared to shareholders | | | | | | |
From net investment income | | $(48,700,594 | ) | | $(55,801,043 | ) |
From net realized gain on investments | | — | | | (122,921,515 | ) |
Total distributions declared to shareholders | | $(48,700,594 | ) | | $(178,722,558 | ) |
Change in net assets from fund share transactions | | $(26,516,386 | ) | | $(119,280,333 | ) |
Total change in net assets | | $145,946,559 | | | $(695,083,402 | ) |
Net assets | | | | | | |
At beginning of period | | 1,313,359,524 | | | 2,008,442,926 | |
At end of period (including undistributed net investment income of $37,468,127 and
$48,695,759, respectively) | | $1,459,306,083 | | | $1,313,359,524 | |
See Notes to Financial Statements
17
MFS Total Return Portfolio
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.
| | | | | | | | | | | | | | | |
| Initial Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.83 | | | $19.50 | | | $20.02 | | | $19.10 | | | $19.55 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.40 | | | $0.49 | | | $0.53 | | | $0.54 | | | $0.48 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.98 | | | (4.30 | ) | | 0.36 | | | 1.69 | | | 0.07 | |
Total from investment operations | | $2.38 | | | $(3.81 | ) | | $0.89 | | | $2.23 | | | $0.55 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.55 | ) | | $(0.60 | ) | | $(0.60 | ) | | $(0.54 | ) | | $(0.51 | ) |
From net realized gain on investments | | — | | | (1.26 | ) | | (0.81 | ) | | (0.77 | ) | | (0.49 | ) |
Total distributions declared to shareholders | | $(0.55 | ) | | $(1.86 | ) | | $(1.41 | ) | | $(1.31 | ) | | $(1.00 | ) |
Net asset value, end of period | | $15.66 | | | $13.83 | | | $19.50 | | | $20.02 | | | $19.10 | |
Total return (%) (k)(s) | | 18.09 | | | (21.55 | ) | | 4.32 | | | 12.22 | | | 3.02 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 0.76 | | | 0.74 | | | 0.70 | | | 0.71 | | | 0.71 | |
Net investment income | | 2.87 | | | 2.93 | | | 2.67 | | | 2.81 | | | 2.52 | |
Portfolio turnover | | 45 | | | 62 | | | 60 | | | 48 | | | 42 | |
Net assets at end of period (000 omitted) | | $604,214 | | | $604,843 | | | $1,013,465 | | | $1,210,549 | | | $1,370,782 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of period | | $13.70 | | | $19.33 | | | $19.86 | | | $18.97 | | | $19.43 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | |
Net investment income (d) | | $0.36 | | | $0.44 | | | $0.48 | | | $0.49 | | | $0.43 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | 1.97 | | | (4.26 | ) | | 0.36 | | | 1.67 | | | 0.08 | |
Total from investment operations | | $2.33 | | | $(3.82 | ) | | $0.84 | | | $2.16 | | | $0.51 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | |
From net investment income | | $(0.51 | ) | | $(0.55 | ) | | $(0.56 | ) | | $(0.50 | ) | | $(0.48 | ) |
From net realized gain on investments | | — | | | (1.26 | ) | | (0.81 | ) | | (0.77 | ) | | (0.49 | ) |
Total distributions declared to shareholders | | $(0.51 | ) | | $(1.81 | ) | | $(1.37 | ) | | $(1.27 | ) | | $(0.97 | ) |
Net asset value, end of period | | $15.52 | | | $13.70 | | | $19.33 | | | $19.86 | | | $18.97 | |
Total return (%) (k)(s) | | 17.81 | | | (21.74 | ) | | 4.07 | | | 11.91 | | | 2.81 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | |
Expenses (f) | | 1.00 | | | 0.99 | | | 0.95 | | | 0.96 | | | 0.96 | |
Net investment income | | 2.60 | | | 2.69 | | | 2.42 | | | 2.58 | | | 2.28 | |
Portfolio turnover | | 45 | | | 62 | | | 60 | | | 48 | | | 42 | |
Net assets at end of period (000 omitted) | | $855,092 | | | $708,517 | | | $994,977 | | | $903,202 | | | $770,453 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. |
| (s) | From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. |
See Notes to Financial Statements
18
MFS Total Return Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Total Return Portfolio (the fund) is a series of MFS Variable Insurance Trust II (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. The shares of the fund are sold to variable accounts established by insurance companies to fund benefits under variable contracts issued by such companies, and qualified retirement and pension plans.
| (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 February 16, 2010 which is the date that the financial statements were issued. The fund may invest a significant portion of its assets in asset-backed and/or mortgage-backed securities. The value of these securities may depend, in part, on the issuer’s or borrower’s credit quality or ability to pay principal and interest when due and may fall if an issuer or borrower defaults on its obligation to pay principal or interest or if the instrument’s credit rating is downgraded by a credit rating agency. U.S. Government securities not supported as to the payment of principal or interest by the U.S. Treasury, such as those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, are subject to greater credit risk than are U.S. Government securities supported by the U.S. Treasury, such as those issued by Ginnie Mae. 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 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. 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 affect 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
19
MFS Total Return Portfolio
Notes to Financial Statements – continued
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.
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 December 31, 2009 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 | | $789,608,072 | | $— | | $— | | $789,608,072 |
United Kingdom | | — | | 23,296,326 | | — | | 23,296,326 |
France | | 16,617,099 | | 2,324,282 | | — | | 18,941,381 |
Switzerland | | — | | 18,603,878 | | — | | 18,603,878 |
Netherlands | | 1,996,901 | | 2,530,753 | | — | | 4,527,654 |
Germany | | 2,115,232 | | — | | — | | 2,115,232 |
Finland | | 2,005,500 | | — | | — | | 2,005,500 |
Canada | | 1,276,373 | | — | | — | | 1,276,373 |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | — | | 178,099,823 | | — | | 178,099,823 |
| Non-U.S. Sovereign Debt | | — | | 11,867,557 | | — | | 11,867,557 |
| Municipal Bonds | | — | | 4,828,504 | | — | | 4,828,504 |
| Corporate Bonds | | — | | 103,180,177 | | — | | 103,180,177 |
| Residential Mortgage-Backed Securities | | — | | 217,340,244 | | — | | 217,340,244 |
| Commercial Mortgage-Backed Securities | | — | | 30,557,555 | | — | | 30,557,555 |
| Asset-Backed Securities (including CDOs) | | — | | 636,442 | | — | | 636,442 |
| Foreign Bonds | | — | | 35,836,733 | | — | | 35,836,733 |
| Mutual Funds | | 17,588,859 | | — | | — | | 17,588,859 |
| Total Investments | | $831,208,036 | | $629,102,274 | | $— | | $1,460,310,310 |
For further information regarding security characteristics, see the Portfolio of Investments.
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.
20
MFS Total Return Portfolio
Notes to Financial Statements – continued
Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. For the year ended December 31, 2009, the fund did not invest in any derivative instruments and accordingly there is no impact to the financial statements.
Security Loans – State Street Bank and Trust Company (“State Street”), as lending agent, may loan the securities of the fund to certain qualified institutions (the “Borrowers”) approved by the fund. The loans are collateralized by cash and/or U.S. Treasury and federal agency obligations in an amount typically at least equal to the market value of the securities loaned. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. State Street provides the fund with indemnification against Borrower default. The fund bears the risk of loss with respect to the investment of cash collateral. On loans collateralized by cash, the cash collateral is invested in a money market fund or short-term securities. A portion of the income generated upon investment of the collateral is remitted to the Borrowers, and the remainder is allocated between the fund and the lending agent. On loans collateralized by U.S. Treasury and/or federal agency obligations, a fee is received from the Borrower, and is allocated between the fund and the lending agent. Income from securities lending is included in interest income on the Statement of Operations. The dividend and interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2009, there were no securities on loan.
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. 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.
The fund may enter into “TBA” (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date. Although the unit price has been established, the principal value has not been finalized. However, the principal amount of the commitments will not fluctuate more than 0.01%. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to settlement date, which is in addition to the risk of decline in the value of the fund’s other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities.
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 December 31, 2009, 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.
21
MFS Total Return Portfolio
Notes to Financial Statements – continued
Book/tax differences primarily relate to amortization and accretion of debt securities and wash sale loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | |
| | | 12/31/09 | | 12/31/08 |
| Ordinary income (including any short-term capital gains) | | $48,700,594 | | $73,730,438 |
| Long-term capital gain | | — | | 104,992,120 |
| Total distributions | | $48,700,594 | | $178,722,558 |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | |
| As of 12/31/09 | | | |
| Cost of investments | | $1,437,073,329 | |
| Gross appreciation | | 76,701,322 | |
| Gross depreciation | | (53,464,341 | ) |
| Net unrealized appreciation (depreciation) | | $23,236,981 | |
| Undistributed ordinary income | | 37,468,127 | |
| Capital loss carryforwards | | (160,622,036 | ) |
| Other temporary differences | | 118 | |
As of December 31, 2009, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| | | |
| 12/31/16 | | $(144,491,354 | ) |
| 12/31/17 | | (16,130,682 | ) |
| | $(160,622,036 | ) |
Multiple Classes of Shares of Beneficial Interest – The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund’s income, realized and unrealized gain (loss), and common expenses 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. 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 |
| | | Year ended
12/31/09 | | Year ended
12/31/08 | | Year ended
12/31/09 | | Year ended
12/31/08 |
| Initial Class | | $22,536,162 | | $28,220,546 | | $— | | $59,583,022 |
| Service Class | | 26,164,432 | | 27,580,497 | | — | | 63,338,493 |
| Total | | $48,700,594 | | $55,801,043 | | $— | | $122,921,515 |
| (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 $300 million of average daily net assets | | 0.75% |
| Next $700 million of average daily net assets | | 0.675% |
| Average daily net assets in excess of $1 billion | | 0.60% |
The management fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.67% of the fund’s average daily net assets.
The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, brokerage commissions, and extraordinary expenses, such that total annual operating expenses of the fund do not exceed 1.25% of the fund’s average daily net assets. MFS’ agreement to limit the fund’s operating expense is contained in the investment advisory agreement between MFS and the fund and may not be rescinded without shareholder approval. In addition, the investment advisor has voluntarily agreed to pay a portion of the fund’s total operating expenses, exclusive of interest, taxes, brokerage commissions and extraordinary expenses, such that the total annual operating expenses do not exceed 1.00% of the fund’s average daily net assets attributable to Initial Class shares. This voluntary agreement may be changed or rescinded at any time by MFS. For the year ended December 31, 2009, the fund’s actual operating expenses did not exceed the limit and therefore, the investment advisor did not pay a portion of the fund’s expenses.
22
MFS Total Return Portfolio
Notes to Financial Statements – continued
Distributor – MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The fund’s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries.
Shareholder Servicing Agent – MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, has contracted to provide transfer agent and recordkeeping functions in connection with the issuance, transfer, and redemption of each class of shares of the fund under a Shareholder Servicing Agent Agreement. During the year ended December 31, 2009, the fund did not pay MFSC a fee for this service.
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 $10,000 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2009 was equivalent to an annual effective rate of 0.0400% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to Trustees in the form of a retainer, attendance fees, and additional compensation to the Board chairperson. The fund does not pay compensation directly to 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 of the fund are officers or directors of MFS, MFD, and MFSC.
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. MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. For the year ended December 31, 2009, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $23,879 and are included in miscellaneous expense on the Statement of Operations.
The fund may invest in a money market fund managed by MFS which 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 purchased option transactions and short-term obligations, were as follows:
| | | | |
| | | Purchases | | Sales |
| U.S. Government securities | | $208,090,233 | | $202,932,304 |
| Investments (non-U.S. Government securities) | | $381,849,090 | | $422,186,234 |
23
MFS Total Return Portfolio
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 12/31/09 | | | Year ended 12/31/08 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | |
Initial Class | | 672,781 | | | $9,372,909 | | | 598,498 | | | $9,249,450 | |
Service Class | | 5,685,771 | | | 80,037,857 | | | 2,358,542 | | | 40,099,814 | |
| | 6,358,552 | | | $89,410,766 | | | 2,957,040 | | | $49,349,264 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | |
Initial Class | | 1,742,936 | | | $22,536,162 | | | 5,025,963 | | | $87,803,568 | |
Service Class | | 2,037,728 | | | 26,164,432 | | | 5,246,335 | | | 90,918,990 | |
| | 3,780,664 | | | $48,700,594 | | | 10,272,298 | | | $178,722,558 | |
| Shares reacquired | | | | | | | | | | | | |
Initial Class | | (7,567,033 | ) | | $(104,697,805 | ) | | (13,854,343 | ) | | $(227,889,998 | ) |
Service Class | | (4,338,223 | ) | | (59,929,941 | ) | | (7,348,557 | ) | | (119,462,157 | ) |
| | (11,905,256 | ) | | $(164,627,746 | ) | | (21,202,900 | ) | | $(347,352,155 | ) |
| Net change | | | | | | | | | | | | |
Initial Class | | (5,151,316 | ) | | $(72,788,734 | ) | | (8,229,882 | ) | | $(130,836,980 | ) |
Service Class | | 3,385,276 | | | 46,272,348 | | | 256,320 | | | 11,556,647 | |
| | (1,766,040 | ) | | $(26,516,386 | ) | | (7,973,562 | ) | | $(119,280,333 | ) |
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 December 31, 2009, the fund’s commitment fee and interest expense were $20,138 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 | | 6,582,398 | | 336,019,996 | | (325,013,535 | ) | | 17,588,859 |
| | | | |
| Underlying Funds | | Realized
Gain (Loss) | | Capital Gain
Distributions | | Dividend
Income | | | Ending
Value |
| MFS Institutional Money Market Portfolio | | $— | | $— | | $47,697 | | | $17,588,859 |
24
MFS Total Return Portfolio
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of MFS Variable Insurance Trust II and the Shareholders of MFS Total Return Portfolio:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Total Return Portfolio (the “Fund”) (one of the portfolios comprising MFS Variable Insurance Trust II) as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MFS Total Return Portfolio as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 16, 2010
25
MFS Total Return Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of February 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 (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
| INTERESTED TRUSTEE | | | | |
David D. Horn (3) (born 6/07/41) | | Trustee | | April 1986 | | Private investor; Sun Life Assurance Company of Canada, Senior Vice President and General Manager for the United States (until 1997); Director (until March 2004) |
| | |
| INDEPENDENT TRUSTEES | | | | |
J. Kermit Birchfield (born 1/08/40) | | Chairman | | May 1997 | | Consultant; Century Partners, Inc. (investments), Director; Displaytech, Inc. (technology), Chairman; Dessin Fournir LLC (furniture manufacturer), Director (2005 to present); Site Watch LLC (software to monitor oil tanks), Managing Director (2006 to present); Juridica Investments (fund investing in judicial matters), Director (2007 to present), Immuno Science, Inc. (medical research), Independent Director (2009 to present), Intermountain Industries, Inc. (oil & gas exploration and production), Director (until February 2009) |
| | | |
Robert C. Bishop (born 1/13/43) | | Trustee | | May 2001 | | AutoImmune, Inc. (pharmaceutical product development), Chairman, President and Chief Executive Officer; Caliper Life Sciences Corp. (laboratory analytical instruments), Chairman; Millipore Corporation (purification/filtration products), Director; Waterstreet Capital (leverage buyouts), Advisory Board (August 2006 to present); Optobionics Corporation (ophthalmic devices), Director (until 2007) |
| | | |
Frederick H. Dulles (born 3/12/42) | | Trustee | | May 2001 | | Ten State International Law PLLC (law firm), Of Counsel (since 2006); Prudential Carolina Real Estate, (real estate), Broker (since 2006); Free Enterprise Foundation, Inc. (research institute), Director & Secretary (until 2008); Disher, Hamrick & Myers Residential, Inc. (real estate) Broker (2005 until 2006); Frederick H. Dulles law practice (until 2006); Ten State Street LLP (law firm), Member (until 2005) |
| | | |
Marcia A. Kean (born 6/30/48) | | Trustee | | April 2005 | | Feinstein Kean Healthcare (consulting), Chief Executive Officer |
| | | |
Ronald G. Steinhart (born 6/15/40) | | Trustee | | May 2001 | | Private investor; Penske Automotive Group (automotive retailer), Director; Animal Health International, Inc. (animal health products), Director (since 2007); Texas Industries (concrete/ aggregates/cement), Director (since 2007); Susser Holdings Corporation (retail convenience stores and distributor of wholesale motor fuel), Director (since 2009), (Carreker Corporation (technology consulting) Director (until 2005); Prentiss Properties Trust (real estate investment trust), Director (until 2006); Penson Worldwide, Inc. (securities clearance), Director (until 2008) |
| | | |
Haviland Wright (born 7/21/48) | | Trustee | | May 2001 | | Profitability of Hawaii (software), Chief Development Officer (since December 2008); Elixir Technologies Corporation (software) Director (since 2005); Nano Loa Inc. (liquid crystal displays), Director |
| | |
| TRUSTEE EMERITUS | | | | |
Samuel Adams (born 10/19/25) | | Trustee Emeritus | | | | Retired; K&L Gates LLP (law firm), Of Counsel |
| | |
| OFFICERS | | | | |
Maria F. Dwyer (4) (born 12/01/58) | | President | | November 2005 | | 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 (4) (born 1/18/74) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel |
| | | |
John M. Corcoran (4) (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) |
| | | |
Ethan D. Corey (4) (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 (4) (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) |
26
MFS Total Return Portfolio
Trustees and Officers – continued
| | | | | | |
Name, Date of Birth | | Position(s) Held
with Fund | | Trustee/Officer
Since (1) | | Principal Occupations During the Past Five Years and
Other Directorships (2) |
Timothy M. Fagan (4) (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 (4) (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 (4) (born 3/07/73) | | Assistant Secretary and Assistant Clerk | | May 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) |
| | | |
Ellen Moynihan (4) (born 11/13/57) | | Assistant Treasurer | | May 1997 | | Massachusetts Financial Services Company, Senior Vice President |
| | | |
Susan S. Newton (4) (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 (4) (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 (4) (born 5/01/52) | | Secretary and Clerk | | February 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 | | September 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 (4) (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 (4) (born 6/12/60) | | Assistant Treasurer | | April 1992 | | Massachusetts Financial Services Company, Senior Vice President |
| (1) | Date first appointed to serve as Trustee/Officer of an MFS fund or a Compass variable account. Each Trustee has served continuously since appointment. |
| (2) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (3) | “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 Trust, as a result of position with Sun Life of Canada (U.S.). The address of Sun Life of Canada (U.S.) is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. |
| (4) | “Interested person” of MFS within the meaning of the 1940 Act. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. |
The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. 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.
All Trustees currently serve as Trustees of the Trust and have served in that capacity since originally elected or appointed. All of the Trustees are also Managers of the Compass Variable Accounts. The executive officers of the Trust hold similar offices for the Compass Variable Accounts and other funds in the MFS fund complex. As of January 1, 2010, each Trustee serves as a Trustee or Manager of 32 Accounts/Portfolios.
27
MFS Total Return Portfolio
Trustees and Officers – continued
The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-752-7215.
| | |
Investment Adviser
Massachusetts Financial Services Company 500 Boylston Street, Boston, MA 02116-3741 | | Custodian State Street Bank and Trust 1 Lincoln Street, Boston, MA 02111-2900 |
Distributor
MFS Fund Distributors, Inc. 500 Boylston Street, Boston, MA 02116-3741 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116 |
Portfolio Managers Nevin Chitkara William Douglas Steven Gorham Richard Hawkins Joshua Marston Michael Roberge Brooks Taylor | | |
28
MFS Total Return Portfolio
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the investment advisory agreement between MFS Variable Insurance Trust II (the “Trust”) and Massachusetts Financial Services Company (“MFS”) on behalf of the Fund. The Trustees consider matters bearing on the Fund and the advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met in person in May and again in July 2009 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund. The independent Trustees were assisted in their evaluation of the investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS management during various contract review meetings. The independent Trustees were also assisted in this process by the Fund’s Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement was considered separately for the Fund, although the Trustees also took into account the common interests of all Funds in the Trust in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Trust.
In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. (“Lipper”) on the investment performance of the Fund for various time periods ended December 31, 2008, compared to the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper on the Fund’s advisory fees and other expenses compared to the advisory fees and other expenses of comparable funds identified by Lipper (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of its other clients, including institutional separate account and other clients, (iv) information as to whether expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund, (vi) MFS’ views regarding the outlook for the mutual fund industry and its strategic business plans, (vii) descriptions of various functions performed by MFS for the Trust, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund. The comparative performance, fee and expense information prepared and provided by Lipper was not independently verified, and the independent Trustees did not independently verify any information provided to them by MFS.
The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on comprehensive consideration of all information provided to the Trustees and was not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below for the Fund, while individual Trustees may have given different weight to various factors and evaluated the information presented as a whole differently than another individual Trustee. The Trustees recognized that the fee arrangements for the Fund reflect years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper, the Trustees compared the Fund’s total return investment performance to the performance of a peer group of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s Initial Class shares in comparison to the performance of funds in its Lipper performance universe over the one-, three- and five-year periods ended December 31, 2008. The Trustees did not rely on performance results for more recent periods, including those shown elsewhere in this report.
The Trustees noted the performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the Lipper Classification Index for the one-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund was in the 2nd quintile for the three-year period and the five-year period ended December 31, 2008, relative to the Lipper performance universe. Based on the nature and quality of services provided by MFS, the Board of Trustees concluded that the Fund’s performance was satisfactory.
29
MFS Total Return Portfolio
Board Review of Investment Advisory Agreement – continued
In the course of their deliberations, the Trustees took into account information provided by MFS during contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year.
In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s Initial Class shares as a percentage of average daily net assets, compared to the advisory fee and total expense ratios of its peer group of funds based on information provided by Lipper. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered the generally broader scope of services provided by MFS to the Trust than those provided to institutional accounts. The Trustees also considered the higher demands placed on MFS’ investment personnel and trading infrastructure as a result of the daily cash in-flows and out-flows of the Fund, and the impact on MFS and related expenses due to the more extensive regulatory regime to which the Fund is subject, compared to institutional accounts.
In considering the fees, the Trustees noted from the Lipper data that the Fund’s effective advisory fee rate and total expense ratio were each above the median of such fees and expenses of funds in the Lipper expense group. In addition, the Trustees accepted MFS’ offer to continue its expense limitation for the Fund. The Trustees further concluded that the existing breakpoints were sufficient to allow the Fund to benefit from economies of scale as its assets grow. The Trustees concluded that the fees were reasonable in light of the nature and quality of services provided.
The Trustees also considered information prepared by MFS relating to its costs and profits with respect to the Fund and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described below, the Trustees concluded that the advisory fees charged to the Fund represent reasonable compensation in light of the nature and quality of the services being provided by MFS.
In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered the financial resources of MFS and its parent, Sun Life Financial Inc. The Trustees further considered any advantages and possible disadvantages of having an adviser which also serves other investment companies as well as institutional accounts.
The Trustees also considered the nature, quality, cost, and extent of administrative, transfer agency, and distribution services provided to the Fund by MFS and its affiliates under agreements and plans other than the investment advisory agreement, including the 12b-1 fees the Fund pays to MFS Fund Distributors, Inc., an affiliate of MFS. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’ interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Fund were satisfactory. The Trustees also considered the benefits to MFS from the use of the Fund’s portfolio brokerage commissions to pay for research and other similar services and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Trust, and determined that any such benefits derived by MFS were reasonable and fair.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the investment advisory agreement should be continued for an additional one-year period, commencing September 1, 2009.
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 “Variable Insurance Portfolios – VIT II” in the “Products and Performance” section of the MFS Web site (mfs.com).
30
MFS Total Return Portfolio
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.
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 “Variable Insurance Portfolios – VIT II” in the “Products and Performance” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 42.71% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
31
MFS Total Return Portfolio
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.
32
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. J. Kermit Birchfield, Robert C. Bishop, and Haviland Wright, 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. J. Kermit Birchfield, Robert C. Bishop, and Haviland Wright are “independent” members of the Audit Committee as defined in Form N-CSR.
| 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 each series of the Registrant (collectively, the “Funds”). 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 December 31, 2009 and 2008, audit fees billed to the Funds by Deloitte were as follows:
| | | | |
| | | Audit Fees |
| | | 2009 | | 2008 |
Fees billed by Deloitte: | | | | |
MFS Blended Research Core Equity Portfolio | | 40,270 | | 37,781 |
MFS Blended Research Growth Portfolio | | 38,403 | | 37,703 |
MFS Blended Research Value Portfolio | | 38,403 | | 37,703 |
MFS Bond Portfolio | | 52,937 | | 50,868 |
MFS Capital Appreciation Portfolio+ | | 0 | | 36,171 |
MFS Core Equity Portfolio | | 39,785 | | 39,785 |
MFS Growth Portfolio | | 38,554 | | 36,854 |
MFS Emerging Markets Equity Portfolio | | 42,322 | | 39,922 |
MFS Global Governments Portfolio | | 50,867 | | 49,168 |
MFS Global Growth Portfolio | | 51,216 | | 48,816 |
MFS Global Total Return Portfolio | | 51,216 | | 48,816 |
MFS Government Securities Portfolio | | 43,343 | | 43,343 |
MFS High Yield Portfolio | | 55,989 | | 52,424 |
MFS International Growth Portfolio | | 42,322 | | 39,922 |
MFS International Value Portfolio | | 43,006 | | 40,607 |
MFS Massachusetts Investors Growth Stock Portfolio | | 39,785 | | 38,085 |
MFS Mid Cap Growth Portfolio | | 37,870 | | 36,171 |
MFS Mid Cap Value Portfolio+ | | 0 | | 38,907 |
MFS Money Market Portfolio | | 23,504 | | 21,804 |
MFS New Discovery Portfolio | | 37,870 | | 36,171 |
MFS Research International Portfolio | | 40,270 | | 37,871 |
MFS Global Research Portfolio | | 40,954 | | 36,854 |
MFS Strategic Income Portfolio | | 55,756 | | 37,836 |
MFS Strategic Value Portfolio+ | | 0 | | 38,907 |
MFS Technology Portfolio | | 40,270 | | 36,171 |
MFS Total Return Portfolio | | 50,867 | | 50,868 |
MFS Utilities Portfolio | | 37,870 | | 37,871 |
MFS Value Portfolio | | 37,870 | | 37,871 |
Total | | 1,071,519 | | 1,125,270 |
For the fiscal years ended December 31, 2009 and 2008, fees billed by Deloitte 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 |
| | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 |
Fees billed by Deloitte: | | | | | | | | | | | | |
To MFS Blended Research Core Equity Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Blended Research Growth Portfolio | | 0 | | 0 | | 4,952 | | 4,776 | | 1,166 | | 2,815 |
To MFS Blended Research Value Portfolio | | 0 | | 0 | | 4,952 | | 4,776 | | 1,166 | | 2,815 |
To MFS Bond Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 4,080 |
To MFS Capital Appreciation Portfolio+ | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Core Equity Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Growth Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Emerging Markets Equity Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Global Governments Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Global Growth Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Global Total Return Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Government Securities Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS High Yield Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 5,115 |
To MFS International Growth Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS International Value Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Massachusetts Investors Growth Stock Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Mid Cap Growth Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Mid Cap Value Portfolio+ | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Money Market Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS New Discovery Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Research International Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Global Research Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Strategic Income Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,380 |
To MFS Strategic Value Portfolio+ | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Technology Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 1,115 |
To MFS Total Return Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Utilities Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
To MFS Value Portfolio | | 0 | | 0 | | 4,276 | | 4,124 | | 1,166 | | 2,815 |
Total fees billed by Deloitte To above Funds: | | 0 | | 0 | | 121,080 | | 116,776 | | 32,648 | | 63,250 |
| | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Blended Research Core Equity Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Blended Research Growth Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Blended Research Value Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Bond Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Capital Appreciation Portfolio+* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Core Equity Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Growth Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Emerging Markets Equity Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Global Governments Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Global Growth Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS Global Total Return Portfolio, MFS and MFS Related Entities# | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Government Securities Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS High Yield Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS International Growth Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS International Value Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
| | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Massachusetts Investors Growth Stock Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Mid Cap Growth Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Mid Cap Value Portfolio+* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Money Market Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS New Discovery Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Research International Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Global Research Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Strategic Income Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Strategic Value Portfolio+* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Technology Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Total Return Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Utilities Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
To MFS and MFS Related Entities of MFS Value Portfolio* | | 1,061,841 | | 1,256,504 | | 0 | | 0 | | 59,174 | | 223,140 |
Aggregate fees for non-audit services: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | |
| | | 2009 | | | | 2008 | | | | | | |
To MFS Blended Research Core Equity Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Blended Research Growth Portfolio, MFS and MFS Related Entities# | | 1,225,258 | | | | 1,537,060 | | | | | | |
To MFS Blended Research Value Portfolio, MFS and MFS Related Entities# | | 1,225,258 | | | | 1,537,060 | | | | | | |
To MFS Bond Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,537,673 | | | | | | |
To MFS Capital Appreciation Portfolio, MFS and MFS Related Entities+# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Core Equity Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Growth Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Emerging Markets Equity Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Global Governments Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Global Growth Portfolio MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Global Total Return Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Government Securities Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS High Yield Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,538,708 | | | | | | |
To MFS International Growth Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS International Value Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Massachusetts Investors Growth Stock Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Mid Cap Growth Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
| | | | | | | | | | | | |
To MFS Mid Cap Value Portfolio, MFS and MFS Related Entities+# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Money Market Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS New Discovery Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Research International Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,536,408 | | | | | | |
To MFS Global Research Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Strategic Income Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,535,973 | | | | | | |
To MFS Strategic Value Portfolio, MFS and MFS Related Entities+# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Technology Portfolio, MFS and MFS Related Entities# | | 1,224,582 | | | | 1,534,708 | | | | | | |
To MFS Total Return Portfolio, MFS and MFS Related Entities# | | 1,224,581 | | | | 1,536,408 | | | | | | |
To MFS Utilities Portfolio, MFS and MFS Related Entities# | | 1,224,581 | | | | 1,536,408 | | | | | | |
To MFS Value Portfolio, MFS and MFS Related Entities# | | 1,224,581 | | | | 1,536,408 | | | | | | |
| + | MFS Capital Appreciation Portfolio was reorganized into the MFS Massachusetts Investors Growth Stock Portfolio, as of December 4, 2009. MFS Mid Cap Value Portfolio was reorganized into the MFS Value Portfolio, as of December 4, 2009. MFS Strategic Value Portfolio was reorganized into the MFS Value Portfolio, as of June 26, 2009. |
| * | 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 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. |
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.
| ITEM 6. | SCHEDULE OF INVESTMENTS |
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)(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 VARIABLE INSURANCE TRUST II
| | |
| By (Signature and Title)* | | MARIA F. DWYER |
| | Maria F. Dwyer, President |
Date: February 16, 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: February 16, 2010
| | |
| By (Signature and Title)* | | JOHN M. CORCORAN |
| | John M. Corcoran, Treasurer (Principal Financial Officer and Accounting Officer) |
Date: February 16, 2010
| * | Print name and title of each signing officer under his or her signature. |
