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 811-03732
MFS VARIABLE INSURANCE TRUST II
(Exact name of registrant as specified in charter)
111 Huntington Avenue, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
111 Huntington Avenue
Boston, Massachusetts 02199
(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, 2014
| ** | Effective August 8, 2014, MFS New Discovery Portfolio, a series of the Registrant, was reorganized into MFS New Discovery Series, a series of MFS Variable Insurance Trust; MFS Utilities Portfolio, a series of the Registrant, was reorganized into MFS Utilities Series, a series of MFS Variable Insurance Trust; and MFS Value Portfolio, a series of the Registrant, was reorganized into MFS Value Series, a series of MFS Variable Insurance Trust. Effective October 15, 2014, MFS New Discovery Portfolio, MFS Utilities Portfolio and MFS Value Portfolio were each terminated as a series of the Registrant. |
| ITEM 1. | REPORTS TO STOCKHOLDERS. |
Each of MFS New Discovery Portfolio, MFS Utilities Portfolio and MFS Value Portfolio, each a series of the Registrant, did not have shareholders as of period end. For further information please see the introductory footnote.
ANNUAL REPORT
December 31, 2014
MFS® BLENDED RESEARCH® CORE EQUITY PORTFOLIO
MFS® Variable Insurance Trust II
CGS-ANN
MFS® BLENDED RESEARCH® CORE EQUITY PORTFOLIO
CONTENTS
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 OR CREDIT UNION 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 CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Blended Research Core Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Exxon Mobil Corp. | | | 3.2% | |
| Apple, Inc. | | | 2.6% | |
| JPMorgan Chase & Co. | | | 2.6% | |
| CVS Health Corp. | | | 2.3% | |
| Procter & Gamble Co. | | | 2.2% | |
| Facebook, Inc., “A” | | | 2.2% | |
| Verizon Communications, Inc. | | | 1.9% | |
| Wells Fargo & Co. | | | 1.9% | |
| Hewlett-Packard Co. | | | 1.9% | |
| Biogen Idec, Inc. | | | 1.8% | |
| | | | |
| Equity sectors | | | | |
| Technology | | | 16.4% | |
| Financial Services | | | 16.0% | |
| Health Care | | | 14.1% | |
| Energy | | | 7.9% | |
| Retailing | | | 7.7% | |
| Consumer Staples | | | 7.4% | |
| Leisure | | | 7.2% | |
| Utilities & Communications | | | 6.4% | |
| Industrial Goods & Services | | | 5.4% | |
| Special Products & Services | | | 3.9% | |
| Transportation | | | 2.8% | |
| Basic Materials | | | 2.5% | |
| Autos & Housing | | | 1.9% | |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Blended Research Core Equity Portfolio (“fund”) provided a total return of 12.57%, while Service Class shares of the fund provided a total return of 12.28%. These compare with a return of 13.69% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”).
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Weak stock selection in the health care sector detracted from performance relative to the S&P 500 Index. An underweight position in strong-performing biopharmaceutical company Celgene (h) weighed on relative results. The stock appreciated throughout the reporting period due to highly anticipated new products in the company’s pipeline.
Stock selection within the financial services sector also hurt relative returns. However, there were no individual stocks within this sector that were among the fund’s top relative detractors for the reporting period.
Elsewhere, the fund’s overweight positions in offshore drilling contractor Ensco, online travel company TripAdvisor, steel producer US Steel, integrated oil and gas company Exxon Mobil and automotive company General Motors (h) held back relative returns. The stock price of Ensco plummeted toward the end of the year reflecting the global oil supply glut that contributed to crude oil prices falling to their lowest levels since July 2009. Shares of TripAdvisor weakened after the company reported mixed earnings results caused by seasonality headwinds and acquisitions-related expenses that offset strong revenue growth during the period. The fund’s holdings of anti-aging care products and nutritional supplements distributor Nu Skin (b)(h), and the timing of ownership in shares of multinational retailer Best Buy and online information portal Yahoo! (h), also dampened relative results. Shares of Nu Skin dropped sharply at the beginning of the reporting period following an unfavorable press release in a Chinese news publication that questioned the company’s recruiting and selling practices. An underweight position in computer and personal electronics maker Apple, which strongly outperformed the benchmark, also held back relative performance.
Contributors to Performance
Stock selection in the retailing sector was a primary factor that contributed to relative performance. Within this sector, overweight positions in retailer Kroger and drugstore retailer CVS Health boosted relative results. Shares of Kroger appreciated during the reporting period reflecting strong earnings results where market share gains and improving cost controls and margins were at the forefront. Additionally, avoiding shares of internet retailer Amazon.com also aided relative returns as the stock turned in weak performance for the period.
Favorable stock selection in the leisure sector was another factor that supported relative results. An overweight position in strong-performing video game maker Electronic Arts bolstered relative performance after the company posted favorable earnings results led by a strong product portfolio, including Madden NFL 15, The Sims 4, FIFA 15 and Need for Speed Rivals. The timing of the fund’s ownership in cruise line operator Royal Caribbean Cruises also helped.
Elsewhere, the fund’s overweight positions in strong-performing semiconductor manufacturer Avago Technologies, computer and personal electronics maker Hewlett-Packard, social networking services provider Facebook, and health insurance company WellPoint (h) aided relative performance. Shares of Avago Technologies rose on the back of synergies from the company’s acquisition
3
MFS Blended Research Core Equity Portfolio
Management Review – continued
of LSI and from growth in its wireless communications segment. Avago’s sale of the LSI’s Axxia networking business to Intel also benefited the stock. Shares of Hewlett-Packard appreciated reflecting the company’s recovery due to enterprise share gains and stabilization in its printing and PCs segments. Upbeat comments from management and the impending plan to split its hardware business from the faster-growing software and enterprise division appeared to have overshadowed disappointing financial results during the second half of the period. The fund’s underweight position in diversified technology products and services company International Business Machines (IBM) (h) also supported relative returns as the stock underperformed the benchmark over the reporting period.
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/14/86 | | 12.57% | | 16.04% | | 8.28% | | |
| | | Service Class | | 8/24/01 | | 12.28% | | 15.74% | | 8.01% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 13.69% | | 15.45% | | 7.67% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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.
5
MFS Blended Research Core Equity Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.45% | | | | $1,000.00 | | | | $1,064.85 | | | | $2.34 | |
| | Hypothetical (h) | | | 0.45% | | | | $1,000.00 | | | | $1,022.94 | | | | $2.29 | |
| Service Class | | Actual | | | 0.70% | | | | $1,000.00 | | | | $1,063.44 | | | | $3.64 | |
| | Hypothetical (h) | | | 0.70% | | | | $1,000.00 | | | | $1,021.68 | | | | $3.57 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Blended Research Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.6% | | | | | |
| Aerospace – 2.4% | | | | | |
| Lockheed Martin Corp. | | | 16,603 | | | $ | 3,197,239 | |
| United Technologies Corp. | | | 73,587 | | | | 8,462,505 | |
| | | | | | | | |
| | | | | | $ | 11,659,744 | |
| | | | | | | | |
| Automotive – 1.3% | | | | | |
| Johnson Controls, Inc. | | | 124,950 | | | $ | 6,040,083 | |
| | | | | | | | |
| Biotechnology – 3.5% | | | | | |
| Biogen Idec, Inc. (a) | | | 25,665 | | | $ | 8,711,984 | |
| Gilead Sciences, Inc. (a) | | | 28,428 | | | | 2,679,623 | |
| Illumina, Inc. (a) | | | 27,574 | | | | 5,089,609 | |
| | | | | | | | |
| | | | | | $ | 16,481,216 | |
| | | | | | | | |
| Broadcasting – 0.8% | | | | | |
| Time Warner, Inc. | | | 47,341 | | | $ | 4,043,868 | |
| | | | | | | | |
| Business Services – 2.9% | | | | | |
| Accenture PLC, “A” | | | 50,921 | | | $ | 4,547,755 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 68,669 | | | | 3,616,110 | |
| FleetCor Technologies, Inc. (a) | | | 37,856 | | | | 5,629,566 | |
| | | | | | | | |
| | | | | | $ | 13,793,431 | |
| | | | | | | | |
| Cable TV – 2.2% | | | | | |
| Comcast Corp., “A” | | | 105,137 | | | $ | 6,098,997 | |
| Time Warner Cable, Inc. | | | 30,159 | | | | 4,585,978 | |
| | | | | | | | |
| | | | | | $ | 10,684,975 | |
| | | | | | | | |
| Chemicals – 2.0% | | | | | |
| CF Industries Holdings, Inc. | | | 15,236 | | | $ | 4,152,419 | |
| LyondellBasell Industries N.V., “A” | | | 65,287 | | | | 5,183,135 | |
| | | | | | | | |
| | | | | | $ | 9,335,554 | |
| | | | | | | | |
| Computer Software – 3.5% | | | | | |
| Citrix Systems, Inc. (a) | | | 93,629 | | | $ | 5,973,530 | |
| Microsoft Corp. | | | 134,441 | | | | 6,244,784 | |
| Oracle Corp. | | | 101,663 | | | | 4,571,785 | |
| | | | | | | | |
| | | | | | $ | 16,790,099 | |
| | | | | | | | |
| Computer Software – Systems – 5.7% | | | | | |
| Apple, Inc. | | | 113,933 | | | $ | 12,575,925 | |
| Hewlett-Packard Co. | | | 224,874 | | | | 9,024,194 | |
| Western Digital Corp. | | | 48,847 | | | | 5,407,363 | |
| | | | | | | | |
| | | | | | $ | 27,007,482 | |
| | | | | | | | |
| Construction – 0.7% | | | | | |
| Pulte Homes, Inc. | | | 145,091 | | | $ | 3,113,653 | |
| | | | | | | | |
| Consumer Products – 2.2% | | | | | |
| Procter & Gamble Co. | | | 115,401 | | | $ | 10,511,877 | |
| | | | | | | | |
| Consumer Services – 1.0% | | | | | |
| TripAdvisor, Inc. (a) | | | 61,491 | | | $ | 4,590,918 | |
| | | | | | | | |
| Electrical Equipment – 0.6% | | | | | |
| General Electric Co. | | | 107,957 | | | $ | 2,728,073 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – 2.7% | | | | | |
| Avago Technologies Ltd. | | | 60,397 | | | $ | 6,075,334 | |
| Broadcom Corp., “A” | | | 158,458 | | | | 6,865,985 | |
| | | | | | | | |
| | | | | | $ | 12,941,319 | |
| | | | | | | | |
| Energy – Independent – 2.6% | | | | | |
| EOG Resources, Inc. | | | 66,302 | | | $ | 6,104,425 | |
| Marathon Petroleum Corp. | | | 70,074 | | | | 6,324,879 | |
| | | | | | | | |
| | | | | | $ | 12,429,304 | |
| | | | | | | | |
| Energy – Integrated – 4.6% | | | | | |
| Chevron Corp. | | | 60,387 | | | $ | 6,774,214 | |
| Exxon Mobil Corp. | | | 164,024 | | | | 15,164,019 | |
| | | | | | | | |
| | | | | | $ | 21,938,233 | |
| | | | | | | | |
| Food & Beverages – 3.2% | | | | | |
| Archer Daniels Midland Co. | | | 88,312 | | | $ | 4,592,224 | |
| General Mills, Inc. | | | 90,079 | | | | 4,803,913 | |
| Mondelez International, Inc. | | | 166,614 | | | | 6,052,254 | |
| | | | | | | | |
| | | | | | $ | 15,448,391 | |
| | | | | | | | |
| Food & Drug Stores – 3.6% | | | | | |
| CVS Health Corp. | | | 112,500 | | | $ | 10,834,875 | |
| Kroger Co. | | | 98,241 | | | | 6,308,055 | |
| | | | | | | | |
| | | | | | $ | 17,142,930 | |
| | | | | | | | |
| Gaming & Lodging – 1.1% | | | | | |
| Royal Caribbean Cruises Ltd. | | | 62,397 | | | $ | 5,143,385 | |
| | | | | | | | |
| General Merchandise – 1.3% | | | | | |
| Kohl’s Corp. | | | 101,229 | | | $ | 6,179,018 | |
| | | | | | | | |
| Health Maintenance Organizations – 1.3% | | | | | |
| Anthem, Inc. | | | 50,776 | | | $ | 6,381,020 | |
| | | | | | | | |
| Insurance – 5.4% | | | | | |
| Berkshire Hathaway, Inc., “B” (a) | | | 11,030 | | | $ | 1,656,155 | |
| Everest Re Group Ltd. | | | 28,884 | | | | 4,918,945 | |
| MetLife, Inc. | | | 140,723 | | | | 7,611,707 | |
| Prudential Financial, Inc. | | | 79,554 | | | | 7,196,455 | |
| Validus Holdings Ltd. | | | 102,261 | | | | 4,249,967 | |
| | | | | | | | |
| | | | | | $ | 25,633,229 | |
| | | | | | | | |
| Internet – 3.4% | | | | | |
| Facebook, Inc., “A “ (a) | | | 134,407 | | | $ | 10,486,434 | |
| Google, Inc., “A” (a) | | | 5,377 | | | | 2,853,359 | |
| Google, Inc., “C” (a) | | | 5,383 | | | | 2,833,611 | |
| | | | | | | | |
| | | | | | $ | 16,173,404 | |
| | | | | | | | |
| Leisure & Toys – 1.3% | | | | | |
| Electronic Arts, Inc. (a) | | | 135,216 | | | $ | 6,357,180 | |
| | | | | | | | |
| Machinery & Tools – 2.4% | | | | | |
| Cummins, Inc. | | | 37,831 | | | $ | 5,454,095 | |
| Illinois Tool Works, Inc. | | | 26,880 | | | | 2,545,536 | |
| Joy Global, Inc. | | | 69,661 | | | | 3,240,630 | |
| | | | | | | | |
| | | | | | $ | 11,240,261 | |
| | | | | | | | |
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MFS Blended Research Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Major Banks – 6.2% | | | | | |
| Goldman Sachs Group, Inc. | | | 42,142 | | | $ | 8,168,384 | |
| JPMorgan Chase & Co. | | | 195,581 | | | | 12,239,459 | |
| Wells Fargo & Co. | | | 169,291 | | | | 9,280,533 | |
| | | | | | | | |
| | | $ | 29,688,376 | |
| | | | | | | | |
| Medical Equipment – 2.7% | | | | | |
| Abbott Laboratories | | | 121,459 | | | $ | 5,468,084 | |
| Thermo Fisher Scientific, Inc. | | | 59,408 | | | | 7,443,228 | |
| | | | | | | | |
| | | $ | 12,911,312 | |
| | | | | | | | |
| Metals & Mining – 0.5% | | | | | |
| United States Steel Corp. | | | 94,796 | | | $ | 2,534,845 | |
| | | | | | | | |
| Network & Telecom – 1.1% | | | | | |
| Qualcomm, Inc. | | | 72,154 | | | $ | 5,363,207 | |
| | | | | | | | |
| Oil Services – 0.7% | | | | | |
| Ensco PLC, “A” | | | 118,160 | | | $ | 3,538,892 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.3% | | | | | |
| Citigroup, Inc. | | | 155,152 | | | $ | 8,395,275 | |
| Discover Financial Services | | | 113,498 | | | | 7,432,984 | |
| | | | | | | | |
| | | $ | 15,828,259 | |
| | | | | | | | |
| Pharmaceuticals – 6.7% | | | | | |
| Bristol-Myers Squibb Co. | | | 137,913 | | | $ | 8,141,004 | |
| Johnson & Johnson | | | 64,448 | | | | 6,739,327 | |
| Merck & Co., Inc. | | | 147,282 | | | | 8,364,145 | |
| Pfizer, Inc. | | | 274,696 | | | | 8,556,780 | |
| | | | | | | | |
| | | $ | 31,801,256 | |
| | | | | | | | |
| Railroad & Shipping – 1.6% | | | | | |
| Union Pacific Corp. | | | 65,430 | | | $ | 7,794,676 | |
| | | | | | | | |
| Real Estate – 1.1% | | | | | |
| Iron Mountain, Inc., REIT | | | 71,676 | | | $ | 2,770,994 | |
| Public Storage, Inc., REIT | | | 13,347 | | | | 2,467,193 | |
| | | | | | | | |
| | | $ | 5,238,187 | |
| | | | | | | | |
| Restaurants – 1.7% | | | | | |
| McDonald’s Corp. | | | 54,640 | | | $ | 5,119,768 | |
| YUM! Brands, Inc. | | | 39,917 | | | | 2,907,953 | |
| | | | | | | | |
| | | $ | 8,027,721 | |
| | | | | | | | |
| Specialty Stores – 2.8% | | | | | |
| AutoZone, Inc. (a) | | | 12,053 | | | $ | 7,462,133 | |
| Best Buy Co., Inc. | | | 99,713 | | | | 3,886,813 | |
| Ross Stores, Inc. | | | 22,233 | | | | 2,095,683 | |
| | | | | | | | |
| | | $ | 13,444,629 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Telecommunications – Wireless – 1.0% | | | | | |
| American Tower Corp., REIT | | | 49,720 | | | $ | 4,914,822 | |
| | | | | | | | |
| Telephone Services – 2.4% | | | | | |
| Frontier Communications Corp. | | | 328,244 | | | $ | 2,189,387 | |
| Verizon Communications, Inc. | | | 198,996 | | | | 9,309,033 | |
| | | | | | | | |
| | | $ | 11,498,420 | |
| | | | | | | | |
| Tobacco – 2.0% | | | | | |
| Lorillard, Inc. | | | 46,364 | | | $ | 2,918,150 | |
| Philip Morris International, Inc. | | | 80,324 | | | | 6,542,390 | |
| | | | | | | | |
| | | $ | 9,460,540 | |
| | | | | | | | |
| Trucking – 1.1% | | | | | |
| United Parcel Service, Inc., “B” | | | 49,241 | | | $ | 5,474,122 | |
| | | | | | | | |
| Utilities – Electric Power – 3.0% | | | | | |
| AES Corp. | | | 322,823 | | �� | $ | 4,445,273 | |
| American Electric Power Co., Inc. | | | 96,180 | | | | 5,840,050 | |
| Edison International | | | 62,144 | | | | 4,069,189 | |
| | | | | | | | |
| | | $ | 14,354,512 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $364,747,863) | | | $ | 475,662,423 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.5% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 2,434,210 | | | $ | 2,434,210 | |
| | | | | | | | |
Total Investments
(Identified Cost, $367,182,073) | | | | | | $ | 478,096,633 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | (294,889 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 477,801,744 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
8
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $364,747,863) | | | $475,662,423 | | | | | |
Underlying affiliated funds, at cost and value | | | 2,434,210 | | | | | |
Total investments, at value (identified cost, $367,182,073) | | | $478,096,633 | | | | | |
Receivables for dividends | | | 468,277 | | | | | |
Other assets | | | 4,038 | | | | | |
Total assets | | | | | | | $478,568,948 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $680,179 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 8,061 | | | | | |
Shareholder servicing costs | | | 61 | | | | | |
Distribution and/or service fees | | | 1,616 | | | | | |
Payable for independent Trustees’ compensation | | | 18 | | | | | |
Accrued expenses and other liabilities | | | 77,269 | | | | | |
Total liabilities | | | | | | | $767,204 | |
Net assets | | | | | | | $477,801,744 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $324,457,348 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 110,914,560 | | | | | |
Accumulated net realized gain (loss) on investments | | | 35,325,516 | | | | | |
Undistributed net investment income | | | 7,104,320 | | | | | |
Net assets | | | | | | | $477,801,744 | |
Shares of beneficial interest outstanding | | | | | | | 8,943,804 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value per share | |
Initial Class | | | $361,501,203 | | | | 6,756,904 | | | | $53.50 | |
Service Class | | | 116,300,541 | | | | 2,186,900 | | | | 53.18 | |
See Notes to Financial Statements
9
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 12/31/14 | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Dividends | | | $9,592,266 | | | | | |
Dividends from underlying affiliated funds | | | 1,968 | | | | | |
Total investment income | | | | | | | $9,594,234 | |
Expenses | | | | | | | | |
Management fee | | | $2,666,455 | | | | | |
Distribution and/or service fees | | | 312,370 | | | | | |
Shareholder servicing costs | | | 13,004 | | | | | |
Administrative services fee | | | 75,674 | | | | | |
Independent Trustees’ compensation | | | 15,235 | | | | | |
Custodian fee | | | 51,241 | | | | | |
Shareholder communications | | | 31,010 | | | | | |
Audit and tax fees | | | 53,215 | | | | | |
Legal fees | | | 4,168 | | | | | |
Miscellaneous | | | 17,872 | | | | | |
Total expenses | | | | | | | $3,240,244 | |
Fees paid indirectly | | | (2 | ) | | | | |
Reduction of expenses by investment adviser | | | (750,356 | ) | | | | |
Net expenses | | | | | | | $2,489,886 | |
Net investment income | | | | | | | $7,104,348 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) on investments (identified cost basis) | | | | | | | $69,372,475 | |
Change in unrealized appreciation (depreciation) on investments | | | | | | | $(19,698,576 | ) |
Net realized and unrealized gain (loss) on investments | | | | | | | $49,673,899 | |
Change in net assets from operations | | | | | | | $56,778,247 | |
See Notes to Financial Statements
10
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $7,104,348 | | | | $7,685,814 | |
Net realized gain (loss) on investments | | | 69,372,475 | | | | 57,531,662 | |
Net unrealized gain (loss) on investments | | | (19,698,576 | ) | | | 82,114,230 | |
Change in net assets from operations | | | $56,778,247 | | | | $147,331,706 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(7,682,407 | ) | | | $(9,239,051 | ) |
Change in net assets from fund share transactions | | | $(73,074,943 | ) | | | $(81,956,261 | ) |
Total change in net assets | | | $(23,979,103 | ) | | | $56,136,394 | |
| Net assets | | | | | | | | |
At beginning of period | | | 501,780,847 | | | | 445,644,453 | |
At end of period (including undistributed net investment income of $7,104,320 and
$7,682,379, respectively) | | | $477,801,744 | | | | $501,780,847 | |
See Notes to Financial Statements
11
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $48.31 | | | | $36.15 | | | | $31.86 | | | | $31.89 | | | | $27.84 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.77 | | | | $0.71 | | | | $0.72 | | | | $0.49 | | | | $0.51 | |
Net realized and unrealized gain (loss) on investments | | | 5.28 | | | | 12.32 | | | | 4.17 | | | | 0.10 | | | | 4.05 | |
Total from investment operations | | | $6.05 | | | | $13.03 | | | | $4.89 | | | | $0.59 | | | | $4.56 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.86 | ) | | | $(0.87 | ) | | | $(0.60 | ) | | | $(0.62 | ) | | | $(0.51 | ) |
Net asset value, end of period (x) | | | $53.50 | | | | $48.31 | | | | $36.15 | | | | $31.86 | | | | $31.89 | |
Total return (%) (k)(r)(s)(x) | | | 12.57 | | | | 36.40 | | | | 15.37 | | | | 1.97 | | | | 16.46 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.60 | | | | 0.60 | | | | 0.61 | | | | 0.64 | | | | 0.65 | |
Expenses after expense reductions (f) | | | 0.45 | | | | 0.50 | | | | 0.60 | | | | 0.60 | | | | 0.60 | |
Net investment income | | | 1.53 | | | | 1.68 | | | | 2.06 | | | | 1.52 | | | | 1.77 | |
Portfolio turnover | | | 41 | | | | 43 | | | | 54 | | | | 77 | | | | 68 | |
Net assets at end of period (000 omitted) | | | $361,501 | | | | $367,674 | | | | $311,265 | | | | $315,115 | | | | $360,667 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $48.02 | | | | $35.93 | | | | $31.65 | | | | $31.66 | | | | $27.66 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.64 | | | | $0.60 | | | | $0.62 | | | | $0.41 | | | | $0.44 | |
Net realized and unrealized gain (loss) on investments | | | 5.23 | | | | 12.24 | | | | 4.15 | | | | 0.11 | | | | 4.00 | |
Total from investment operations | | | $5.87 | | | | $12.84 | | | | $4.77 | | | | $0.52 | | | | $4.44 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.71 | ) | | | $(0.75 | ) | | | $(0.49 | ) | | | $(0.53 | ) | | | $(0.44 | ) |
Net asset value, end of period (x) | | | $53.18 | | | | $48.02 | | | | $35.93 | | | | $31.65 | | | | $31.66 | |
Total return (%) (k)(r)(s)(x) | | | 12.28 | | | | 36.05 | | | | 15.10 | | | | 1.74 | | | | 16.12 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.85 | | | | 0.85 | | | | 0.86 | | | | 0.89 | | | | 0.90 | |
Expenses after expense reductions (f) | | | 0.70 | | | | 0.75 | | | | 0.85 | | | | 0.85 | | | | 0.85 | |
Net investment income | | | 1.28 | | | | 1.44 | | | | 1.80 | | | | 1.26 | | | | 1.52 | |
Portfolio turnover | | | 41 | | | | 43 | | | | 54 | | | | 77 | | | | 68 | |
Net assets at end of period (000 omitted) | | | $116,301 | | | | $134,107 | | | | $134,379 | | | | $147,882 | | | | $184,799 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
12
MFS Blended Research Core Equity Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Blended Research Core Equity Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and
13
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $475,662,423 | | | | $— | | | | $— | | | | $475,662,423 | |
| Mutual Funds | | | 2,434,210 | | | | — | | | | — | | | | 2,434,210 | |
| Total Investments | | | $478,096,633 | | | | $— | | | | $— | | | | $478,096,633 | |
For further information regarding security characteristics, see the Portfolio of Investments.
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. 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 payments received in additional securities are recorded on the ex-dividend 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $7,682,407 | | | | $9,239,051 | |
14
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $367,251,738 | |
| Gross appreciation | | | 118,996,094 | |
| Gross depreciation | | | (8,151,199 | ) |
| Net unrealized appreciation (depreciation) | | | $110,844,895 | |
| Undistributed ordinary income | | | 7,104,320 | |
| Undistributed long-term capital gain | | | 35,395,181 | |
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $5,951,524 | | | | $6,891,828 | |
| Service Class | | | 1,730,883 | | | | 2,347,223 | |
| Total | | | $7,682,407 | | | | $9,239,051 | |
| (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 reduce its management fee to 0.40% of average daily net assets. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, this management fee reduction amounted to $727,215, which is included in the reduction of total expenses in the Statement of Operations. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $22,296, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.40% 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, 2014, the fee was $12,894, which equated to 0.0027% 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, 2014, these costs amounted to $110.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0156% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly
15
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $2,252 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $845, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, aggregated $198,415,827 and $269,874,135, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 73,782 | | | | $3,701,939 | | | | 54,971 | | | | $2,333,113 | |
Service Class | | | 29,988 | | | | 1,480,042 | | | | 5,220 | | | | 211,518 | |
| | | 103,770 | | | | $5,181,981 | | | | 60,191 | | | | $2,544,631 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 114,717 | | | | $5,951,524 | | | | 163,468 | | | | $6,891,828 | |
Service Class | | | 33,538 | | | | 1,730,883 | | | | 55,966 | | | | 2,347,223 | |
| | | 148,255 | | | | $7,682,407 | | | | 219,434 | | | | $9,239,051 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,041,546 | ) | | | $(52,431,317 | ) | | | (1,218,111 | ) | | | $(51,430,547 | ) |
Service Class | | | (669,301 | ) | | | (33,508,014 | ) | | | (1,008,597 | ) | | | (42,309,396 | ) |
| | | (1,710,847 | ) | | | $(85,939,331 | ) | | | (2,226,708 | ) | | | $(93,739,943 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (853,047 | ) | | | $(42,777,854 | ) | | | (999,672 | ) | | | $(42,205,606 | ) |
Service Class | | | (605,775 | ) | | | (30,297,089 | ) | | | (947,411 | ) | | | (39,750,655 | ) |
| | | (1,458,822 | ) | | | $(73,074,943 | ) | | | (1,947,083 | ) | | | $(81,956,261 | ) |
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
16
MFS Blended Research Core Equity Portfolio
Notes to Financial Statements – continued
agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $1,810 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 385,807 | | | | 67,148,760 | | | | (65,100,357 | ) | | | 2,434,210 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $1,968 | | | | $2,434,210 | |
17
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian. 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, 2014, 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 13, 2015
18
MFS Blended Research Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
19
MFS Blended Research Core Equity Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
20
MFS Blended Research Core Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Matthew Krummell | | |
21
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for each of the one- and five-year periods ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
22
MFS Blended Research Core Equity 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS has agreed in writing to reduce its advisory fee, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is not subject to any breakpoints. Taking into account the advisory fee waiver noted above, the Trustees determined not to recommend any advisory fee breakpoints for the Fund at this time. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the group fee waiver was sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
23
MFS Blended Research Core Equity Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” 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.
24
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
25
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® BOND PORTFOLIO
MFS® Variable Insurance Trust II
BDS-ANN
MFS® BOND PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Bond Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Bond Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| Investment Grade Corporates | | | 71.5% | |
| High Yield Corporates | | | 22.1% | |
| Emerging Markets Bonds | | | 2.9% | |
| Commercial Mortgage-Backed Securities | | | 0.7% | |
| Non-U.S. Government Bonds | | | 0.2% | |
| Collateralized Debt Obligations | | | 0.2% | |
| Asset-Backed Securities (o) | | | 0.0% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AA | | | 0.4% | |
| A | | | 18.0% | |
| BBB | | | 55.8% | |
| BB | | | 18.5% | |
| B | | | 4.8% | |
| CCC (o) | | | 0.0% | |
| C | | | 0.1% | |
| D (o) | | | 0.0% | |
| Not Rated (o) | | | 0.0% | |
| Cash & Other | | | 2.4% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 6.3 | |
| Average Effective Maturity (m) | | | 9.7 yrs. | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (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 due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
| (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. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Bond Portfolio (“fund”) provided a total return of 5.78%, while Service Class shares of the fund provided a total return of 5.59%. These compare with a return of 7.53% over the same period for the fund’s benchmark, the Barclays U.S. Credit Bond Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
The fund’s yield curve (y) positioning, particularly a lesser exposure to shifts in the long end of the yield curve (centered around maturities of 10 or more years), was a negative factor for performance relative to the Barclays U.S. Credit Bond Index as interest rates decreased during the period.
A greater exposure to “BBB” rated (r) bonds and below weighed on relative performance. A lesser exposure to debt in the utility-electric sector also hindered relative returns as this sector turned in positive results for the reporting period.
Contributors to Performance
A lesser exposure to “AAA” and “AA” rated bonds benefited relative performance. Additionally, a greater exposure to corporate bonds in both the industrial and financial (excluding banks) sectors further supported relative performance as both sectors generated positive relative performance during the period. The portion of the fund’s return derived from yield, which was greater than that of the benchmark, was an additional contributor to relative results.
Respectfully,
| | |
| Richard Hawkins | | Robert Persons |
| 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 source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). 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.
3
MFS Bond Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 5.78% | | 6.78% | | 5.82% | | |
| | | Service Class | | 8/24/01 | | 5.59% | | 6.53% | | 5.57% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays U.S. Credit Bond Index (f) | | 7.53% | | 6.25% | | 5.46% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Barclays 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.
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS Bond Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.64% | | | | $1,000.00 | | | | $1,007.33 | | | | $3.24 | |
| | Hypothetical (h) | | | 0.64% | | | | $1,000.00 | | | | $1,021.98 | | | | $3.26 | |
| Service Class | | Actual | | | 0.89% | | | | $1,000.00 | | | | $1,006.70 | | | | $4.50 | |
| | Hypothetical (h) | | | 0.89% | | | | $1,000.00 | | | | $1,020.72 | | | | $4.53 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Notes to Expense Table
Changes to the fund’s fee arrangements occurred during the six month period. Had these fee changes been in effect throughout the entire six month period, the annualized expense ratios, the actual expenses paid during the period and the hypothetical expenses paid during the period would have been approximately 0.63%, $3.19 and $3.21 for Initial Class and 0.88%, $4.45 and $4.48 for Service Class. For further information about the fund’s fee arrangements and changes to those fee arrangements, please see Note 3 in the Notes to Financial Statements.
5
MFS Bond Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 96.4% | | | | | | | | |
| Apparel Manufacturers – 0.6% | | | | | | | | |
| Hanesbrands, Inc., 6.375%, 12/15/20 | | $ | 1,569,000 | | | $ | 1,663,140 | |
| PVH Corp., 4.5%, 12/15/22 | | | 190,000 | | | | 187,625 | |
| | | | | | | | |
| | | $ | 1,850,765 | |
| | | | | | | | |
| Asset-Backed & Securitized – 0.9% | | | | | | | | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.769%, 12/28/40 (z) | | $ | 270,998 | | | $ | 161,745 | |
| Commercial Mortgage Acceptance Corp., FRN, 1.99%, 9/15/30 (i) | | | 197,874 | | | | 8,081 | |
| Falcon Franchise Loan LLC, FRN, 19.164%, 1/05/25 (i)(z) | | | 104,716 | | | | 26,441 | |
| GMAC LLC, FRN, 8.072%, 4/15/34 (d)(n)(q) | | | 185,522 | | | | 96,708 | |
| Greenwich Capital Commercial Funding Corp., FRN, 5.818%, 7/10/38 | | | 350,000 | | | | 368,855 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.787%, 6/15/49 | | | 1,195,039 | | | | 1,283,278 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.458%, 7/15/42 (n) | | | 765,072 | | | | 167,398 | |
| KKR Financial CLO Ltd., “C”, FRN, 1.682%, 5/15/21 (n) | | | 505,395 | | | | 501,711 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.175%, 2/18/30 (i) | | | 261,237 | | | | 5,905 | |
| Morgan Stanley Capital I, Inc., FRN, 0.938%, 11/15/30 (i)(n) | | | 1,001,057 | | | | 23,352 | |
| | | | | | | | |
| | | $ | 2,643,474 | |
| | | | | | | | |
| Automotive – 5.5% | | | | | | | | |
| American Honda Finance Corp., 2.125%, 2/28/17 (n) | | $ | 1,672,000 | | | $ | 1,702,581 | |
| Delphi Corp., 6.125%, 5/15/21 | | | 742,000 | | | | 808,780 | |
| Ford Motor Credit Co. LLC, 4.207%, 4/15/16 | | | 560,000 | | | | 579,739 | |
| General Motors Co., 6.25%, 10/02/43 | | | 1,257,000 | | | | 1,501,612 | |
| General Motors Financial Co., 2.75%, 5/15/16 | | | 170,000 | | | | 172,763 | |
| Harley-Davidson Financial Services, 3.875%, 3/15/16 (n) | | | 1,061,000 | | | | 1,095,210 | |
| Harley-Davidson Financial Services, Inc., 2.7%, 3/15/17 (n) | | | 942,000 | | | | 965,281 | |
| Lear Corp., 8.125%, 3/15/20 | | | 1,661,000 | | | | 1,748,203 | |
| Lear Corp., 4.75%, 1/15/23 | | | 787,000 | | | | 785,033 | |
| Lear Corp., 5.375%, 3/15/24 | | | 690,000 | | | | 705,525 | |
| Nissan Motor Acceptance Corp., 1.95%, 9/12/17 (n) | | | 908,000 | | | | 913,965 | |
| TRW Automotive, Inc., 4.5%, 3/01/21 (n) | | | 940,000 | | | | 944,700 | |
| TRW Automotive, Inc., 7.25%, 3/15/17 (n) | | | 1,613,000 | | | | 1,782,365 | |
| Volkswagen International Finance N.V., 1.15%, 11/20/15 (n) | | | 1,895,000 | | | | 1,902,254 | |
| Volkswagen International Finance N.V., 2.375%, 3/22/17 (n) | | | 500,000 | | | | 509,320 | |
| | | | | | | | |
| | | $ | 16,117,331 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Biotechnology – 0.9% | | | | | | | | |
| Life Technologies Corp., 6%, 3/01/20 | | $ | 2,172,000 | | | $ | 2,481,434 | |
| | | | | | | | |
| Broadcasting – 1.9% | | | | | | | | |
| Discovery Communications, Inc., 4.875%, 4/01/43 | | $ | 1,022,000 | | | $ | 1,053,703 | |
| Grupo Televisa S.A.B., 5%, 5/13/45 | | | 269,000 | | | | 271,536 | |
| News America, Inc., 8.5%, 2/23/25 | | | 770,000 | | | | 1,043,613 | |
| Omnicom Group, Inc., 3.625%, 5/01/22 | | | 1,283,000 | | | | 1,317,120 | |
| SES Global Americas Holdings GP, 2.5%, 3/25/19 (n) | | | 578,000 | | | | 575,094 | |
| SES S.A., 3.6%, 4/04/23 (n) | | | 346,000 | | | | 349,484 | |
| Time Warner, Inc., 5.35%, 12/15/43 | | | 685,000 | | | | 778,007 | |
| | | | | | | | |
| | | $ | 5,388,557 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.1% | | | | | | | | |
| Franklin Resources, Inc., 1.375%, 9/15/17 | | $ | 374,000 | | | $ | 372,640 | |
| | | | | | | | |
| Building – 2.2% | | | | | | | | |
| CEMEX Finance LLC, 6%, 4/01/24 (n) | | $ | 1,198,000 | | | $ | 1,168,050 | |
| CEMEX S.A.B. de C.V., 5.7%, 1/11/25 (n) | | | 599,000 | | | | 581,030 | |
| Martin Marietta Materials, Inc., 4.25%, 7/02/24 | | | 850,000 | | | | 870,719 | |
| Mohawk Industries, Inc., 6.125%, 1/15/16 | | | 1,625,000 | | | | 1,701,721 | |
| Mohawk Industries, Inc., 3.85%, 2/01/23 | | | 999,000 | | | | 999,402 | |
| Owens Corning, Inc., 6.5%, 12/01/16 | | | 26,000 | | | | 28,336 | |
| Owens Corning, Inc., 4.2%, 12/15/22 | | | 914,000 | | | | 927,599 | |
| | | | | | | | |
| | | $ | 6,276,857 | |
| | | | | | | | |
| Business Services – 0.8% | | | | | | | | |
| Equinix, Inc., 5.75%, 1/01/25 | | $ | 285,000 | | | $ | 287,494 | |
| Fidelity National Information Services, Inc., 2%, 4/15/18 | | | 135,000 | | | | 134,271 | |
| Fidelity National Information Services, Inc., 5%, 3/15/22 | | | 1,270,000 | | | | 1,346,905 | |
| Fidelity National Information Services, Inc., 3.5%, 4/15/23 | | | 416,000 | | | | 413,505 | |
| | | | | | | | |
| | | $ | 2,182,175 | |
| | | | | | | | |
| Cable TV – 3.2% | | | | | | | | |
| CCO Holdings LLC, 5.25%, 9/30/22 | | $ | 1,395,000 | | | $ | 1,391,513 | |
| Comcast Corp., 4.65%, 7/15/42 | | | 628,000 | | | | 687,354 | |
| Comcast Corp., 4.75%, 3/01/44 | | | 1,220,000 | | | | 1,359,558 | |
| Cox Communications, Inc., 6.25%, 6/01/18 (n) | | | 261,000 | | | | 294,704 | |
| NBCUniversal Enterprise, Inc., 1.974%, 4/15/19 (n) | | | 578,000 | | | | 572,310 | |
| SIRIUS XM Radio, Inc., 5.875%, 10/01/20 (n) | | | 25,000 | | | | 25,750 | |
| SIRIUS XM Radio, Inc., 5.75%, 8/01/21 (n) | | | 1,375,000 | | | | 1,405,938 | |
| Time Warner Cable, Inc., 8.25%, 4/01/19 | | | 850,000 | | | | 1,040,520 | |
| Time Warner Cable, Inc., 5%, 2/01/20 | | | 354,000 | | | | 390,103 | |
| Time Warner Cable, Inc., 4.5%, 9/15/42 | | | 80,000 | | | | 82,235 | |
| Time Warner Entertainment Co. LP, 8.375%, 7/15/33 | | | 266,000 | | | | 399,196 | |
| Videotron Ltd., 5%, 7/15/22 | | | 1,555,000 | | | | 1,582,213 | |
| | | | | | | | |
| | | $ | 9,231,394 | |
| | | | | | | | |
6
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Chemicals – 2.9% | | | | | | | | |
| Celanese U.S. Holdings LLC, 4.625%, 11/15/22 | | $ | 1,356,000 | | | $ | 1,342,440 | |
| CF Industries, Inc., 5.15%, 3/15/34 | | | 753,000 | | | | 787,637 | |
| CF Industries, Inc., 3.45%, 6/01/23 | | | 62,000 | | | | 60,608 | |
| CF Industries, Inc., 4.95%, 6/01/43 | | | 356,000 | | | | 357,307 | |
| Dow Chemical Co., 8.55%, 5/15/19 | | | 1,413,000 | | | | 1,756,707 | |
| LYB International Finance B.V., 4.875%, 3/15/44 | | | 676,000 | | | | 695,445 | |
| LyondellBasell Industries N.V., 5%, 4/15/19 | | | 939,000 | | | | 1,024,227 | |
| LyondellBasell Industries N.V., 6%, 11/15/21 | | | 1,256,000 | | | | 1,445,605 | |
| Monsanto Co., 4.7%, 7/15/64 | | | 1,025,000 | | | | 1,074,738 | |
| | | | | | | | |
| | | $ | 8,544,714 | |
| | | | | | | | |
| Computer Software – 0.5% | | | | | | | | |
| Oracle Corp., 3.4%, 7/08/24 | | $ | 1,107,000 | | | $ | 1,131,434 | |
| VeriSign, Inc., 4.625%, 5/01/23 | | | 425,000 | | | | 416,500 | |
| | | | | | | | |
| | | $ | 1,547,934 | |
| | | | | | | | |
| Computer Software – Systems – 0.2% | | | | | |
| Seagate HDD Cayman, 3.75%, 11/15/18 (n) | | $ | 442,000 | | | $ | 453,603 | |
| | | | | | | | |
| Conglomerates – 0.4% | | | | | | | | |
| Roper Industries, Inc., 1.85%, 11/15/17 | | $ | 1,171,000 | | | $ | 1,172,511 | |
| | | | | | | | |
| Consumer Products – 0.9% | | | | | | | | |
| Hasbro, Inc., 5.1%, 5/15/44 | | $ | 1,138,000 | | | $ | 1,191,775 | |
| Mattel, Inc., 1.7%, 3/15/18 | | | 393,000 | | | | 388,098 | |
| Mattel, Inc., 5.45%, 11/01/41 | | | 460,000 | | | | 521,308 | |
| Newell Rubbermaid, Inc., 2.05%, 12/01/17 | | | 589,000 | | | | 587,250 | |
| | | | | | | | |
| | | $ | 2,688,431 | |
| | | | | | | | |
| Consumer Services – 1.1% | | | | | | | | |
| ADT Corp., 4.125%, 6/15/23 | | $ | 1,915,000 | | | $ | 1,733,075 | |
| Service Corp. International, 5.375%, 1/15/22 | | | 170,000 | | | | 174,250 | |
| Service Corp. International, 5.375%, 5/15/24 | | | 1,220,000 | | | | 1,244,400 | |
| | | | | | | | |
| | | $ | 3,151,725 | |
| | | | | | | | |
| Containers – 1.3% | | | | | | | | |
| Ball Corp., 5%, 3/15/22 | | $ | 1,206,000 | | | $ | 1,242,180 | |
| Ball Corp., 4%, 11/15/23 | | | 691,000 | | | | 666,815 | |
| Crown American LLC, 4.5%, 1/15/23 | | | 1,853,000 | | | | 1,797,410 | |
| | | | | | | | |
| | | $ | 3,706,405 | |
| | | | | | | | |
| Defense Electronics – 0.5% | | | | | | | | |
| BAE Systems Holdings, Inc., 6.375%, 6/01/19 (n) | | $ | 1,358,000 | | | $ | 1,567,841 | |
| | | | | | | | |
| Electronics – 1.5% | | | | | | | | |
| Flextronics International Ltd., 4.625%, 2/15/20 | | $ | 2,018,000 | | | $ | 2,048,270 | |
| Jabil Circuit, Inc., 4.7%, 9/15/22 | | | 399,000 | | | | 397,005 | |
| Micron Technology, Inc., 5.5%, 2/01/25 (n) | | | 890,000 | | | | 898,900 | |
| Tyco Electronics Group S.A., 6.55%, 10/01/17 | | | 360,000 | | | | 405,255 | |
| Tyco Electronics Group S.A., 2.375%, 12/17/18 | | | 229,000 | | | | 230,973 | |
| Tyco Electronics Group S.A., 3.5%, 2/03/22 | | | 252,000 | | | | 260,237 | |
| | | | | | | | |
| | | $ | 4,240,640 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.7% | | | | | |
| Comision Federal de Electricidad, 5.75%, 2/14/42 (n) | | $ | 285,000 | | | $ | 304,095 | |
| Comision Federal de Electricidad, 5.75%, 2/14/42 | | | 465,000 | | | | 496,155 | |
| NOVA Chemicals Corp., 5.25%, 8/01/23 (n) | | | 956,000 | | | | 965,560 | |
| NOVA Chemicals Corp., 5%, 5/01/25 (n) | | | 180,000 | | | | 178,650 | |
| Petroleos Mexicanos, 5.5%, 6/27/44 (n) | | | 10,000 | | | | 10,200 | |
| | | | | | | | |
| | | $ | 1,954,660 | |
| | | | | | | | |
| Energy – Independent – 4.0% | | | | | | | | |
| Anadarko Petroleum Corp., 6.375%, 9/15/17 | | $ | 1,337,000 | | | $ | 1,486,580 | |
| Anadarko Petroleum Corp., 4.5%, 7/15/44 | | | 1,075,000 | | | | 1,043,261 | |
| Canadian Natural Resources Ltd., 3.8%, 4/15/24 | | | 52,000 | | | | 51,025 | |
| Cimarex Energy Co., 4.375%, 6/01/24 | | | 1,467,000 | | | | 1,400,985 | |
| Concho Resources, Inc., 5.5%, 4/01/23 | | | 1,203,000 | | | | 1,208,654 | |
| Continental Resources, Inc., 4.9%, 6/01/44 | | | 516,000 | | | | 437,032 | |
| Continental Resources, Inc., 4.5%, 4/15/23 | | | 492,000 | | | | 467,966 | |
| EQT Corp., 4.875%, 11/15/21 | | | 253,000 | | | | 273,318 | |
| Hess Corp., 8.125%, 2/15/19 | | | 440,000 | | | | 523,508 | |
| Hess Corp., 3.5%, 7/15/24 | | | 680,000 | | | | 649,441 | |
| Noble Energy, Inc., 4.15%, 12/15/21 | | | 1,920,000 | | | | 1,957,826 | |
| Pioneer Natural Resources Co., 7.5%, 1/15/20 | | | 1,518,000 | | | | 1,779,949 | |
| SM Energy Co., 6.125%, 11/15/22 (n) | | | 330,000 | | | | 310,200 | |
| | | | | | | | |
| | | $ | 11,589,745 | |
| | | | | | | | |
| Entertainment – 0.1% | | | | | | | | |
| Carnival Corp., 1.875%, 12/15/17 | | $ | 435,000 | | | $ | 431,779 | |
| | | | | | | | |
| Financial Institutions – 4.2% | | | | | | | | |
| CIT Group, Inc., 4.25%, 8/15/17 | | $ | 353,000 | | | $ | 360,060 | |
| CIT Group, Inc., 5.25%, 3/15/18 | | | 365,000 | | | | 380,513 | |
| CIT Group, Inc., 6.625%, 4/01/18 (n) | | | 1,900,000 | | | | 2,061,500 | |
| CIT Group, Inc., 5.5%, 2/15/19 (n) | | | 781,000 | | | | 823,955 | |
| General Electric Capital Corp., 1.6%, 11/20/17 | | | 883,000 | | | | 888,492 | |
| General Electric Capital Corp., 5.5%, 1/08/20 | | | 1,470,000 | | | | 1,682,527 | |
| General Electric Capital Corp., 3.15%, 9/07/22 | | | 1,000,000 | | | | 1,018,516 | |
| International Lease Finance Corp., 7.125%, 9/01/18 (n) | | | 570,000 | | | | 638,400 | |
| International Lease Finance Corp., 5.875%, 8/15/22 | | | 1,000,000 | | | | 1,085,000 | |
| SLM Corp., 6.25%, 1/25/16 | | | 1,212,000 | | | | 1,260,480 | |
| SLM Corp., 6%, 1/25/17 | | | 1,147,000 | | | | 1,201,483 | |
| SLM Corp., 4.875%, 6/17/19 | | | 161,000 | | | | 161,467 | |
| SLM Corp., 8%, 3/25/20 | | | 468,000 | | | | 516,967 | |
| | | | | | | | |
| | | $ | 12,079,360 | |
| | | | | | | | |
| Food & Beverages – 5.5% | | | | | | | | |
| Anheuser-Busch Inbev S.A., 4.625%, 2/01/44 | | $ | 926,000 | | | $ | 1,007,184 | |
| BRF S.A., 4.75%, 5/22/24 | | | 1,548,000 | | | | 1,503,495 | |
| Constellation Brands, Inc., 7.25%, 9/01/16 | | | 1,119,000 | | | | 1,208,520 | |
7
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Food & Beverages – continued | | | | | | | | |
| Constellation Brands, Inc., 4.25%, 5/01/23 | | $ | 965,000 | | | $ | 957,763 | |
| Heineken N.V., 1.4%, 10/01/17 (n) | | | 114,000 | | | | 113,351 | |
| J.M. Smucker Co., 3.5%, 10/15/21 | | | 880,000 | | | | 916,994 | |
| Kraft Foods Group, Inc., 6.5%, 2/09/40 | | | 1,959,000 | | | | 2,518,042 | |
| Mead Johnson Nutrition Co., 4.6%, 6/01/44 | | | 1,093,000 | | | | 1,147,746 | |
| Pernod Ricard S.A., 5.75%, 4/07/21 (n) | | | 831,000 | | | | 954,551 | |
| SABMiller Holdings, Inc., 3.75%, 1/15/22 (n) | | | 1,341,000 | | | | 1,399,615 | |
| Smithfield Foods, Inc., 6.625%, 8/15/22 | | | 348,000 | | | | 363,660 | |
| Tyson Foods, Inc., 6.6%, 4/01/16 | | | 2,229,000 | | | | 2,376,573 | |
| Tyson Foods, Inc., 4.5%, 6/15/22 | | | 598,000 | | | | 647,446 | |
| Tyson Foods, Inc., 5.15%, 8/15/44 | | | 368,000 | | | | 413,328 | |
| Wm. Wrigley Jr. Co., 2.9%, 10/21/19 (n) | | | 505,000 | | | | 511,531 | |
| | | | | | | | |
| | | $ | 16,039,799 | |
| | | | | | | | |
| Food & Drug Stores – 1.5% | | | | | | | | |
| CVS Health Corp., 3.25%, 5/18/15 | | $ | 296,000 | | | $ | 298,869 | |
| CVS Health Corp., 5.75%, 6/01/17 | | | 200,000 | | | | 220,743 | |
| CVS Health Corp., 2.75%, 12/01/22 | | | 500,000 | | | | 486,991 | |
| CVS Health Corp., 5.75%, 5/15/41 | | | 1,465,000 | | | | 1,823,298 | |
| Walgreens Boots Alliance, Inc., 2.7%, 11/18/19 | | | 1,433,000 | | | | 1,440,291 | |
| | | | | | | | |
| | | $ | 4,270,192 | |
| | | | | | | | |
| Forest & Paper Products – 1.5% | | | | | | | | |
| Georgia-Pacific LLC, 5.4%, 11/01/20 (n) | | $ | 806,000 | | | $ | 906,942 | |
| International Paper Co., 6%, 11/15/41 | | | 860,000 | | | | 1,006,828 | |
| International Paper Co., 4.8%, 6/15/44 | | | 994,000 | | | | 1,015,077 | |
| Packaging Corp. of America, 3.9%, 6/15/22 | | | 712,000 | | | | 730,261 | |
| Packaging Corp. of America, 3.65%, 9/15/24 | | | 850,000 | | | | 836,732 | |
| | | | | | | | |
| | | $ | 4,495,840 | |
| | | | | | | | |
| Gaming & Lodging – 0.8% | | | | | | | | |
| Host Hotels & Resorts, Inc., REIT, 4.75%, 3/01/23 | | $ | 157,000 | | | $ | 166,836 | |
| Wyndham Worldwide Corp., 2.5%, 3/01/18 | | | 811,000 | | | | 809,614 | |
| Wyndham Worldwide Corp., 4.25%, 3/01/22 | | | 1,227,000 | | | | 1,253,225 | |
| | | | | | | | |
| | | $ | 2,229,675 | |
| | | | | | | | |
| Insurance – 1.7% | | | | | | | | |
| American International Group, Inc., 6.4%, 12/15/20 | | $ | 1,200,000 | | | $ | 1,430,964 | |
| American International Group, Inc., 4.5%, 7/16/44 | | | 1,417,000 | | | | 1,497,076 | |
| Unum Group, 7.125%, 9/30/16 | | | 500,000 | | | | 546,330 | |
| Unum Group, 4%, 3/15/24 | | | 637,000 | | | | 650,559 | |
| UnumProvident Corp., 6.85%, 11/15/15 (n) | | | 686,000 | | | | 718,549 | |
| | | | | | | | |
| | | $ | 4,843,478 | |
| | | | | | | | |
| Insurance – Health – 1.2% | | | | | | | | |
| CIGNA Corp., 2.75%, 11/15/16 | | $ | 1,400,000 | | | $ | 1,438,030 | |
| Humana, Inc., 7.2%, 6/15/18 | | | 1,157,000 | | | | 1,351,590 | |
| Wellpoint, Inc., 1.875%, 1/15/18 | | | 618,000 | | | | 617,874 | |
| | | | | | | | |
| | | $ | 3,407,494 | |
| | | | | | | | |
| Insurance – Property & Casualty – 3.0% | | | | | |
| Aon PLC, 4.6%, 6/14/44 | | $ | 237,000 | | | $ | 246,118 | |
| AXIS Capital Holdings Ltd., 5.875%, 6/01/20 | | | 190,000 | | | | 215,228 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Insurance – Property & Casualty – continued | | | | | |
| Chubb Corp., 6.375% to 4/15/17, FRN to 3/29/67 | | $ | 279,000 | | | $ | 299,102 | |
| CNA Financial Corp., 5.875%, 8/15/20 | | | 1,570,000 | | | | 1,792,210 | |
| Liberty Mutual Group, Inc., 4.85%, 8/01/44 (n) | | | 951,000 | | | | 966,667 | |
| Marsh & McLennan Cos., Inc., 2.55%, 10/15/18 | | | 678,000 | | | | 689,462 | |
| Marsh & McLennan Cos., Inc., 4.8%, 7/15/21 | | | 900,000 | | | | 1,000,278 | |
| Marsh & McLennan Cos., Inc., 3.5%, 6/03/24 | | | 779,000 | | | | 776,270 | |
| Swiss Re Ltd., 4.25%, 12/06/42 (n) | | | 468,000 | | | | 484,938 | |
| XL Group PLC, 5.75%, 10/01/21 | | | 1,110,000 | | | | 1,289,443 | |
| ZFS Finance USA Trust V, 6.5% to 5/09/17, FRN to 5/09/67 (n) | | | 896,000 | | | | 954,240 | |
| | | | | | | | |
| | | $ | 8,713,956 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.2% | | | | | |
| Israel Electric Corp. Ltd., 6.875%, 6/21/23 (n) | | $ | 542,000 | | | $ | 617,880 | |
| | | | | | | | |
| Machinery & Tools – 0.2% | | | | | | | | |
| United Rentals North America, Inc., 5.75%, 11/15/24 | | $ | 680,000 | | | $ | 700,400 | |
| | | | | | | | |
| Major Banks – 8.3% | | | | | | | | |
| Bank of America Corp., 2%, 1/11/18 | | $ | 3,000,000 | | | $ | 2,997,720 | |
| Bank of America Corp., 7.625%, 6/01/19 | | | 500,000 | | | | 604,306 | |
| Bank of America Corp., 5.625%, 7/01/20 | | | 185,000 | | | | 210,639 | |
| Bank of America Corp., 4.125%, 1/22/24 | | | 1,917,000 | | | | 2,013,147 | |
| Bank of America Corp., 4.875%, 4/01/44 | | | 459,000 | | | | 507,097 | |
| Bank of America Corp., FRN, 5.2%, 12/31/49 | | | 637,000 | | | | 588,429 | |
| Goldman Sachs Group, Inc., 5.625%, 1/15/17 | | | 1,123,000 | | | | 1,204,589 | |
| Goldman Sachs Group, Inc., 4.8%, 7/08/44 | | | 904,000 | | | | 968,255 | |
| JPMorgan Chase & Co., 4.25%, 10/15/20 | | | 893,000 | | | | 960,064 | |
| JPMorgan Chase & Co., 4.5%, 1/24/22 | | | 1,500,000 | | | | 1,637,628 | |
| JPMorgan Chase & Co., 3.25%, 9/23/22 | | | 904,000 | | | | 909,266 | |
| JPMorgan Chase & Co., 6.75% to 2/01/24, FRN to 1/29/49 | | | 1,221,000 | | | | 1,289,681 | |
| Merrill Lynch & Co., Inc., 6.05%, 5/16/16 | | | 349,000 | | | | 369,642 | |
| Morgan Stanley, 5.75%, 10/18/16 | | | 906,000 | | | | 973,045 | |
| Morgan Stanley, 5.5%, 7/28/21 | | | 1,245,000 | | | | 1,412,927 | |
| PNC Funding Corp., 5.625%, 2/01/17 | | | 1,095,000 | | | | 1,181,827 | |
| Regions Financial Corp., 2%, 5/15/18 | | | 1,460,000 | | | | 1,445,802 | |
| Royal Bank of Scotland PLC, 2.55%, 9/18/15 | | | 1,054,000 | | | | 1,064,538 | |
| Wachovia Corp., 6.605%, 10/01/25 | | | 1,270,000 | | | | 1,566,083 | |
| Wells Fargo & Co., 4.1%, 6/03/26 | | | 1,000,000 | | | | 1,022,057 | |
| Wells Fargo & Co., 5.9% to 6/15/24, FRN to 12/29/49 | | | 1,106,000 | | | | 1,114,295 | |
| | | | | | | | |
| | | $ | 24,041,037 | |
| | | | | | | | |
| Medical & Health Technology & Services – 3.2% | | | | | |
| Becton, Dickinson and Co., 3.734%, 12/15/24 | | $ | 348,000 | | | $ | 358,147 | |
8
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Medical & Health Technology & Services – continued | |
| Becton, Dickinson and Co., 4.685%, 12/15/44 | | $ | 666,000 | | | $ | 717,256 | |
| Davita, Inc., 6.625%, 11/01/20 | | | 2,018,000 | | | | 2,118,900 | |
| Fresenius Medical Care AG & Co. KGaA, 9%, 7/15/15 (n) | | | 1,775,000 | | | | 1,828,250 | |
| Fresenius Medical Care US Finance II, Inc., 6.5%, 9/15/18 (n) | | | 734,000 | | | | 811,070 | |
| Fresenius US Finance II, Inc., 4.25%, 2/01/21 (n) | | | 189,000 | | | | 190,418 | |
| HCA, Inc., 4.75%, 5/01/23 | | | 910,000 | | | | 925,925 | |
| McKesson Corp., 5.7%, 3/01/17 | | | 770,000 | | | | 836,255 | |
| McKesson Corp., 7.5%, 2/15/19 | | | 120,000 | | | | 143,370 | |
| McKesson Corp., 2.7%, 12/15/22 | | | 158,000 | | | | 151,168 | |
| Universal Health Services, Inc., 4.75%, 8/01/22 (n) | | | 1,260,000 | | | | 1,260,000 | |
| | | | | | | | |
| | | $ | 9,340,759 | |
| | | | | | | | |
| Medical Equipment – 0.5% | | | | | | | | |
| Medtronic, Inc., 3.5%, 3/15/25 (n) | | $ | 1,061,000 | | | $ | 1,085,371 | |
| Medtronic, Inc., 4.375%, 3/15/35 (n) | | | 406,000 | | | | 430,708 | |
| | | | | | | | |
| | | $ | 1,516,079 | |
| | | | | | | | |
| Metals & Mining – 1.4% | | | | | | | | |
| Consol Energy, Inc., 5.875%, 4/15/22 (n) | | $ | 875,000 | | | $ | 813,750 | |
| Kinross Gold Corp., 5.95%, 3/15/24 (n) | | | 240,000 | | | | 225,202 | |
| Plains Exploration & Production Co., 6.875%, 2/15/23 | | | 1,235,000 | | | | 1,373,938 | |
| Rio Tinto Finance (USA) Ltd., 3.75%, 9/20/21 | | | 600,000 | | | | 616,681 | |
| Southern Copper Corp., 6.75%, 4/16/40 | | | 880,000 | | | | 923,120 | |
| | | | | | | | |
| | | $ | 3,952,691 | |
| | | | | | | | |
| Midstream – 6.5% | | | | | | | | |
| Access Midstream Partner LP, 4.875%, 3/15/24 | | $ | 1,200,000 | | | $ | 1,218,000 | |
| AmeriGas Finance LLC, 7%, 5/20/22 | | | 475,000 | | | | 491,625 | |
| El Paso Corp., 7.75%, 1/15/32 | | | 465,000 | | | | 571,950 | |
| El Paso Pipeline Partners LP, 6.5%, 4/01/20 | | | 306,000 | | | | 346,019 | |
| Energy Transfer Partners LP, 9.7%, 3/15/19 | | | 213,000 | | | | 267,340 | |
| Energy Transfer Partners LP, 5.15%, 2/01/43 | | | 1,112,000 | | | | 1,100,465 | |
| Enterprise Products Operating LLC, 3.9%, 2/15/24 | | | 406,000 | | | | 413,506 | |
| Enterprise Products Operating LLC, 4.85%, 3/15/44 | | | 362,000 | | | | 377,464 | |
| Enterprise Products Partners LP, 6.3%, 9/15/17 | | | 540,000 | | | | 603,766 | |
| Enterprise Products Partners LP, 4.45%, 2/15/43 | | | 473,000 | | | | 467,328 | |
Enterprise Products Partners LP,
7.034% to 1/15/18, FRN to 1/15/68 | | | 267,000 | | | | 292,866 | |
| Kinder Morgan Energy Partners LP, 6.85%, 2/15/20 | | | 370,000 | | | | 424,991 | |
| Kinder Morgan Energy Partners LP, 7.4%, 3/15/31 | | | 581,000 | | | | 695,089 | |
| Kinder Morgan Energy Partners LP, 5.4%, 9/01/44 | | | 670,000 | | | | 671,373 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Midstream – continued | | | | | | | | |
| MarkWest Energy Partners LP/MarkWest Energy Finance Corp., 4.5%, 7/15/23 | | $ | 1,121,000 | | | $ | 1,078,963 | |
| MarkWest Energy Partners LP/MarkWest Energy Finance Corp., 4.875%, 12/01/24 | | | 365,000 | | | | 356,788 | |
| NiSource Finance Corp., 3.85%, 2/15/23 | | | 1,106,000 | | | | 1,145,960 | |
| NiSource Finance Corp., 4.8%, 2/15/44 | | | 761,000 | | | | 810,804 | |
| ONEOK Partners LP, 2%, 10/01/17 | | | 447,000 | | | | 444,536 | |
| ONEOK, Inc., 4.25%, 2/01/22 | | | 1,093,000 | | | | 1,000,372 | |
| Plains All American Pipeline LP, 3.6%, 11/01/24 | | | 619,000 | | | | 607,682 | |
| Sabine Pass Liquefaction LLC, 5.625%, 4/15/23 | | | 1,467,000 | | | | 1,433,993 | |
| Spectra Energy Capital LLC, 8%, 10/01/19 | | | 942,000 | | | | 1,139,920 | |
| Sunoco Logistics Partners LP, 5.3%, 4/01/44 | | | 692,000 | | | | 697,502 | |
| Sunoco Logistics Partners LP, 5.35%, 5/15/45 | | | 400,000 | | | | 404,427 | |
| Targa Resources Partners LP/Targa Resources Finance Corp., 4.125%, 11/15/19 (n) | | | 60,000 | | | | 57,750 | |
| Williams Cos., Inc., 3.7%, 1/15/23 | | | 1,254,000 | | | | 1,126,200 | |
| Williams Cos., Inc., 5.75%, 6/24/44 | | | 750,000 | | | | 652,393 | |
| | | | | | | | |
| | | $ | 18,899,072 | |
| | | | | | | | |
| Network & Telecom – 2.8% | | | | | | | | |
| CenturyLink, Inc., 7.6%, 9/15/39 | | $ | 1,282,000 | | | $ | 1,269,180 | |
| Verizon Communications, Inc., 2.625%, 2/21/20 (n) | | | 1,156,000 | | | | 1,142,783 | |
| Verizon Communications, Inc., 4.5%, 9/15/20 | | | 1,471,000 | | | | 1,597,149 | |
| Verizon Communications, Inc., 5.05%, 3/15/34 | | | 929,000 | | | | 990,988 | |
| Verizon Communications, Inc., 6%, 4/01/41 | | | 690,000 | | | | 813,255 | |
| Verizon Communications, Inc., 6.55%, 9/15/43 | | | 1,779,000 | | | | 2,279,164 | |
| | | | | | | | |
| | | $ | 8,092,519 | |
| | | | | | | | |
| Oils – 0.3% | | | | | | | | |
| Marathon Petroleum Corp., 4.75%, 9/15/44 | | $ | 910,000 | | | $ | 859,409 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.0% | | | | | |
| BPCE S.A., 4.5%, 3/15/25 (n) | | $ | 760,000 | | | $ | 742,617 | |
| Capital One Bank (USA) N.A., 3.375%, 2/15/23 | | | 1,200,000 | | | | 1,193,329 | |
| Capital One Financial Corp., 3.75%, 4/24/24 | | | 796,000 | | | | 813,193 | |
| Citigroup, Inc., 3.75%, 6/16/24 | | | 1,606,000 | | | | 1,642,724 | |
| Discover Bank, 7%, 4/15/20 | | | 2,197,000 | | | | 2,589,259 | |
| Intesa Sanpaolo S.p.A., 5.017%, 6/26/24 (n) | | | 703,000 | | | | 682,272 | |
| Macquarie Group Ltd., 3%, 12/03/18 (n) | | | 1,029,000 | | | | 1,053,563 | |
| | | | | | | | |
| | | $ | 8,716,957 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.3% | | | | | |
| Equifax, Inc., 3.3%, 12/15/22 | | $ | 849,000 | | | $ | 839,401 | |
| | | | | | | | |
| Pharmaceuticals – 4.6% | | | | | | | | |
| Bayer U.S. Finance LLC, 3.375%, 10/08/24 (n) | | $ | 554,000 | | | $ | 563,735 | |
| Celgene Corp., 1.9%, 8/15/17 | | | 1,583,000 | | | | 1,588,688 | |
9
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Pharmaceuticals – continued | | | | | | | | |
| Forest Laboratories, Inc., 4.375%, 2/01/19 (n) | | $ | 3,159,000 | | | $ | 3,337,073 | |
| Gilead Sciences, Inc., 3.7%, 4/01/24 | | | 1,189,000 | | | | 1,247,060 | |
| Gilead Sciences, Inc., 4.5%, 2/01/45 | | | 488,000 | | | | 521,574 | |
| Hospira, Inc., 6.05%, 3/30/17 | | | 906,000 | | | | 976,873 | |
| Hospira, Inc., 5.2%, 8/12/20 | | | 360,000 | | | | 386,217 | |
| Mylan, Inc., 2.55%, 3/28/19 | | | 399,000 | | | | 397,468 | |
| Mylan, Inc., 3.125%, 1/15/23 (n) | | | 500,000 | | | | 483,440 | |
| Teva Pharmaceutical Finance B.V., 2.95%, 12/18/22 | | | 931,000 | | | | 906,849 | |
| Valeant Pharmaceuticals International, Inc., 5.625%, 12/01/21 (n) | | | 784,000 | | | | 789,880 | |
| Valeant Pharmaceuticals International, Inc., 7.25%, 7/15/22 (n) | | | 1,013,000 | | | | 1,080,111 | |
| Watson Pharmaceuticals, Inc., 1.875%, 10/01/17 | | | 320,000 | | | | 318,782 | |
| Watson Pharmaceuticals, Inc., 3.25%, 10/01/22 | | | 414,000 | | | | 403,079 | |
| Watson Pharmaceuticals, Inc., 4.625%, 10/01/42 | | | 347,000 | | | | 340,037 | |
| | | | | | | | |
| | | $ | 13,340,866 | |
| | | | | | | | |
| Pollution Control – 0.5% | | | | | | | | |
| Republic Services, Inc., 5.25%, 11/15/21 | | $ | 1,160,000 | | | $ | 1,313,449 | |
| | | | | | | | |
| Printing & Publishing – 0.4% | |
| Gannett Co., Inc., 5.125%, 10/15/19 | | $ | 1,222,000 | | | $ | 1,249,495 | |
| | | | | | | | |
| Railroad & Shipping – 0.5% | | | | | | | | |
| Canadian Pacific Railway Co., 7.25%, 5/15/19 | | $ | 424,000 | | | $ | 506,926 | |
| Canadian Pacific Railway Co., 4.5%, 1/15/22 | | | 400,000 | | | | 439,240 | |
| CSX Corp., 7.375%, 2/01/19 | | | 365,000 | | | | 437,093 | |
| | | | | | | | |
| | | $ | 1,383,259 | |
| | | | | | | | |
| Real Estate – Healthcare – 0.2% | | | | | | | | |
| HCP, Inc., REIT, 3.875%, 8/15/24 | | $ | 707,000 | | | $ | 718,183 | |
| | | | | | | | |
| Real Estate – Office – 0.8% | | | | | | | | |
| Boston Properties LP, REIT, 3.7%, 11/15/18 | | $ | 754,000 | | | $ | 795,041 | |
| Boston Properties LP, REIT, 3.85%, 2/01/23 | | | 1,131,000 | | | | 1,174,065 | |
| Vornado Realty LP, REIT, 2.5%, 6/30/19 | | | 422,000 | | | | 418,344 | |
| | | | | | | | |
| | | $ | 2,387,450 | |
| | | | | | | | |
| Real Estate – Retail – 0.6% | | | | | | | | |
| Simon Property Group, Inc., REIT, 1.5%, 2/01/18 (n) | | $ | 503,000 | | | $ | 499,811 | |
| Simon Property Group, Inc., REIT, 10.35%, 4/01/19 | | | 1,026,000 | | | | 1,341,996 | |
| | | | | | | | |
| | | $ | 1,841,807 | |
| | | | | | | | |
| Restaurants – 0.3% | | | | | | | | |
| YUM! Brands, Inc., 5.35%, 11/01/43 | | $ | 753,000 | | | $ | 823,445 | |
| | | | | | | | |
| Retailers – 3.3% | | | | | | | | |
| Bed Bath & Beyond, Inc., 5.165%, 8/01/44 | | $ | 1,042,000 | | | $ | 1,086,905 | |
| Best Buy Co., Inc., 5%, 8/01/18 | | | 935,000 | | | | 967,141 | |
| Dollar General Corp., 4.125%, 7/15/17 | | | 2,144,000 | | | | 2,211,283 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Retailers – continued | | | | | | | | |
| Gap, Inc., 5.95%, 4/12/21 | | $ | 2,613,000 | | | $ | 2,973,610 | |
| Home Depot, Inc., 4.875%, 2/15/44 | | | 641,000 | | | | 745,026 | |
| Limited Brands, Inc., 7%, 5/01/20 | | | 1,441,000 | | | | 1,635,535 | |
| | | | | | | | |
| | | $ | 9,619,500 | |
| | | | | | | | |
| Specialty Chemicals – 0.8% | | | | | | | | |
| Ecolab, Inc., 4.35%, 12/08/21 | | $ | 804,000 | | | $ | 876,030 | |
| Mexichem S.A.B. de C.V., 6.75%, 9/19/42 (n) | | | 1,265,000 | | | | 1,312,438 | |
| Mexichem S.A.B. de C.V., 5.875%, 9/17/44 (n) | | | 220,000 | | | | 207,900 | |
| | | | | | | | |
| | | $ | 2,396,368 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.4% | | | | | |
| American Tower Corp., REIT, 4.625%, 4/01/15 | | $ | 1,770,000 | | | $ | 1,785,872 | |
| American Tower Corp., REIT, 4.5%, 1/15/18 | | | 1,150,000 | | | | 1,221,285 | |
| American Tower Corp., REIT, 3.5%, 1/31/23 | | | 371,000 | | | | 358,463 | |
| Crown Castle International Corp., 5.25%, 1/15/23 | | | 470,000 | | | | 479,400 | |
| Crown Castle Towers LLC, 6.113%, 1/15/20 (n) | | | 955,000 | | | | 1,096,953 | |
| Rogers Communications, Inc., 5%, 3/15/44 | | | 609,000 | | | | 665,984 | |
| SBA Tower Trust, 2.898%, 10/15/19 (n) | | | 1,081,000 | | | | 1,083,848 | |
| Vodafone Group PLC, 5.625%, 2/27/17 | | | 201,000 | | | | 217,793 | |
| | | | | | | | |
| | | $ | 6,909,598 | |
| | | | | | | | |
| Tobacco – 2.3% | | | | | | | | |
| Altria Group, Inc., 2.95%, 5/02/23 | | $ | 1,400,000 | | | $ | 1,353,754 | |
| Altria Group, Inc., 4%, 1/31/24 | | | 231,000 | | | | 240,836 | |
| B.A.T. International Finance PLC, 2.125%, 6/07/17 (n) | | | 1,052,000 | | | | 1,061,844 | |
| Lorillard Tobacco Co., 2.3%, 8/21/17 | | | 945,000 | | | | 951,098 | |
| Lorillard Tobacco Co., 8.125%, 6/23/19 | | | 733,000 | | | | 888,636 | |
| Philip Morris International, Inc., 4.875%, 11/15/43 | | | 892,000 | | | | 994,428 | |
| Reynolds American, Inc., 6.75%, 6/15/17 | | | 1,100,000 | | | | 1,225,401 | |
| | | | | | | | |
| | | $ | 6,715,997 | |
| | | | | | | | |
| Transportation – Services – 0.4% | | | | | | | | |
| ERAC USA Finance Co., 6.375%, 10/15/17 (n) | | $ | 200,000 | | | $ | 224,576 | |
| ERAC USA Finance Co., 7%, 10/15/37 (n) | | | 421,000 | | | | 567,345 | |
| ERAC USA Finance LLC, 3.85%, 11/15/24 (n) | | | 272,000 | | | | 275,848 | |
| | | | | | | | |
| | | $ | 1,067,769 | |
| | | | | | | | |
| Utilities – Electric Power – 3.0% | | | | | |
| Alabama Power Co., 4.15%, 8/15/44 | | $ | 479,000 | | | $ | 502,889 | |
| American Electric Power Co., Inc., 1.65%, 12/15/17 | | | 487,000 | | | | 487,163 | |
| Berkshire Hathaway Energy, 4.5%, 2/01/45 (z) | | | 597,000 | | | | 624,670 | |
| CMS Energy Corp., 6.25%, 2/01/20 | | | 1,010,000 | | | | 1,169,488 | |
| CMS Energy Corp., 5.05%, 3/15/22 | | | 209,000 | | | | 234,312 | |
| Duke Energy Corp., 1.625%, 8/15/17 | | | 488,000 | | | | 488,360 | |
| EDP Finance B.V., 4.125%, 1/15/20 (n) | | | 517,000 | | | | 519,895 | |
10
MFS Bond Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | | | | | |
| EDP Finance B.V., 5.25%, 1/14/21 (n) | | $ | 400,000 | | | $ | 420,904 | |
| Empresa Nacional de Electricidad S.A., 4.25%, 4/15/24 | | | 304,000 | | | | 305,700 | |
| NRG Energy, Inc., 6.25%, 7/15/22 | | | 1,400,000 | | | | 1,431,500 | |
| PPL Capital Funding, Inc., 5%, 3/15/44 | | | 590,000 | | | | 656,631 | |
| PPL WEM Holdings PLC, 5.375%, 5/01/21 (n) | | | 1,057,000 | | | | 1,187,939 | |
| PSEG Power LLC, 5.32%, 9/15/16 | | | 288,000 | | | | 307,772 | |
| Waterford 3 Funding Corp., 8.09%, 1/02/17 | | | 365,174 | | | | 365,225 | |
| | | | | | | | |
| | | $ | 8,702,448 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $269,628,946) | | | $ | 279,720,247 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 2.5% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 7,326,058 | | | $ | 7,326,058 | |
| | | | | | | | |
Total Investments
(Identified Cost, $276,955,004) | | | $ | 287,046,305 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.1% | | | | 3,328,128 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 290,374,433 | |
| | | | | | | | |
| (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 $56,455,667, representing 19.4% of net assets. |
| (q) | | Interest received was less than stated coupon rate. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 | | | Value | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.769%, 12/28/40 | | 3/01/06 | | | $270,998 | | | | $161,745 | |
| Berkshire Hathaway Energy, 4.5%, 2/01/45 | | 12/01/14 | | | 591,878 | | | | 624,670 | |
| Falcon Franchise Loan LLC, FRN, 19.164%, 1/05/25 | | 1/29/03 | | | 7,863 | | | | 26,441 | |
| Total Restricted Securities | | | | $812,856 | |
| % of Net assets | | | | 0.3% | |
The following abbreviations are used in this report and are defined:
| 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 |
See Notes to Financial Statements
11
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $269,628,946) | | | $279,720,247 | | | | | |
Underlying affiliated funds, at cost and value | | | 7,326,058 | | | | | |
Total investments, at value (identified cost, $276,955,004) | | | $287,046,305 | | | | | |
Cash | | | 17,199 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 275,236 | | | | | |
Interest | | | 3,562,867 | | | | | |
Receivable from investment adviser | | | 4,172 | | | | | |
Other assets | | | 2,804 | | | | | |
Total assets | | | | | | | $290,908,583 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $462,601 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 54 | | | | | |
Distribution and/or service fees | | | 2,891 | | | | | |
Payable for independent Trustees’ compensation | | | 45 | | | | | |
Accrued expenses and other liabilities | | | 68,559 | | | | | |
Total liabilities | | | | | | | $534,150 | |
Net assets | | | | | | | $290,374,433 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $269,258,248 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 10,091,301 | | | | | |
Accumulated distributions in excess of net realized gain on investments | | | (12,576 | ) | | | | |
Undistributed net investment income | | | 11,037,460 | | | | | |
Net assets | | | | | | | $290,374,433 | |
Shares of beneficial interest outstanding | | | | | | | 24,898,669 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $79,041,988 | | | | 6,719,945 | | | | $11.76 | |
Service Class | | | 211,332,445 | | | | 18,178,724 | | | | 11.63 | |
See Notes to Financial Statements
12
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $12,668,749 | | | | | |
Dividends from underlying affiliated funds | | | 11,747 | | | | | |
Total investment income | | | | | | | $12,680,496 | |
Expenses | | | | | | | | |
Management fee | | | $1,791,912 | | | | | |
Distribution and/or service fees | | | 543,116 | | | | | |
Shareholder servicing costs | | | 12,108 | | | | | |
Administrative services fee | | | 50,788 | | | | | |
Independent Trustees’ compensation | | | 9,117 | | | | | |
Custodian fee | | | 37,384 | | | | | |
Shareholder communications | | | 17,510 | | | | | |
Audit and tax fees | | | 72,995 | | | | | |
Legal fees | | | 2,740 | | | | | |
Miscellaneous | | | 19,413 | | | | | |
Total expenses | | | | | | | $2,557,083 | |
Fees paid indirectly | | | (65 | ) | | | | |
Reduction of expenses by investment adviser | | | (65,868 | ) | | | | |
Net expenses | | | | | | | $2,491,150 | |
Net investment income | | | | | | | $10,189,346 | |
Realized and unrealized gain (loss) on investments | | | | | | | | |
Realized gain (loss) on investments (identified cost basis) | | | | | | | $2,902,673 | |
Change in unrealized appreciation (depreciation) on investments | | | | | | | $3,205,635 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $6,108,308 | |
Change in net assets from operations | | | | | | | $16,297,654 | |
See Notes to Financial Statements
13
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $10,189,346 | | | | $9,971,324 | |
Net realized gain (loss) on investments | | | 2,902,673 | | | | 1,569,999 | |
Net unrealized gain (loss) on investments | | | 3,205,635 | | | | (13,036,800 | ) |
Change in net assets from operations | | | $16,297,654 | | | | $(1,495,477 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(10,948,230 | ) | | | $(12,220,034 | ) |
From net realized gain on investments | | | (776,199 | ) | | | (5,130,772 | ) |
Total distributions declared to shareholders | | | $(11,724,429 | ) | | | $(17,350,806 | ) |
Change in net assets from fund share transactions | | | $(7,423,215 | ) | | | $20,928,492 | |
Total change in net assets | | | $(2,849,990 | ) | | | $2,082,209 | |
Net assets | | | | | | | | |
At beginning of period | | | 293,224,423 | | | | 291,142,214 | |
At end of period (including undistributed net investment income of $11,037,460 and
$10,947,859, respectively) | | | $290,374,433 | | | | $293,224,423 | |
See Notes to Financial Statements
14
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $11.58 | | | | $12.36 | | | | $11.67 | | | | $11.49 | | | | $10.84 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.43 | | | | $0.43 | | | | $0.50 | | | | $0.57 | | | | $0.58 | |
Net realized and unrealized gain (loss) on investments | | | 0.24 | | | | (0.48 | ) | | | 0.80 | | | | 0.18 | | | | 0.57 | |
Total from investment operations | | | $0.67 | | | | $(0.05 | ) | | | $1.30 | | | | $0.75 | | | | $1.15 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.46 | ) | | | $(0.52 | ) | | | $(0.61 | ) | | | $(0.57 | ) | | | $(0.50 | ) |
From net realized gain on investments | | | (0.03 | ) | | | (0.21 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.49 | ) | | | $(0.73 | ) | | | $(0.61 | ) | | | $(0.57 | ) | | | $(0.50 | ) |
Net asset value, end of period (x) | | | $11.76 | | | | $11.58 | | | | $12.36 | | | | $11.67 | | | | $11.49 | |
Total return (%) (k)(r)(s)(x) | | | 5.78 | | | | (0.27 | ) | | | 11.31 | | | | 6.63 | | | | 10.86 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.67 | | | | 0.67 | | | | 0.68 | | | | 0.70 | | | | 0.72 | |
Expenses after expense reductions (f) | | | 0.65 | | | | 0.67 | | | | 0.68 | | | | N/A | | | | N/A | |
Net investment income | | | 3.59 | | | | 3.54 | | | | 4.13 | | | | 4.85 | | | | 5.17 | |
Portfolio turnover | | | 36 | | | | 38 | | | | 57 | | | | 55 | | | | 58 | |
Net assets at end of period (000 omitted) | | | $79,042 | | | | $81,921 | | | | $95,361 | | | | $90,822 | | | | $95,584 | |
See Notes to Financial Statements
15
MFS Bond Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $11.45 | | | | $12.23 | | | | $11.56 | | | | $11.40 | | | | $10.76 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.39 | | | | $0.39 | | | | $0.47 | | | | $0.53 | | | | $0.55 | |
Net realized and unrealized gain (loss) on investments | | | 0.25 | | | | (0.47 | ) | | | 0.78 | | | | 0.18 | | | | 0.57 | |
Total from investment operations | | | $0.64 | | | | $(0.08 | ) | | | $1.25 | | | | $0.71 | | | | $1.12 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.43 | ) | | | $(0.49 | ) | | | $(0.58 | ) | | | $(0.55 | ) | | | $(0.48 | ) |
From net realized gain on investments | | | (0.03 | ) | | | (0.21 | ) | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.46 | ) | | | $(0.70 | ) | | | $(0.58 | ) | | | $(0.55 | ) | | | $(0.48 | ) |
Net asset value, end of period (x) | | | $11.63 | | | | $11.45 | | | | $12.23 | | | | $11.56 | | | | $11.40 | |
Total return (%) (k)(r)(s)(x) | | | 5.59 | | | | (0.51 | ) | | | 11.00 | | | | 6.30 | | | | 10.67 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.92 | | | | 0.92 | | | | 0.93 | | | | 0.95 | | | | 0.97 | |
Expenses after expense reductions (f) | | | 0.90 | | | | 0.92 | | | | 0.93 | | | | N/A | | | | N/A | |
Net investment income | | | 3.34 | | | | 3.29 | | | | 3.86 | | | | 4.59 | | | | 4.90 | |
Portfolio turnover | | | 36 | | | | 38 | | | | 57 | | | | 55 | | | | 58 | |
Net assets at end of period (000 omitted) | | | $211,332 | | | | $211,303 | | | | $195,781 | | | | $165,367 | | | | $146,977 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
16
MFS Bond Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Bond Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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 invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Debt instruments and floating rate loans, 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 may be 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. 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
17
MFS Bond Portfolio
Notes to Financial Statements – continued
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Non-U.S. Sovereign Debt | | | $— | | | | $2,572,540 | | | | $— | | | | $2,572,540 | |
| U.S. Corporate Bonds | | | — | | | | 242,186,457 | | | | — | | | | 242,186,457 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 1,980,018 | | | | — | | | | 1,980,018 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 663,456 | | | | — | | | | 663,456 | |
| Foreign Bonds | | | — | | | | 32,317,776 | | | | — | | | | 32,317,776 | |
| Mutual Funds | | | 7,326,058 | | | | — | | | | — | | | | 7,326,058 | |
| Total Investments | | | $7,326,058 | | | | $279,720,247 | | | | $— | | | | $287,046,305 | |
For further information regarding security characteristics, see the Portfolio of Investments.
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. Interest payments received in additional securities are recorded on the ex-interest date in an amount equal to the value of the security on such date. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.
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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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
18
MFS Bond Portfolio
Notes to Financial Statements – continued
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.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $10,948,230 | | | | $15,106,585 | |
| Long-term capital gains | | | 776,199 | | | | 2,244,221 | |
| Total distributions | | | $11,724,429 | | | | $17,350,806 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $279,009,241 | |
| Gross appreciation | | | 10,519,816 | |
| Gross depreciation | | | (2,482,752 | ) |
| Net unrealized appreciation (depreciation) | | | $8,037,064 | |
| Undistributed ordinary income | | | 11,493,580 | |
| Undistributed long-term capital gain | | | 1,594,140 | |
| Other temporary differences | | | (8,599 | ) |
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $3,058,073 | | | | $3,749,442 | | | | $207,005 | | | | $1,517,318 | |
| Service Class | | | 7,890,157 | | | | 8,470,592 | | | | 569,194 | | | | 3,613,454 | |
| Total | | | $10,948,230 | | | | $12,220,034 | | | | $776,199 | | | | $5,130,772 | |
| (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 | | | 0.60% | |
| Average daily net assets in excess of $1 billion | | | 0.50% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $13,766, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.60% of the fund’s average daily net assets.
Effective August 1, 2014, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.63% of average daily net assets for the Initial Class shares and 0.88% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the period August 1, 2014 through December 31, 2014, this reduction amounted to $51,583, which is included in the 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.
19
MFS Bond 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, 2014, the fee was $11,934, which equated to 0.0040% 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, 2014, these costs amounted to $174.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0170% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $1,399 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $519, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $2,970,531 | | | | $3,153,153 | |
| Investments (non-U.S. Government securities) | | | $102,251,014 | | | | $97,764,487 | |
| (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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 358,376 | | | | $4,245,360 | | | | 702,584 | | | | $8,435,409 | |
Service Class | | | 2,124,964 | | | | 24,955,363 | | | | 4,292,770 | | | | 51,374,935 | |
| | | 2,483,340 | | | | $29,200,723 | | | | 4,995,354 | | | | $59,810,344 | |
20
MFS Bond Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 277,643 | | | | $3,265,078 | | | | 468,573 | | | | $5,266,760 | |
Service Class | | | 726,748 | | | | 8,459,351 | | | | 1,085,718 | | | | 12,084,046 | |
| | | 1,004,391 | | | | $11,724,429 | | | | 1,554,291 | | | | $17,350,806 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (991,212 | ) | | | $(11,740,077 | ) | | | (1,811,428 | ) | | | $(21,644,615 | ) |
Service Class | | | (3,126,345 | ) | | | (36,608,290 | ) | | | (2,928,484 | ) | | | (34,588,043 | ) |
| | | (4,117,557 | ) | | | $(48,348,367 | ) | | | (4,739,912 | ) | | | $(56,232,658 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (355,193 | ) | | | $(4,229,639 | ) | | | (640,271 | ) | | | $(7,942,446 | ) |
Service Class | | | (274,633 | ) | | | (3,193,576 | ) | | | 2,450,004 | | | | 28,870,938 | |
| | | (629,826 | ) | | | $(7,423,215 | ) | | | 1,809,733 | | | | $20,928,492 | |
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, 2014, the fund’s commitment fee and interest expense were $1,108 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 19,504,889 | | | | 89,992,059 | | | | (102,170,890 | ) | | | 7,326,058 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $11,747 | | | | $7,326,058 | |
21
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian. 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, 2014, 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 13, 2015
22
MFS Bond Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
23
MFS Bond Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
24
MFS Bond Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Richard Hawkins Robert Persons | | |
25
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
26
MFS Bond 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS has agreed to implement an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median, and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
27
MFS Bond Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $854,000 as capital gain dividends paid during the fiscal year.
28
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
29
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® CORE
EQUITY PORTFOLIO
MFS® Variable Insurance Trust II
RGS-ANN
MFS® CORE EQUITY PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Core Equity Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Core Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Apple, Inc. | | | 2.5% | |
| American International Group, Inc. | | | 1.6% | |
| Visa, Inc., “A” | | | 1.6% | |
| Hess Corp. | | | 1.6% | |
| JPMorgan Chase & Co. | | | 1.4% | |
| Wells Fargo & Co. | | | 1.3% | |
| MetLife, Inc. | | | 1.3% | |
| Twenty-First Century Fox, Inc. | | | 1.3% | |
| Discover Financial Services | | | 1.2% | |
| Chevron Corp. | | | 1.2% | |
| | | | |
| Equity sectors | | | | |
| Financial Services | | | 18.7% | |
| Technology | | | 15.7% | |
| Health Care | | | 14.2% | |
| Industrial Goods & Services | | | 7.2% | |
| Retailing | | | 7.1% | |
| Energy | | | 6.9% | |
| Consumer Staples | | | 6.6% | |
| Leisure (s) | | | 5.1% | |
| Utilities & Communications | | | 5.1% | |
| Special Products & Services | | | 3.9% | |
| Basic Materials | | | 3.4% | |
| Autos & Housing | | | 2.5% | |
| Transportation | | | 2.1% | |
| (s) | Includes securities sold short. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Core Equity Portfolio (“fund”) provided a total return of 11.38%, while Service Class shares of the fund provided a total return of 11.07%. These compare with a return of 12.56% over the same period for the fund’s benchmark, the Russell 3000 Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Weak stock selection in the special products & services sector detracted from performance relative to the Russell 3000 Index. The fund’s overweight position in postsecondary education provider ITT Educational Services (h) held back relative returns. Shares of ITT Educational Services declined during the period reflecting weaker trends in new student enrollment and potential regulatory issues brought forward by the Securities and Exchange Commission (“SEC”). In addition, the Department of Education introduced sanctions against ITT Educational Services as the company did not submit 2013 audited financials within the deadline date which further pressured the stock.
Stock selection was also a negative factor affecting relative performance in the leisure sector, particularly the fund’s overweight positions in digital coupon marketplace operator RetailMeNot (h) and casino resorts operator Wynn Resorts. Shares of Wynn Resorts were negatively impacted by downward operating trends across the industry. The share price decline was also affected by the adverse impact from regulatory risks centered around anticorruption policies on the company’s Macau operations.
Elsewhere, the fund’s overweight positions in food retail stores operator Fairway Group Holdings, global integrated energy company Hess, oil and natural gas exploration and production company Noble Energy, complex metal parts manufacturer for the aerospace industry Precision Castparts and global industrial manufacturing and engineering company Colfax dampened relative performance. Shares of Fairway Group Holdings were pressured due to disappointing earnings results and the announcement that the company’s long-serving CEO was retiring. The timing of the fund’s ownership in shares of software giant Microsoft (h), and not owning strong-performing semiconductor company Intel, further weighed on relative returns.
Contributors to Performance
Stock selection in the health care sector contributed to relative performance. The fund’s overweight positions in development stage biopharmaceutical company Puma Biotechnology, medical devices and supply products manufacturer Covidien, and specialty pharmaceutical company Actavis boosted results. Shares of Covidien skyrocketed late in the reporting period as the company announced that Medtronic had entered into an agreement to acquire the company at a significant premium.
Stock selection was also a positive factor affecting performance in the autos & housing sector. Within this sector, overweighting strong-performing paint and coating manufacturer Sherwin-Williams helped relative results. Shares of Sherwin-Williams rose as the company beat market expectations on the back of strong volume trends across all segments which were the primary drivers behind the outperformance. Additionally, the company raised its earnings guidance for the full year which also helped relative returns.
Elsewhere, the fund’s overweight positions in analog semiconductor devices developer Avago Technologies, computer and personal electronics maker Hewlett-Packard and retailer Burlington Stores aided relative performance. Shares of Hewlett-Packard benefited from total company sales growth driven by the PC segment. Additionally, Hewlett-Packard posted very strong free cash flows that could potentially provide adequate funds for stock repurchases, dividends and strategic Mergers & Acquisitions (“M&A”) activity. Not
3
MFS Core Equity Portfolio
Management Review – continued
holding weak-performing diversified industrial conglomerate General Electric, internet retailer Amazon.com and diversified technology products and services company International Business Machines (IBM) also benefited relative returns as all three stock underperformed the benchmark during the reporting period.
Respectfully,
Joseph MacDougall
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 Core Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/12/97 | | 11.38% | | 15.19% | | 8.09% | | |
| | | Service Class | | 8/24/01 | | 11.07% | | 14.89% | | 7.82% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 3000 Index (f) | | 12.56% | | 15.63% | | 7.94% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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 7/01/14 | | | Ending Account Value 12/31/14 | | | Expenses Paid During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.85% | | | | $1,000.00 | | | | $1,052.56 | | | | $4.40 | |
| | Hypothetical (h) | | | 0.85% | | | | $1,000.00 | | | | $1,020.92 | | | | $4.33 | |
| Service Class | | Actual | | | 1.10% | | | | $1,000.00 | | | | $1,051.02 | | | | $5.69 | |
| | Hypothetical (h) | | | 1.10% | | | | $1,000.00 | | | | $1,019.66 | | | | $5.60 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Core Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.7% | | | | | |
| Aerospace – 3.2% | | | | | |
| Honeywell International, Inc. | | | 19,979 | | | $ | 1,996,302 | |
| Precision Castparts Corp. | | | 5,002 | | | | 1,204,882 | |
| Textron, Inc. | | | 6,882 | | | | 289,801 | |
| United Technologies Corp. | | | 15,892 | | | | 1,827,580 | |
| | | | | | | | |
| | | | | | $ | 5,318,565 | |
| | | | | | | | |
| Alcoholic Beverages – 0.3% | | | | | |
| Constellation Brands, Inc., “A” (a) | | | 4,412 | | | $ | 433,126 | |
| | | | | | | | |
| Apparel Manufacturers – 0.9% | | | | | |
| NIKE, Inc., “B” | | | 1,164 | | | $ | 111,919 | |
| PVH Corp. | | | 8,071 | | | | 1,034,460 | |
| VF Corp. | | | 4,104 | | | | 307,390 | |
| | | | | | | | |
| | | | | | $ | 1,453,769 | |
| | | | | | | | |
| Automotive – 1.2% | | | | | |
| Delphi Automotive PLC | | | 11,633 | | | $ | 845,952 | |
| Harley-Davidson, Inc. | | | 9,818 | | | | 647,104 | |
| Johnson Controls, Inc. | | | 11,206 | | | | 541,698 | |
| | | | | | | | |
| | | | | | $ | 2,034,754 | |
| | | | | | | | |
| Biotechnology – 1.7% | | | | | |
| Alexion Pharmaceuticals, Inc. (a) | | | 5,184 | | | $ | 959,196 | |
| Biogen Idec, Inc. (a) | | | 3,693 | | | | 1,253,589 | |
| Exact Sciences Corp. (a) | | | 3,195 | | | | 87,671 | |
| Illumina, Inc. (a) | | | 398 | | | | 73,463 | |
| MiMedx Group, Inc. (a)(l) | | | 9,201 | | | | 106,088 | |
| Puma Biotechnology, Inc. (a) | | | 2,033 | | | | 384,786 | |
| | | | | | | | |
| | | | | | $ | 2,864,793 | |
| | | | | | | | |
| Broadcasting – 2.5% | | | | | |
| Time Warner, Inc. | | | 17,643 | | | $ | 1,507,065 | |
| Twenty-First Century Fox, Inc. | | | 54,563 | | | | 2,095,492 | |
| Walt Disney Co. | | | 5,225 | | | | 492,143 | |
| | | | | | | | |
| | | | | | $ | 4,094,700 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.7% | | | | | |
| Affiliated Managers Group, Inc. (a) | | | 1,610 | | | $ | 341,706 | |
| BlackRock, Inc. | | | 2,172 | | | | 776,620 | |
| Franklin Resources, Inc. | | | 9,279 | | | | 513,778 | |
| FXCM, Inc., “A” | | | 18,998 | | | | 314,797 | |
| NASDAQ OMX Group, Inc. | | | 18,751 | | | | 899,298 | |
| | | | | | | | |
| | | | | | $ | 2,846,199 | |
| | | | | | | | |
| Business Services – 2.6% | | | | | |
| Accenture PLC, “A” | | | 7,002 | | | $ | 625,349 | |
| Bright Horizons Family Solutions, Inc. (a) | | | 16,586 | | | | 779,708 | |
| Fidelity National Information Services, Inc. | | | 14,323 | | | | 890,891 | |
| FleetCor Technologies, Inc. (a) | | | 3,478 | | | | 517,213 | |
| Forrester Research, Inc. | | | 7,002 | | | | 275,599 | |
| Gartner, Inc. (a) | | | 7,607 | | | | 640,585 | |
| Global Payments, Inc. | | | 1,605 | | | | 129,572 | |
| Wex, Inc. (a) | | | 3,668 | | | | 362,838 | |
| | | | | | | | |
| | | | | | $ | 4,221,755 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Cable TV – 1.2% | | | | | |
| Charter Communications, Inc., “A” (a) | | | 4,109 | | | $ | 684,642 | |
| Comcast Corp., “Special A” | | | 8,264 | | | | 475,717 | |
| Time Warner Cable, Inc. | | | 5,825 | | | | 885,750 | |
| | | | | | | | |
| | | | | | $ | 2,046,109 | |
| | | | | | | | |
| Chemicals – 1.4% | | | | | |
| Agrium, Inc. | | | 5,095 | | | $ | 482,398 | |
| E.I. du Pont de Nemours & Co. | | | 14,651 | | | | 1,083,295 | |
| LyondellBasell Industries N.V., “A” | | | 8,248 | | | | 654,809 | |
| | | | | | | | |
| | | | | | $ | 2,220,502 | |
| | | | | | | | |
| Computer Software – 4.1% | | | | | |
| Adobe Systems, Inc. (a) | | | 13,272 | | | $ | 964,874 | |
| Check Point Software Technologies Ltd. (a) | | | 20,008 | | | | 1,572,029 | |
| Intuit, Inc. | | | 4,857 | | | | 447,767 | |
| Oracle Corp. | | | 29,336 | | | | 1,319,240 | |
| Qlik Technologies, Inc. (a) | | | 26,082 | | | | 805,673 | |
| Salesforce.com, Inc. (a) | | | 26,916 | | | | 1,596,388 | |
| | | | | | | | |
| | | | | | $ | 6,705,971 | |
| | | | | | | | |
| Computer Software – Systems – 4.5% | | | | | |
| Apple, Inc. (s) | | | 37,876 | | | $ | 4,180,753 | |
| EMC Corp. | | | 62,682 | | | | 1,864,163 | |
| Hewlett-Packard Co. | | | 8,698 | | | | 349,051 | |
| NCR Corp. (a) | | | 16,453 | | | | 479,440 | |
| SS&C Technologies Holdings, Inc. | | | 9,199 | | | | 538,050 | |
| | | | | | | | |
| | | | | | $ | 7,411,457 | |
| | | | | | | | |
| Construction – 1.3% | | | | | |
| Fortune Brands Home & Security, Inc. | | | 15,442 | | | $ | 699,059 | |
| Pool Corp. | | | 3,430 | | | | 217,599 | |
| Sherwin-Williams Co. | | | 4,631 | | | | 1,218,138 | |
| | | | | | | | |
| | | | | | $ | 2,134,796 | |
| | | | | | | | |
| Consumer Products – 2.4% | | | | | |
| Colgate-Palmolive Co. | | | 15,739 | | | $ | 1,088,981 | |
| Estee Lauder Cos., Inc., “A” | | | 4,528 | | | | 345,034 | |
| Newell Rubbermaid, Inc. | | | 19,655 | | | | 748,659 | |
| Procter & Gamble Co. | | | 19,223 | | | | 1,751,023 | |
| | | | | | | | |
| | | | | | $ | 3,933,697 | |
| | | | | | | | |
| Consumer Services – 1.4% | | | | | |
| Nord Anglia Education, Inc. (a) | | | 27,921 | | | $ | 532,733 | |
| Priceline Group, Inc. (a) | | | 1,540 | | | | 1,755,923 | |
| | | | | | | | |
| | | | | | $ | 2,288,656 | |
| | | | | | | | |
| Containers – 0.1% | | | | | |
| Crown Holdings, Inc. (a) | | | 4,342 | | | $ | 221,008 | |
| | | | | | | | |
| Electrical Equipment – 1.8% | | | | | |
| Advanced Drainage Systems, Inc. | | | 23,685 | | | $ | 544,281 | |
| AMETEK, Inc. | | | 14,353 | | | | 755,398 | |
| Danaher Corp. | | | 17,102 | | | | 1,465,812 | |
| W.W. Grainger, Inc. | | | 927 | | | | 236,283 | |
| | | | | | | | |
| | | | | | $ | 3,001,774 | |
| | | | | | | | |
7
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – 4.0% | | | | | |
| Altera Corp. | | | 38,716 | | | $ | 1,430,169 | |
| Avago Technologies Ltd. | | | 8,886 | | | | 893,843 | |
| Broadcom Corp., “A” | | | 19,009 | | | | 823,660 | |
| Freescale Semiconductor Ltd. (a) | | | 7,214 | | | | 182,009 | |
| KLA-Tencor Corp. | | | 7,221 | | | | 507,781 | |
| Mellanox Technologies Ltd. (a) | | | 11,345 | | | | 484,772 | |
| Rubicon Technology, Inc. (a)(l) | | | 28,999 | | | | 132,525 | |
| Skyworks Solutions, Inc. | | | 3,531 | | | | 256,739 | |
| Texas Instruments, Inc. | | | 29,616 | | | | 1,583,419 | |
| Ultratech, Inc. (a) | | | 10,963 | | | | 203,473 | |
| | | | | | | | |
| | | | | | $ | 6,498,390 | |
| | | | | | | | |
| Energy – Independent – 2.9% | | | | | |
| Access Midstream Partners LP | | | 5,967 | | | $ | 323,411 | |
| Anadarko Petroleum Corp. | | | 8,873 | | | | 732,023 | |
| Clayton Williams Energy, Inc. (a) | | | 1,722 | | | | 109,864 | |
| Concho Resources, Inc. (a) | | | 2,049 | | | | 204,388 | |
| CONSOL Energy, Inc. | | | 3,074 | | | | 103,932 | |
| Energy XXI (Bermuda) Ltd. | | | 10,234 | | | | 33,363 | |
| EOG Resources, Inc. | | | 8,170 | | | | 752,212 | |
| Goodrich Petroleum Corp. (a)(l) | | | 16,535 | | | | 73,415 | |
| Marathon Petroleum Corp. | | | 10,092 | | | | 910,904 | |
| Memorial Resource Development Corp. (a) | | | 19,446 | | | | 350,611 | |
| Noble Energy, Inc. | | | 7,021 | | | | 333,006 | |
| PDC Energy, Inc. (a) | | | 1,800 | | | | 74,286 | |
| Peabody Energy Corp. | | | 3,304 | | | | 25,573 | |
| Pioneer Natural Resources Co. | | | 2,358 | | | | 350,988 | |
| Rice Energy, Inc. (a) | | | 5,685 | | | | 119,214 | |
| Sanchez Energy Corp. (a) | | | 4,995 | | | | 46,404 | |
| Targa Resources Corp. | | | 2,844 | | | | 301,606 | |
| | | | | | | | |
| | | | | | $ | 4,845,200 | |
| | | | | | | | |
| Energy – Integrated – 2.8% | | | | | |
| Chevron Corp. | | | 17,846 | | | $ | 2,001,964 | |
| Hess Corp. (s) | | | 36,030 | | | | 2,659,735 | |
| | | | | | | | |
| | | | | | $ | 4,661,699 | |
| | | | | | | | |
| Food & Beverages – 2.8% | | | | | |
| Coca-Cola Co. | | | 40,739 | | | $ | 1,720,001 | |
| Flowers Foods, Inc. | | | 16,873 | | | | 323,793 | |
| General Mills, Inc. | | | 13,298 | | | | 709,182 | |
| Mondelez International, Inc. | | | 24,707 | | | | 897,482 | |
| Pinnacle Foods, Inc. | | | 13,550 | | | | 478,315 | |
| WhiteWave Foods Co., “A” (a) | | | 14,905 | | | | 521,526 | |
| | | | | | | | |
| | | | | | $ | 4,650,299 | |
| | | | | | | | |
| Food & Drug Stores – 1.1% | | | | | |
| CVS Health Corp. | | | 17,790 | | | $ | 1,713,355 | |
| Fairway Group Holdings Corp. (a)(l) | | | 45,643 | | | | 143,775 | |
| | | | | | | | |
| | | | | | $ | 1,857,130 | |
| | | | | | | | |
| Gaming & Lodging – 0.7% | | | | | |
| Starwood Hotels & Resorts Worldwide, Inc. | | | 3,823 | | | $ | 309,931 | |
| Wynn Resorts Ltd. | | | 5,337 | | | | 793,932 | |
| | | | | | | | |
| | | | | | $ | 1,103,863 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| General Merchandise – 1.5% | | | | | |
| Five Below, Inc. (a) | | | 9,471 | | | $ | 386,701 | |
| Kohl’s Corp. | | | 14,082 | | | | 859,565 | |
| Target Corp. | | | 16,318 | | | | 1,238,699 | |
| | | | | | | | |
| | | | | | $ | 2,484,965 | |
| | | | | | | | |
| Health Maintenance Organizations – 1.1% | | | | | |
| UnitedHealth Group, Inc. | | | 17,383 | | | $ | 1,757,247 | |
| | | | | | | | |
| Insurance – 3.1% | | | | | |
| American International Group, Inc. | | | 48,192 | | | $ | 2,699,234 | |
| MetLife, Inc. | | | 38,896 | | | | 2,103,885 | |
| Safety Insurance Group, Inc. | | | 4,885 | | | | 312,689 | |
| | | | | | | | |
| | | | | | $ | 5,115,808 | |
| | | | | | | | |
| Internet – 3.0% | | | | | |
| Facebook, Inc., “A “ (a) | | | 17,242 | | | $ | 1,345,221 | |
| Google, Inc., “A” (a) | | | 3,158 | | | | 1,675,824 | |
| Google, Inc., “C” (a) | | | 2,477 | | | | 1,303,893 | |
| LinkedIn Corp., “A” (a) | | | 2,616 | | | | 600,921 | |
| | | | | | | | |
| | | | | | $ | 4,925,859 | |
| | | | | | | | |
| Machinery & Tools – 2.1% | | | | | |
| Colfax Corp. (a) | | | 14,256 | | | $ | 735,182 | |
| Eaton Corp. PLC | | | 4,092 | | | | 278,092 | |
| IPG Photonics Corp. (a) | | | 6,364 | | | | 476,791 | |
| Joy Global, Inc. | | | 13,395 | | | | 623,135 | |
| Roper Industries, Inc. | | | 8,963 | | | | 1,401,365 | |
| | | | | | | | |
| | | | | | $ | 3,514,565 | |
| | | | | | | | |
| Major Banks – 5.4% | | | | | |
| Bank of America Corp. | | | 101,433 | | | $ | 1,814,636 | |
| Goldman Sachs Group, Inc. | | | 4,823 | | | | 934,842 | |
| JPMorgan Chase & Co. (s) | | | 36,519 | | | | 2,285,359 | |
| Morgan Stanley | | | 21,652 | | | | 840,098 | |
| State Street Corp. | | | 11,702 | | | | 918,607 | |
| Wells Fargo & Co. | | | 38,383 | | | | 2,104,156 | |
| | | | | | | | |
| | | | | | $ | 8,897,698 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.1% | | | | | |
| Cerner Corp. (a) | | | 3,543 | | | $ | 229,090 | |
| Express Scripts Holding Co. (a) | | | 8,207 | | | | 694,887 | |
| Healthcare Services Group, Inc. | | | 9,130 | | | | 282,391 | |
| McKesson Corp. | | | 2,632 | | | | 546,351 | |
| | | | | | | | |
| | | | | | $ | 1,752,719 | |
| | | | | | | | |
| Medical Equipment – 4.6% | | | | | |
| Abbott Laboratories | | | 40,629 | | | $ | 1,829,118 | |
| AtriCure, Inc. (a) | | | 11,143 | | | | 222,414 | |
| Cepheid, Inc. (a) | | | 3,924 | | | | 212,445 | |
| Cooper Cos., Inc. | | | 6,358 | | | | 1,030,568 | |
| Covidien PLC | | | 12,705 | | | | 1,299,467 | |
| DENTSPLY International, Inc. | | | 5,864 | | | | 312,375 | |
| DexCom, Inc. (a) | | | 3,152 | | | | 173,518 | |
| Heartware International, Inc. (a) | | | 1,156 | | | | 84,885 | |
| OraSure Technologies, Inc. (a) | | | 9,294 | | | | 94,241 | |
| STERIS Corp. | | | 1,916 | | | | 124,253 | |
| Stryker Corp. | | | 15,616 | | | | 1,473,057 | |
8
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Medical Equipment – continued | | | | | |
| TearLab Corp. (a)(l) | | | 35,709 | | | $ | 94,629 | |
| Thermo Fisher Scientific, Inc. | | | 4,911 | | | | 615,299 | |
| | | | | | | | |
| | | | | | $ | 7,566,269 | |
| | | | | | | | |
| Metals & Mining – 0.3% | | | | | |
| First Quantum Minerals Ltd. | | | 15,498 | | | $ | 220,238 | |
| Lundin Mining Corp. (a) | | | 65,372 | | | | 321,852 | |
| | | | | | | | |
| | | | | | $ | 542,090 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.3% | | | | | |
| Williams Cos., Inc. | | | 10,995 | | | $ | 494,115 | |
| | | | | | | | |
| Network & Telecom – 0.2% | | | | | |
| Ixia (a) | | | 22,085 | | | $ | 248,456 | |
| | | | | | | | |
| Oil Services – 1.1% | | | | | |
| Forum Energy Technologies, Inc. (a) | | | 4,206 | | | $ | 87,190 | |
| Halliburton Co. | | | 8,022 | | | | 315,505 | |
| Schlumberger Ltd. | | | 17,232 | | | | 1,471,785 | |
| | | | | | | | |
| | | | | | $ | 1,874,480 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 5.0% | | | | | |
| American Express Co. | | | 11,124 | | | $ | 1,034,977 | |
| BB&T Corp. | | | 24,660 | | | | 959,027 | |
| Discover Financial Services | | | 31,130 | | | | 2,038,704 | |
| EuroDekania Ltd. | | | 100,530 | | | | 54,741 | |
| PrivateBancorp, Inc. | | | 23,539 | | | | 786,203 | |
| Texas Capital Bancshares, Inc. (a) | | | 11,632 | | | | 631,967 | |
| Visa, Inc., “A” | | | 10,201 | | | | 2,674,702 | |
| | | | | | | | |
| | | | | | $ | 8,180,321 | |
| | | | | | | | |
| Pharmaceuticals – 5.7% | | | | | |
| AbbVie, Inc. | | | 19,882 | | | $ | 1,301,078 | |
| Actavis PLC (a) | | | 7,525 | | | | 1,937,010 | |
| Bristol-Myers Squibb Co. | | | 28,665 | | | | 1,692,095 | |
| Eli Lilly & Co. | | | 9,770 | | | | 674,032 | |
| Endo International PLC (a) | | | 13,078 | | | | 943,185 | |
| Merck & Co., Inc. | | | 19,659 | | | | 1,116,435 | |
| Valeant Pharmaceuticals International, Inc. (a) | | | 12,058 | | | | 1,725,620 | |
| | | | | | | | |
| | | | | | $ | 9,389,455 | |
| | | | | | | | |
| Railroad & Shipping – 1.4% | | | | | |
| Canadian Pacific Railway Ltd. | | | 5,068 | | | $ | 976,553 | |
| Union Pacific Corp. | | | 11,778 | | | | 1,403,113 | |
| | | | | | | | |
| | | | | | $ | 2,379,666 | |
| | | | | | | | |
| Real Estate – 3.5% | | | | | |
| Equity Lifestyle Properties, Inc., REIT | | | 20,520 | | | $ | 1,057,806 | |
| Gramercy Property Trust, Inc., REIT | | | 81,533 | | | | 562,578 | |
| Medical Properties Trust, Inc., REIT | | | 67,139 | | | | 925,175 | |
| Mid-America Apartment Communities, Inc., REIT | | | 16,549 | | | | 1,235,879 | |
| Plum Creek Timber Co. Inc., REIT | | | 23,860 | | | | 1,020,969 | |
| Tanger Factory Outlet Centers, Inc., REIT | | | 26,433 | | | | 976,964 | |
| | | | | | | | |
| | | | | | $ | 5,779,371 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Restaurants – 1.0% | | | | | |
| Domino’s Pizza, Inc. | | | 5,027 | | | $ | 473,393 | |
| YUM! Brands, Inc. | | | 15,148 | | | | 1,103,532 | |
| | | | | | | | |
| | | | | | $ | 1,576,925 | |
| | | | | | | | |
| Specialty Chemicals – 1.6% | | | | | |
| Albemarle Corp. | | | 15,458 | | | $ | 929,490 | |
| Amira Nature Foods Ltd. (a)(l) | | | 8,852 | | | | 127,026 | |
| Axalta Coating Systems Ltd. (a) | | | 29,739 | | | | 773,809 | |
| W.R. Grace & Co. (a) | | | 8,184 | | | | 780,672 | |
| | | | | | | | |
| | | | | | $ | 2,610,997 | |
| | | | | | | | |
| Specialty Stores – 3.6% | | | | | |
| AutoZone, Inc. (a) | | | 1,229 | | | $ | 760,886 | |
| Bed Bath & Beyond, Inc. (a) | | | 12,029 | | | | 916,249 | |
| Burlington Stores, Inc. (a) | | | 18,816 | | | | 889,244 | |
| L Brands, Inc. | | | 11,319 | | | | 979,659 | |
| Ross Stores, Inc. | | | 9,841 | | | | 927,613 | |
| Sally Beauty Holdings, Inc. (a) | | | 17,812 | | | | 547,541 | |
| Urban Outfitters, Inc. (a) | | | 24,202 | | | | 850,216 | |
| | | | | | | | |
| | | | | | $ | 5,871,408 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.1% | | | | | |
| American Tower Corp., REIT | | | 18,668 | | | $ | 1,845,332 | |
| | | | | | | | |
| Telephone Services – 1.1% | | | | | |
| Verizon Communications, Inc. | | | 40,283 | | | $ | 1,884,439 | |
| | | | | | | | |
| Tobacco – 1.2% | | | | | |
| Altria Group, Inc. | | | 18,570 | | | $ | 914,944 | |
| Philip Morris International, Inc. | | | 12,206 | | | | 994,179 | |
| | | | | | | | |
| | | | | | $ | 1,909,123 | |
| | | | | | | | |
| Trucking – 0.6% | | | | | |
| Swift Transportation Co. (a) | | | 35,289 | | | $ | 1,010,324 | |
| | | | | | | | |
| Utilities – Electric Power – 2.5% | | | | | |
| American Electric Power Co., Inc. | | | 10,985 | | | $ | 667,009 | |
| Calpine Corp. (a) | | | 19,161 | | | | 424,033 | |
| CMS Energy Corp. | | | 19,613 | | | | 681,552 | |
| Dominion Resources, Inc. | | | 5,882 | | | | 452,326 | |
| Edison International | | | 9,002 | | | | 589,451 | |
| Exelon Corp. | | | 10,904 | | | | 404,320 | |
| NextEra Energy, Inc. | | | 3,242 | | | | 344,592 | |
| NRG Energy, Inc. | | | 10,853 | | | | 292,488 | |
| Pattern Energy Group, Inc. | | | 10,929 | | | | 269,509 | |
| | | | | | | | |
| | | | | | $ | 4,125,280 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $125,236,864) | | | | | | $ | 162,585,124 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.5% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 2,418,386 | | | $ | 2,418,386 | |
| | | | | | | | |
|
| COLLATERAL FOR SECURITIES LOANED – 0.2% | |
| Navigator Securities Lending Prime Portfolio, 0.16%, at Cost and Net Asset Value (j) | | | 302,320 | | | $ | 302,320 | |
| | | | | | | | |
Total Investments
(Identified Cost, $127,957,570) | | | | | | $ | 165,305,830 | |
| | | | | | | | |
9
MFS Core Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| SECURITIES SOLD SHORT – (0.2)% | | | | | |
| Gaming & Lodging – (0.2)% | | | | | |
| Marriott International, Inc., “A” (Proceeds Received, $328,280) | | | (4,888 | ) | | $ | (381,411 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.2)% | | | | | | | (285,355 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 164,639,064 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (j) | | The rate quoted is the annualized seven-day yield of the fund at period end. |
| (l) | | 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. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
At December 31, 2014, the fund had cash collateral of $8,922 and other liquid securities with an aggregate value of $966,968 to cover any commitments for securities sold short. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities.
The following abbreviations are used in this report and are defined:
| 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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $125,539,184) | | | $162,887,444 | | | | | |
Underlying affiliated funds, at cost and value | | | 2,418,386 | | | | | |
Total investments, at value, including $299,397 of securities on loan (identified cost, $127,957,570) | | | $165,305,830 | | | | | |
Deposits with brokers | | | 8,922 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 1,552 | | | | | |
Interest and dividends | | | 153,312 | | | | | |
Other assets | | | 1,755 | | | | | |
Total assets | | | | | | | $165,471,371 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Securities sold short, at value (proceeds received, $328,280) | | | $381,411 | | | | | |
Fund shares reacquired | | | 90,672 | | | | | |
Collateral for securities loaned, at value | | | 302,320 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 6,003 | | | | | |
Shareholder servicing costs | | | 26 | | | | | |
Distribution and/or service fees | | | 676 | | | | | |
Payable for independent Trustees’ compensation | | | 71 | | | | | |
Accrued expenses and other liabilities | | | 51,128 | | | | | |
Total liabilities | | | | | | | $832,307 | |
Net assets | | | | | | | $164,639,064 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $109,862,026 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 37,295,129 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 16,383,988 | | | | | |
Undistributed net investment income | | | 1,097,921 | | | | | |
Net assets | | | | | | | $164,639,064 | |
Shares of beneficial interest outstanding | | | | | | | 7,054,316 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $115,825,794 | | | | 4,950,365 | | | | $23.40 | |
Service Class | | | 48,813,270 | | | | 2,103,951 | | | | 23.20 | |
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $2,594,155 | | | | | |
Interest | | | 18,416 | | | | | |
Dividends from underlying affiliated funds | | | 1,235 | | | | | |
Foreign taxes withheld | | | (4,340 | ) | | | | |
Total investment income | | | | | | | $2,609,466 | |
Expenses | | | | | | | | |
Management fee | | | $1,236,192 | | | | | |
Distribution and/or service fees | | | 123,933 | | | | | |
Shareholder servicing costs | | | 5,514 | | | | | |
Administrative services fee | | | 32,870 | | | | | |
Independent Trustees’ compensation | | | 4,647 | | | | | |
Custodian fee | | | 25,180 | | | | | |
Shareholder communications | | | 15,941 | | | | | |
Audit and tax fees | | | 55,147 | | | | | |
Legal fees | | | 1,414 | | | | | |
Dividend and interest expense on securities sold short | | | 2,969 | | | | | |
Miscellaneous | | | 15,439 | | | | | |
Total expenses | | | | | | | $1,519,246 | |
Fees paid indirectly | | | (4 | ) | | | | |
Reduction of expenses by investment adviser | | | (7,872 | ) | | | | |
Net expenses | | | | | | | $1,511,370 | |
Net investment income | | | | | | | $1,098,096 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $16,481,087 | | | | | |
Foreign currency | | | (131 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $16,480,956 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(109 | ) | | | | |
Securities sold short | | | (53,131 | ) | | | | |
Net unrealized gain (loss) on investments | | | | | | | $(53,240 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $16,427,716 | |
Change in net assets from operations | | | | | | | $17,525,812 | |
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,098,096 | | | | $1,204,348 | |
Net realized gain (loss) on investments and foreign currency | | | 16,480,956 | | | | 21,912,256 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (53,240 | ) | | | 22,509,699 | |
Change in net assets from operations | | | $17,525,812 | | | | $45,626,303 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,201,680 | ) | | | $(1,427,024 | ) |
From net realized gain on investments | | | (2,447,779 | ) | | | — | |
Total distributions declared to shareholders | | | $(3,649,459 | ) | | | $(1,427,024 | ) |
Change in net assets from fund share transactions | | | $(16,674,844 | ) | | | $(15,817,135 | ) |
Total change in net assets | | | $(2,798,491 | ) | | | $28,382,144 | |
Net assets | | | | | | | | |
At beginning of period | | | 167,437,555 | | | | 139,055,411 | |
At end of period (including undistributed net investment income of $1,097,921 and
$1,201,710, respectively) | | | $164,639,064 | | | | $167,437,555 | |
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.49 | | | | $16.12 | | | | $13.95 | | | | $14.23 | | | | $12.27 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.16 | | | | $0.16 | | | | $0.17 | | | | $0.11 | | | | $0.12 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.27 | | | | 5.40 | | | | 2.12 | | | | (0.25 | ) | | | 1.98 | |
Total from investment operations | | | $2.43 | | | | $5.56 | | | | $2.29 | | | | $(0.14 | ) | | | $2.10 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.18 | ) | | | $(0.19 | ) | | | $(0.12 | ) | | | $(0.14 | ) | | | $(0.14 | ) |
From net realized gain on investments | | | (0.34 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.52 | ) | | | $(0.19 | ) | | | $(0.12 | ) | | | $(0.14 | ) | | | $(0.14 | ) |
Net asset value, end of period (x) | | | $23.40 | | | | $21.49 | | | | $16.12 | | | | $13.95 | | | | $14.23 | |
Total return (%) (k)(r)(s)(x) | | | 11.38 | | | | 34.62 | | | | 16.46 | | | | (0.94 | ) | | | 17.22 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.85 | | | | 0.85 | | | | 0.85 | | | | 0.88 | | | | 0.90 | |
Expenses after expense reductions (f) | | | 0.84 | | | | 0.85 | | | | 0.85 | | | | 0.87 | | | | 0.86 | |
Net investment income | | | 0.74 | | | | 0.85 | | | | 1.10 | | | | 0.75 | | | | 0.98 | |
Portfolio turnover | | | 48 | | | | 55 | | | | 63 | | | | 65 | | | | 69 | |
Net assets at end of period (000 omitted) | | | $115,826 | | | | $117,044 | | | | $97,349 | | | | $96,375 | | | | $112,121 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding short sale dividend and interest expense (f) | | | 0.84 | | | | 0.84 | | | | 0.85 | | | | 0.87 | | | | 0.85 | |
See Notes to Financial Statements
14
MFS Core Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.32 | | | | $16.00 | | | | $13.84 | | | | $14.13 | | | | $12.19 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.11 | | | | $0.11 | | | | $0.13 | | | | $0.07 | | | | $0.09 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 2.24 | | | | 5.36 | | | | 2.11 | | | | (0.25 | ) | | | 1.97 | |
Total from investment operations | | | $2.35 | | | | $5.47 | | | | $2.24 | | | | $(0.18 | ) | | | $2.06 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.13 | ) | | | $(0.15 | ) | | | $(0.08 | ) | | | $(0.11 | ) | | | $(0.12 | ) |
From net realized gain on investments | | | (0.34 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.47 | ) | | | $(0.15 | ) | | | $(0.08 | ) | | | $(0.11 | ) | | | $(0.12 | ) |
Net asset value, end of period (x) | | | $23.20 | | | | $21.32 | | | | $16.00 | | | | $13.84 | | | | $14.13 | |
Total return (%) (k)(r)(s)(x) | | | 11.07 | | | | 34.28 | | | | 16.24 | | | | (1.25 | ) | | | 16.95 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.10 | | | | 1.10 | | | | 1.10 | | | | 1.13 | | | | 1.15 | |
Expenses after expense reductions (f) | | | 1.09 | | | | 1.10 | | | | 1.10 | | | | 1.12 | | | | 1.11 | |
Net investment income | | | 0.49 | | | | 0.60 | | | | 0.85 | | | | 0.51 | | | | 0.73 | |
Portfolio turnover | | | 48 | | | | 55 | | | | 63 | | | | 65 | | | | 69 | |
Net assets at end of period (000 omitted) | | | $48,813 | | | | $50,394 | | | | $41,707 | | | | $37,337 | | | | $35,819 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale dividend and interest expense (f) | | | 1.09 | | | | 1.09 | | | | 1.10 | | | | 1.12 | | | | 1.10 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
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 diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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 may be 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 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
16
MFS Core Equity Portfolio
Notes to Financial Statements – continued
traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $156,571,934 | | | | $— | | | | $— | | | | $156,571,934 | |
Canada | | | 3,726,661 | | | | — | | | | — | | | | 3,726,661 | |
Israel | | | 1,572,029 | | | | — | | | | — | | | | 1,572,029 | |
Hong Kong | | | 532,733 | | | | — | | | | — | | | | 532,733 | |
United Arab Emirates | | | 127,026 | | | | — | | | | — | | | | 127,026 | |
Cayman Islands | | | — | | | | — | | | | 54,741 | | | | 54,741 | |
| Mutual Funds | | | 2,720,706 | | | | — | | | | — | | | | 2,720,706 | |
| Total Investments | | | $165,251,089 | | | | $— | | | | $54,741 | | | | $165,305,830 | |
| Short Sales | | | $(381,411 | ) | | | $— | | | | $— | | | | $(381,411 | ) |
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 fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/13 | | | $93,352 | |
Change in unrealized appreciation (depreciation) | | | (37,757 | ) |
Partial liquidation proceeds | | | (854 | ) |
| Balance as of 12/31/14 | | | $54,741 | |
The net change in unrealized appreciation (depreciation) from investments still held as level 3 at December 31, 2014 is $(37,757).
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or
17
MFS Core Equity Portfolio
Notes to Financial Statements – continued
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.
The derivative instruments used by the fund were purchased options. At December 31, 2014, 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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Equity | | | $34 | |
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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Equity | | | $2,278 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Purchased Options – The fund purchased call options for a premium. Purchased call options entitle the holder to buy 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument.
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 call options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered 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
18
MFS Core Equity Portfolio
Notes to Financial Statements – continued
the year ended December 31, 2014, this expense amounted to $2,969. 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 – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. At period end, the fund had investment securities on loan with a fair value of $299,397 and a related liability of $302,320 for cash collateral received on securities loaned, both of which are presented gross in the Statement of Assets and Liabilities. The liability for cash collateral for securities loaned is carried at fair value, which is categorized as level 2 within the fair value hierarchy. 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 in 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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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.
19
MFS Core Equity Portfolio
Notes to Financial Statements – continued
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $1,201,680 | | | | $1,427,024 | |
| Long-term capital gains | | | 2,447,779 | | | | — | |
| Total distributions | | | $3,649,459 | | | | $1,427,024 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $128,135,003 | |
| Gross appreciation | | | 41,419,154 | |
| Gross depreciation | | | (4,248,327 | ) |
| Net unrealized appreciation (depreciation) | | | $37,170,827 | |
| Undistributed ordinary income | | | 4,880,824 | |
| Undistributed long-term capital gain | | | 12,801,638 | |
| Other temporary differences | | | (76,251 | ) |
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $921,244 | | | | $1,069,194 | | | | $1,709,770 | | | | $— | |
| Service Class | | | 280,436 | | | | 357,830 | | | | 738,009 | | | | — | |
| Total | | | $1,201,680 | | | | $1,427,024 | | | | $2,447,779 | | | | $— | |
| (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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, the fund’s average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced in accordance with this agreement. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $7,585, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, 2014, the fee was $5,481, which equated to
20
MFS Core Equity Portfolio
Notes to Financial Statements – continued
0.0033% 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, 2014, these costs amounted to $33.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0199% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $764 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $287, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions and short-term obligations, aggregated $77,937,537 and $98,249,745, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 174,011 | | | | $3,827,167 | | | | 116,021 | | | | $2,244,241 | |
Service Class | | | 251,018 | | | | 5,503,108 | | | | 390,771 | | | | 7,163,432 | |
| | | 425,029 | | | | $9,330,275 | | | | 506,792 | | | | $9,407,673 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 115,548 | | | | $2,631,014 | | | | 55,891 | | | | $1,069,194 | |
Service Class | | | 45,064 | | | | 1,018,445 | | | | 18,833 | | | | 357,830 | |
| | | 160,612 | | | | $3,649,459 | | | | 74,724 | | | | $1,427,024 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (785,003 | ) | | | $(17,414,315 | ) | | | (764,376 | ) | | | $(14,457,675 | ) |
Service Class | | | (555,931 | ) | | | (12,240,263 | ) | | | (652,687 | ) | | | (12,194,157 | ) |
| | | (1,340,934 | ) | | | $(29,654,578 | ) | | | (1,417,063 | ) | | | $(26,651,832 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (495,444 | ) | | | $(10,956,134 | ) | | | (592,464 | ) | | | $(11,144,240 | ) |
Service Class | | | (259,849 | ) | | | (5,718,710 | ) | | | (243,083 | ) | | | (4,672,895 | ) |
| | | (755,293 | ) | | | $(16,674,844 | ) | | | (835,547 | ) | | | $(15,817,135 | ) |
21
MFS Core 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, 2014, the fund’s commitment fee and interest expense were $607 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 966,711 | | | | 33,102,422 | | | | (31,650,747 | ) | | | 2,418,386 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $1,235 | | | | $2,418,386 | |
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian. 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, 2014, 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 13, 2015
23
MFS Core Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | �� | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
24
MFS Core Equity Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
25
MFS Core Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Joseph MacDougal | | |
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for each of the one- and five-year periods ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
27
MFS Core Equity 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion, and that MFS has agreed in writing to reduce its advisory fee rate on the Fund’s average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
28
MFS Core Equity Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $2,693,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
29
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
30
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® EMERGING MARKETS EQUITY PORTFOLIO
MFS® Variable Insurance Trust II
FCE-ANN
MFS® EMERGING MARKETS EQUITY PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Emerging Markets Equity Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Emerging Markets Equity Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 5.5% | |
| Naspers Ltd. | | | 3.6% | |
| Samsung Electronics Co. Ltd. | | | 3.6% | |
| China Construction Bank | | | 3.1% | |
| MediaTek, Inc. | | | 2.7% | |
| Housing Development Finance Corp. Ltd. | | | 2.4% | |
| Cognizant Technology Solutions Corp., “A” | | | 2.4% | |
| Techtronic Industries Co. Ltd. | | | 1.9% | |
| China Pacific Insurance Co. Ltd. | | | 1.9% | |
| Kia Motors Corp. | | | 1.9% | |
| |
| Equity sectors | | | | |
| Financial Services | | | 28.8% | |
| Technology | | | 14.4% | |
| Consumer Staples | | | 9.8% | |
| Retailing | | | 8.1% | |
| Autos & Housing | | | 6.2% | |
| Utilities & Communications | | | 6.2% | |
| Leisure | | | 5.9% | |
| Energy | | | 5.7% | |
| Special Products & Services | | | 4.8% | |
| Basic Materials | | | 2.9% | |
| Transportation | | | 2.0% | |
| Health Care | | | 2.0% | |
| Industrial Goods & Services | | | 1.8% | |
| | | | |
| Issuer country weightings (x) | | | | |
| China | | | 13.0% | |
| Taiwan | | | 11.6% | |
| South Korea | | | 10.8% | |
| Hong Kong | | | 9.4% | |
| Brazil | | | 9.1% | |
| South Africa | | | 7.3% | |
| India | | | 7.0% | |
| Mexico | | | 5.5% | |
| United States | | | 3.8% | |
| Other Countries | | | 22.5% | |
| |
| Currency exposure weightings (y) | | | | |
| Hong Kong Dollar | | | 21.9% | |
| Taiwan Dollar | | | 11.6% | |
| South Korean Won | | | 10.8% | |
| Brazilian Real | | | 9.1% | |
| South African Rand | | | 7.3% | |
| Indian Rupee | | | 7.0% | |
| United States Dollar | | | 6.7% | |
| Mexican Peso | | | 5.5% | |
| Thailand Baht | | | 3.6% | |
| Other Currencies | | | 16.5% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Emerging Markets Equity Portfolio (“fund”) provided a total return of –6.72%, while Service Class shares provided a total return of –6.99%. These compare with a return of –1.82% over the same period for the fund’s benchmark, the MSCI Emerging Markets Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Weak stock selection within the transportation sector detracted from performance relative to the MSCI Emerging Markets Index, led by the portfolio’s position in shipping company Diana Shipping (b) (Greece). Shares of Diana Shipping weakened in the second half of the reporting period after the company posted consecutive quarterly losses due to a sluggish demand environment.
An overweight allocation to the retailing sector also hurt relative performance. Within this sector, an overweight position in poor-performing retail store operator Magnit OJSC (Russia) weakened relative results.
Stock selection in both the industrial goods & services and health care sectors hampered relative returns. Within industrial goods & services, holdings of Brazilian specialty engineering services company Mills Estruturas e Servicos de Engenharia (b) held back relative performance. Shares of Mills Estruturas e Servicos de Engenharia decreased markedly after the company reported weaker-than-expected earnings on the back of project delays and backlogging that continued to affect operations. There were no individual stocks within the health care sector that were among the portfolio’s top relative detractors during the period.
Within the utilities & communications sector, weak stock selection weighed on relative performance. Here, an overweight position in Russian telecommunications company Mobile TeleSystems (h) (Russia) held back relative results due to weak ruble prices and legal issues facing its parent company, Sistema.
Stocks in other sectors that detracted from relative performance included holdings of insurance and brokerage services provider Brasil Insurance Participacoes e Administracao (b) (Brazil), pipe manufacturer OAO TMK (b)(h) (Russia), oil and gas exploration company Gran Tierra Energy (b) (United States), banking group Standard Chartered (b) (United Kingdom), and South Korean LED device manufacturer Seoul Semiconductor (b). Shares of Brasil Insurance Participacoes e Administracao came under pressure after the company posted disappointing earnings that were strongly impacted by cancellations of contracts and weaker financial guarantees. In addition, impairment charges related to the company’s acquisition of a Brazil-based brokerage company ISM also weighed on performance. An overweight position in commercial banking firm Sberbank of Russia (Russia) was another top relative detractor. The stock price of Sberbank of Russia fell due to reduced domestic growth reflecting an uncertain macroeconomic environment, headwinds from the ruble’s devaluation, rapid rate hikes and economic sanctions imposed by western countries.
Contributors to Performance
Stock selection in the consumer staples sector aided relative performance. Within this sector, an overweight position in ayurvedic and natural health care products maker Dabur India (India) boosted relative returns as the stock turned in strong performance for the period. Shares of Dabur India grew in line with other consumer staples names due to an improved outlook which reflected a decline in key input costs, including crude derivatives and palm oil.
3
MFS Emerging Markets Equity Portfolio
Management Review – continued
An overweight allocation to the leisure sector was another factor that supported relative performance, led by the fund’s overweight positions in multinational media company Naspers (South Africa) and hotel operator Minor International (Thailand). The share price of Naspers grew as the company posted very strong year-on-year revenue growth. Most notable were the improved margins for both the pay-TV and e-commerce lines of businesses.
An underweight allocation to the energy sector also helped relative results. There were no individual stocks within the energy sector that were among the fund’s top relative contributors during the period.
Stocks in other sectors that contributed to relative performance included overweight positions in financial services company Housing Development Finance (India), banking group Kasikornbank (Thailand), semiconductor manufacturer Taiwan Semiconductor Manufacturing (Taiwan), banking services providers, Kotak Mahindra Bank (India) and Banco De Oro Unibank (Philippines), insurance company China Pacific Insurance (China) and semiconductor testing company Siliconware Precision Industries (Taiwan). Shares of Housing Development Finance grew steadily in the period after the company posted an increase in profits on the back of strong loan growth and lower cost of funds that were driven by expanding spreads.
During the reporting period, the fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was another 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 exposure than the benchmark.
Respectfully,
| | |
| Jose Luis Garcia | | Robert Lau |
| 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 Emerging Markets Equity Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/05/96 | | (6.72)% | | 1.18% | | 6.85% | | |
| | | Service Class | | 8/24/01 | | (6.99)% | | 0.93% | | 6.57% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI Emerging Markets Index (f) | | (1.82)% | | 2.11% | | 8.78% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Emerging Markets Equity Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 1.40% | | | | $1,000.00 | | | | $891.62 | | | | $6.68 | |
| | Hypothetical (h) | | | 1.40% | | | | $1,000.00 | | | | $1,018.15 | | | | $7.12 | |
| Service Class | | Actual | | | 1.65% | | | | $1,000.00 | | | | $890.27 | | | | $7.86 | |
| | Hypothetical (h) | | | 1.65% | | | | $1,000.00 | | | | $1,016.89 | | | | $8.39 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Emerging Markets Equity Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.6% | |
| Airlines – 0.5% | | | | | | | | |
| Copa Holdings S.A., “A” | | | 3,444 | | | $ | 356,936 | |
| | | | | | | | |
| Alcoholic Beverages – 2.9% | | | | | | | | |
| AmBev S.A., ADR | | | 119,533 | | | $ | 743,495 | |
| SABMiller PLC | | | 22,112 | | | | 1,144,347 | |
| | | | | | | | |
| | | | | | $ | 1,887,842 | |
| | | | | | | | |
| Apparel Manufacturers – 3.3% | | | | | | | | |
| Global Brands Group Holding Ltd. (a) | | | 2,666,000 | | | $ | 521,110 | |
| Li & Fung Ltd. | | | 454,000 | | | | 425,040 | |
| Samsonite International S.A. | | | 102,000 | | | | 302,528 | |
| Stella International Holdings | | | 345,000 | | | | 909,720 | |
| | | | | | | | |
| | | | | | $ | 2,158,398 | |
| | | | | | | | |
| Automotive – 3.7% | | | | | | | | |
| Guangzhou Automobile Group Co. Ltd., “H” | | | 1,292,000 | | | $ | 1,167,690 | |
| Kia Motors Corp. (a) | | | 26,219 | | | | 1,238,772 | |
| | | | | | | | |
| | | | | | $ | 2,406,462 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.7% | |
| BM&F Bovespa S.A. | | | 158,288 | | | $ | 586,539 | |
| Bolsa Mexicana de Valores S.A. de C.V. | | | 139,557 | | | | 252,747 | |
| Turkiye Sinai Kalkinma Bankasi A.S. | | | 306,694 | | | | 264,206 | |
| | | | | | | | |
| | | | | | $ | 1,103,492 | |
| | | | | | | | |
| Business Services – 2.4% | | | | | | | | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 29,509 | | | $ | 1,553,944 | |
| | | | | | | | |
| Cable TV – 4.4% | | | | | | | | |
| Astro Malaysia Holdings Berhad | | | 542,000 | | | $ | 469,687 | |
| Naspers Ltd. | | | 18,365 | | | | 2,364,458 | |
| | | | | | | | |
| | | | | | $ | 2,834,145 | |
| | | | | | | | |
| Computer Software – Systems – 0.0% | |
| Hon Hai Precision Industry Co. Ltd. | | | 11,010 | | | $ | 30,361 | |
| | | | | | | | |
| Conglomerates – 0.9% | | | | | | | | |
| First Pacific Co. Ltd. | | | 615,400 | | | $ | 607,467 | |
| | | | | | | | |
| Construction – 2.5% | | | | | | | | |
| Cemex S.A.B. de C.V., ADR (a) | | | 37,225 | | | $ | 379,323 | |
| Techtronic Industries Co. Ltd. | | | 388,000 | | | | 1,243,420 | |
| | | | | | | | |
| | | | | | $ | 1,622,743 | |
| | | | | | | | |
| Consumer Products – 3.3% | | | | | | | | |
| Dabur India Ltd. | | | 242,293 | | | $ | 895,693 | |
| LG Household & Health Care Ltd. (a) | | | 2,185 | | | | 1,238,462 | |
| | | | | | | | |
| | | | | | $ | 2,134,155 | |
| | | | | | | | |
| Consumer Services – 1.5% | | | | | | | | |
| Estacio Participacoes S.A. | | | 62,878 | | | $ | 556,450 | |
| Kroton Educacional S.A. | | | 32,004 | | | | 184,409 | |
| Localiza Rent a Car S.A. | | | 18,024 | | | | 240,089 | |
| | | | | | | | |
| | | | | | $ | 980,948 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Electronics – 12.7% | | | | | | | | |
| MediaTek, Inc. | | | 123,000 | | | $ | 1,790,625 | |
| Samsung Electronics Co. Ltd. | | | 1,942 | | | | 2,334,385 | |
| Seoul Semiconductor Co. Ltd. (a) | | | 11,084 | | | | 201,537 | |
| Siliconware Precision Industries Co. Ltd. | | | 227,000 | | | | 342,266 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 814,258 | | | | 3,593,101 | |
| | | | | | | | |
| | | | | | $ | 8,261,914 | |
| | | | | | | | |
| Energy – Independent – 3.8% | | | | | | | | |
| China Shenhua Energy Co. Ltd. | | | 342,500 | | | $ | 1,008,651 | |
| Gran Tierra Energy, Inc. (a) | | | 149,938 | | | | 575,593 | |
| INPEX Corp. | | | 52,000 | | | | 576,958 | |
| Reliance Industries Ltd. | | | 21,679 | | | | 304,957 | |
| | | | | | | | |
| | | | | | $ | 2,466,159 | |
| | | | | | | | |
| Energy – Integrated – 1.3% | | | | | | | | |
| NovaTek OAO, GDR | | | 7,739 | | | $ | 601,026 | |
| Petroleo Brasileiro S.A., ADR | | | 36,854 | | | | 269,034 | |
| | | | | | | | |
| | | | | | $ | 870,060 | |
| | | | | | | | |
| Engineering – Construction – 0.6% | |
| Mills Estruturas e Servicos de Engenharia S.A. | | | 59,039 | | | $ | 212,107 | |
| Promotora y Operadora de Infraestructura S.A.B. de C.V. (a) | | | 16,785 | | | | 201,813 | |
| | | | | | | | |
| | | | | | $ | 413,920 | |
| | | | | | | | |
| Food & Beverages – 2.7% | | | | | | | | |
| AVI Ltd. | | | 54,303 | | | $ | 363,932 | |
| BRF S.A. | | | 10,854 | | | | 253,760 | |
| Grupo Lala S.A.B. de C.V. (a) | | | 102,037 | | | | 196,622 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 10,218 | | | | 349,800 | |
| Want Want China Holdings Ltd. | | | 471,000 | | | | 617,881 | |
| | | | | | | | |
| | | | | | $ | 1,781,995 | |
| | | | | | | | |
| Food & Drug Stores – 2.9% | | | | | | | | |
| Dairy Farm International Holdings Ltd. | | | 39,600 | | | $ | 356,400 | |
| E-Mart Co. Ltd. (a) | | | 3,235 | | | | 595,996 | |
| Magnit OJSC (a) | | | 3,602 | | | | 575,193 | |
| Wumart Stores, Inc., “H” | | | 427,000 | | | | 364,654 | |
| | | | | | | | |
| | | | | | $ | 1,892,243 | |
| | | | | | | | |
| Forest & Paper Products – 0.5% | |
| Fibria Celulose S.A. (a) | | | 24,536 | | | $ | 297,891 | |
| | | | | | | | |
| Gaming & Lodging – 1.1% | | | | | | | | |
| Minor International PLC | | | 437,830 | | | $ | 432,507 | |
| Sands China Ltd. | | | 56,000 | | | | 272,373 | |
| | | | | | | | |
| | | | | | $ | 704,880 | |
| | | | | | | | |
| General Merchandise – 1.9% | | | | | | | | |
| PT Mitra Adiperkasa Tbk | | | 86,000 | | | $ | 34,967 | |
| S.A.C.I. Falabella | | | 41,565 | | | | 278,949 | |
| Woolworths Ltd. | | | 138,693 | | | | 916,847 | |
| | | | | | | | |
| | | | | | $ | 1,230,763 | |
| | | | | | | | |
7
MFS Emerging Markets Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Health Maintenance Organizations – 1.0% | |
| OdontoPrev S.A. | | | 124,806 | | | $ | 462,940 | |
| Qualicorp S.A. (a) | | | 18,094 | | | | 187,959 | |
| | | | | | | | |
| | | | | | $ | 650,899 | |
| | | | | | | | |
| Insurance – 3.7% | | | | | | | | |
| Brasil Insurance Participacoes e Administracao S.A. | | | 88,411 | | | $ | 111,987 | |
| Cathay Financial Holding Co. Ltd. | | | 496,900 | | | | 731,100 | |
| China Pacific Insurance Co. Ltd. | | | 247,600 | | | | 1,240,828 | |
| Samsung Fire & Marine Insurance Co. Ltd. (a) | | | 1,313 | | | | 336,372 | |
| | | | | | | | |
| | | | | | $ | 2,420,287 | |
| | | | | | | | |
| Internet – 1.7% | | | | | | | | |
| 51job, Inc., ADR (a) | | | 14,534 | | | $ | 521,044 | |
| NAVER Corp. (a) | | | 907 | | | | 585,941 | |
| | | | | | | | |
| | | | | | $ | 1,106,985 | |
| | | | | | | | |
| Machinery & Tools – 1.1% | | | | | | | | |
| Glory Ltd. | | | 16,800 | | | $ | 448,983 | |
| Haitian International Holdings Ltd. | | | 40,000 | | | | 83,873 | |
| TK Corp. (a) | | | 20,169 | | | | 209,712 | |
| | | | | | | | |
| | | | | | $ | 742,568 | |
| | | | | | | | |
| Major Banks – 1.8% | | | | | | | | |
| BOC Hong Kong Holdings Ltd. | | | 194,000 | | | $ | 645,905 | |
| Standard Chartered PLC | | | 37,343 | | | | 555,875 | |
| | | | | | | | |
| | | | | | $ | 1,201,780 | |
| | | | | | | | |
| Medical Equipment – 0.5% | | | | | | | | |
| Top Glove Corp. | | | 228,300 | | | $ | 295,128 | |
| | | | | | | | |
| Metals & Mining – 1.6% | | | | | | | | |
| Gerdau S.A., ADR | | | 71,712 | | | $ | 254,578 | |
| Grupo Mexico S.A.B. de C.V., “B” | | | 96,954 | | | | 281,391 | |
| Iluka Resources Ltd. | | | 45,504 | | | | 218,746 | |
| Vale S.A., ADR | | | 38,423 | | | | 314,300 | |
| | | | | | | | |
| | | | | | $ | 1,069,015 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.4% | |
| China Resources Gas Group Ltd. | | | 104,000 | | | $ | 269,023 | |
| | | | | | | | |
| Oil Services – 0.6% | | | | | | | | |
| Lamprell PLC (a) | | | 206,455 | | | $ | 383,662 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 18.8% | |
| Banco De Oro Unibank, Inc. | | | 354,130 | | | $ | 869,244 | |
| Bancolombia S.A., ADR | | | 5,144 | | | | 246,295 | |
| Bangkok Bank Public Co. Ltd. | | | 29,500 | | | | 174,974 | |
| China Construction Bank | | | 2,491,670 | | | | 2,027,917 | |
| Credicorp Ltd. | | | 4,689 | | | | 751,084 | |
| E.Sun Financial Holding Co. Ltd. | | | 1,698,191 | | | | 1,052,862 | |
| Gentera S.A.B. de C.V. (a) | | | 108,561 | | | | 218,171 | |
| Grupo Financiero Banorte S.A. de C.V. | | | 74,508 | | | | 410,069 | |
| Housing Development Finance Corp. Ltd. | | | 87,967 | | | | 1,573,735 | |
| Itau Unibanco Holding S.A., ADR | | | 34,624 | | | | 450,458 | |
| Kasikornbank Co. Ltd. | | | 54,000 | | | | 375,218 | |
| Kasikornbank PLC, NVDR | | | 164,300 | | | | 1,134,528 | |
| Komercni Banka A.S. | | | 3,063 | | | | 631,021 | |
| Kotak Mahindra Bank Ltd. | | | 43,486 | | | | 865,844 | |
| PT Bank Mandiri Tbk. | | | 333,500 | | | | 287,860 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Other Banks & Diversified Financials – continued | |
| Sberbank of Russia (a) | | | 422,565 | | | $ | 381,874 | |
| Turkiye Garanti Bankasi A.S. | | | 201,663 | | | | 808,052 | |
| | | | | | | | |
| | | | | | $ | 12,259,206 | |
| | | | | | | | |
| Pharmaceuticals – 0.5% | | | | | | | | |
| Genomma Lab Internacional S.A., “B” (a) | | | 172,788 | | | $ | 328,624 | |
| | | | | | | | |
| Railroad & Shipping – 1.0% | | | | | | | | |
| Diana Shipping, Inc. (a) | | | 58,382 | | | $ | 391,743 | |
| Pacific Basin Shipping Ltd. | | | 593,360 | | | | 237,628 | |
| | | | | | | | |
| | | | | | $ | 629,371 | |
| | | | | | | | |
| Real Estate – 2.8% | | | | | | | | |
| Concentradora Fibra Danhos S.A. de C.V., REIT | | | 106,631 | | | $ | 262,571 | |
| Concentradora Fibra Hotelera Mexicana S.A. de C.V., REIT | | | 208,928 | | | | 325,137 | |
| Emaar Malls Group PJSC (a) | | | 95,031 | | | | 69,338 | |
| Hang Lung Properties Ltd. | | | 215,000 | | | | 599,181 | |
| Iguatemi Empresa de Shopping Centers S.A. | | | 27,339 | | | | 251,140 | |
| Prologis Property Mexico S.A. de C.V., REIT | | | 157,322 | | | | 290,998 | |
| | | | | | | | |
| | | | | | $ | 1,798,365 | |
| | | | | | | | |
| Restaurants – 0.5% | | | | | | | | |
| Ajisen China Holdings Ltd. | | | 404,000 | | | $ | 307,898 | |
| | | | | | | | |
| Specialty Chemicals – 0.8% | | | | | | | | |
| LG Chemical Ltd. (a) | | | 2,004 | | | $ | 327,048 | |
| PTT Global Chemical PLC | | | 140,900 | | | | 219,487 | |
| | | | | | | | |
| | | | | | $ | 546,535 | |
| | | | | | | | |
| Telecommunications – Wireless – 3.3% | |
| America Movil S.A.B. de C.V., “L”, ADR | | | 20,194 | | | $ | 447,903 | |
| China Mobile Ltd. | | | 73,000 | | | | 857,577 | |
| MTN Group Ltd. | | | 42,840 | | | | 812,966 | |
| | | | | | | | |
| | | | | | $ | 2,118,446 | |
| | | | | | | | |
| Telephone Services – 1.2% | | | | | | | | |
| Hellenic Telecommunications Organization S.A. (a) | | | 27,178 | | | $ | 299,269 | |
| PT XL Axiata Tbk | | | 505,000 | | | | 196,883 | |
| Telekomunikacja Polska S.A. | | | 116,389 | | | | 272,638 | |
| | | | | | | | |
| | | | | | $ | 768,790 | |
| | | | | | | | |
| Tobacco – 0.9% | | | | | | | | |
| ITC Ltd. | | | 50,285 | | | $ | 292,771 | |
| PT Gudang Garam Tbk. | | | 59,000 | | | | 289,164 | |
| | | | | | | | |
| | | | | | $ | 581,935 | |
| | | | | | | | |
| Trucking – 0.5% | | | | | | | | |
| Imperial Holdings | | | 19,271 | | | $ | 305,511 | |
| | | | | | | | |
| Utilities – Electric Power – 1.3% | | | | | | | | |
| Alupar Investimento S.A., IEU | | | 32,861 | | | $ | 218,063 | |
| CESC Ltd. | | | 60,032 | | | | 633,633 | |
| | | | | | | | |
| | | | | | $ | 851,696 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $57,176,475) | | | | | | $ | 64,232,442 | |
| | | | | | | | |
8
MFS Emerging Markets Equity Portfolio
Portfolio of Investments – continued
| | | | | | | | | | | | | | |
| Issuer | | Strike
Price | | First
Exercise | | | Shares/Par | | | Value ($) | |
| | | | | | | | | | | | | | |
| WARRANTS – 0.0% | |
| Gaming & Lodging – 0.0% | |
Minor International PLC (1 share for 1 warrant) (a) (Identified Cost, $0) | | THB 40 | | | 2/25/15 | | | | 43,301 | | | $ | 6,396 | |
| | | | | | | | | | | | | | |
|
| MONEY MARKET FUNDS – 1.7% | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | | 1,136,726 | | | $ | 1,136,726 | |
| | | | | | | | | | | | | | |
Total Investments
(Identified Cost, $58,313,201) | | | | | | | $ | 65,375,564 | |
| | | | | | | | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.3)% | | | | | | | | (204,298 | ) |
| | | | | | | | | | | | | | |
| NET ASSETS – 100.0% | | | | | | | $ | 65,171,266 | |
| | | | | | | | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary Receipt |
| GDR | | Global Depositary Receipt |
| IEU | | International Equity Unit |
| NVDR | | Non-Voting Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $57,176,475) | | | $64,238,838 | | | | | |
Underlying affiliated funds, at cost and value | | | 1,136,726 | | | | | |
Total investments, at value (identified cost, $58,313,201) | | | $65,375,564 | | | | | |
Cash | | | 3,208 | | | | | |
Foreign currency, at value (identified cost, $15,891) | | | 16,012 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 139,950 | | | | | |
Fund shares sold | | | 27,789 | | | | | |
Dividends | | | 21,981 | | | | | |
Receivable from investment adviser | | | 3,941 | | | | | |
Other assets | | | 959 | | | | | |
Total assets | | | | | | | $65,589,404 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $185,917 | | | | | |
Fund shares reacquired | | | 20,151 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 55 | | | | | |
Distribution and/or service fees | | | 432 | | | | | |
Payable for independent Trustees’ compensation | | | 95 | | | | | |
Deferred country tax expense payable | | | 116,352 | | | | | |
Accrued expenses and other liabilities | | | 95,136 | | | | | |
Total liabilities | | | | | | | $418,138 | |
Net assets | | | | | | | $65,171,266 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $60,134,420 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies
(net of $115,724 deferred country tax) | | | 6,945,627 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (2,370,363 | ) | | | | |
Undistributed net investment income | | | 461,582 | | | | | |
Net assets | | | | | | | $65,171,266 | |
Shares of beneficial interest outstanding | | | | | | | 4,879,847 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $33,752,164 | | | | 2,507,564 | | | | $13.46 | |
Service Class | | | 31,419,102 | | | | 2,372,283 | | | | 13.24 | |
See Notes to Financial Statements
10
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $2,002,251 | | | | | |
Interest | | | 646 | | | | | |
Dividends from underlying affiliated funds | | | 656 | | | | | |
Foreign taxes withheld | | | (194,184 | ) | | | | |
Total investment income | | | | | | | $1,809,369 | |
Expenses | | | | | | | | |
Management fee | | | $819,090 | | | | | |
Distribution and/or service fees | | | 94,639 | | | | | |
Shareholder servicing costs | | | 13,062 | | | | | |
Administrative services fee | | | 21,142 | | | | | |
Independent Trustees’ compensation | | | 2,801 | | | | | |
Custodian fee | | | 179,924 | | | | | |
Shareholder communications | | | 13,852 | | | | | |
Audit and tax fees | | | 96,543 | | | | | |
Legal fees | | | 696 | | | | | |
Miscellaneous | | | 9,840 | | | | | |
Total expenses | | | | | | | $1,251,589 | |
Fees paid indirectly | | | (9 | ) | | | | |
Reduction of expenses by investment adviser | | | (64,319 | ) | | | | |
Net expenses | | | | | | | $1,187,261 | |
Net investment income | | | | | | | $622,108 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $36,059 country tax) | | | $361,211 | | | | | |
Foreign currency | | | (39,203 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $322,008 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $83,964 increase in deferred country tax) | | | $(5,550,239 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (412 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(5,550,651 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(5,228,643 | ) |
Change in net assets from operations | | | | | | | $(4,606,535 | ) |
See Notes to Financial Statements
11
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
| Net investment income | | | $622,108 | | | | $598,188 | |
| Net realized gain (loss) on investments and foreign currency | | | 322,008 | | | | 1,670,102 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (5,550,651 | ) | | | (6,905,299 | ) |
Change in net assets from operations | | | $(4,606,535 | ) | | | $(4,637,009 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(417,083 | ) | | | $(1,339,009 | ) |
Change in net assets from fund share transactions | | | $(14,715,552 | ) | | | $1,220,865 | |
Total change in net assets | | | $(19,739,170 | ) | | | $(4,755,153 | ) |
Net assets | | | | | | | | |
At beginning of period | | | 84,910,436 | | | | 89,665,589 | |
At end of period (including undistributed net investment income of $461,582 and
$416,089, respectively) | | | $65,171,266 | | | | $84,910,436 | |
See Notes to Financial Statements
12
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $14.51 | | | | $15.56 | | | | $13.84 | | | | $17.88 | | | | $14.54 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.13 | | | | $0.12 | | | | $0.18 | | | | $0.21 | | | | $0.13 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (1.08 | ) | | | (0.93 | ) | | | 2.35 | | | | (3.46 | ) | | | 3.31 | |
Total from investment operations | | | $(0.95 | ) | | | $(0.81 | ) | | | $2.53 | | | | $(3.25 | ) | | | $3.44 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.10 | ) | | | $(0.24 | ) | | | $(0.17 | ) | | | $(0.09 | ) | | | $(0.10 | ) |
From net realized gain on investments | | | — | | | | — | | | | (0.64 | ) | | | (0.70 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.10 | ) | | | $(0.24 | ) | | | $(0.81 | ) | | | $(0.79 | ) | | | $(0.10 | ) |
Net asset value, end of period (x) | | | $13.46 | | | | $14.51 | | | | $15.56 | | | | $13.84 | | | | $17.88 | |
Total return (%) (k)(r)(s)(x) | | | (6.66 | ) | | | (5.09 | ) | | | 18.76 | | | | (18.58 | ) | | | 23.82 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.48 | | | | 1.46 | | | | 1.35 | | | | 1.36 | | | | 1.55 | |
Expenses after expense reductions (f) | | | 1.40 | | | | 1.40 | | | | 1.35 | | | | 1.36 | | | | 1.40 | |
Net investment income | | | 0.89 | | | | 0.78 | | | | 1.23 | | | | 1.28 | | | | 0.86 | |
Portfolio turnover | | | 49 | | | | 36 | | | | 33 | | | | 34 | | | | 39 | |
Net assets at end of period (000 omitted) | | | $33,752 | | | | $45,293 | | | | $48,803 | | | | $88,928 | | | | $99,316 | |
See Notes to Financial Statements
13
MFS Emerging Markets Equity Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $14.29 | | | | $15.32 | | | | $13.64 | | | | $17.64 | | | | $14.36 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.10 | | | | $0.08 | | | | $0.13 | | | | $0.16 | | | | $0.09 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (1.09 | ) | | | (0.90 | ) | | | 2.32 | | | | (3.40 | ) | | | 3.28 | |
Total from investment operations | | | $(0.99 | ) | | | $(0.82 | ) | | | $2.45 | | | | $(3.24 | ) | | | $3.37 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.06 | ) | | | $(0.21 | ) | | | $(0.13 | ) | | | $(0.06 | ) | | | $(0.09 | ) |
From net realized gain on investments | | | — | | | | — | | | | (0.64 | ) | | | (0.70 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.06 | ) | | | $(0.21 | ) | | | $(0.77 | ) | | | $(0.76 | ) | | | $(0.09 | ) |
Net asset value, end of period (x) | | | $13.24 | | | | $14.29 | | | | $15.32 | | | | $13.64 | | | | $17.64 | |
Total return (%) (k)(r)(s)(x) | | | (6.99 | ) | | | (5.28 | ) | | | 18.45 | | | | (18.77 | ) | | | 23.54 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.73 | | | | 1.71 | | | | 1.60 | | | | 1.61 | | | | 1.80 | |
Expenses after expense reductions (f) | | | 1.65 | | | | 1.65 | | | | 1.60 | | | | 1.61 | | | | 1.65 | |
Net investment income | | | 0.70 | | | | 0.56 | | | | 0.90 | | | | 1.02 | | | | 0.62 | |
Portfolio turnover | | | 49 | | | | 36 | | | | 33 | | | | 34 | | | | 39 | |
Net assets at end of period (000 omitted) | | | $31,419 | | | | $39,617 | | | | $40,863 | | | | $36,618 | | | | $37,146 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
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 diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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
15
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
China | | | $828,942 | | | | $7,638,094 | | | | $— | | | | $8,467,036 | |
Taiwan | | | — | | | | 7,540,315 | | | | — | | | | 7,540,315 | |
South Korea | | | 1,238,462 | | | | 5,829,762 | | | | — | | | | 7,068,224 | |
Hong Kong | | | 1,083,969 | | | | 5,036,802 | | | | — | | | | 6,120,771 | |
Brazil | | | 3,861,319 | | | | 2,083,685 | | | | — | | | | 5,945,004 | |
South Africa | | | — | | | | 4,763,713 | | | | — | | | | 4,763,713 | |
India | | | — | | | | 4,566,633 | | | | — | | | | 4,566,633 | |
Mexico | | | 3,595,367 | | | | — | | | | — | | | | 3,595,367 | |
Thailand | | | 6,396 | | | | 2,336,713 | | | | — | | | | 2,343,109 | |
Other Countries | | | 6,446,374 | | | | 7,382,292 | | | | — | | | | 13,828,666 | |
| Mutual Funds | | | 1,136,726 | | | | — | | | | — | | | | 1,136,726 | |
| Total Investments | | | $18,197,555 | | | | $47,178,009 | | | | $— | | | | $65,375,564 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $27,288,845 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $732,938 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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.
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. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be
16
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $417,083 | | | | $1,339,009 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $59,533,907 | |
| Gross appreciation | | | 12,231,488 | |
| Gross depreciation | | | (6,389,831 | ) |
| Net unrealized appreciation (depreciation) | | | $5,841,657 | |
| Undistributed ordinary income | | | 465,682 | |
| Capital loss carryforwards | | | (1,149,657 | ) |
| Other temporary differences | | | (120,836 | ) |
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such losses are characterized as follows:
| | | | |
| Short-Term | | | $(896,877 | ) |
| Long-Term | | | (252,780 | ) |
| Total | | | $(1,149,657 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the above net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
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
17
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $249,462 | | | | $737,887 | |
| Service Class | | | 167,621 | | | | 601,122 | |
| Total | | | $417,083 | | | | $1,339,009 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $3,547, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, this reduction amounted to $60,631, which is included in the 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, 2014, the fee was $12,854, which equated to 0.0165% 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, 2014, these costs amounted to $208.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0271% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms
18
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $373 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $141, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, aggregated $37,491,341 and $53,550,735, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 256,157 | | | | $3,612,753 | | | | 435,731 | | | | $6,398,926 | |
Service Class | | | 1,280,415 | | | | 17,736,024 | | | | 993,565 | | | | 14,312,278 | |
| | | 1,536,572 | | | | $21,348,777 | | | | 1,429,296 | | | | $20,711,204 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 16,115 | | | | $249,462 | | | | 54,862 | | | | $737,887 | |
Service Class | | | 10,999 | | | | 167,621 | | | | 45,368 | | | | 601,122 | |
| | | 27,114 | | | | $417,083 | | | | 100,230 | | | | $1,339,009 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (886,606 | ) | | | $(12,913,777 | ) | | | (505,032 | ) | | | $(7,399,172 | ) |
Service Class | | | (1,691,499 | ) | | | (23,567,635 | ) | | | (934,004 | ) | | | (13,430,176 | ) |
| | | (2,578,105 | ) | | | $(36,481,412 | ) | | | (1,439,036 | ) | | | $(20,829,348 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (614,334 | ) | | | $(9,051,562 | ) | | | (14,439 | ) | | | $(262,359 | ) |
Service Class | | | (400,085 | ) | | | (5,663,990 | ) | | | 104,929 | | | | 1,483,224 | |
| | | (1,014,419 | ) | | | $(14,715,552 | ) | | | 90,490 | | | | $1,220,865 | |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Growth Allocation Portfolio was the owner of record of approximately 8% of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $297 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
19
MFS Emerging Markets Equity Portfolio
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 165,075 | | | | 25,771,663 | | | | (24,800,012 | ) | | | 1,136,726 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $656 | | | | $1,136,726 | |
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Emerging Markets Equity Portfolio as of December 31, 2014, 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 13, 2015
21
MFS Emerging Markets Equity Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
22
MFS Emerging Markets Equity Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
23
MFS Emerging Markets Equity Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Jose Luis Garcia Robert Lau | | |
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 5th quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed concern to MFS about the substandard investment performance of the Fund’s retail counterpart, MFS Emerging Markets Equity Fund, which has substantially similar investment strategies and experienced substantially similar investment performance as the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, including more recent performance information, as well as during investment review meetings conducted with portfolio management personnel during the course of the year as to MFS’ efforts to improve the
25
MFS Emerging Markets Equity Portfolio
Board Review of Investment Advisory Agreement – continued
performance of the Fund’s retail counterpart. In addition, the Trustees requested that they receive a separate update on the Fund’s retail counterpart at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund’s retail counterpart.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was lower than the Lipper expense group median and the Fund’s total expense ratio was higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $500 million. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
26
MFS Emerging Markets Equity Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” 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 $2,002,883. The fund intends to pass through foreign tax credits of $284,140 for the fiscal year.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® GLOBAL
GOVERNMENTS PORTFOLIO
MFS® Variable Insurance Trust II
WGS-ANN
MFS® GLOBAL GOVERNMENTS PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Governments Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Global Governments Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| Non-U.S. Government Bonds | | | 67.2% | |
| U.S. Treasury Securities | | | 24.3% | |
| Investment Grade Corporates | | | 1.3% | |
| U.S. Government Agencies | | | 0.7% | |
| Mortgage-Backed Securities | | | 0.6% | |
| Commercial Mortgage-Backed Securities (o) | | | 0.0% | |
|
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 15.3% | |
| AA | | | 15.5% | |
| A | | | 19.1% | |
| BBB | | | 18.6% | |
| CCC (o) | | | 0.0% | |
| C (o) | | | 0.0% | |
| U.S. Government | | | 24.3% | |
| Federal Agencies | | | 1.3% | |
| Cash & Other | | | 5.9% | |
| | | | |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 7.3 | |
| Average Effective Maturity (m) | | | 9.7 yrs. | |
|
| Issuer country weightings (i)(x) | |
| United States | | | 31.6% | |
| Japan | | | 19.7% | |
| Italy | | | 11.7% | |
| Spain | | | 6.3% | |
| United Kingdom | | | 5.2% | |
| Germany | | | 4.4% | |
| France | | | 3.9% | |
| Australia | | | 3.2% | |
| Belgium | | | 3.1% | |
| Other Countries | | | 10.9% | |
|
| Currency exposure weightings (i)(y) | |
| United States Dollar | | | 38.9% | |
| Euro | | | 28.0% | |
| Japanese Yen | | | 21.9% | |
| British Pound Sterling | | | 7.8% | |
| Canadian Dollar | | | 1.4% | |
| Australian Dollar | | | 1.2% | |
| Danish Krone | | | 0.5% | |
| Swedish Krona | | | 0.3% | |
| New Zealand Dollar (o) | | | 0.0% | |
| Other Currencies (o) | | | 0.0% | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (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 due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
| (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. |
| (x) | | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
2
MFS Global Governments Portfolio
Portfolio Composition – continued
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
The portfolio is actively managed and current holdings may be different.
3
MFS Global Governments Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2014, Initial Class shares of the MFS Global Governments Portfolio (“fund”) provided a total return of 0.73%, while Service Class shares of the fund provided a total return of 0.49%. These compare with a return of 0.67% for the fund’s benchmark, the JPMorgan Global Government Bond Index (Unhedged).
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Factors Affecting Performance
Strong bond selection and a positive impact from the fund’s currency exposure, particularly long US dollar, contributed to performance relative to the JPMorgan Global Government Bond Index (Unhedged). An overweight exposure to peripheral euro zone, Scandinavian, and dollar bloc duration further supported relative performance. An out-of-benchmark exposure to Ireland also helped as these issues performed well over the period.
The fund’s yield curve (y) positioning in United States and United Kingdom, particularly a lesser exposure to shifts at the long end (centered around maturities of 10 or more years) of the yield curve, held back relative returns.
Respectfully,
| | |
| Matthew Ryan | | Erik Weisman |
| Portfolio Manager | | 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 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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/16/88 | | 0.73% | | 1.28% | | 2.63% | | |
| | | Service Class | | 8/24/01 | | 0.49% | | 1.03% | | 2.37% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | JPMorgan Global Government Bond Index (Unhedged) (f) | | 0.67% | | 2.13% | | 3.36% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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 7/01/14 | | | Ending Account Value 12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.83% | | | | $1,000.00 | | | | $956.92 | | | | $4.09 | |
| | Hypothetical (h) | | | 0.83% | | | | $1,000.00 | | | | $1,021.02 | | | | $4.23 | |
| Service Class | | Actual | | | 1.08% | | | | $1,000.00 | | | | $955.63 | | | | $5.32 | |
| | Hypothetical (h) | | | 1.08% | | | | $1,000.00 | | | | $1,019.76 | | | | $5.50 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Global Governments Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 93.0% | | | | | |
| Foreign Bonds – 67.1% | | | | | |
| Australia – 3.1% | | | | | |
| Commonwealth of Australia, 5.75%, 5/15/21 | | AUD | 5,800,000 | | | $ | 5,653,209 | |
| Commonwealth of Australia, 4.75%, 4/21/27 | | AUD | 1,000,000 | | | | 969,483 | |
| | | | | | | | |
| | | | | | $ | 6,622,692 | |
| | | | | | | | |
| Austria – 0.5% | | | | | |
| Republic of Austria, 1.75%, 10/20/23 | | EUR | 776,000 | | | $ | 1,034,401 | |
| | | | | | | | |
| Belgium – 3.1% | | | | | |
| Kingdom of Belgium, 4.25%, 9/28/21 | | EUR | 3,452,000 | | | $ | 5,251,759 | |
| Kingdom of Belgium, 4%, 3/28/32 | | EUR | 743,000 | | | | 1,241,598 | |
| | | | | | | | |
| | | | | | $ | 6,493,357 | |
| | | | | | | | |
| Canada – 0.4% | | | | | |
| Government of Canada, 5.75%, 6/01/33 | | CAD | 411,000 | | | $ | 541,421 | |
| Government of Canada, 4%, 6/01/41 | | CAD | 356,000 | | | | 406,109 | |
| | | | | | | | |
| | | | | | $ | 947,530 | |
| | | | | | | | |
| Denmark – 0.8% | | | | | |
| Kingdom of Denmark, 3%, 11/15/21 | | DKK | 9,372,000 | | | $ | 1,799,582 | |
| | | | | | | | |
| Finland – 0.5% | | | | | |
| Republic of Finland, 3.875%, 9/15/17 | | EUR | 771,000 | | | $ | 1,031,461 | |
| | | | | | | | |
| France – 3.8% | | | | | |
| Republic of France, 2.5%, 10/25/20 | | EUR | 1,006,000 | | | $ | 1,373,539 | |
| Republic of France, 6%, 10/25/25 | | EUR | 1,428,000 | | | | 2,629,305 | |
| Republic of France, 4.75%, 4/25/35 | | EUR | 2,171,000 | | | | 4,044,800 | |
| | | | | | | | |
| | | | | | $ | 8,047,644 | |
| | | | | | | | |
| Germany – 4.3% | | | | | |
| Federal Republic of Germany, 3.25%, 7/04/21 | | EUR | 3,647,000 | | | $ | 5,302,680 | |
| Federal Republic of Germany, 6.25%, 1/04/30 | | EUR | 1,505,000 | | | | 3,184,784 | |
| Federal Republic of Germany, 2.5%, 7/04/44 | | EUR | 450,000 | | | | 692,311 | |
| | | | | | | | |
| | | | | | $ | 9,179,775 | |
| | | | | | | | |
| Iceland – 0.6% | | | | | |
| Republic of Iceland, 4.875%, 6/16/16 (n) | | $ | 1,122,000 | | | $ | 1,174,010 | |
| | | | | | | | |
| Italy – 11.5% | | | | | |
| Republic of Italy, 5.25%, 8/01/17 | | EUR | 8,803,000 | | | $ | 11,910,838 | |
| Republic of Italy, 3.75%, 3/01/21 | | EUR | 9,004,000 | | | | 12,533,421 | |
| | | | | | | | |
| | | | | | $ | 24,444,259 | |
| | | | | | | | |
| Japan – 19.1% | | | | | |
| Government of Japan, 2%, 3/20/52 | | JPY | 122,900,000 | | | $ | 1,219,008 | |
| Government of Japan, 1.1%, 6/20/20 | | JPY | 1,645,200,000 | | | | 14,528,251 | |
| Government of Japan, 2.1%, 9/20/24 | | JPY | 1,099,350,000 | | | | 10,750,565 | |
| Government of Japan, 2.2%, 9/20/27 | | JPY | 868,900,000 | | | | 8,771,973 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Foreign Bonds – continued | | | | | |
| Japan – continued | | | | | |
| Government of Japan, 1.5%, 3/20/34 | | JPY | 46,000,000 | | | $ | 416,610 | |
| Government of Japan, 2.4%, 3/20/37 | | JPY | 448,600,000 | | | | 4,655,770 | |
| | | | | | | | |
| | | | | | $ | 40,342,177 | |
| | | | | | | | |
| Netherlands – 2.9% | | | | | |
| Kingdom of the Netherlands, 3.5%, 7/15/20 | | EUR | 3,022,000 | | | $ | 4,329,534 | |
| Kingdom of the Netherlands, 5.5%, 1/15/28 | | EUR | 970,000 | | | | 1,829,968 | |
| | | | | | | | |
| | | | | | $ | 6,159,502 | |
| | | | | | | | |
| New Zealand – 2.2% | | | | | |
| Government of New Zealand, 5%, 3/15/19 | | NZD | 2,700,000 | | | $ | 2,223,489 | |
| Government of New Zealand, 5.5%, 4/15/23 | | NZD | 2,792,000 | | | | 2,460,373 | |
| | | | | | | | |
| | | | | | $ | 4,683,862 | |
| | | | | | | | |
| Norway – 0.8% | | | | | |
| Government of Norway, 3.75%, 5/25/21 | | NOK | 11,100,000 | | | $ | 1,717,782 | |
| | | | | | | | |
| Spain – 6.2% | | | | | |
| Kingdom of Spain, 5.4%, 1/31/23 | | EUR | 1,790,000 | | | $ | 2,832,617 | |
| Kingdom of Spain, 5.5%, 7/30/17 | | EUR | 3,781,000 | | | | 5,154,878 | |
| Kingdom of Spain, 4.6%, 7/30/19 | | EUR | 3,573,000 | | | | 5,061,986 | |
| | | | | | | | |
| | | | | | $ | 13,049,481 | |
| | | | | | | | |
| Sweden – 2.1% | | | | | |
| Kingdom of Sweden, 5%, 12/01/20 | | SEK | 16,105,000 | | | $ | 2,616,904 | |
| Kingdom of Sweden, 3.5%, 6/01/22 | | SEK | 4,745,000 | | | | 735,292 | |
| Nordea Bank AB, FRN, 0.693%, 5/13/16 (n) | | $ | 1,000,000 | | | | 1,002,322 | |
| | | | | | | | |
| | | | | | $ | 4,354,518 | |
| | | | | | | | |
| United Kingdom – 5.2% | | | | | |
| HSBC Bank PLC, FRN, 0.872%, 5/15/18 (n) | | $ | 403,000 | | | $ | 404,610 | |
| United Kingdom Treasury, 4.25%, 12/07/27 | | GBP | 844,000 | | | | 1,656,813 | |
| United Kingdom Treasury, 4.25%, 3/07/36 | | GBP | 3,232,000 | | | | 6,597,818 | |
| United Kingdom Treasury, 3.25%, 1/22/44 | | GBP | 336,000 | | | | 604,162 | |
| United Kingdom Treasury, 3.75%, 7/22/52 | | GBP | 826,000 | | | | 1,683,500 | |
| | | | | | | | |
| | | | | | $ | 10,946,903 | |
| | | | | | | | |
| Total Foreign Bonds | | | | | | $ | 142,028,936 | |
| | | | | | | | |
7
MFS Global Governments Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| U.S. Bonds – 25.9% | | | | | | | | |
| Asset-Backed & Securitized – 0.0% | | | | | |
| Commercial Mortgage Asset Trust, FRN, 0.494%, 1/17/32 (i)(z) | | $ | 909,739 | | | $ | 4,611 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.735%, 1/12/43 (i)(z) | | | 100,452 | | | | 169 | |
| | | | | | | | |
| | | | | | $ | 4,780 | |
| | | | | | | | |
| Automotive – 0.6% | | | | | |
| Toyota Motor Credit Corp., FRN, 0.522%, 5/17/16 | | $ | 1,227,000 | | | $ | 1,229,351 | |
| | | | | | | | |
| Mortgage-Backed – 0.6% | | | | | |
| Fannie Mae, 5.5%, 2/01/15 | | $ | 45,974 | | | $ | 45,889 | |
| Fannie Mae, 4.78%, 8/01/15 | | | 83,828 | | | | 84,941 | |
| Fannie Mae, 4.856%, 8/01/15 | | | 40,358 | | | | 40,885 | |
| Fannie Mae, 5.432%, 2/01/16 | | | 72,032 | | | | 74,090 | |
| Fannie Mae, 5.09%, 12/01/16 | | | 81,780 | | | | 86,988 | |
| Fannie Mae, 5.05%, 1/01/17 | | | 50,198 | | | | 52,786 | |
| Fannie Mae, 5.236%, 1/01/18 | | | 83,628 | | | | 87,298 | |
| Fannie Mae, 5.1%, 3/01/19 | | | 60,076 | | | | 67,050 | |
| Fannie Mae, 5.18%, 3/01/19 | | | 60,150 | | | | 65,075 | |
| Freddie Mac, 1.426%, 8/25/17 | | | 560,000 | | | | 563,095 | |
| Freddie Mac, 3.882%, 11/25/17 | | | 89,000 | | | | 94,647 | |
| Freddie Mac, 5.085%, 3/25/19 | | | 43,000 | | | | 48,276 | |
| Freddie Mac, 3.32%, 2/25/23 | | | 5,000 | | | | 5,263 | |
| | | | | | | | |
| | | | | | $ | 1,316,283 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.7% | |
| Aid-Egypt, 4.45%, 9/15/15 | | $ | 301,000 | | | $ | 309,640 | |
| Small Business Administration, 4.57%, 6/01/25 | | | 14,159 | | | | 15,187 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| U.S. Government Agencies and Equivalents – continued | |
| Small Business Administration, 5.09%, 10/01/25 | | $ | 14,540 | | | $ | 15,814 | |
| Small Business Administration, 5.21%, 1/01/26 | | | 210,650 | | | | 227,528 | |
| Small Business Administration, 2.22%, 3/01/33 | | | 949,376 | | | | 937,033 | |
| | | | | | | | |
| | | | | | $ | 1,505,202 | |
| | | | | | | | |
| U.S. Treasury Obligations – 24.0% | | | | | |
| U.S. Treasury Bonds, 5.25%, 2/15/29 | | $ | 4,242,000 | | | $ | 5,705,490 | |
| U.S. Treasury Bonds, 4.5%, 8/15/39 | | | 8,960,400 | | | | 11,949,536 | |
| U.S. Treasury Bonds, 3.625%, 2/15/44 | | | 1,904,000 | | | | 2,242,257 | |
| U.S. Treasury Notes, 4.125%, 5/15/15 | | | 9,403,000 | | | | 9,541,845 | |
| U.S. Treasury Notes, 4.75%, 8/15/17 | | | 9,315,000 | | | | 10,226,119 | |
| U.S. Treasury Notes, 3.5%, 5/15/20 | | | 4,397,000 | | | | 4,795,478 | |
| U.S. Treasury Notes, 2.75%, 2/15/24 | | | 6,143,000 | | | | 6,460,231 | |
| | | | | | | | |
| | | | | | $ | 50,920,956 | |
| | | | | | | | |
| Total U.S. Bonds | | | | | | $ | 54,976,572 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $204,712,308) | | | $ | 197,005,508 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 5.7% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 11,963,279 | | | $ | 11,963,279 | |
| | | | | | | | |
Total Investments
(Identified Cost, $216,675,587) | | | $ | 208,968,787 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.3% | | | | | | | 2,785,112 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 211,753,899 | |
| | | | | | | | |
| (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 $2,580,942, representing 1.2% of net assets. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 | | | Value | |
| Commercial Mortgage Asset Trust, FRN, 0.494%, 1/17/32 | | 8/25/03-12/02/11 | | | $5,282 | | | | $4,611 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.735%, 1/12/43 | | 12/11/03-11/30/11 | | | 176 | | | | 169 | |
| Total Restricted Securities | | | | $4,780 | |
| % of Net assets | | | | 0.0% | |
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. |
| PLC | | Public Limited Company |
8
MFS Global Governments Portfolio
Portfolio of Investments – continued
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 12/31/14
Forward Foreign Currency Exchange Contracts at 12/31/14
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | |
| | SELL | | | AUD | | | Citibank N.A. | | 110,000 | | 1/09/15 | | $ | 95,569 | | | $ | 89,778 | | | $ | 5,791 | |
| | SELL | | | AUD | | | Deutsche Bank AG | | 3,719,000 | | 1/09/15 | | | 3,148,383 | | | | 3,035,306 | | | | 113,077 | |
| | SELL | | | AUD | | | Goldman Sachs International | | 5,167,851 | | 1/09/15 | | | 4,371,390 | | | | 4,217,803 | | | | 153,587 | |
| | SELL | | | CAD | | | Citibank N.A. | | 164,000 | | 1/09/15 | | | 144,927 | | | | 141,139 | | | | 3,788 | |
| | SELL | | | CAD | | | Goldman Sachs International | | 3,282,000 | | 1/09/15 | | | 2,896,506 | | | | 2,824,504 | | | | 72,002 | |
| | SELL | | | CAD | | | Merrill Lynch International Bank | | 2,211,898 | | 1/09/15 | | | 1,968,511 | | | | 1,903,569 | | | | 64,942 | |
| | SELL | | | CHF | | | UBS AG | | 2,057,000 | | 1/09/15 | | | 2,132,170 | | | | 2,069,099 | | | | 63,071 | |
| | SELL | | | DKK | | | Citibank N.A. | | 1,149,706 | | 1/09/15 | | | 194,605 | | | | 186,817 | | | | 7,788 | |
| | SELL | | | DKK | | | Goldman Sachs International | | 765,000 | | 1/09/15 | | | 129,127 | | | | 124,305 | | | | 4,822 | |
| | SELL | | | DKK | | | Morgan Stanley Capital Services, Inc. | | 2,363,359 | | 1/09/15 | | | 396,689 | | | | 384,024 | | | | 12,665 | |
| | SELL | | | EUR | | | Citibank N.A. | | 236,000 | | 1/09/15 | | | 301,412 | | | | 285,584 | | | | 15,828 | |
| | SELL | | | EUR | | | Credit Suisse Group | | 17,265,283 | | 1/09/15 | | | 21,815,462 | | | | 20,892,749 | | | | 922,713 | |
| | SELL | | | EUR | | | Deutsche Bank AG | | 4,739,932 | | 1/09/15-3/18/15 | | | 5,941,858 | | | | 5,736,307 | | | | 205,551 | |
| | SELL | | | EUR | | | Goldman Sachs International | | 2,741,807 | | 1/09/15 | | | 3,400,436 | | | | 3,317,866 | | | | 82,570 | |
| | SELL | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 190,000 | | 1/09/15 | | | 240,532 | | | | 229,919 | | | | 10,613 | |
| | SELL | | | GBP | | | Barclays Bank PLC | | 386,321 | | 1/09/15 | | | 614,617 | | | | 602,101 | | | | 12,516 | |
| | SELL | | | GBP | | | Morgan Stanley Capital Services, Inc. | | 663,455 | | 2/23/15 | | | 1,047,007 | | | | 1,033,660 | | | | 13,347 | |
| | BUY | | | JPY | | | Credit Suisse Group | | 265,333,458 | | 1/09/15 | | | 2,185,214 | | | | 2,215,229 | | | | 30,015 | |
| | SELL | | | JPY | | | Barclays Bank PLC | | 93,652,000 | | 1/09/15 | | | 794,574 | | | | 781,887 | | | | 12,687 | |
| | SELL | | | JPY | | | Deutsche Bank AG | | 248,522,000 | | 1/09/15 | | | 2,107,751 | | | | 2,074,873 | | | | 32,878 | |
| | SELL | | | JPY | | | Goldman Sachs International | | 294,681,271 | | 1/09/15 | | | 2,542,236 | | | | 2,460,250 | | | | 81,986 | |
| | SELL | | | JPY | | | Morgan Stanley Capital Services, Inc. | | 310,964,253 | | 1/09/15 | | | 2,847,830 | | | | 2,596,194 | | | | 251,636 | |
| | SELL | | | NOK | | | Barclays Bank PLC | | 12,867,162 | | 1/09/15 | | | 1,804,664 | | | | 1,726,239 | | | | 78,425 | |
| | SELL | | | NOK | | | Goldman Sachs International | | 13,878,000 | | 1/12/15 | | | 2,143,940 | | | | 1,861,688 | | | | 282,252 | |
| | BUY | | | NZD | | | Goldman Sachs International | | 3,622,000 | | 1/09/15 | | | 2,796,539 | | | | 2,824,508 | | | | 27,969 | |
| | SELL | | | SEK | | | Barclays Bank PLC | | 856,000 | | 1/09/15 | | | 119,206 | | | | 109,808 | | | | 9,398 | |
| | SELL | | | SEK | | | Goldman Sachs International | | 20,355,701 | | 1/09/15 | | | 2,814,934 | | | | 2,611,230 | | | | 203,704 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 2,775,621 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Liability Derivatives | | | | | | | | | | | | |
| | BUY | | | AUD | | | Goldman Sachs International | | 1,430,000 | | 1/09/15 | | $ | 1,194,017 | | | $ | 1,167,112 | | | $ | (26,905 | ) |
| | BUY | | | AUD | | | Westpac Banking Corp. | | 2,619,045 | | 1/09/15 | | | 2,181,935 | | | | 2,137,565 | | | | (44,370 | ) |
| | BUY | | | CAD | | | Citibank N.A. | | 1,339,337 | | 1/09/15 | | | 1,175,049 | | | | 1,152,639 | | | | (22,410 | ) |
| | BUY | | | CAD | | | Goldman Sachs International | | 5,033,387 | | 1/09/15 | | | 4,402,492 | | | | 4,331,756 | | | | (70,736 | ) |
| | BUY | | | CAD | | | Morgan Stanley Capital Services, Inc. | | 1,483,675 | | 1/09/15 | | | 1,310,928 | | | | 1,276,857 | | | | (34,071 | ) |
| | BUY | | | CHF | | | Goldman Sachs International | | 2,057,000 | | 1/12/15 | | | 2,152,944 | | | | 2,069,198 | | | | (83,746 | ) |
9
MFS Global Governments Portfolio
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/14 – continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives – continued | | | | | | | | | | | | | | | | |
| | BUY | | | EUR | | | Citibank N.A. | | 2,279,000 | | 1/09/15 | | $ | 2,840,870 | | | $ | 2,757,822 | | | $ | (83,048 | ) |
| | BUY | | | EUR | | | Deutsche Bank AG | | 1,715,000 | | 1/09/15 | | | 2,151,171 | | | | 2,075,325 | | | | (75,846 | ) |
| | BUY | | | EUR | | | Goldman Sachs International | | 9,370,351 | | 1/09/15-1/12/15 | | | 11,920,759 | | | | 11,339,166 | | | | (581,593 | ) |
| | BUY | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 1,520,000 | | 1/09/15 | | | 1,937,366 | | | | 1,839,355 | | | | (98,011 | ) |
| | BUY | | | EUR | | | Royal Bank of Scotland Group PLC | | 860,000 | | 1/09/15 | | | 1,063,733 | | | | 1,040,688 | | | | (23,045 | ) |
| | BUY | | | GBP | | | Credit Suisse Group | | 2,303,529 | | 1/09/15 | | | 3,685,259 | | | | 3,590,170 | | | | (95,089 | ) |
| | BUY | | | GBP | | | Goldman Sachs International | | 205,000 | | 1/09/15-1/12/15 | | | 329,325 | | | | 319,499 | | | | (9,826 | ) |
| | BUY | | | GBP | | | Merrill Lynch International Bank | | 2,303,529 | | 1/09/15 | | | 3,687,938 | | | | 3,590,170 | | | | (97,768 | ) |
| | BUY | | | JPY | | | Brown Brothers Harriman | | 127,773,000 | | 1/09/15 | | | 1,067,784 | | | | 1,066,758 | | | | (1,026 | ) |
| | BUY | | | JPY | | | Deutsche Bank AG | | 271,561,046 | | 1/09/15 | | | 2,511,001 | | | | 2,267,223 | | | | (243,778 | ) |
| | BUY | | | JPY | | | Goldman Sachs International | | 95,765,339 | | 1/09/15-2/23/15 | | | 835,936 | | | | 799,808 | | | | (36,128 | ) |
| | BUY | | | JPY | | | JPMorgan Chase Bank N.A. | | 246,906,000 | | 1/09/15 | | | 2,118,566 | | | | 2,061,381 | | | | (57,185 | ) |
| | BUY | | | JPY | | | Morgan Stanley Capital Services, Inc. | | 780,514,000 | | 1/09/15 | | | 6,827,793 | | | | 6,516,395 | | | | (311,398 | ) |
| | SELL | | | JPY | | | Brown Brothers Harriman | | 127,107,000 | | 1/09/15 | | | 1,047,851 | | | | 1,061,197 | | | | (13,346 | ) |
| | BUY | | | NOK | | | JPMorgan Chase Bank N.A. | | 13,885,742 | | 1/09/15 | | | 2,141,160 | | | | 1,862,890 | | | | (278,270 | ) |
| | BUY | | | NZD | | | Barclays Bank PLC | | 2,730,000 | | 1/09/15 | | | 2,135,431 | | | | 2,128,908 | | | | (6,523 | ) |
| | SELL | | | NZD | | | Barclays Bank PLC | | 1,492,643 | | 1/09/15 | | | 1,144,096 | | | | 1,163,994 | | | | (19,898 | ) |
| | SELL | | | NZD | | | Goldman Sachs International | | 6,415,000 | | 1/09/15 | | | 4,979,442 | | | | 5,002,546 | | | | (23,104 | ) |
| | SELL | | | NZD | | | Westpac Banking Corp. | | 4,443,687 | | 1/09/15 | | | 3,438,658 | | | | 3,465,276 | | | | (26,618 | ) |
| | BUY | | | PLN | | | Goldman Sachs International | | 24,636 | | 1/09/15 | | | 7,456 | | | | 6,957 | | | | (499 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (2,364,237 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2014, the fund had cash collateral of $280,000 to cover any commitments for certain derivative contracts. Cash collateral is comprised of “Restricted cash” in the Statement of Assets and Liabilities.
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $204,712,308) | | | $197,005,508 | | | | | |
Underlying affiliated funds, at cost and value | | | 11,963,279 | | | | | |
Total investments, at value (identified cost, $216,675,587) | | | $208,968,787 | | | | | |
Restricted cash | | | 280,000 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 2,775,621 | | | | | |
Interest | | | 2,170,960 | | | | | |
Other assets | | | 2,102 | | | | | |
Total assets | | | | | | | $214,197,470 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $2,364,237 | | | | | |
Fund shares reacquired | | | 14,108 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 7,595 | | | | | |
Shareholder servicing costs | | | 17 | | | | | |
Distribution and/or service fees | | | 25 | | | | | |
Payable for independent Trustees’ compensation | | | 67 | | | | | |
Accrued expenses and other liabilities | | | 57,522 | | | | | |
Total liabilities | | | | | | | $2,443,571 | |
Net assets | | | | | | | $211,753,899 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $222,230,001 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | (7,382,543 | ) | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (6,875,362 | ) | | | | |
Undistributed net investment income | | | 3,781,803 | | | | | |
Net assets | | | | | | | $211,753,899 | |
Shares of beneficial interest outstanding | | | | | | | 20,219,935 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $209,945,038 | | | | 20,044,546 | | | | $10.47 | |
Service Class | | | 1,808,861 | | | | 175,389 | | | | 10.31 | |
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $4,271,540 | | | | | |
Dividends from underlying affiliated funds | | | 9,864 | | | | | |
Total investment income | | | | | | | $4,281,404 | |
Expenses | | | | | | | | |
Management fee | | | $1,692,094 | | | | | |
Distribution and/or service fees | | | 5,235 | | | | | |
Shareholder servicing costs | | | 4,000 | | | | | |
Administrative services fee | | | 40,885 | | | | | |
Independent Trustees’ compensation | | | 8,943 | | | | | |
Custodian fee | | | 46,092 | | | | | |
Shareholder communications | | | 5,422 | | | | | |
Audit and tax fees | | | 70,340 | | | | | |
Legal fees | | | 2,142 | | | | | |
Miscellaneous | | | 17,164 | | | | | |
Total expenses | | | | | | | $1,892,317 | |
Fees paid indirectly | | | (4 | ) | | | | |
Reduction of expenses by investment adviser | | | (10,721 | ) | | | | |
Net expenses | | | | | | | $1,881,592 | |
Net investment income | | | | | | | $2,399,812 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $(972,909 | ) | | | | |
Foreign currency | | | 1,469,970 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $497,061 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(1,475,635 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | 804,256 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(671,379 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(174,318 | ) |
Change in net assets from operations | | | | | | | $2,225,494 | |
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,399,812 | | | | $2,131,492 | |
Net realized gain (loss) on investments and foreign currency | | | 497,061 | | | | (6,419,900 | ) |
Net unrealized gain (loss) on investments and foreign currency translation | | | (671,379 | ) | | | (7,750,671 | ) |
Change in net assets from operations | | | $2,225,494 | | | | $(12,039,079 | ) |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,198,057 | ) | | | $— | |
Change in net assets from fund share transactions | | | $(19,854,890 | ) | | | $13,684,598 | |
Total change in net assets | | | $(18,827,453 | ) | | | $1,645,519 | |
Net assets | | | | | | | | |
At beginning of period | | | 230,581,352 | | | | 228,935,833 | |
At end of period (including undistributed net investment income of $3,781,803 and
$643,512, respectively) | | | $211,753,899 | | | | $230,581,352 | |
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $10.45 | | | | $11.03 | | | | $11.29 | | | | $11.00 | | | | $10.60 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.11 | | | | $0.10 | | | | $0.11 | | | | $0.18 | | | | $0.18 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.03 | ) | | | (0.68 | ) | | | (0.04 | ) | | | 0.49 | | | | 0.30 | |
Total from investment operations | | | $0.08 | | | | $(0.58 | ) | | | $0.07 | | | | $0.67 | | | | $0.48 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.06 | ) | | | $— | | | | $(0.33 | ) | | | $(0.26 | ) | | | $— | |
From net realized gain on investments | | | — | | | | — | | | | — | | | | (0.12 | ) | | | (0.08 | ) |
From tax return of capital | | | — | | | | — | | | | (0.00 | )(w) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.06 | ) | | | $— | | | | $(0.33 | ) | | | $(0.38 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $10.47 | | | | $10.45 | | | | $11.03 | | | | $11.29 | | | | $11.00 | |
Total return (%) (k)(r)(s)(x) | | | 0.73 | | | | (5.26 | ) | | | 0.64 | | | | 6.06 | | | | 4.61 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.84 | | | | 0.84 | | | | 0.98 | | | | 1.14 | | | | 1.15 | |
Expenses after expense reductions (f) | | | 0.83 | | | | 0.84 | | | | 0.98 | | | | 1.00 | | | | 1.00 | |
Net investment income | | | 1.07 | | | | 0.94 | | | | 0.96 | | | | 1.59 | | | | 1.64 | |
Portfolio turnover | | | 31 | | | | 56 | | | | 15 | | | | 70 | | | | 66 | |
Net assets at end of period (000 omitted) | | | $209,945 | | | | $228,029 | | | | $226,668 | | | | $34,252 | | | | $30,047 | |
See Notes to Financial Statements
14
MFS Global Governments Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $10.28 | | | | $10.87 | | | | $11.13 | | | | $10.85 | | | | $10.48 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.09 | | | | $0.07 | | | | $0.08 | | | | $0.15 | | | | $0.15 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.04 | ) | | | (0.66 | ) | | | (0.04 | ) | | | 0.48 | | | | 0.30 | |
Total from investment operations | | | $0.05 | | | | $(0.59 | ) | | | $0.04 | | | | $0.63 | | | | $0.45 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.02 | ) | | | $— | | | | $(0.30 | ) | | | $(0.23 | ) | | | $— | |
From net realized gain on investments | | | — | | | | — | | | | — | | | | (0.12 | ) | | | (0.08 | ) |
From tax return of capital | | | — | | | | — | | | | (0.00 | )(w) | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.02 | ) | | | $— | | | | $(0.30 | ) | | | $(0.35 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $10.31 | | | | $10.28 | | | | $10.87 | | | | $11.13 | | | | $10.85 | |
Total return (%) (k)(r)(s)(x) | | | 0.49 | | | | (5.43 | ) | | | 0.33 | | | | 5.75 | | | | 4.38 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.09 | | | | 1.09 | | | | 1.25 | | | | 1.39 | | | | 1.40 | |
Expenses after expense reductions (f) | | | 1.08 | | | | 1.09 | | | | 1.25 | | | | 1.25 | | | | 1.25 | |
Net investment income | | | 0.81 | | | | 0.69 | | | | 0.71 | | | | 1.34 | | | | 1.39 | |
Portfolio turnover | | | 31 | | | | 56 | | | | 15 | | | | 70 | | | | 66 | |
Net assets at end of period (000 omitted) | | | $1,809 | | | | $2,553 | | | | $2,268 | | | | $2,617 | | | | $3,093 | |
| (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 a 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) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
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 non-diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Debt instruments and floating rate loans, 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 may be valued at amortized cost, which approximates market value. Forward foreign currency exchange 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
16
MFS Global Governments Portfolio
Notes to Financial Statements – continued
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. 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 forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | $— | | | | $52,426,158 | | | | $— | | | | $52,426,158 | |
| Non-U.S. Sovereign Debt | | | — | | | | 140,622,004 | | | | — | | | | 140,622,004 | |
| Residential Mortgage-Backed Securities | | | — | | | | 1,316,283 | | | | — | | | | 1,316,283 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 4,780 | | | | — | | | | 4,780 | |
| Foreign Bonds | | | — | | | | 2,636,283 | | | | — | | | | 2,636,283 | |
| Mutual Funds | | | 11,963,279 | | | | — | | | | — | | | | 11,963,279 | |
| Total Investments | | | $11,963,279 | | | | $197,005,508 | | | | $— | | | | $208,968,787 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Forward Foreign Currency Exchange Contracts | | | $— | | | | $411,384 | | | | $— | | | | $411,384 | |
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
The derivative instruments used by the fund were forward foreign currency exchange contracts. 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | $2,775,621 | | | | $(2,364,237 | ) |
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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Foreign Currency | |
| Foreign Exchange | | | $1,580,441 | |
17
MFS Global Governments Portfolio
Notes to Financial Statements – continued
The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended December 31, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Translation of Assets and Liabilities in Foreign Currencies | |
| Foreign Exchange | | | $912,190 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used 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.
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. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. 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. Interest payments received in additional securities are recorded on the ex-interest date in 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 Governments 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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, wash sale loss deferrals, straddle loss deferrals, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $1,198,057 | | | | $— | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $220,858,146 | |
| Gross appreciation | | | 3,133,924 | |
| Gross depreciation | | | (15,023,283 | ) |
| Net unrealized appreciation (depreciation) | | | $(11,889,359 | ) |
| Undistributed ordinary income | | | 4,962,637 | |
| Capital loss carryforwards | | | (2,499,698 | ) |
| Other temporary differences | | | (1,049,682 | ) |
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such losses are characterized as follows:
| | | | |
| Short-Term | | | $(1,382,554 | ) |
| Long-Term | | | (1,117,144 | ) |
| Total | | | $(2,499,698 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the above net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $1,194,116 | | | | $— | |
| Service Class | | | 3,941 | | | | — | |
| Total | | | $1,198,057 | | | | $— | |
19
MFS Global Governments 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% | |
Effective August 1, 2014, MFS has agreed in writing to reduce its management fee to 0.625% of average daily net assets in excess of $1 billion. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the period August 1, 2014 through December 31, 2014, the average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced in accordance with this agreement. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $10,325, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $3,935, which equated to 0.0017% 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, 2014, these costs amounted to $65.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0181% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC
20
MFS Global Governments Portfolio
Notes to Financial Statements – continued
was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $1,063 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $396, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $25,912,956 | | | | $28,063,947 | |
| Investments (non-U.S. Government securities) | | | $40,172,366 | | | | $37,988,081 | |
| (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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 349,890 | | | | $3,736,310 | | | | 2,422,644 | | | | $25,584,999 | |
Service Class | | | 68,923 | | | | 728,991 | | | | 143,724 | | | | 1,505,760 | |
| | | 418,813 | | | | $4,465,301 | | | | 2,566,368 | | | | $27,090,759 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 109,653 | | | | $1,194,116 | | | | — | | | | $— | |
Service Class | | | 367 | | | | 3,941 | | | | — | | | | — | |
| | | 110,020 | | | | $1,198,057 | | | | — | | | | $— | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (2,227,628 | ) | | | $(24,033,815 | ) | | | (1,166,362 | ) | | | $(12,320,726 | ) |
Service Class | | | (142,120 | ) | | | (1,484,433 | ) | | | (104,054 | ) | | | (1,085,435 | ) |
| | | (2,369,748 | ) | | | $(25,518,248 | ) | | | (1,270,416 | ) | | | $(13,406,161 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (1,768,085 | ) | | | $(19,103,389 | ) | | | 1,256,282 | | | | $13,264,273 | |
Service Class | | | (72,830 | ) | | | (751,501 | ) | | | 39,670 | | | | 420,325 | |
| | | (1,840,915 | ) | | | $(19,854,890 | ) | | | 1,295,952 | | | | $13,684,598 | |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Conservative Allocation Portfolio, and the MFS Growth Allocation Portfolio were the owners of record of approximately 49%, 30%, and 10%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $857 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
21
MFS Global Governments Portfolio
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning Shares/Par Amount | | | Acquisitions Shares/Par Amount | | | Dispositions Shares/Par Amount | | | Ending Shares/Par Amount | |
| MFS Institutional Money Market Portfolio | | | 25,496,421 | | | | 57,289,594 | | | | (70,822,736 | ) | | | 11,963,279 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $9,864 | | | | $11,963,279 | |
22
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Governments Portfolio as of December 31, 2014, 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 13, 2015
23
MFS Global Governments Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
24
MFS Global Governments Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
25
MFS Global Governments Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Matthew Ryan Erik Weisman | | |
26
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 5th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and the 5th quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed continued concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance. In addition, the Trustees requested that they receive a separate update on the Fund’s performance at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context
27
MFS Global Governments Portfolio
Board Review of Investment Advisory Agreement – continued
of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period but that they would continue to closely monitor the performance of the Fund.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median, and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $300 million, and that MFS has agreed in writing to implement an additional breakpoint that reduces its advisory fee rate on the Fund’s average daily net assets over $1 billion, which may not be changed without the Trustees’ approval. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
28
MFS Global Governments Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
29
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
30
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® GLOBAL GROWTH PORTFOLIO
MFS® Variable Insurance Trust II
WGO-ANN
MFS® GLOBAL GROWTH PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Growth Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Global Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Accenture PLC, “A” | | | 2.6% | |
| Google, Inc., “A” | | | 2.4% | |
| Schlumberger Ltd. | | | 2.3% | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 2.2% | |
| Visa, Inc., “A” | | | 2.2% | |
| Colgate-Palmolive Co. | | | 2.1% | |
| Danone S.A. | | | 2.0% | |
| Pernod Ricard S.A. | | | 1.9% | |
| CVS Health Corp. | | | 1.9% | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 1.9% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 16.5% | |
| Industrial Goods & Services | | | 12.3% | |
| Retailing | | | 11.7% | |
| Special Products & Services | | | 10.5% | |
| Financial Services | | | 10.3% | |
| Technology | | | 10.3% | |
| Health Care | | | 10.0% | |
| Leisure | | | 7.6% | |
| Basic Materials | | | 5.2% | |
| Energy | | | 3.3% | |
| Autos & Housing | | | 1.4% | |
| Transportation | | | 0.4% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United States | | | 56.7% | |
| United Kingdom | | | 11.3% | |
| France | | | 9.5% | |
| Switzerland | | | 5.4% | |
| Germany | | | 3.9% | |
| Brazil | | | 3.0% | |
| Taiwan | | | 1.9% | |
| Denmark | | | 1.6% | |
| India | | | 1.2% | |
| Other Countries | | | 5.5% | |
| |
| Currency exposure weightings (y) | | | | |
| United States Dollar | | | 57.9% | |
| Euro | | | 13.9% | |
| British Pound Sterling | | | 11.3% | |
| Swiss Franc | | | 5.4% | |
| Brazilian Real | | | 3.0% | |
| Taiwan Dollar | | | 1.9% | |
| Danish Krone | | | 1.6% | |
| Hong Kong Dollar | | | 1.3% | |
| Indian Rupee | | | 1.2% | |
| Other Currencies | | | 2.5% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Global Growth Portfolio (“fund”) provided a total return of 4.32%, while Service Class shares of the fund provided a total return of 4.05%. These returns compare with a return of 5.82% over the same period for the fund’s benchmark, the MSCI All Country World Growth Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Weak stock selection within the consumer staples sector was a primary detractor from performance relative to the MSCI All Country World Growth Index. The fund’s overweight positions in alcoholic and non-alcoholic beverages producer Carlsberg (Denmark) and international food producer Danone (France) held back relative performance as both stocks lagged the benchmark over the reporting period. Shares of Carlsberg traded lower late in the period on what appeared to have been concerns of a weakening macro-economic situation in Russia, despite Russia being a much smaller percentage of the company’s operating profits than in the past.
Within the technology sector, stock selection also weakened relative performance, led by the fund’s underweight position in strong-performing computer and personal electronics maker Apple (United States). Shares of Apple appreciated during the period due to strong consumer demand for the company’s iPhone 6 and 6 Plus smartphones.
Elsewhere, overweight positions in civil and defense aerospace company Rolls-Royce Holdings (United Kingdom), commercial banking firm Sberbank of Russia (Russia), product safety testing company Intertek Group (United Kingdom), food distribution and consumer products manufacturing company Jeronimo Martins (h) (Portugal) and global media company Discovery Communications (United States) were among the fund’s top relative detractors. Shares of Discovery Communications came under pressure as the company missed consensus estimates and its management unexpectedly lowered earnings guidance late in the period due to foreign exchange headwinds and ongoing weakness in domestic ad revenues. The fund’s ownership of banking group Standard Chartered (b) (United Kingdom) and mining operator Rio Tinto (b) (Australia) also held back relative returns.
Contributors to Performance
The combination of strong stock selection and an underweight position in the energy sector contributed to relative performance, as this was the worst-performing sector in the benchmark during the reporting period. There were no individual securities within this sector that were among the fund’s top relative contributors.
Strong stock selection in the industrial goods & services sector also benefited relative returns, driven by an overweight position in sensors and controls manufacturer Sensata Technologies Holding (Netherlands). The fund’s overweight position in precision instrument manufacturer Mettler Toledo International (United States) also boosted relative returns as the company posted better-than-expected earnings results in the second half of the period due to improved margins from stronger pricing and lower materials costs.
Elsewhere, the fund’s overweight position in animal health products manufacturer Zoetis (United States) aided relative performance. The company posted solid results reflecting strong revenue growth across all divisions, particularly related to recovery from the US drought which favorably affected US livestock revenues. Additionally, the stock rose towards the end of the reporting period as the company raised its quarterly dividend, offering further clarity on its capital utilization strategy and commitment to shareholders, which appeared to have been well received by the market.
3
MFS Global Growth Portfolio
Management Review – continued
Other notable contributors to relative performance included overweight positions in drugstore retailer CVS Health (United States), semiconductor manufacturer Taiwan Semiconductor Manufacturing (Taiwan), banking firm HDFC Bank (India), media firm Time Warner (United States), paint and coating manufacturer Sherwin-Williams (United States) and global payments technology company Visa (United States). Not owning shares of internet retailer Amazon.com (United States) also aided relative results as the stock turned in weak performance over the period.
The fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was another positive factor for 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 exposure than the benchmark.
Respectfully,
| | |
| David Antonelli | | Jeffrey Constantino |
| 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 Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/16/93 | | 4.32% | | 9.65% | | 7.07% | | |
| | | Service Class | | 8/24/01 | | 4.05% | | 9.38% | | 6.80% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World Growth Index (f) | | 5.82% | | 10.48% | | 7.06% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
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.
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Global Growth Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending
Account Value 12/31/14 | | | Expenses Paid During Period (p) 7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 1.04% | | | | $1,000.00 | | | | $993.99 | | | | $5.23 | |
| | Hypothetical (h) | | | 1.04% | | | | $1,000.00 | | | | $1,019.96 | | | | $5.30 | |
| Service Class | | Actual | | | 1.29% | | | | $1,000.00 | | | | $992.64 | | | | $6.48 | |
| | Hypothetical (h) | | | 1.29% | | | | $1,000.00 | | | | $1,018.70 | | | | $6.56 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Notes to Expense Table
Changes to the fund’s fee arrangements occurred during the six month period. Had these fee changes been in effect throughout the entire six month period, the annualized expense ratios, the actual expenses paid during the period and the hypothetical expenses paid during the period would have been approximately 1.01%, $5.08 and $5.14 for Initial Class and 1.26%, $6.33 and $6.41 for Service Class. For further information about the fund’s fee arrangements and changes to those fee arrangements, please see Note 3 in the Notes to Financial Statements.
6
MFS Global Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.5% | | | | | |
| Aerospace – 3.7% | | | | | | | | |
| Precision Castparts Corp. | | | 1,325 | | | $ | 319,163 | |
| Rolls-Royce Holdings PLC | | | 54,889 | | | | 739,413 | |
| United Technologies Corp. | | | 9,263 | | | | 1,065,245 | |
| | | | | | | | |
| | | | | | $ | 2,123,821 | |
| | | | | | | | |
| Alcoholic Beverages – 5.0% | |
| AmBev S.A., ADR | | | 98,007 | | | $ | 609,604 | |
| Carlsberg A.S., “B” | | | 7,290 | | | | 566,109 | |
| Diageo PLC | | | 21,142 | | | | 606,377 | |
| Pernod Ricard S.A. | | | 9,920 | | | | 1,099,899 | |
| | | | | | | | |
| | | | | | $ | 2,881,989 | |
| | | | | | | | |
| Apparel Manufacturers – 6.2% | | | | | | | | |
| Burberry Group PLC | | | 30,902 | | | $ | 783,014 | |
| Compagnie Financiere Richemont S.A. | | | 3,523 | | | | 312,058 | |
| Li & Fung Ltd. | | | 249,600 | | | | 233,679 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 8,165 | | | | 1,291,165 | |
| NIKE, Inc., “B” | | | 4,652 | | | | 447,290 | |
| VF Corp. | | | 6,917 | | | | 518,083 | |
| | | | | | | | |
| | | | | | $ | 3,585,289 | |
| | | | | | | | |
| Automotive – 0.5% | | | | | | | | |
| Johnson Controls, Inc. | | | 6,297 | | | $ | 304,397 | |
| | | | | | | | |
| Broadcasting – 6.2% | | | | | | | | |
| Discovery Communications, Inc., “A” (a) | | | 15,145 | | | $ | 521,745 | |
| Publicis Groupe S.A. | | | 4,042 | | | | 289,501 | |
| Time Warner, Inc. | | | 9,749 | | | | 832,760 | |
| Twenty-First Century Fox, Inc. | | | 25,683 | | | | 986,356 | |
| Viacom, Inc., “B” | | | 3,451 | | | | 259,688 | |
| Walt Disney Co. | | | 7,283 | | | | 685,986 | |
| | | | | | | | |
| | | | | | $ | 3,576,036 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.8% | |
| BM&F Bovespa S.A. | | | 82,448 | | | $ | 305,512 | |
| CME Group, Inc. | | | 5,650 | | | | 500,873 | |
| Franklin Resources, Inc. | | | 14,522 | | | | 804,083 | |
| | | | | | | | |
| | | | | | $ | 1,610,468 | |
| | | | | | | | |
| Business Services – 10.5% | | | | | | | | |
| Accenture PLC, “A” | | | 16,757 | | | $ | 1,496,568 | |
| Brenntag AG | | | 10,663 | | | | 600,108 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 13,939 | | | | 734,028 | |
| Compass Group PLC | | | 59,989 | | | | 1,022,472 | |
| Equifax, Inc. | | | 6,670 | | | | 539,403 | |
| Experian Group Ltd. | | | 28,649 | | | | 483,243 | |
| Fidelity National Information Services, Inc. | | | 9,600 | | | | 597,120 | |
| Intertek Group PLC | | | 14,818 | | | | 537,136 | |
| | | | | | | | |
| | | | | | $ | 6,010,078 | |
| | | | | | | | |
| Chemicals – 1.1% | | | | | | | | |
| Monsanto Co. | | | 5,458 | | | $ | 652,067 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – 2.2% | | | | | | | | |
| Dassault Systems S.A. | | | 7,205 | | | $ | 438,485 | |
| Oracle Corp. | | | 18,513 | | | | 832,530 | |
| | | | | | | | |
| | | | | | $ | 1,271,015 | |
| | | | | | | | |
| Computer Software – Systems – 2.1% | |
| Apple, Inc. | | | 3,184 | | | $ | 351,450 | |
| EMC Corp. | | | 28,181 | | | | 838,103 | |
| | | | | | | | |
| | | | | | $ | 1,189,553 | |
| | | | | | | | |
| Construction – 0.9% | | | | | | | | |
| Sherwin-Williams Co. | | | 1,872 | | | $ | 492,411 | |
| | | | | | | | |
| Consumer Products – 4.4% | | | | | | | | |
| Colgate-Palmolive Co. | | | 17,335 | | | $ | 1,199,409 | |
| L’Oreal S.A. | | | 4,002 | | | | 671,884 | |
| Procter & Gamble Co. | | | 3,120 | | | | 284,201 | |
| Reckitt Benckiser Group PLC | | | 4,895 | | | | 394,886 | |
| | | | | | | | |
| | | | | | $ | 2,550,380 | |
| | | | | | | | |
| Electrical Equipment – 6.9% | | | | | | | | |
| Amphenol Corp., “A” | | | 7,196 | | | $ | 387,217 | |
| Danaher Corp. | | | 12,522 | | | | 1,073,261 | |
| Legrand S.A. | | | 4,794 | | | | 250,961 | |
| Mettler-Toledo International, Inc. (a) | | | 2,510 | | | | 759,175 | |
| Schneider Electric S.A. | | | 3,231 | | | | 234,770 | |
| Sensata Technologies Holding B.V. (a) | | | 7,694 | | | | 403,243 | |
| W.W. Grainger, Inc. | | | 3,441 | | | | 877,076 | |
| | | | | | | | |
| | | | | | $ | 3,985,703 | |
| | | | | | | | |
| Electronics – 3.1% | | | | | | | | |
| Microchip Technology, Inc. | | | 8,668 | | | $ | 391,013 | |
| Samsung Electronics Co. Ltd. | | | 268 | | | | 322,150 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 48,100 | | | | 1,076,478 | |
| | | | | | | | |
| | | | | | $ | 1,789,641 | |
| | | | | | | | |
| Energy – Independent – 0.6% | | | | | | | | |
| Occidental Petroleum Corp. | | | 4,039 | | | $ | 325,584 | |
| | | | | | | | |
| Energy – Integrated – 0.4% | | | | | | | | |
| BG Group PLC | | | 16,096 | | | $ | 214,250 | |
| | | | | | | | |
| Food & Beverages – 7.1% | | | | | | | | |
| Chr. Hansen Holding A.S. | | | 8,157 | | | $ | 362,945 | |
| Danone S.A. | | | 17,269 | | | | 1,136,067 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 10,442 | | | | 357,468 | |
| Mead Johnson Nutrition Co., “A” | | | 6,424 | | | | 645,869 | |
| Nestle S.A. | | | 14,298 | | | | 1,048,065 | |
| Want Want China Holdings Ltd. | | | 386,000 | | | | 506,374 | |
| | | | | | | | |
| | | | | | $ | 4,056,788 | |
| | | | | | | | |
7
MFS Global Growth Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Food & Drug Stores – 2.3% | | | | | | | | |
| CVS Health Corp. | | | 11,227 | | | $ | 1,081,272 | |
| Sundrug Co. Ltd. | | | 6,500 | | | | 263,086 | |
| | | | | | | | |
| | | | | | $ | 1,344,358 | |
| | | | | | | | |
| General Merchandise – 1.3% | | | | | | | | |
| Dollarama, Inc. | | | 8,374 | | | $ | 428,142 | |
| Lojas Renner S.A. | | | 10,358 | | | | 295,439 | |
| | | | | | | | |
| | | | | | $ | 723,581 | |
| | | | | | | | |
| Internet – 2.9% | | | | | | | | |
| Google, Inc., “A” (a) | | | 2,543 | | | $ | 1,349,468 | |
| NAVER Corp. (a) | | | 448 | | | | 289,417 | |
| | | | | | | | |
| | | | | | $ | 1,638,885 | |
| | | | | | | | |
| Machinery & Tools – 1.7% | | | | | | | | |
| Colfax Corp. (a) | | | 9,312 | | | $ | 480,220 | |
| Schindler Holding AG | | | 3,432 | | | | 495,213 | |
| | | | | | | | |
| | | | | | $ | 975,433 | |
| | | | | | | | |
| Major Banks – 0.7% | | | | | | | | |
| Standard Chartered PLC | | | 25,249 | | | $ | 378,971 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.5% | |
| Express Scripts Holding Co. (a) | | | 10,135 | | | $ | 858,130 | |
| | | | | | | | |
| Medical Equipment – 5.6% | | | | | | | | |
| Abbott Laboratories | | | 13,177 | | | $ | 593,229 | |
| DENTSPLY International, Inc. | | | 16,011 | | | | 852,906 | |
| Sonova Holding AG | | | 2,618 | | | | 383,781 | |
| Thermo Fisher Scientific, Inc. | | | 6,977 | | | | 874,148 | |
| Waters Corp. (a) | | | 4,642 | | | | 523,246 | |
| | | | | | | | |
| | | | | | $ | 3,227,310 | |
| | | | | | | | |
| Metals & Mining – 0.7% | | | | | | | | |
| Rio Tinto Ltd. | | | 9,150 | | | $ | 421,564 | |
| | | | | | | | |
| Oil Services – 2.3% | | | | | | | | |
| Schlumberger Ltd. | | | 15,632 | | | $ | 1,335,129 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 6.9% | |
| Credicorp Ltd. | | | 4,092 | | | $ | 655,457 | |
| HDFC Bank Ltd. | | | 44,480 | | | | 667,054 | |
| Itau Unibanco Holding S.A., ADR | | | 14,216 | | | | 184,950 | |
| Julius Baer Group Ltd. | | | 12,947 | | | | 590,837 | |
| MasterCard, Inc., “A” | | | 4,718 | | | | 406,503 | |
| Sberbank of Russia, ADR | | | 38,742 | | | | 155,676 | |
| Visa, Inc., “A” | | | 4,862 | | | | 1,274,816 | |
| | | | | | | | |
| | | | | | $ | 3,935,293 | |
| | | | | | | | |
| Pharmaceuticals – 2.9% | | | | | | | | |
| Bayer AG | | | 5,201 | | | $ | 711,162 | |
| Johnson & Johnson | | | 2,153 | | | | 225,139 | |
| Zoetis, Inc. | | | 16,576 | | | | 713,265 | |
| | | | | | | | |
| | | | | | $ | 1,649,566 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Railroad & Shipping – 0.4% | | | | | | | | |
| Kuehne & Nagel, Inc. AG | | | 1,894 | | | $ | 257,454 | |
| | | | | | | | |
| Restaurants – 1.4% | | | | | | | | |
| McDonald’s Corp. | | | 2,979 | | | $ | 279,132 | |
| Whitbread PLC | | | 6,915 | | | | 510,306 | |
| | | | | | | | |
| | | | | | $ | 789,438 | |
| | | | | | | | |
| Specialty Chemicals – 3.3% | | | | | | | | |
| Croda International PLC | | | 10,171 | | | $ | 419,085 | |
| Linde AG | | | 3,182 | | | | 593,729 | |
| Praxair, Inc. | | | 4,178 | | | | 541,302 | |
| Symrise AG | | | 5,570 | | | | 337,875 | |
| | | | | | | | |
| | | | | | $ | 1,891,991 | |
| | | | | | | | |
| Specialty Stores – 1.9% | | | | | | | | |
| AutoZone, Inc. (a) | | | 1,241 | | | $ | 768,316 | |
| Hermes International | | | 55 | | | | 19,620 | |
| Inditex | | | 10,237 | | | | 293,641 | |
| | | | | | | | |
| | | | | | $ | 1,081,577 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $45,074,434) | | | | | | $ | 57,128,150 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 0.6% | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 361,434 | | | $ | 361,434 | |
| | | | | | | | |
Total Investments
(Identified Cost, $45,435,868) | | | | | | $ | 57,489,584 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (68,274 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 57,421,310 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary Receipt |
| PLC | | Public Limited Company |
See Notes to Financial Statements
8
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $45,074,434) | | | $57,128,150 | | | | | |
Underlying affiliated funds, at cost and value | | | 361,434 | | | | | |
Total investments, at value (identified cost, $45,435,868) | | | $57,489,584 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 19,881 | | | | | |
Interest and dividends | | | 98,431 | | | | | |
Receivable from investment adviser | | | 4,688 | | | | | |
Other assets | | | 829 | | | | | |
Total assets | | | | | | | $57,613,413 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $17,359 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 9,115 | | | | | |
Fund shares reacquired | | | 107,487 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 14 | | | | | |
Distribution and/or service fees | | | 33 | | | | | |
Payable for independent Trustees’ compensation | | | 90 | | | | | |
Accrued expenses and other liabilities | | | 58,005 | | | | | |
Total liabilities | | | | | | | $192,103 | |
Net assets | | | | | | | $57,421,310 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $42,601,813 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 12,050,917 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 2,231,973 | | | | | |
Undistributed net investment income | | | 536,607 | | | | | |
Net assets | | | | | | | $57,421,310 | |
Shares of beneficial interest outstanding | | | | | | | 2,558,311 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $55,049,788 | | | | 2,452,328 | | | | $22.45 | |
Service Class | | | 2,371,522 | | | | 105,983 | | | | 22.38 | |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $1,278,977 | | | | | |
Interest | | | 8,842 | | | | | |
Dividends from underlying affiliated funds | | | 308 | | | | | |
Foreign taxes withheld | | | (71,738 | ) | | | | |
Total investment income | | | | | | | $1,216,389 | |
Expenses | | | | | | | | |
Management fee | | | $538,842 | | | | | |
Distribution and/or service fees | | | 6,450 | | | | | |
Shareholder servicing costs | | | 3,105 | | | | | |
Administrative services fee | | | 18,781 | | | | | |
Independent Trustees’ compensation | | | 2,748 | | | | | |
Custodian fee | | | 56,332 | | | | | |
Shareholder communications | | | 7,603 | | | | | |
Audit and tax fees | | | 77,600 | | | | | |
Legal fees | | | 521 | | | | | |
Miscellaneous | | | 10,391 | | | | | |
Total expenses | | | | | | | $722,373 | |
Fees paid indirectly | | | (1 | ) | | | | |
Reduction of expenses by investment adviser | | | (44,249 | ) | | | | |
Net expenses | | | | | | | $678,123 | |
Net investment income | | | | | | | $538,266 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $2,836,640 | | | | | |
Foreign currency | | | (1,286 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $2,835,354 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(906,326 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (3,544 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(909,870 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $1,925,484 | |
Change in net assets from operations | | | | | | | $2,463,750 | |
See Notes to Financial Statements
10
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $538,266 | | | | $297,689 | |
Net realized gain (loss) on investments and foreign currency | | | 2,835,354 | | | | 6,445,390 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (909,870 | ) | | | 5,166,533 | |
Change in net assets from operations | | | $2,463,750 | | | | $11,909,612 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(294,235 | ) | | | $(404,001 | ) |
Change in net assets from fund share transactions | | | $(8,549,721 | ) | | | $(8,155,939 | ) |
Total change in net assets | | | $(6,380,206 | ) | | | $3,349,672 | |
Net assets | | | | | | | | |
At beginning of period | | | 63,801,516 | | | | 60,451,844 | |
At end of period (including undistributed net investment income of $536,607 and
$293,862, respectively) | | | $57,421,310 | | | | $63,801,516 | |
See Notes to Financial Statements
11
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.63 | | | | $17.96 | | | | $15.11 | | | | $16.26 | | | | $14.65 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.20 | | | | $0.10 | | | | $0.11 | | | | $0.11 | | | | $0.10 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.73 | | | | 3.70 | | | | 2.86 | | | | (1.15 | ) | | | 1.62 | |
Total from investment operations | | | $0.93 | | | | $3.80 | | | | $2.97 | | | | $(1.04 | ) | | | $1.72 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.11 | ) | | | $(0.13 | ) | | | $(0.12 | ) | | | $(0.11 | ) | | | $(0.11 | ) |
Net asset value, end of period (x) | | | $22.45 | | | | $21.63 | | | | $17.96 | | | | $15.11 | | | | $16.26 | |
Total return (%) (k)(r)(s)(x) | | | 4.32 | | | | 21.26 | | | | 19.72 | | | | (6.38 | ) | | | 11.80 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.20 | | | | 1.17 | | | | 1.19 | | | | 1.22 | | | | 1.19 | |
Expenses after expense reductions (f) | | | 1.12 | | | | 1.17 | | | | 1.19 | | | | N/A | | | | N/A | |
Net investment income | | | 0.91 | | | | 0.49 | | | | 0.68 | | | | 0.72 | | | | 0.66 | |
Portfolio turnover | | | 25 | | | | 33 | | | | 40 | | | | 36 | | | | 61 | |
Net assets at end of period (000 omitted) | | | $55,050 | | | | $60,188 | | | | $57,300 | | | | $56,309 | | | | $71,546 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.55 | | | | $17.89 | | | | $15.04 | | | | $16.18 | | | | $14.58 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.14 | | | | $0.05 | | | | $0.07 | | | | $0.08 | | | | $0.06 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 0.73 | | | | 3.69 | | | | 2.86 | | | | (1.16 | ) | | | 1.62 | |
Total from investment operations | | | $0.87 | | | | $3.74 | | | | $2.93 | | | | $(1.08 | ) | | | $1.68 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.04 | ) | | | $(0.08 | ) | | | $(0.08 | ) | | | $(0.06 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $22.38 | | | | $21.55 | | | | $17.89 | | | | $15.04 | | | | $16.18 | |
Total return (%) (k)(r)(s)(x) | | | 4.05 | | | | 20.94 | | | | 19.49 | | | | (6.67 | ) | | | 11.53 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.45 | | | | 1.42 | | | | 1.44 | | | | 1.47 | | | | 1.44 | |
Expenses after expense reductions (f) | | | 1.37 | | | | 1.42 | | | | 1.44 | | | | N/A | | | | N/A | |
Net investment income | | | 0.63 | | | | 0.23 | | | | 0.44 | | | | 0.49 | | | | 0.42 | |
Portfolio turnover | | | 25 | | | | 33 | | | | 40 | | | | 36 | | | | 61 | |
Net assets at end of period (000 omitted) | | | $2,372 | | | | $3,614 | | | | $3,152 | | | | $3,101 | | | | $4,098 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
12
MFS Global Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Growth Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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
13
MFS Global Growth Portfolio
Notes to Financial Statements – continued
significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $32,281,619 | | | | $— | | | | $— | | | | $32,281,619 | |
United Kingdom | | | 378,971 | | | | 6,131,747 | | | | — | | | | 6,510,718 | |
France | | | 19,620 | | | | 5,412,732 | | | | — | | | | 5,432,352 | |
Switzerland | | | — | | | | 3,087,408 | | | | — | | | | 3,087,408 | |
Germany | | | 2,242,874 | | | | — | | | | — | | | | 2,242,874 | |
Brazil | | | 1,457,534 | | | | 295,439 | | | | — | | | | 1,752,973 | |
Taiwan | | | 1,076,478 | | | | — | | | | — | | | | 1,076,478 | |
Denmark | | | — | | | | 929,054 | | | | — | | | | 929,054 | |
India | | | — | | | | 667,054 | | | | — | | | | 667,054 | |
Other Countries | | | 1,610,917 | | | | 1,536,703 | | | | — | | | | 3,147,620 | |
| Mutual Funds | | | 361,434 | | | | — | | | | — | | | | 361,434 | |
| Total Investments | | | $39,429,447 | | | | $18,060,137 | | | | $— | | | | $57,489,584 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $15,952,825 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $233,679 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when
14
MFS Global Growth Portfolio
Notes to Financial Statements – continued
such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in 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, 2014, there were no securities on loan or collateral outstanding.
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. 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 payments received in additional securities are recorded on the ex-dividend 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $294,235 | | | | $404,001 | |
15
MFS Global Growth Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $45,482,824 | |
| Gross appreciation | | | 13,728,920 | |
| Gross depreciation | | | (1,722,160 | ) |
| Net unrealized appreciation (depreciation) | | | $12,006,760 | |
| Undistributed ordinary income | | | 536,607 | |
| Undistributed long-term capital gain | | | 2,278,929 | |
| Other temporary differences | | | (2,799 | ) |
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $289,368 | | | | $392,147 | |
| Service Class | | | 4,867 | | | | 11,854 | |
| Total | | | $294,235 | | | | $404,001 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $2,742, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
The investment adviser had agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses did 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 expired on July 31, 2014. For the period January 1, 2014 to July 31, 2014 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 total annual operating expense related to this agreement. Effective August 1, 2014 the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 1.01% of average daily net assets for the Initial Class shares and 1.26% of average daily net assets for the Service Class share. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the period August 1, 2014 to December 31, 2014 this reduction amounted to $41,402, which is included in the 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
16
MFS Global Growth Portfolio
Notes to Financial Statements – continued
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, 2014, the fee was $3,027, which equated to 0.0051% 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, 2014, these costs amounted to $78.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0314% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $281 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $105, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other short-term obligations, aggregated $14,637,113 and $23,052,273, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 23,527 | | | | $516,947 | | | | 35,748 | | | | $711,946 | |
Service Class | | | 3,725 | | | | 82,392 | | | | 40,640 | | | | 835,599 | |
| | | 27,252 | | | | $599,339 | | | | 76,388 | | | | $1,547,545 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 12,872 | | | | $289,368 | | | | 20,007 | | | | $392,147 | |
Service Class | | | 217 | | | | 4,867 | | | | 607 | | | | 11,854 | |
| | | 13,089 | | | | $294,235 | | | | 20,614 | | | | $404,001 | |
17
MFS Global Growth Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (366,883 | ) | | | $(8,054,870 | ) | | | (462,799 | ) | | | $(9,130,525 | ) |
Service Class | | | (65,694 | ) | | | (1,388,425 | ) | | | (49,690 | ) | | | (976,960 | ) |
| | | (432,577 | ) | | | $(9,443,295 | ) | | | (512,489 | ) | | | $(10,107,485 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (330,484 | ) | | | $(7,248,555 | ) | | | (407,044 | ) | | | $(8,026,432 | ) |
Service Class | | | (61,752 | ) | | | (1,301,166 | ) | | | (8,443 | ) | | | (129,507 | ) |
| | | (392,236 | ) | | | $(8,549,721 | ) | | | (415,487 | ) | | | $(8,155,939 | ) |
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, 2014, the fund’s commitment fee and interest expense were $227 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 26 | | | | 9,933,750 | | | | (9,572,342 | ) | | | 361,434 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $308 | | | | $361,434 | |
18
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Growth Portfolio as of December 31, 2014, 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 13, 2015
19
MFS Global Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k)
(age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
20
MFS Global Growth Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
21
MFS Global Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers David Antonelli Jeffrey Constantino | | |
22
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 5th quintile for each of the one- and five-year periods ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed concern to MFS about the substandard investment performance of the Fund’s retail counterpart, MFS Global Growth Fund, which has substantially similar investment strategies and experienced substantially similar investment performance as the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, including more recent performance information, as well as during investment review meetings conducted with portfolio management personnel during the course of the year as to MFS’ efforts to improve the performance of the Fund’s retail counterpart. In addition, the Trustees requested that they receive a separate update on the Fund’s retail counterpart at each of
23
MFS Global Growth Portfolio
Board Review of Investment Advisory Agreement – continued
their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund’s retail counterpart.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, and that MFS has agreed to further reduce such expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each higher than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $1 billion and $2 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund��s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
24
MFS Global Growth Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” 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.
25
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
26
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® GLOBAL
RESEARCH PORTFOLIO
MFS® Variable Insurance Trust II
RES-ANN
MFS® GLOBAL RESEARCH PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Research Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Global Research Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Danaher Corp. | | | 1.6% | |
| Exxon Mobil Corp. | | | 1.5% | |
| Novartis AG | | | 1.4% | |
| Royal Dutch Shell PLC, “A” | | | 1.4% | |
| Visa, Inc., “A” | | | 1.3% | |
| Roche Holding AG | | | 1.2% | |
| EMC Corp. | | | 1.2% | |
| Wells Fargo & Co. | | | 1.2% | |
| Twenty-First Century Fox, Inc. | | | 1.2% | |
| CMS Energy Corp. | | | 1.1% | |
| |
| Global equity sectors | | | | |
| Financial Services | | | 21.5% | |
| Capital Goods | | | 17.9% | |
| Technology | | | 14.6% | |
| Health Care | | | 11.6% | |
| Energy | | | 10.9% | |
| Consumer Cyclicals | | | 10.7% | |
| Consumer Staples | | | 7.4% | |
| Telecommunications/Cable Television | | | 4.9% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United States | | | 59.7% | |
| United Kingdom | | | 7.2% | |
| Japan | | | 6.2% | |
| Switzerland | | | 5.4% | |
| France | | | 4.0% | |
| Hong Kong | | | 2.6% | |
| Germany | | | 2.2% | |
| Netherlands | | | 1.7% | |
| Canada | | | 1.6% | |
| Other Countries | | | 9.4% | |
| |
| Currency exposure weightings (y) | | | | |
| United States Dollar | | | 61.4% | |
| Euro | | | 9.5% | |
| British Pound Sterling | | | 7.2% | |
| Japanese Yen | | | 6.2% | |
| Swiss Franc | | | 5.4% | |
| Hong Kong Dollar | | | 3.4% | |
| Taiwan Dollar | | | 1.2% | |
| Indian Rupee | | | 0.9% | |
| Singapore Dollar | | | 0.7% | |
| Other Currencies | | | 4.1% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Global Research Portfolio (“fund”) provided a total return of 2.40%, while Service Class shares of the fund provided a total return of 2.15%. These compare with a return of 4.71% over the same period for the fund’s benchmark, the MSCI All Country World Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Weak stock selection in the financial services sector was a primary detractor from relative performance. Within this sector, overweight positions in commercial banking firm Sberbank of Russia (Russia), financial services company Erste Group Bank (Austria), banking group Standard Chartered (United Kingdom) and banking and financial services firm Sumitomo Mitsui Financial Group (Japan) weakened relative results as all four stocks underperformed the benchmark during the period. Shares of Sberbank of Russia declined as the Russian banking sector faced headwinds from the Russian ruble’s devaluation, rapid rate hikes and a macro recession. Additionally, western sanctions put further pressure on the sector with regards to refinancing of foreign obligations.
Weak stock selection within both the consumer staples and capital goods sectors also dampened relative performance. There were no individual securities within the consumer staples sector that were among the fund’s top relative detractors for the reporting period. Within capital goods, overweight positions in engineering and construction company JGC Corp. (Japan) and petrochemical products manufacturer LG Chemical (South Korea) weakened relative returns. Shares of JGC Corp. appeared to have been affected by concerns about possible cancellations of LNG plant construction projects, a major source of revenue for the company, and the announced reductions in capital expenditures by energy companies in the face of sharply declining oil prices.
Elsewhere, the fund’s overweight positions in oil and gas producer Whiting Petroleum (h) (United States), casino and resort operator Sands China (Hong Kong) and oil and gas company BG Group (United Kingdom) held back relative performance. Shares of BG Group declined due to falling oil prices and OPEC’s (Organization of Petroleum Exporting Countries) decision to not intervene by reducing output. An underweight position in computer and personal electronics maker Apple (United States) also dampened relative returns as the company’s shares outperformed the benchmark over the reporting period.
Contributors to Performance
Strong stock selection in the telecommunications/cable television sector was a primary contributor to relative performance. However, there were no individual securities within this sector that were among the fund’s top relative contributors.
Stocks in other sectors that benefited relative returns included the fund’s overweight positions in computer and personal electronics maker Hewlett-Packard (United States), electric and gas utility company CMS Energy (United States), medical device and supply products manufacturer Covidien (h) (Ireland) and specialty retailer Limited Brands (h) (United States). Limited Brands released strong results due, in part, to robust sales growth in both the Victoria Secret and Bath & Body Works segments and improved margins. The company’s international business also showed gains as it continued to expand both company owned and franchise units. The fund’s holdings of semiconductor manufacturer NXP Semiconductors (b) (Ireland) and overweight positions in banking group Kasikornbank (Thailand), drugstore retailer CVS Health (United States), railroad company Union Pacific (United States), oil and gas exploration and production company Petroleo Brasileiro (h) (Brazil) and paint and coating manufacturer Sherwin-Williams (United States), were also among the fund’s top relative contributors. Investors appeared to have responded positively to CVS Health’s better-than-expected
3
MFS Global Research Portfolio
Management Review – continued
quarterly earnings results, which were bolstered by solid performance from its retail pharmacy business and improved Pharmacy Benefit management profitability. In addition, late in the period, CVS Health held an upbeat analyst meeting where the company increased its earnings growth expectations for 2015 and through 2018, which further supported the stock.
Respectfully,
| | | | |
| James Keating | | Ben Kottler | | Joseph MacDougall |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
Note to Contract Owners: Effective April 30, 2014, Michael Cantara is no longer a Portfolio Manager of the Fund. Effective September 29, 2014, James Keating is also a Portfolio Manager of the Fund.
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/07/94 | | 2.40% | | 9.28% | | 5.90% | | |
| | | Service Class | | 8/24/01 | | 2.15% | | 9.02% | | 5.64% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World Index (f) | | 4.71% | | 9.74% | | 6.65% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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.
5
MFS Global Research Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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 7/01/14 | | | Ending Account Value 12/31/14 | | | Expenses Paid During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.93% | | | | $1,000.00 | | | | $977.55 | | | | $4.64 | |
| | Hypothetical (h) | | | 0.93% | | | | $1,000.00 | | | | $1,020.52 | | | | $4.74 | |
| Service Class | | Actual | | | 1.18% | | | | $1,000.00 | | | | $976.10 | | | | $5.88 | |
| | Hypothetical (h) | | | 1.18% | | | | $1,000.00 | | | | $1,019.26 | | | | $6.01 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Global Research Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | | | | |
| Aerospace – 2.5% | | | | | |
| Honeywell International, Inc. | | | 11,275 | | | $ | 1,126,598 | |
| Precision Castparts Corp. | | | 3,381 | | | | 814,415 | |
| United Technologies Corp. | | | 9,280 | | | | 1,067,200 | |
| | | | | | | | |
| | | | | | $ | 3,008,213 | |
| | | | | | | | |
| Alcoholic Beverages – 0.7% | | | | | |
| Pernod Ricard S.A. | | | 7,755 | | | $ | 859,851 | |
| | | | | | | | |
| Apparel Manufacturers – 1.7% | | | | | |
| Global Brands Group Holding Ltd. (a) | | | 1,470,000 | | | $ | 287,334 | |
| Li & Fung Ltd. | | | 232,000 | | | | 217,201 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 5,931 | | | | 937,893 | |
| PVH Corp. | | | 4,805 | | | | 615,857 | |
| | | | | | | | |
| | | | | | $ | 2,058,285 | |
| | | | | | | | |
| Automotive – 2.0% | | | | | |
| Delphi Automotive PLC | | | 15,955 | | | $ | 1,160,248 | |
| DENSO Corp. | | | 19,600 | | | | 913,470 | |
| Guangzhou Automobile Group Co. Ltd., “H” | | | 358,000 | | | | 323,555 | |
| | | | | | | | |
| | | | | | $ | 2,397,273 | |
| | | | | | | | |
| Biotechnology – 1.0% | | | | | |
| Biogen Idec, Inc. (a) | | | 3,587 | | | $ | 1,217,607 | |
| | | | | | | | |
| Broadcasting – 2.9% | | | | | |
| Time Warner, Inc. | | | 14,185 | | | $ | 1,211,683 | |
| Twenty-First Century Fox, Inc. | | | 36,891 | | | | 1,416,799 | |
| WPP PLC | | | 42,397 | | | | 879,576 | |
| | | | | | | | |
| | | | | | $ | 3,508,058 | |
| | | | | | | | |
| Brokerage & Asset Managers – 2.0% | | | | | |
| BlackRock, Inc. | | | 2,724 | | | $ | 973,993 | |
| Franklin Resources, Inc. | | | 10,945 | | | | 606,025 | |
| Intercontinental Exchange, Inc. | | | 3,870 | | | | 848,652 | |
| | | | | | | | |
| | | | | | $ | 2,428,670 | |
| | | | | | | | |
| Business Services – 2.6% | | | | | |
| Accenture PLC, “A” | | | 10,143 | | | $ | 905,871 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 14,501 | | | | 763,623 | |
| Equifax, Inc. | | | 2,530 | | | | 204,601 | |
| Fidelity National Information Services, Inc. | | | 12,081 | | | | 751,438 | |
| Gartner, Inc. (a) | | | 3,355 | | | | 282,525 | |
| Global Payments, Inc. | | | 2,952 | | | | 238,315 | |
| | | | | | | | |
| | | | | | $ | 3,146,373 | |
| | | | | | | | |
| Cable TV – 1.2% | | | | | |
| Comcast Corp., “Special A” | | | 17,679 | | | $ | 1,017,692 | |
| Time Warner Cable, Inc. | | | 3,343 | | | | 508,337 | |
| | | | | | | | |
| | | | | | $ | 1,526,029 | |
| | | | | | | | |
| Chemicals – 0.4% | | | | | |
| E.I. du Pont de Nemours & Co. | | | 6,911 | | | $ | 510,999 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Computer Software – 2.7% | | | | | |
| Adobe Systems, Inc. (a) | | | 8,784 | | | $ | 638,597 | |
| Citrix Systems, Inc. (a) | | | 6,504 | | | | 414,955 | |
| Dassault Systems S.A. | | | 4,720 | | | | 287,252 | |
| Oracle Corp. | | | 16,056 | | | | 722,038 | |
| Qlik Technologies, Inc. (a) | | | 12,102 | | | | 373,831 | |
| Salesforce.com, Inc. (a) | | | 14,666 | | | | 869,840 | |
| | | | | | | | |
| | | | | | $ | 3,306,513 | |
| | | | | | | | |
| Computer Software – Systems – 3.2% | | | | | |
| Apple, Inc. (s) | | | 7,554 | | | $ | 833,811 | |
| EMC Corp. | | | 49,258 | | | | 1,464,933 | |
| Hewlett-Packard Co. | | | 33,426 | | | | 1,341,385 | |
| NCR Corp. (a) | | | 8,393 | | | | 244,572 | |
| | | | | | | | |
| | | | | | $ | 3,884,701 | |
| | | | | | | | |
| Conglomerates – 0.4% | | | | | |
| Hutchison Whampoa Ltd. | | | 46,000 | | | $ | 526,636 | |
| | | | | | | | |
| Construction – 0.8% | | | | | |
| Sherwin-Williams Co. | | | 3,859 | | | $ | 1,015,071 | |
| | | | | | | | |
| Consumer Products – 2.1% | | | | | |
| Colgate-Palmolive Co. | | | 13,783 | | | $ | 953,646 | |
| L’Oreal S.A. | | | 4,919 | | | | 825,837 | |
| Newell Rubbermaid, Inc. | | | 20,797 | | | | 792,158 | |
| | | | | | | | |
| | | | | | $ | 2,571,641 | |
| | | | | | | | |
| Consumer Services – 0.7% | | | | | |
| Priceline Group, Inc. (a) | | | 704 | | | $ | 802,708 | |
| | | | | | | | |
| Containers – 0.4% | | | | | |
| Crown Holdings, Inc. (a) | | | 9,306 | | | $ | 473,675 | |
| | | | | | | | |
| Electrical Equipment – 2.7% | | | | | |
| Danaher Corp. (s) | | | 22,667 | | | $ | 1,942,789 | |
| Siemens AG | | | 6,822 | | | | 773,903 | |
| W.W. Grainger, Inc. | | | 2,267 | | | | 577,836 | |
| | | | | | | | |
| | | | | | $ | 3,294,528 | |
| | | | | | | | |
| Electronics – 2.8% | | | | | |
| Altera Corp. | | | 16,020 | | | $ | 591,779 | |
| MediaTek, Inc. | | | 38,500 | | | | 560,480 | |
| Mellanox Technologies Ltd. (a) | | | 9,595 | | | | 409,994 | |
| Microchip Technology, Inc. | | | 13,583 | | | | 612,729 | |
| NXP Semiconductors N.V. (a) | | | 4,574 | | | | 349,454 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 133,000 | | | | 586,893 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 13,033 | | | | 291,679 | |
| | | | | | | | |
| | | | | | $ | 3,403,008 | |
| | | | | | | | |
| Energy – Independent – 3.1% | | | | | |
| Anadarko Petroleum Corp. | | | 9,669 | | | $ | 797,693 | |
| Cabot Oil & Gas Corp. | | | 19,950 | | | | 590,720 | |
| Cenovus Energy, Inc. | | | 12,461 | | | | 257,093 | |
| EOG Resources, Inc. | | | 11,730 | | | | 1,079,981 | |
| INPEX Corp. | | | 27,600 | | | | 306,231 | |
7
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Energy – Independent – continued | | | | | |
| Oil Search Ltd. | | | 63,488 | | | $ | 410,185 | |
| Pioneer Natural Resources Co. | | | 2,525 | | | | 375,846 | |
| | | | | | | | |
| | | | | | $ | 3,817,749 | |
| | | | | | | | |
| Energy – Integrated – 3.5% | | | | | |
| BG Group PLC | | | 59,480 | | | $ | 791,722 | |
| Exxon Mobil Corp. (s) | | | 19,352 | | | | 1,789,092 | |
| Royal Dutch Shell PLC, “A” | | | 50,356 | | | | 1,669,125 | |
| | | | | | | | |
| | | $ | 4,249,939 | |
| | | | | | | | |
| Engineering – Construction – 0.4% | | | | | |
| Fluor Corp. | | | 2,532 | | | $ | 153,515 | |
| JGC Corp. | | | 19,000 | | | | 391,572 | |
| | | | | | | | |
| | | $ | 545,087 | |
| | | | | | | | |
| Food & Beverages – 4.0% | | | | | |
| Coca-Cola Co. | | | 28,853 | | | $ | 1,218,174 | |
| Danone S.A. | | | 13,821 | | | | 909,235 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 8,010 | | | | 274,212 | |
| Mondelez International, Inc. | | | 26,718 | | | | 970,531 | |
| Nestle S.A. | | | 15,490 | | | | 1,135,441 | |
| Want Want China Holdings Ltd. | | | 268,000 | | | | 351,575 | |
| | | | | | | | |
| | | $ | 4,859,168 | |
| | | | | | | | |
| Food & Drug Stores – 1.0% | | | | | |
| CVS Health Corp. | | | 13,073 | | | $ | 1,259,061 | |
| | | | | | | | |
| Gaming & Lodging – 0.4% | | | | | |
| Sands China Ltd. | | | 110,000 | | | $ | 535,018 | |
| | | | | | | | |
| General Merchandise – 1.7% | | | | | |
| Dollarama, Inc. | | | 12,403 | | | $ | 634,135 | |
| Lojas Renner S.A. | | | 10,728 | | | | 305,992 | |
| Target Corp. | | | 15,227 | | | | 1,155,882 | |
| | | | | | | | |
| | | $ | 2,096,009 | |
| | | | | | | | |
| Insurance – 3.5% | | | | | |
| AIA Group Ltd. | | | 219,200 | | | $ | 1,207,016 | |
| American International Group, Inc. | | | 18,805 | | | | 1,053,268 | |
| Hiscox Ltd. | | | 62,607 | | | | 703,059 | |
| ING Groep N.V. (a) | | | 43,383 | | | | 561,706 | |
| MetLife, Inc. | | | 15,021 | | | | 812,486 | |
| | | | | | | | |
| | | $ | 4,337,535 | |
| | | | | | | | |
| Internet – 3.4% | | | | | |
| Facebook, Inc., “A “ (a) | | | 12,921 | | | $ | 1,008,096 | |
| Google, Inc., “A” (a) | | | 2,537 | | | | 1,346,284 | |
| Google, Inc., “C” (a) | | | 1,487 | | | | 782,757 | |
| LinkedIn Corp., “A” (a) | | | 3,044 | | | | 699,237 | |
| Yelp, Inc. (a) | | | 5,421 | | | | 296,691 | |
| | | | | | | | |
| | | $ | 4,133,065 | |
| | | | | | | | |
| Machinery & Tools – 3.0% | | | | | |
| Atlas Copco AB, “A” | | | 23,202 | | | $ | 645,877 | |
| Eaton Corp. PLC | | | 12,025 | | | | 817,219 | |
| Joy Global, Inc. | | | 14,750 | | | | 686,170 | |
| Roper Industries, Inc. | | | 6,614 | | | | 1,034,099 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Machinery & Tools – continued | | | | | |
| Schindler Holding AG | | | 3,641 | | | $ | 525,370 | |
| | | | | | | | |
| | | $ | 3,708,735 | |
| | | | | | | | |
| Major Banks – 6.6% | | | | | |
| BNP Paribas | | | 9,590 | | | $ | 563,550 | |
| BOC Hong Kong Holdings Ltd. | | | 123,500 | | | | 411,182 | |
| Goldman Sachs Group, Inc. | | | 3,432 | | | | 665,225 | |
| HSBC Holdings PLC | | | 89,927 | | | | 849,854 | |
| JPMorgan Chase & Co. | | | 21,914 | | | | 1,371,378 | |
| Morgan Stanley | | | 21,503 | | | | 834,316 | |
| Royal Bank of Scotland Group PLC (a) | | | 87,568 | | | | 531,584 | |
| Standard Chartered PLC | | | 43,405 | | | | 651,480 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 21,600 | | | | 780,462 | |
| Wells Fargo & Co. | | | 26,264 | | | | 1,439,792 | |
| | | | | | | | |
| | | $ | 8,098,823 | |
| | | | | | | | |
| Medical Equipment – 3.7% | | | | | |
| Abbott Laboratories | | | 23,963 | | | $ | 1,078,814 | |
| DENTSPLY International, Inc. | | | 15,947 | | | | 849,497 | |
| Stryker Corp. | | | 10,281 | | | | 969,807 | |
| Terumo Corp. | | | 21,000 | | | | 478,268 | |
| Thermo Fisher Scientific, Inc. | | | 9,300 | | | | 1,165,197 | |
| | | | | | | | |
| | | $ | 4,541,583 | |
| | | | | | | | |
| Metals & Mining – 1.0% | | | | | |
| Iluka Resources Ltd. | | | 35,563 | | | $ | 170,957 | |
| Rio Tinto Ltd. | | | 23,152 | | | | 1,066,672 | |
| | | | | | | | |
| | | $ | 1,237,629 | |
| | | | | | | | |
| Natural Gas – Distribution – 1.3% | | | | | |
| Centrica PLC | | | 99,919 | | | $ | 430,047 | |
| China Resources Gas Group Ltd. | | | 108,000 | | | | 279,370 | |
| GDF SUEZ | | | 22,757 | | | | 531,497 | |
| Tokyo Gas Co. Ltd. | | | 62,000 | | | | 334,562 | |
| | | | | | | | |
| | | $ | 1,575,476 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.4% | | | | | |
| Williams Cos., Inc. | | | 11,476 | | | $ | 515,731 | |
| | | | | | | | |
| Oil Services – 0.7% | | | | | |
| Schlumberger Ltd. | | | 10,109 | | | $ | 863,410 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 9.0% | | | | | |
| American Express Co. | | | 11,024 | | | $ | 1,025,673 | |
| BB&T Corp. | | | 17,125 | | | | 665,991 | |
| Credicorp Ltd. | | | 3,926 | | | | 628,867 | |
| DBS Group Holdings Ltd. | | | 60,000 | | | | 926,546 | |
| Discover Financial Services | | | 10,081 | | | | 660,205 | |
| Erste Group Bank AG | | | 20,155 | | | | 462,082 | |
| HDFC Bank Ltd. | | | 74,154 | | | | 1,112,066 | |
| Julius Baer Group Ltd. | | | 13,855 | | | | 632,274 | |
| Kasikornbank PLC, NVDR | | | 89,300 | | | | 616,636 | |
| KBC Group N.V. (a) | | | 12,733 | | | | 706,688 | |
| Sberbank of Russia, ADR | | | 78,522 | | | | 315,523 | |
| UBS AG (a) | | | 65,245 | | | | 1,121,542 | |
| UniCredit S.p.A. | | | 82,700 | | | | 527,089 | |
| Visa, Inc., “A” | | | 6,257 | | | | 1,640,585 | |
| | | | | | | | |
| | | $ | 11,041,767 | |
| | | | | | | | |
8
MFS Global Research Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Pharmaceuticals – 6.9% | | | | | |
| AbbVie, Inc. | | | 10,526 | | | $ | 688,821 | |
| Actavis PLC (a) | | | 5,303 | | | | 1,365,045 | |
| Bayer AG | | | 8,423 | | | | 1,151,725 | |
| Novartis AG | | | 18,424 | | | | 1,694,409 | |
| Roche Holding AG | | | 5,639 | | | | 1,528,397 | |
| Santen Pharmaceutical Co. Ltd. | | | 16,500 | | | | 883,012 | |
| Valeant Pharmaceuticals International, Inc. (a) | | | 7,827 | | | | 1,120,122 | |
| | | | | | | | |
| | | $ | 8,431,531 | |
| | | | | | | | |
| Railroad & Shipping – 1.1% | | | | | |
| Union Pacific Corp. | | | 11,055 | | | $ | 1,316,982 | |
| | | | | | | | |
| Real Estate – 0.4% | | | | | |
| Intu Properties PLC, REIT | | | 94,095 | | | $ | 486,585 | |
| | | | | | | | |
| Restaurants – 0.6% | | | | | |
| McDonald’s Corp. | | | 8,317 | | | $ | 779,303 | |
| | | | | | | | |
| Specialty Chemicals – 2.7% | | | | | |
| Akzo Nobel N.V. | | | 10,452 | | | $ | 724,791 | |
| JSR Corp. | | | 39,100 | | | | 671,418 | |
| LG Chemical Ltd. (a) | | | 3,335 | | | | 544,263 | |
| Linde AG | | | 4,108 | | | | 766,511 | |
| W.R. Grace & Co. (a) | | | 6,048 | | | | 576,919 | |
| | | | | | | | |
| | | $ | 3,283,902 | |
| | | | | | | | |
| Specialty Stores – 1.7% | | | | | |
| Hennes & Mauritz AB, “B” | | | 4,077 | | | $ | 169,121 | |
| L Brands, Inc. | | | 8,902 | | | | 770,468 | |
| Ryohin Keikaku Co. Ltd. | | | 2,700 | | | | 333,621 | |
| Urban Outfitters, Inc. (a) | | | 22,195 | | | | 779,710 | |
| | | | | | | | |
| | | $ | 2,052,920 | |
| | | | | | | | |
| Telecommunications – Wireless – 2.2% | | | | | |
| American Tower Corp., REIT | | | 8,036 | | | $ | 794,359 | |
| KDDI Corp. | | | 17,146 | | | | 1,072,829 | |
| Mobile TeleSystems OJSC (a) | | | 45,813 | | | | 127,485 | |
| Philippine Long Distance Telephone Co. | | | 4,705 | | | | 305,655 | |
| Vodafone Group PLC | | | 132,103 | | | | 452,646 | |
| | | | | | | | |
| | | $ | 2,752,974 | |
| | | | | | | | |
| Telephone Services – 1.1% | | | | | |
| BT Group PLC | | | 43,863 | | | $ | 272,282 | |
| Hellenic Telecommunications Organization S.A. (a) | | | 33,139 | | | | 364,909 | |
| Royal KPN N.V. | | | 136,034 | | | | 428,885 | |
| Verizon Communications, Inc. | | | 8,282 | | | | 387,432 | |
| | | | | | | | |
| | | $ | 1,453,508 | |
| | | | | | | | |
| Tobacco – 0.7% | | | | | |
| Japan Tobacco, Inc. | | | 29,000 | | | $ | 796,284 | |
| | | | | | | | |
| Trucking – 0.5% | | | | | |
| Yamato Holdings Co. Ltd. | | | 33,300 | | | $ | 655,691 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | |
| Utilities – Electric Power – 1.9% | | | | | |
| CMS Energy Corp. | | | 40,487 | | | $ | 1,406,923 | |
| Edison International | | | 10,774 | | | | 705,484 | |
| Energias do Brasil S.A. | | | 67,781 | | | | 227,069 | |
| | | | | | | | |
| | | $ | 2,339,476 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $104,932,975) | | | $ | 121,704,780 | |
| | | | | | | | |
|
| PREFERRED STOCKS – 0.2% | |
| Telephone Services – 0.2% | | | | | |
Telecom Italia S.p.A.
(Identified Cost, $417,996) | | | 373,506 | | | $ | 312,189 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 0.8% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 989,853 | | | $ | 989,853 | |
| | | | | | | | |
Total Investments
(Identified Cost, $106,340,824) | | | | | | $ | 123,006,822 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.3)% | | | | (437,854 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 122,568,968 | |
| | | | | | | | |
| (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, 2014, the fund had no short sales outstanding. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
At December 31, 2014, the fund had cash collateral of $8,687 and other liquid securities with an aggregate value of $576,153 to cover any commitments for securities sold short. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities. At December 31, 2014, the fund had no short sales outstanding.
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| NVDR | | Non-Voting Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $105,350,971) | | | $122,016,969 | | | | | |
Underlying affiliated funds, at cost and value | | | 989,853 | | | | | |
Total investments, at value (identified cost, $106,340,824) | | | $123,006,822 | | | | | |
Cash | | | 1,577 | | | | | |
Deposits with brokers | | | 8,687 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 3,149 | | | | | |
Interest and dividends | | | 169,155 | | | | | |
Other assets | | | 1,427 | | | | | |
Total assets | | | | | | | $123,190,817 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $8,999 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 390,209 | | | | | |
Fund shares reacquired | | | 135,818 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 4,479 | | | | | |
Shareholder servicing costs | | | 21 | | | | | |
Distribution and/or service fees | | | 132 | | | | | |
Payable for independent Trustees’ compensation | | | 83 | | | | | |
Deferred country tax expense payable | | | 7,105 | | | | | |
Accrued expenses and other liabilities | | | 75,003 | | | | | |
Total liabilities | | | | | | | $621,849 | |
Net assets | | | | | | | $122,568,968 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $117,477,044 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $7,010 deferred country tax) | | | 16,651,448 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (13,017,800 | ) | | | | |
Undistributed net investment income | | | 1,458,276 | | | | | |
Net assets | | | | | | | $122,568,968 | |
Shares of beneficial interest outstanding | | | | | | | 4,869,866 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value per share | |
Initial Class | | | $113,018,278 | | | | 4,488,694 | | | | $25.18 | |
Service Class | | | 9,550,690 | | | | 381,172 | | | | 25.06 | |
See Notes to Financial Statements
10
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $2,811,528 | | | | | |
Interest | | | 21,331 | | | | | |
Dividends from underlying affiliated funds | | | 613 | | | | | |
Foreign taxes withheld | | | (146,150 | ) | | | | |
Total investment income | | | | | | | $2,687,322 | |
Expenses | | | | | | | | |
Management fee | | | $976,455 | | | | | |
Distribution and/or service fees | | | 25,241 | | | | | |
Shareholder servicing costs | | | 4,706 | | | | | |
Administrative services fee | | | 28,162 | | | | | |
Independent Trustees’ compensation | | | 4,566 | | | | | |
Custodian fee | | | 87,972 | | | | | |
Shareholder communications | | | 14,649 | | | | | |
Audit and tax fees | | | 66,125 | | | | | |
Legal fees | | | 1,129 | | | | | |
Dividend and interest expense on securities sold short | | | 875 | | | | | |
Miscellaneous | | | 12,825 | | | | | |
Total expenses | | | | | | | $1,222,705 | |
Fees paid indirectly | | | (3 | ) | | | | |
Reduction of expenses by investment adviser | | | (6,187 | ) | | | | |
Net expenses | | | | | | | $1,216,515 | |
Net investment income | | | | | | | $1,470,807 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $2,122 country tax) | | | $11,086,385 | | | | | |
Securities sold short | | | (258,552 | ) | | | | |
Foreign currency | | | (12,057 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $10,815,776 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $1,203 increase in deferred country tax) | | | $(9,278,509 | ) | | | | |
Securities sold short | | | 109,797 | | | | | |
Translation of assets and liabilities in foreign currencies | | | (9,445 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(9,178,157 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $1,637,619 | |
Change in net assets from operations | | | | | | | $3,108,426 | |
See Notes to Financial Statements
11
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $1,470,807 | | | | $1,422,018 | |
Net realized gain (loss) on investments and foreign currency | | | 10,815,776 | | | | 15,745,728 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (9,178,157 | ) | | | 11,567,111 | |
Change in net assets from operations | | | $3,108,426 | | | | $28,734,857 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,348,125 | ) | | | $(2,039,015 | ) |
Change in net assets from fund share transactions | | | $(16,911,014 | ) | | | $(18,942,031 | ) |
Total change in net assets | | | $(15,150,713 | ) | | | $7,753,811 | |
| Net assets | | | | | | | | |
At beginning of period | | | 137,719,681 | | | | 129,965,870 | |
At end of period (including undistributed net investment income of $1,458,276 and
$1,348,713, respectively) | | | $122,568,968 | | | | $137,719,681 | |
See Notes to Financial Statements
12
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $24.85 | | | | $20.36 | | | | $17.71 | | | | $19.23 | | | | $17.29 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.29 | | | | $0.24 | | | | $0.30 | | | | $0.27 | | | | $0.20 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.31 | | | | 4.61 | | | | 2.66 | | | | (1.56 | ) | | | 1.97 | |
Total from investment operations | | | $0.60 | | | | $4.85 | | | | $2.96 | | | | $(1.29 | ) | | | $2.17 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.27 | ) | | | $(0.36 | ) | | | $(0.31 | ) | | | $(0.23 | ) | | | $(0.23 | ) |
Net asset value, end of period (x) | | | $25.18 | | | | $24.85 | | | | $20.36 | | | | $17.71 | | | | $19.23 | |
Total return (%) (k)(r)(s)(x) | | | 2.40 | | | | 24.00 | | | | 16.81 | | | | (6.73 | ) | | | 12.66 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.92 | | | | 0.92 | | | | 0.94 | | | | 0.97 | | | | 0.97 | |
Expenses after expense reductions (f) | | | 0.91 | | | | 0.92 | | | | 0.94 | | | | N/A | | | | N/A | |
Net investment income | | | 1.15 | | | | 1.08 | | | | 1.58 | | | | 1.38 | | | | 1.18 | |
Portfolio turnover | | | 37 | | | | 41 | | | | 40 | | | | 54 | | | | 59 | |
Net assets at end of period (000 omitted) | | | $113,018 | | | | $126,707 | | | | $117,388 | | | | $117,312 | | | | $144,156 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding
short sale dividend and interest expense (f) | | | 0.91 | | | | 0.91 | | | | 0.93 | | | | 0.96 | | | | 0.96 | |
See Notes to Financial Statements
13
MFS Global Research Portfolio
Financial Highlights – continued
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| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $24.72 | | | | $20.25 | | | �� | $17.60 | | | | $19.11 | | | | $17.18 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.23 | | | | $0.19 | | | | $0.26 | | | | $0.22 | | | | $0.16 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.31 | | | | 4.57 | | | | 2.64 | | | | (1.55 | ) | | | 1.96 | |
Total from investment operations | | | $0.54 | | | | $4.76 | | | | $2.90 | | | | $(1.33 | ) | | | $2.12 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.20 | ) | | | $(0.29 | ) | | | $(0.25 | ) | | | $(0.18 | ) | | | $(0.19 | ) |
Net asset value, end of period (x) | | | $25.06 | | | | $24.72 | | | | $20.25 | | | | $17.60 | | | | $19.11 | |
Total return (%) (k)(r)(s)(x) | | | 2.15 | | | | 23.68 | | | | 16.57 | | | | (7.00 | ) | | | 12.42 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.17 | | | | 1.17 | | | | 1.19 | | | | 1.22 | | | | 1.22 | |
Expenses after expense reductions (f) | | | 1.16 | | | | 1.17 | | | | 1.19 | | | | N/A | | | | N/A | |
Net investment income | | | 0.90 | | | | 0.86 | | | | 1.35 | | | | 1.13 | | | | 0.93 | |
Portfolio turnover | | | 37 | | | | 41 | | | | 40 | | | | 54 | | | | 59 | |
Net assets at end of period (000 omitted) | | | $9,551 | | | | $11,013 | | | | $12,578 | | | | $13,073 | | | | $17,036 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions excluding
short sale dividend and interest expense (f) | | | 1.16 | | | | 1.16 | | | | 1.18 | | | | 1.21 | | | | 1.21 | |
| (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. Excluding the effect of the proceeds received from a non-recurring litigation settlement against Tyco International Ltd., the Initial Class and Service Class total returns for the year ended December 31, 2010 would have been lower by approximately 0.71% and 0.70%, respectively. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
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 diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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 may be 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 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
15
MFS Global Research Portfolio
Notes to Financial Statements – continued
third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $72,562,692 | | | | $— | | | | $— | | | | $72,562,692 | |
United Kingdom | | | 1,354,539 | | | | 7,430,093 | | | | — | | | | 8,784,632 | |
Japan | | | — | | | | 7,617,422 | | | | — | | | | 7,617,422 | |
Switzerland | | | 1,121,542 | | | | 5,515,891 | | | | — | | | | 6,637,433 | |
France | | | — | | | | 4,915,114 | | | | — | | | | 4,915,114 | |
Hong Kong | | | 217,201 | | | | 2,967,186 | | | | — | | | | 3,184,387 | |
Germany | | | 2,692,138 | | | | — | | | | — | | | | 2,692,138 | |
Netherlands | | | 349,454 | | | | 1,715,382 | | | | — | | | | 2,064,836 | |
Canada | | | 2,011,350 | | | | — | | | | — | | | | 2,011,350 | |
Other Countries | | | 1,865,322 | | | | 9,681,643 | | | | — | | | | 11,546,965 | |
| Mutual Funds | | | 989,853 | | | | — | | | | — | | | | 989,853 | |
| Total Investments | | | $83,164,091 | | | | $39,842,731 | | | | $— | | | | $123,006,822 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $27,891,888 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $217,201 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments.
16
MFS Global Research Portfolio
Notes to Financial Statements – continued
Derivatives are 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.
The derivative instruments used by the fund were purchased options. At December 31, 2014, 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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Puchased Options) | |
| Equity | | | $(615 | ) |
There is no change in unrealized appreciation (depreciation) on derivative transactions at period end.
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Purchased Options – The fund purchased put options for a premium. Purchased put options entitle the holder to 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 put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
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 put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered 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, 2014, this expense amounted to $875. 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, 2014, the fund had no short sales outstanding.
17
MFS Global Research Portfolio
Notes to Financial Statements – continued
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in 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, 2014, there were no securities on loan or collateral outstanding.
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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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 straddle loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $1,348,125 | | | | $2,039,015 | |
18
MFS Global Research Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $106,370,696 | |
| Gross appreciation | | | 23,447,981 | |
| Gross depreciation | | | (6,811,855 | ) |
| Net unrealized appreciation (depreciation) | | | $16,636,126 | |
| Undistributed ordinary income | | | 1,458,276 | |
| Capital loss carryforwards | | | (12,937,239 | ) |
| Other temporary differences | | | (65,239 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses (“post-enactment losses”). Previously, net capital losses were carried forward for eight years and treated as short-term losses (“pre-enactment losses”). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment losses expire as follows:
The availability of $12,937,239 of the capital loss carryforwards of the fund may be limited in a given year due to a change in ownership of the fund on July 31, 2013.
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $1,271,809 | | | | $1,891,705 | |
| Service Class | | | 76,316 | | | | 147,310 | |
| Total | | | $1,348,125 | | | | $2,039,015 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $5,958, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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.
19
MFS Global Research 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, 2014, the fee was $4,659, which equated to 0.0036% 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, 2014, these costs amounted to $47.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0216% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $611 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $229, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions, short sales, and short-term obligations, aggregated $47,725,547 and $64,414,822, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 27,217 | | | | $688,081 | | | | 32,474 | | | | $747,119 | |
Service Class | | | 14,838 | | | | 368,961 | | | | 14,109 | | | | 315,844 | |
| | | 42,055 | | | | $1,057,042 | | | | 46,583 | | | | $1,062,963 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 49,124 | | | | $1,271,809 | | | | 84,263 | | | | $1,891,705 | |
Service Class | | | 2,959 | | | | 76,316 | | | | 6,591 | | | | 147,310 | |
| | | 52,083 | | | | $1,348,125 | | | | 90,854 | | | | $2,039,015 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (685,547 | ) | | | $(17,270,545 | ) | | | (784,748 | ) | | | $(17,661,909 | ) |
Service Class | | | (82,044 | ) | | | (2,045,636 | ) | | | (196,495 | ) | | | (4,382,100 | ) |
| | | (767,591 | ) | | | $(19,316,181 | ) | | | (981,243 | ) | | | $(22,044,009 | ) |
20
MFS Global Research Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (609,206 | ) | | | $(15,310,655 | ) | | | (668,011 | ) | | | $(15,023,085 | ) |
Service Class | | | (64,247 | ) | | | (1,600,359 | ) | | | (175,795 | ) | | | (3,918,946 | ) |
| | | (673,453 | ) | | | $(16,911,014 | ) | | | (843,806 | ) | | | $(18,942,031 | ) |
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, 2014, the fund’s commitment fee and interest expense were $490 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 43 | | | | 24,471,232 | | | | (23,481,422 | ) | | | 989,853 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $613 | | | | $989,853 | |
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Research Portfolio as of December 31, 2014, 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 13, 2015
22
MFS Global Research Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
23
MFS Global Research Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
24
MFS Global Research Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers James Keating Ben Kottler Joseph MacDougall | | |
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for each of the one- and five-year periods ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed continued concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance, including assigning an additional portfolio manager to the Fund in both 2011 and 2013. In addition, the Trustees requested that they receive a separate update on the Fund’s performance at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the
26
MFS Global Research Portfolio
Board Review of Investment Advisory Agreement – continued
investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $300 million. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
27
MFS Global Research Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 72.47% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
28
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
29
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® GLOBAL TACTICAL ALLOCATION PORTFOLIO
MFS® Variable Insurance Trust II
WTS-ANN
MFS® GLOBAL TACTICAL ALLOCATION PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Global Tactical Allocation Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Global Tactical Allocation Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | | | | | | | | | | | |
| | | | | Active Security
Selection (a) | | | Tactical
Overlay (b) | | | Net Market
Exposure (c) | |
| Fixed Income | | U.S. | | | 16.9% | | | | 16.1% | | | | 33.0% | |
| | Europe ex-U.K. | | | 21.9% | | | | (4.9)% | | | | 17.0% | |
| | United Kingdom | | | 4.0% | | | | (1.4)% | | | | 2.6% | |
| | Emerging Markets | | | 1.9% | | | | 0.0% | | | | 1.9% | |
| | North America ex-U.S. | | | 2.6% | | | | (1.8)% | | | | 0.8% | |
| | Japan | | | 7.6% | | | | (7.2)% | | | | 0.4% | |
| | Developed - Middle East/Africa | | | 0.1% | | | | 0.0% | | | | 0.1% | |
| | Asia/Pacific ex-Japan | | | 3.4% | | | | (3.5)% | | | | (0.1)% | |
| | | Total | | | 58.4% | | | | (2.7)% | | | | 55.7% | |
| Equity | | U.S. Large Cap | | | 18.2% | | | | (3.8)% | | | | 14.4% | |
| | Europe ex-U.K. | | | 6.5% | | | | 7.1% | | | | 13.6% | |
| | Emerging Markets | | | 0.4% | | | | 8.1% | | | | 8.5% | |
| | Japan | | | 3.8% | | | | 0.0% | | | | 3.8% | |
| | United Kingdom | | | 3.7% | | | | (1.2)% | | | | 2.5% | |
| | Asia/Pacific ex-Japan | | | 0.4% | | | | (2.0)% | | | | (1.6)% | |
| | U.S. Small/Mid Cap | | | 0.6% | | | | (2.6)% | | | | (2.0)% | |
| | North America ex-U.S. | | | 0.8% | | | | (3.4)% | | | | (2.6)% | |
| | | Total | | | 34.4% | | | | 2.2% | | | | 36.6% | |
| Real Estate-related | | Non-U.S. | | | 0.7% | | | | 0.0% | | | | 0.7% | |
| | U.S. | | | 0.4% | | | | 0.0% | | | | 0.4% | |
| | | Total | | | 1.1% | | | | 0.0% | | | | 1.1% | |
| Cash | | Cash & Equivalents (d) | | | 1.1% | | | | 2.8% | | | | 3.9% | |
| | Derivative Offsets (e) | | | 2.2% | | | | 0.5% | | | | 2.7% | |
| | | Total | | | 3.3% | | | | 3.3% | | | | 6.6% | |
Total Net Exposure Summary | | | 97.2% | | | | 2.8% | | | | 100.0% | |
| | | | | | | | |
Strategic Allocation Targets & Net Exposure Ranges | |
| Asset Class | | | Target (w) | | | | Ranges (z) | |
Equities | | | 35% | | | | 0 to 70% | |
Fixed Income, Cash and Cash Equivalents | | | 65% | | | | 30 to 100% | |
| | | | |
| Top ten holdings (c) | | | | |
US Treasury Note 10 yr Future MAR 2015 | | | 13.9% | |
BIST 30 Index Future FEB 2015 | | | 3.2% | |
Government of Japan, 2.1%, 9/20/24 | | | 3.1% | |
Government of Japan, 1.1%, 6/20/20 | | | 2.6% | |
S&P TSX 60 Index Future MAR 2015 | | | (3.4)% | |
S&P ASX 200 Index Future MAR 2015 | | | (3.4)% | |
Australian Treasury Bond 10 yr Future MAR 2015 | | | (3.5)% | |
E-Mini S&P 500 Index Future MAR 2015 | | | (3.8)% | |
German Euro Bund Future MAR 2015 | | | (4.9)% | |
Japanese Government Bond 10 yr Future MAR 2015 | | | (7.2)% | |
| (a) | Represents the actively managed portion of the portfolio and for purposes of this presentation, components include the value of securities, less any securities sold short. The bond component will include any accrued interest amounts. This also reflects the equivalent exposure of certain derivative positions. These amounts may be negative from time to time. |
| (b) | Represents the tactical overlay portion of the portfolio which is how the fund manages its exposure to markets and currencies through use of derivative positions. Percentages reflect the equivalent exposure of those derivative positions. |
| (c) | For purposes of this presentation, the components include the value of securities, less any securities sold short, and reflect the impact of the equivalent exposure of derivative positions. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. |
2
MFS Global Tactical Allocation Portfolio
Portfolio Composition – continued
| (d) | Cash & Equivalents includes cash, other assets (excluding interest receivables) less liabilities, short term securities, and the unrealized gain or loss in connection with all forward currency exchange contracts. |
| (e) | Derivative Offsets represent the offsetting of the leverage produced by the fund’s derivative positions. |
| (w) | The strategic asset class allocations have been selected for investment over longer time periods. The actual strategic asset class weightings can deviate due to market movements and cash flows. |
| (z) | The fund’s net exposures to the asset classes referenced will normally fall within theses ranges after taking into account the tactical overlay. |
Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The value of derivatives may be different.
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Percentages are based on net assets as of 12/31/14.
The portfolio is actively managed and current holdings may be different.
3
MFS Global Tactical Allocation Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2014, Initial Class shares of the MFS Global Tactical Allocation Portfolio (“fund”) provided a total return of 4.46%, while Service Class shares of the fund provided a total return of 4.25%. These compare with a return of 0.59% over the same period for the fund’s benchmark, the Barclays Global Aggregate Bond Index. The fund’s other benchmarks, the MSCI World Index and the MFS Global Tactical Allocation Blended Index (“Blended Index”), generated total returns of 5.50% and 6.14%, respectively. The Blended Index reflects the blended returns of equity and fixed income indices, with percentage allocations to each index designed to resemble the strategic allocations of the fund. The market indices and related percentage allocations used to compile the Blended Index are set forth in the Performance Summary.
The fund’s investment objective is to seek total return. MFS seeks to achieve the fund’s objective by generating returns from a combination of (1) individual security selection of a combination of debt instruments and equity securities and (2) a tactical asset allocation overlay primarily using derivative instruments to manage the fund’s exposure to asset classes (e.g. equity and fixed income), markets (e.g. U.S. and foreign countries), and currencies (e.g. U.S. dollar and Japanese yen). Derivatives include futures, forward contracts, options, structured securities, and swaps.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Within the equity portion of the fund, stock selection in the health care sector held back performance relative to the MSCI World Index. An overweight position in pharmaceutical firm GlaxoSmithKline (United Kingdom) dampened relative performance as the stock lagged the benchmark during the reporting period.
An underweight position and stock selection in the technology sector further weighed on relative results. Not holding strong-performing computer and personal electronics maker Apple, software giant Microsoft and semiconductor company Intel hindered relative returns as all three stocks posted strong results for the period.
Other top individual detractors included the fund’s overweight positions in French international food producer Danone, holdings of Fuji Media Holdings (Japan), overweighting chemical products company Henkel KGaA (Germany), tobacco company Japan Tobacco, and holding shares of retailer Esprit Holdings (Hong Kong) also hindered relative returns.
The fund’s cash and/or cash equivalents position within the equity portion of the fund also held back relative performance. Under normal market conditions, the fund strives to be fully invested and generally 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, yield curve (y) positioning in the US and United Kingdom, particularly the fund’s greater exposure to shifts in the long end of the yield curves, dampened performance relative to the Barclays Global Aggregate Bond Index. A greater exposure to the Japanese yen also hindered relative performance.
As part of the tactical overlay, negative contributions from top-level allocation within stock and bond markets, specifically, by an underweight allocation to developed equity and fixed income securities detracted from relative results. A long exposure to the equity markets of Italy, Mexico and Hong Kong and short exposures to Japan and Canada, via equity index futures, and a short exposure to
4
MFS Global Tactical Allocation Portfolio
Management Review – continued
the fixed income markets of Germany and Canada, via interest rate futures, dampened relative performance. The fund’s long positions in the Norwegian krone and Swedish krona, via foreign currency exchange forward contracts, were additional factors that weakened relative performance.
Contributors to Performance
Within the equity portion of the fund, stock selection in the basic materials sector benefited performance relative to the MSCI World Index. An overweight position in diversified technology company 3M and not holding poor-performing mining giant BHP Billiton (Australia) contributed to relative results.
Strong stock selection in the financial services and industrial goods & services sectors was also a positive factor for relative performance. Within financial services, the fund’s overweight positions in diversified financial services firm Wells Fargo and German real estate company Deutsche Wohnen aided relative returns. Within industrial goods & services, an overweight position in defense contractor Lockheed Martin further supported relative performance.
Individual securities in other sectors that benefited relative results included overweight positions in shares of drugstore retailer CVS Health, consumer and chemical products manufacturer Kao (Japan), holdings of semiconductor manufacturer Taiwan Semiconductor(b) (Taiwan), and overweight positions in shares of medical device manufacturer Medtronic and diversified medical products maker Johnson & Johnson.
Within the fixed income portion of the fund, yield curve positioning in Europe and Australia, particularly the fund’s greater exposure to shifts in the long end of the yield curve, contributed to performance relative to the Barclays Global Aggregate Bond Index. The fund’s greater exposure to Irish debt was another positive factor for relative results. Strong bond selection further supported relative performance.
Within the fund’s tactical overlay, long exposures to the equity markets of Turkey and Taiwan coupled with a short exposure to the equity markets of Australia and US stocks with small market capitalizations, via equity index futures, supported performance. Additionally, a short exposure to the fixed income market of Japan and a long exposure to the fixed income market of the United Kingdom, via interest rate futures, were additional positive factors.
Respectfully,
| | | | | | |
| Nevin Chitkara | | Pablo De La Mata | | Pilar Gomez-Bravo | | Steven Gorham |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
| Richard Hawkins | | Benjamin Nastou | | Robert Persons | | Natalie Shapiro |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
| Benjamin Stone | | Erik Weisman | | Barnaby Wiener | | |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | |
| (b) | Security is not a benchmark constituent. |
| (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. |
Note to Contract Owners: Effective September 30, 2014, Pablo De La Mata is also a Portfolio Manager of the Fund. Effective December 31, 2014, Barnaby Wiener is no longer a Portfolio Manager of the Fund.
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
MFS Global Tactical Allocation Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 11/07/94 | | 4.46% | | 5.95% | | 5.59% | | |
| | | Service Class | | 8/24/01 | | 4.25% | | 5.69% | | 5.32% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Barclays Global Aggregate Bond Index (f) | | 0.59% | | 2.65% | | 3.60% | | |
| | | MFS Global Tactical Allocation Blended Index (f)(w) | | 6.14% | | 6.78% | | 5.56% | | |
| | | Barclays Global Aggregate Bond Index Hedged (f) | | 7.59% | | 4.60% | | 4.69% | | |
| | | MSCI World Index (f) | | 5.50% | | 10.81% | | 6.61% | | |
| (f) | | Source: FactSet Research Systems Inc. |
| (w) | | As of December 31, 2014, the MFS Global Tactical Allocation Blended Index was comprised of 35% MSCI World Index, 54% Barclays Global Aggregate Bond Index Hedged, and 11% Barclays Global Aggregate Bond Index. |
Benchmark Definitions
Barclays Global Aggregate Bond Index – provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.
Barclays Global Aggregate Bond Index Hedged – provides a broad-based measure of the currency-hedged performance of global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.
MSCI World Index – a market capitalization-weighted index that is designed to measure equity market performance in the global developed markets.
6
MFS Global Tactical Allocation Portfolio
Performance Summary – continued
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
MFS Global Tactical Allocation Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.76% | | | | $1,000.00 | | | | $1,000.16 | | | | $3.83 | |
| | Hypothetical (h) | | | 0.76% | | | | $1,000.00 | | | | $1,021.37 | | | | $3.87 | |
| Service Class | | Actual | | | 1.01% | | | | $1,000.00 | | | | $999.35 | | | | $5.09 | |
| | Hypothetical (h) | | | 1.01% | | | | $1,000.00 | | | | $1,020.11 | | | | $5.14 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
8
MFS Global Tactical Allocation Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 34.9% | | | | | |
| Aerospace – 2.0% | | | | | |
| Cobham PLC | | | 383,715 | | | $ | 1,924,102 | |
| Honeywell International, Inc. | | | 53,020 | | | | 5,297,758 | |
| Lockheed Martin Corp. | | | 33,990 | | | | 6,545,454 | |
| Northrop Grumman Corp. | | | 10,003 | | | | 1,474,342 | |
| United Technologies Corp. | | | 38,819 | | | | 4,464,185 | |
| | | | | | | | |
| | | | | | $ | 19,705,841 | |
| | | | | | | | |
| Alcoholic Beverages – 0.9% | | | | | |
| Heineken N.V. | | | 61,020 | | | $ | 4,334,817 | |
| Pernod Ricard S.A. | | | 40,109 | | | | 4,447,164 | |
| | | | | | | | |
| | | | | | $ | 8,781,981 | |
| | | | | | | | |
| Automotive – 0.4% | | | | | |
| Johnson Controls, Inc. | | | 44,264 | | | $ | 2,139,722 | |
| USS Co. Ltd. | | | 103,600 | | | | 1,594,299 | |
| | | | | | | | |
| | | | | | $ | 3,734,021 | |
| | | | | | | | |
| Broadcasting – 0.9% | | | | | |
| Fuji Media Holdings, Inc. | | | 66,500 | | | $ | 817,971 | |
| Nippon Television Holdings, Inc. | | | 71,500 | | | | 1,052,059 | |
| Omnicom Group, Inc. | | | 35,574 | | | | 2,755,918 | |
| Viacom, Inc., “B” | | | 20,330 | | | | 1,529,833 | |
| Walt Disney Co. | | | 32,990 | | | | 3,107,328 | |
| | | | | | | | |
| | | | | | $ | 9,263,109 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.6% | | | | | |
| BlackRock, Inc. | | | 8,079 | | | $ | 2,888,727 | |
| Computershare Ltd. | | | 85,242 | | | | 815,232 | |
| Daiwa Securities Group, Inc. | | | 155,000 | | | | 1,207,080 | |
| Franklin Resources, Inc. | | | 24,410 | | | | 1,351,582 | |
| | | | | | | | |
| | | | | | $ | 6,262,621 | |
| | | | | | | | |
| Business Services – 1.8% | | | | | |
| Accenture PLC, “A” | | | 64,020 | | | $ | 5,717,626 | |
| Amadeus IT Holding S.A. | | | 76,806 | | | | 3,052,057 | |
| Bunzl PLC | | | 104,746 | | | | 2,855,361 | |
| Compass Group PLC | | | 253,400 | | | | 4,319,034 | |
| Nomura Research, Inc. | | | 76,300 | | | | 2,342,863 | |
| | | | | | | | |
| | | | | | $ | 18,286,941 | |
| | | | | | | | |
| Cable TV – 0.5% | | | | | |
| Comcast Corp., “Special A” | | | 78,692 | | | $ | 4,529,905 | |
| | | | | | | | |
| Chemicals – 1.2% | | | | | |
| 3M Co. | | | 36,497 | | | $ | 5,997,187 | |
| Givaudan S.A. | | | 1,533 | | | | 2,741,091 | |
| PPG Industries, Inc. | | | 14,399 | | | | 3,328,329 | |
| | | | | | | | |
| | | | | | $ | 12,066,607 | |
| | | | | | | | |
| Computer Software – 0.4% | | | | | |
| Oracle Corp. | | | 80,297 | | | $ | 3,610,956 | |
| | | | | | | | |
| Computer Software – Systems – 0.4% | | | | | |
| International Business Machines Corp. | | | 22,428 | | | $ | 3,598,348 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Construction – 0.3% | | | | | |
| Geberit AG | | | 5,359 | | | $ | 1,821,167 | |
| Stanley Black & Decker, Inc. | | | 15,899 | | | | 1,527,576 | |
| | | | | | | | |
| | | | | | $ | 3,348,743 | |
| | | | | | | | |
| Consumer Products – 2.1% | | | | | |
| Henkel KGaA, IPS | | | 43,668 | | | $ | 4,724,995 | |
| Kao Corp. | | | 170,700 | | | | 6,734,043 | |
| Kobayashi Pharmaceutical Co. Ltd. | | | 24,300 | | | | 1,417,934 | |
| KOSE Corp. | | | 24,900 | | | | 973,982 | |
| Procter & Gamble Co. | | | 36,158 | | | | 3,293,632 | |
| Reckitt Benckiser Group PLC | | | 43,927 | | | | 3,543,652 | |
| | | | | | | | |
| | | | | | $ | 20,688,238 | |
| | | | | | | | |
| Containers – 0.3% | | | | | |
| Brambles Ltd. | | | 266,714 | | | $ | 2,296,907 | |
| Crown Holdings, Inc. (a) | | | 14,554 | | | | 740,799 | |
| | | | | | | | |
| | | | | | $ | 3,037,706 | |
| | | | | | | | |
| Electrical Equipment – 1.0% | | | | | |
| Danaher Corp. | | | 30,544 | | | $ | 2,617,926 | |
| Legrand S.A. | | | 50,974 | | | | 2,668,432 | |
| Pentair PLC | | | 8,680 | | | | 576,526 | |
| Spectris PLC | | | 49,265 | | | | 1,606,303 | |
| Tyco International PLC | | | 53,994 | | | | 2,368,177 | |
| | | | | | | | |
| | | | | | $ | 9,837,364 | |
| | | | | | | | |
| Electronics – 1.1% | | | | | |
| Halma PLC | | | 138,032 | | | $ | 1,471,517 | |
| Hirose Electric Co. Ltd. | | | 13,500 | | | | 1,571,619 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 171,568 | | | | 3,839,692 | |
| Texas Instruments, Inc. | | | 77,569 | | | | 4,147,227 | |
| | | | | | | | |
| | | | | | $ | 11,030,055 | |
| | | | | | | | |
| Energy – Independent – 0.3% | | | | | |
| Cairn Energy PLC (a) | | | 229,463 | | | $ | 629,887 | |
| Occidental Petroleum Corp. | | | 34,087 | | | | 2,747,753 | |
| | | | | | | | |
| | | | | | $ | 3,377,640 | |
| | | | | | | | |
| Energy – Integrated – 1.4% | | | | | |
| Chevron Corp. | | | 21,921 | | | $ | 2,459,098 | |
| Exxon Mobil Corp. | | | 54,910 | | | | 5,076,430 | |
| Royal Dutch Shell PLC, “A” | | | 131,275 | | | | 4,351,306 | |
| Suncor Energy, Inc. | | | 51,761 | | | | 1,643,984 | |
| | | | | | | | |
| | | | | | $ | 13,530,818 | |
| | | | | | | | |
| Food & Beverages – 1.6% | | | | | |
| Danone S.A. | | | 87,969 | | | $ | 5,787,172 | |
| General Mills, Inc. | | | 58,192 | | | | 3,103,379 | |
| Nestle S.A. | | | 89,828 | | | | 6,584,531 | |
| | | | | | | | |
| | | | | | $ | 15,475,082 | |
| | | | | | | | |
| Food & Drug Stores – 0.7% | | | | | |
| CVS Health Corp. | | | 69,419 | | | $ | 6,685,744 | |
| | | | | | | | |
9
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| General Merchandise – 0.4% | | | | | |
| Target Corp. | | | 49,036 | | | $ | 3,722,323 | |
| | | | | | | | |
| Insurance – 2.5% | | | | | |
| ACE Ltd. | | | 17,093 | | | $ | 1,963,644 | |
| Aon PLC | | | 32,922 | | | | 3,121,993 | |
| Fairfax Financial Holdings Ltd. | | | 7,212 | | | | 3,779,068 | |
| Hiscox Ltd. | | | 113,444 | | | | 1,273,944 | |
| ING Groep N.V. (a) | | | 184,475 | | | | 2,388,511 | |
| MetLife, Inc. | | | 72,970 | | | | 3,946,947 | |
| Prudential Financial, Inc. | | | 26,051 | | | | 2,356,573 | |
| Travelers Cos., Inc. | | | 40,238 | | | | 4,259,192 | |
| Zurich Insurance Group AG | | | 6,220 | | | | 1,947,748 | |
| | | | | | | | |
| | | | | | $ | 25,037,620 | |
| | | | | | | | |
| Leisure & Toys – 0.1% | | | | | |
| Hasbro, Inc. | | | 22,823 | | | $ | 1,255,037 | |
| | | | | | | | |
| Machinery & Tools – 0.2% | | | | | |
| Glory Ltd. | | | 25,800 | | | $ | 689,510 | |
| Neopost S.A. | | | 19,712 | | | | 1,118,806 | |
| | | | | | | | |
| | | | | | $ | 1,808,316 | |
| | | | | | | | |
| Major Banks – 2.9% | | | | | |
| Bank of New York Mellon Corp. | | | 88,620 | | | $ | 3,595,313 | |
| Goldman Sachs Group, Inc. | | | 15,718 | | | | 3,046,620 | |
| HSBC Holdings PLC | | | 327,188 | | | | 3,092,084 | |
| JPMorgan Chase & Co. (s) | | | 108,608 | | | | 6,796,689 | |
| State Street Corp. | | | 40,059 | | | | 3,144,632 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 24,200 | | | | 874,407 | |
| Toronto-Dominion Bank | | | 21,265 | | | | 1,016,027 | |
| Wells Fargo & Co. (s) | | | 134,767 | | | | 7,387,927 | |
| | | | | | | | |
| | | | | | $ | 28,953,699 | |
| | | | | | | | |
| Medical Equipment – 0.9% | | | | | |
| Abbott Laboratories | | | 75,680 | | | $ | 3,407,114 | |
| Medtronic, Inc. | | | 50,740 | | | | 3,663,428 | |
| St. Jude Medical, Inc. | | | 22,859 | | | | 1,486,521 | |
| | | | | | | | |
| | | | | | $ | 8,557,063 | |
| | | | | | | | |
| Network & Telecom – 0.4% | | | | | |
| Ericsson, Inc., “B” | | | 340,523 | | | $ | 4,121,370 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.7% | | | | | |
| DnB NOR A.S.A. | | | 124,766 | | | $ | 1,839,596 | |
| Hachijuni Bank Ltd. | | | 85,000 | | | | 547,137 | |
| North Pacific Bank Ltd. | | | 74,200 | | | | 287,153 | |
| U.S. Bancorp | | | 102,061 | | | | 4,587,642 | |
| | | | | | | | |
| | | | | | $ | 7,261,528 | |
| | | | | | | | |
| Pharmaceuticals – 3.7% | | | | | |
| Bayer AG | | | 35,017 | | | $ | 4,788,073 | |
| GlaxoSmithKline PLC | | | 238,581 | | | | 5,104,453 | |
| Indivior PLC (a) | | | 40,712 | | | | 94,800 | |
| Johnson & Johnson (s) | | | 78,005 | | | | 8,156,983 | |
| Novartis AG | | | 66,873 | | | | 6,150,142 | |
| Pfizer, Inc. | | | 202,535 | | | | 6,308,965 | |
| Roche Holding AG | | | 16,312 | | | | 4,421,212 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Pharmaceuticals – continued | | | | | |
| Santen Pharmaceutical Co. Ltd. | | | 25,100 | | | $ | 1,343,249 | |
| | | | | | | | |
| | | | | | $ | 36,367,877 | |
| | | | | | | | |
| Railroad & Shipping – 0.1% | | | | | |
| Canadian National Railway Co. | | | 15,971 | | | $ | 1,100,562 | |
| | | | | | | | |
| Real Estate – 0.5% | | | | | |
| Deutsche Wohnen AG | | | 205,709 | | | $ | 4,887,694 | |
| | | | | | | | |
| Restaurants – 0.3% | | | | | |
| McDonald’s Corp. | | | 31,541 | | | $ | 2,955,392 | |
| | | | | | | | |
| Specialty Stores – 0.1% | | | | | |
| Esprit Holdings Ltd. | | | 625,200 | | | $ | 748,178 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.2% | | | | | |
| KDDI Corp. | | | 142,100 | | | $ | 8,891,229 | |
| Vodafone Group PLC | | | 763,386 | | | | 2,615,714 | |
| | | | | | | | |
| | | | | | $ | 11,506,943 | |
| | | | | | | | |
| Telephone Services – 0.7% | | | | | |
| TDC A.S. | | | 154,329 | | | $ | 1,176,087 | |
| Verizon Communications, Inc. | | | 119,772 | | | | 5,602,934 | |
| | | | | | | | |
| | | | | | $ | 6,779,021 | |
| | | | | | | | |
| Tobacco – 1.6% | | | | | |
| British American Tobacco PLC | | | 71,321 | | | $ | 3,875,146 | |
| Japan Tobacco, Inc. | | | 121,300 | | | | 3,330,666 | |
| Lorillard, Inc. | | | 42,345 | | | | 2,665,194 | |
| Philip Morris International, Inc. | | | 74,805 | | | | 6,092,867 | |
| | | | | | | | |
| | | | | | $ | 15,963,873 | |
| | | | | | | | |
| Trucking – 0.7% | | | | | |
| United Parcel Service, Inc., “B” | | | 27,278 | | | $ | 3,032,495 | |
| Yamato Holdings Co. Ltd. | | | 192,100 | | | | 3,782,529 | |
| | | | | | | | |
| | | | | | $ | 6,815,024 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $226,940,590) | | | | | | $ | 344,693,240 | |
| | | | | | | | |
| BONDS – 60.6% | | | | | |
| Asset-Backed & Securitized – 2.3% | | | | | |
| Cent LP, 2013-17A, “A1”, CLO, FRN, 1.532%, 1/30/25 (z) | | $ | 1,367,000 | | | $ | 1,348,861 | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 12/11/49 | | | 1,729,018 | | | | 1,830,402 | |
| Commercial Mortgage Pass-Through Certificates, “A3”, 5.293%, 12/11/49 | | | 49,757 | | | | 50,124 | |
| CWCapital LLC, 5.223%, 8/15/48 | | | 2,078,910 | | | | 2,190,558 | |
| Dryden Senior Loan Fund, 2013-26A, “A”, CLO, FRN, 1.33%, 7/15/25 (z) | | | 1,757,000 | | | | 1,720,507 | |
| Goldman Sachs Mortgage Securities Corp., FRN, 5.795%, 8/10/45 | | | 3,457,843 | | | | 3,744,363 | |
| ING Investment Management Ltd., 2013-2A, “A1”, CLO, FRN, 1.383%, 4/25/25 (z) | | | 1,595,000 | | | | 1,566,775 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.787%, 6/15/49 | | | 1,230,759 | | | | 1,246,683 | |
10
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Asset-Backed & Securitized – continued | | | | | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.939%, 2/15/51 | | $ | 96,272 | | | $ | 96,412 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.787%, 6/15/49 | | | 2,310,000 | | | | 2,480,566 | |
| Merrill Lynch Mortgage Trust, “A3”, FRN, 5.834%, 6/12/50 | | | 681,646 | | | | 682,061 | |
| Merrill Lynch Mortgage Trust, FRN, 5.834%, 6/12/50 | | | 3,310,000 | | | | 3,556,032 | |
| Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.743%, 6/12/50 | | | 2,460,000 | | | | 2,657,206 | |
| | | | | | | | |
| | | | | | $ | 23,170,550 | |
| | | | | | | | |
| Automotive – 0.5% | | | | | |
| Daimler Finance North America LLC, 1.875%, 1/11/18 (n) | | $ | 917,000 | | | $ | 920,187 | |
| FCE Bank PLC, 1.875%, 5/12/16 | | EUR | 500,000 | | | | 616,502 | |
| FGA Capital Ireland PLC Co., 2%, 10/23/19 | | EUR | 475,000 | | | | 580,655 | |
| Ford Motor Credit Co. LLC, 1.7%, 5/09/16 | | $ | 1,247,000 | | | | 1,251,676 | |
| RCI Banque S.A., 4.25%, 4/27/17 | | EUR | 650,000 | | | | 852,424 | |
| TRW Automotive, Inc., 4.5%, 3/01/21 (n) | | $ | 337,000 | | | | 338,685 | |
| Volkswagen International Finance N.V., 3.875% to 9/04/18, FRN to 9/29/49 | | EUR | 615,000 | | | | 790,692 | |
| | | | | | | | |
| | | | | | $ | 5,350,821 | |
| | | | | | | | |
| Biotechnology – 0.1% | | | | | |
| Life Technologies Corp., 6%, 3/01/20 | | $ | 411,000 | | | $ | 469,553 | |
| | | | | | | | |
| Broadcasting – 0.4% | | | | | |
| Discovery Communications, Inc., 4.875%, 4/01/43 | | $ | 1,030,000 | | | $ | 1,061,952 | |
| Grupo Televisa S.A.B., 5%, 5/13/45 | | | 551,000 | | | | 556,195 | |
| Omnicom Group, Inc., 3.65%, 11/01/24 | | | 357,000 | | | | 357,166 | |
| ProSiebenSat.1 Media AG, 2.625%, 4/15/21 | | EUR | 615,000 | | | | 781,645 | |
| SES S.A., 3.6%, 4/04/23 (n) | | $ | 734,000 | | | | 741,390 | |
| Vivendi S.A., 4%, 3/31/17 | | EUR | 600,000 | | | | 786,363 | |
| | | | | | | | |
| | | | | | $ | 4,284,711 | |
| | | | | | | | |
| Building – 0.3% | | | | | |
| CRH Finance Ltd., 3.125%, 4/03/23 | | EUR | 500,000 | | | $ | 687,665 | |
| Holcim Finance Luxembourg S.A., 3%, 1/22/24 | | EUR | 300,000 | | | | 413,306 | |
| Holcim GB Finance Ltd., 8.75%, 4/24/17 | | GBP | 300,000 | | | | 542,086 | |
| Mohawk Industries, Inc., 6.125%, 1/15/16 | | $ | 558,000 | | | | 584,345 | |
| Owens Corning, Inc., 6.5%, 12/01/16 | | | 13,000 | | | | 14,168 | |
| Owens Corning, Inc., 4.2%, 12/15/22 | | | 558,000 | | | | 566,302 | |
| | | | | | | | |
| | | | | | $ | 2,807,872 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Business Services – 0.1% | | | | | |
| Fidelity National Information Services, Inc., 5%, 3/15/22 | | $ | 717,000 | | | $ | 760,418 | |
| Tencent Holdings Ltd., 3.375%, 5/02/19 (n) | | | 234,000 | | | | 237,846 | |
| | | | | | | | |
| | | | | | $ | 998,264 | |
| | | | | | | | |
| Cable TV – 0.4% | | | | | |
| Comcast Corp., 4.65%, 7/15/42 | | $ | 512,000 | | | $ | 560,390 | |
| Cox Communications, Inc., 3.25%, 12/15/22 (n) | | | 498,000 | | | | 488,956 | |
| NBCUniversal Media LLC, 5.15%, 4/30/20 | | | 1,166,000 | | | | 1,323,178 | |
| Shaw Communications, Inc., 5.65%, 10/01/19 | | CAD | 755,000 | | | | 720,616 | |
| Time Warner Cable, Inc., 5.75%, 6/02/31 | | GBP | 350,000 | | | | 663,307 | |
| Time Warner Cable, Inc., 5.25%, 7/15/42 | | GBP | 100,000 | | | | 182,346 | |
| | | | | | | | |
| | | | | | $ | 3,938,793 | |
| | | | | | | | |
| Chemicals – 0.3% | | | | | |
| CF Industries, Inc., 5.15%, 3/15/34 | | $ | 604,000 | | | $ | 631,783 | |
| Dow Chemical Co., 8.55%, 5/15/19 | | | 381,000 | | | | 473,677 | |
| LyondellBasell Industries N.V., 5%, 4/15/19 | | | 903,000 | | | | 984,960 | |
| Praxair, Inc., 1.625%, 12/01/25 | | EUR | 250,000 | | | | 308,807 | |
| Solvay Finance S.A., FRN, 4.199%, 5/29/49 | | EUR | 550,000 | | | | 692,487 | |
| | | | | | | | |
| | | | | | $ | 3,091,714 | |
| | | | | | | | |
| Computer Software – 0.1% | | | | | |
| Oracle Corp., 3.4%, 7/08/24 | | $ | 752,000 | | | $ | 768,598 | |
| | | | | | | | |
| Conglomerates – 0.2% | | | | | |
| Roper Industries, Inc., 1.85%, 11/15/17 | | $ | 511,000 | | | $ | 511,659 | |
| Siemens Financierings N.V., 5.25% to 9/14/16, FRN to 9/14/66 | | EUR | 450,000 | | | | 580,180 | |
| Siemens Financierings N.V., 6.125% to 9/14/16, FRN to 9/14/66 | | GBP | 300,000 | | | | 491,895 | |
| | | | | | | | |
| | | | | | $ | 1,583,734 | |
| | | | | | | | |
| Consumer Products – 0.2% | | | | | |
| Prosegur Compania de Seguridad S.A., 2.75%, 4/02/18 | | EUR | 600,000 | | | $ | 768,640 | |
| Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/23 (n) | | $ | 1,077,000 | | | | 1,128,735 | |
| | | | | | | | |
| | | | | | $ | 1,897,375 | |
| | | | | | | | |
| Defense Electronics – 0.1% | | | | | |
| BAE Systems PLC, 4.125%, 6/08/22 | | GBP | 550,000 | | | $ | 931,201 | |
| | | | | | | | |
| Electronics – 0.1% | | | | | |
| Tyco Electronics Group S.A., 2.375%, 12/17/18 | | $ | 778,000 | | | $ | 784,704 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.2% | | | | | |
| Comision Federal de Electricidad , 4.875%, 1/15/24 | | $ | 669,000 | | | $ | 699,105 | |
11
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Emerging Market Quasi-Sovereign – continued | | | | | |
| Empresa Nacional del Petroleo, 6.25%, 7/08/19 | | $ | 619,000 | | | $ | 684,217 | |
| Petroleos Mexicanos, 5.5%, 1/21/21 | | | 664,000 | | | | 718,780 | |
| | | | | | | | |
| | | | | | $ | 2,102,102 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.7% | | | | | |
| Republic of Chile, 1.625%, 1/30/25 | | EUR | 575,000 | | | $ | 697,170 | |
| Republic of Colombia, 6.125%, 1/18/41 | | $ | 1,241,000 | | | | 1,486,098 | |
| Republic of Indonesia, 2.875%, 7/08/21 (z) | | EUR | 500,000 | | | | 612,588 | |
| Republic of Peru, 7.35%, 7/21/25 | | $ | 900,000 | | | | 1,194,750 | |
| United Mexican States, 8.5%, 5/31/29 | | MXN | 31,700,000 | | | | 2,596,256 | |
| | | | | | | | |
| | | | | | $ | 6,586,862 | |
| | | | | | | | |
| Energy – Independent – 0.1% | | | | | |
| Continental Resources, Inc., 4.9%, 6/01/44 | | $ | 227,000 | | | $ | 192,260 | |
| Pioneer Natural Resources Co., 7.5%, 1/15/20 | | | 346,000 | | | | 405,706 | |
| | | | | | | | |
| | | | | | $ | 597,966 | |
| | | | | | | | |
| Energy – Integrated – 0.2% | | | | | |
| BG Energy Capital PLC, FRN, 6.5%, 11/30/72 | | EUR | 550,000 | | | $ | 728,753 | |
| BP Capital Markets PLC, 2.521%, 1/15/20 | | $ | 189,000 | | | | 189,221 | |
| Eni S.p.A., 4%, 6/29/20 | | EUR | 450,000 | | | | 633,899 | |
| Repsol International Finance B.V., 3.625%, 10/07/21 | | EUR | 600,000 | | | | 824,348 | |
| | | | | | | | |
| | | | | | $ | 2,376,221 | |
| | | | | | | | |
| Financial Institutions – 0.1% | | | | | |
| International Lease Finance Corp., 7.125%, 9/01/18 (n) | | $ | 859,000 | | | $ | 962,080 | |
| | | | | | | | |
| Food & Beverages – 0.5% | | | | | |
| BRF S.A., 4.75%, 5/22/24 | | $ | 400,000 | | | $ | 388,500 | |
| Coca-Cola HBC Finance B.V., 4.25%, 11/16/16 | | EUR | 550,000 | | | | 710,407 | |
| Conagra Foods, Inc., 3.2%, 1/25/23 | | $ | 988,000 | | | | 967,762 | |
| Mead Johnson Nutrition Co., 4.6%, 6/01/44 | | | 577,000 | | | | 605,901 | |
| Tyson Foods, Inc., 6.6%, 4/01/16 | | | 1,382,000 | | | | 1,473,497 | |
| Tyson Foods, Inc., 5.15%, 8/15/44 | | | 239,000 | | | | 268,439 | |
| Wm. Wrigley Jr. Co., 2.9%, 10/21/19 (n) | | | 409,000 | | | | 414,290 | |
| | | | | | | | |
| | | | | | $ | 4,828,796 | |
| | | | | | | | |
| Food & Drug Stores – 0.2% | | | | | |
| Loblaw Cos. Ltd., 4.86%, 9/12/23 | | CAD | 771,000 | | | $ | 734,441 | |
| Walgreens Boots Alliance, Inc., 2.7%, 11/18/19 | | $ | 923,000 | | | | 927,696 | |
| | | | | | | | |
| | | | | | $ | 1,662,137 | |
| | | | | | | | |
| Forest & Paper Products – 0.2% | | | | | |
| Georgia-Pacific LLC, 5.4%, 11/01/20 (n) | | $ | 1,090,000 | | | $ | 1,226,509 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Forest & Paper Products – continued | | | | | |
| Packaging Corp. of America, 3.9%, 6/15/22 | | $ | 717,000 | | | $ | 735,390 | |
| | | | | | | | |
| | | | | | $ | 1,961,899 | |
| | | | | | | | |
| Gaming & Lodging – 0.1% | | | | | |
| Wyndham Worldwide Corp., 2.5%, 3/01/18 | | $ | 742,000 | | | $ | 740,732 | |
| Wyndham Worldwide Corp., 5.625%, 3/01/21 | | | 400,000 | | | | 447,279 | |
| | | | | | | | |
| | | | | | $ | 1,188,011 | |
| | | | | | | | |
| Insurance – 0.6% | | | | | |
| American International Group, Inc., 4.875%, 6/01/22 | | $ | 434,000 | | | $ | 487,531 | |
| American International Group, Inc., 4.875% to 3/15/17, FRN to 3/15/67 | | EUR | 900,000 | | | | 1,134,785 | |
| Assicurazioni Generali S.p.A., 7.75% to 2022, FRN to 12/12/42 | | EUR | 300,000 | | | | 453,769 | |
| Aviva PLC, 5.7% to 9/29/15, FRN to 9/29/49 | | EUR | 570,000 | | | | 706,006 | |
| CNP Assurances S.A., 6% to 9/14/20, FRN to 9/14/40 | | EUR | 600,000 | | | | 841,433 | |
| Delta Lloyd N.V., FRN, 9%, 8/29/42 | | EUR | 650,000 | | | | 1,016,397 | |
| UnumProvident Corp., 6.85%, 11/15/15 (n) | | $ | 1,243,000 | | | | 1,301,977 | |
| | | | | | | | |
| | | | | | $ | 5,941,898 | |
| | | | | | | | |
| Insurance – Property & Casualty – 0.4% | | | | | |
| Amlin PLC, 6.5% to 12/19/16, FRN to 12/19/26 | | GBP | 300,000 | | | $ | 483,946 | |
| Berkshire Hathaway, Inc., 4.5%, 2/11/43 | | $ | 400,000 | | | | 437,444 | |
| Chubb Corp., 6.375% to 4/15/17, FRN to 3/29/67 | | | 1,010,000 | | | | 1,082,771 | |
| Clerical Medical Finance PLC, 4.25% to 6/24/15, FRN to 6/29/49 | | EUR | 750,000 | | | | 909,806 | |
| Marsh & McLennan Cos., Inc., 2.55%, 10/15/18 | | $ | 505,000 | | | | 513,538 | |
| QBE Capital Funding III Ltd., 7.5% to 5/24/21, FRN to 5/24/41 | | GBP | 400,000 | | | | 702,255 | |
| | | | | | | | |
| | | | | | $ | 4,129,760 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.7% | | | | | |
| Electricite de France S.A., 6% to 1/29/26, FRN to 12/29/49 | | GBP | 500,000 | | | $ | 828,591 | |
| ESB Finance Ltd., 4.375%, 11/21/19 | | EUR | 600,000 | | | | 848,861 | |
| Statoil A.S.A., 4.25%, 11/23/41 | | $ | 1,260,000 | | | | 1,291,489 | |
| Statoil A.S.A., FRN, 0.522%, 5/15/18 | | | 759,000 | | | | 758,011 | |
| Temasek Financial I Ltd., 2.375%, 1/23/23 (n) | | | 2,880,000 | | | | 2,799,625 | |
| | | | | | | | |
| | | | | | $ | 6,526,577 | |
| | | | | | | | |
| International Market Sovereign – 32.5% | | | | | |
| Commonwealth of Australia, 5.75%, 5/15/21 | | AUD | 18,509,000 | | | $ | 18,040,567 | |
| Federal Republic of Germany, 3.25%, 7/04/21 | | EUR | 9,144,000 | | | | 13,295,232 | |
12
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| International Market Sovereign – continued | | | | | |
| Federal Republic of Germany, 6.25%, 1/04/30 | | EUR | 4,519,000 | | | $ | 9,562,818 | |
| Federal Republic of Germany, 2.5%, 7/04/44 | | EUR | 2,581,000 | | | | 3,970,791 | |
| Government of Canada, 4.25%, 6/01/18 | | CAD | 8,927,000 | | | | 8,479,497 | |
| Government of Canada, 3.25%, 6/01/21 | | CAD | 4,357,000 | | | | 4,153,626 | |
| Government of Canada, 5.75%, 6/01/33 | | CAD | 3,810,000 | | | | 5,019,014 | |
| Government of Canada, 4%, 6/01/41 | | CAD | 1,043,000 | | | | 1,189,808 | |
| Government of Japan, 2%, 3/20/52 | | JPY | 175,000,000 | | | | 1,735,773 | |
| Government of Japan, 1.1%, 6/20/20 | | JPY | 2,961,600,000 | | | | 26,152,970 | |
| Government of Japan, 2.1%, 9/20/24 | | JPY | 3,145,000,000 | | | | 30,755,017 | |
| Government of Japan, 2.2%, 9/20/27 | | JPY | 1,329,450,000 | | | | 13,421,451 | |
| Government of Japan, 2.4%, 3/20/37 | | JPY | 304,200,000 | | | | 3,157,123 | |
| Government of New Zealand, 5%, 3/15/19 | | NZD | 7,656,000 | | | | 6,304,827 | |
| Government of New Zealand, 5.5%, 4/15/23 | | NZD | 6,119,000 | | | | 5,392,201 | |
| Government of Norway, 3.75%, 5/25/21 | | NOK | 42,743,000 | | | | 6,614,699 | |
| Kingdom of Belgium, 4.25%, 9/28/21 | | EUR | 6,809,000 | | | | 10,358,988 | |
| Kingdom of Belgium, 4%, 3/28/32 | | EUR | 2,302,000 | | | | 3,846,780 | |
| Kingdom of Denmark, 3%, 11/15/21 | | DKK | 13,962,000 | | | | 2,680,939 | |
| Kingdom of Spain, 5.4%, 1/31/23 | | EUR | 3,534,000 | | | | 5,592,440 | |
| Kingdom of Spain, 5.5%, 7/30/17 | | EUR | 3,870,000 | | | | 5,276,217 | |
| Kingdom of Spain, 4.6%, 7/30/19 | | EUR | 5,857,000 | | | | 8,297,804 | |
| Kingdom of Sweden, 5%, 12/01/20 | | SEK | 45,950,000 | | | | 7,466,422 | |
| Kingdom of Sweden, 3.5%, 6/01/22 | | SEK | 13,530,000 | | | | 2,096,629 | |
| Kingdom of the Netherlands, 3.5%, 7/15/20 | | EUR | 11,968,000 | | | | 17,146,214 | |
| Kingdom of the Netherlands, 5.5%, 1/15/28 | | EUR | 2,010,000 | | | | 3,791,996 | |
| Republic of Austria, 4.65%, 1/15/18 | | EUR | 1,663,000 | | | | 2,296,949 | |
| Republic of Austria, 1.75%, 10/20/23 | | EUR | 4,746,000 | | | | 6,326,377 | |
| Republic of Finland, 3.875%, 9/15/17 | | EUR | 2,694,000 | | | | 3,604,092 | |
| Republic of France, 2.5%, 10/25/20 | | EUR | 2,688,000 | | | | 3,670,052 | |
| Republic of France, 6%, 10/25/25 | | EUR | 4,568,000 | | | | 8,410,829 | |
| Republic of France, 4.75%, 4/25/35 | | EUR | 4,473,000 | | | | 8,333,667 | |
| Republic of Iceland, 4.875%, 6/16/16 (n) | | $ | 4,712,000 | | | | 4,930,425 | |
| Republic of Ireland, 5.4%, 3/13/25 | | EUR | 49,000 | | | | 81,697 | |
| Republic of Italy, 5.25%, 8/01/17 | | EUR | 8,934,000 | | | | 12,088,086 | |
| Republic of Italy, 3.75%, 3/01/21 | | EUR | 16,031,000 | | | | 22,314,890 | |
| United Kingdom Treasury, 5%, 3/07/18 | | GBP | 2,069,000 | | | | 3,649,380 | |
| United Kingdom Treasury, 8%, 6/07/21 | | GBP | 2,536,000 | | | | 5,566,701 | |
| United Kingdom Treasury, 4.25%, 12/07/27 | | GBP | 3,251,000 | | | | 6,381,871 | |
| United Kingdom Treasury, 4.25%, 3/07/36 | | GBP | 2,259,000 | | | | 4,611,532 | |
| United Kingdom Treasury, 3.25%, 1/22/44 | | GBP | 1,878,000 | | | | 3,376,835 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| International Market Sovereign – continued | | | | | |
| United Kingdom Treasury, 3.75%, 7/22/52 | | GBP | 799,000 | | | $ | 1,628,471 | |
| | | | | | | | |
| | | | | | $ | 321,071,697 | |
| | | | | | | | |
| Major Banks – 2.7% | | | | | |
| ABN AMRO North America Finance, Inc., 7.125%, 7/06/22 | | EUR | 450,000 | | | $ | 718,760 | |
| Bank of America Corp., 7.625%, 6/01/19 | | $ | 690,000 | | | | 833,942 | |
| Bank of America Corp., 4.1%, 7/24/23 | | | 500,000 | | | | 526,575 | |
| Bank of America Corp., 4.125%, 1/22/24 | | | 757,000 | | | | 794,967 | |
| Barclays Bank PLC, 6%, 1/14/21 | | EUR | 398,000 | | | | 590,391 | |
| Barclays Bank PLC, 6.75% to 1/16/18, FRN to 1/16/23 | | GBP | 350,000 | | | | 595,864 | |
| BBVA Senior Finance S.A., 3.25%, 3/21/16 | | EUR | 500,000 | | | | 625,223 | |
| Credit Agricole S.A., 7.375%, 12/18/23 | | GBP | 300,000 | | | | 597,039 | |
| Credit Suisse Group AG, 6.5%, 8/08/23 (n) | | $ | 860,000 | | | | 944,040 | |
| Goldman Sachs Group, Inc., 5.75%, 1/24/22 | | | 1,486,000 | | | | 1,718,985 | |
| HSBC Bank PLC, FRN, 0.872%, 5/15/18 (n) | | | 1,833,000 | | | | 1,840,321 | |
| HSBC USA, Inc., 4.875%, 8/24/20 | | | 1,370,000 | | | | 1,512,190 | |
| ING Bank N.V., 4.875%, 1/18/21 | | EUR | 250,000 | | | | 378,463 | |
| ING Bank N.V., 5.8%, 9/25/23 (n) | | $ | 973,000 | | | | 1,079,328 | |
| ING Bank N.V., 3.5% to 11/21/18, FRN to 11/21/23 | | EUR | 700,000 | | | | 894,469 | |
| JPMorgan Chase & Co., 4.25%, 10/15/20 | | $ | 1,579,000 | | | | 1,697,583 | |
| JPMorgan Chase & Co., 6.75% to 2/01/24, FRN to 8/29/49 | | | 761,000 | | | | 803,806 | |
| Morgan Stanley, 7.3%, 5/13/19 | | | 1,772,000 | | | | 2,101,851 | |
| Morgan Stanley, 5.5%, 7/28/21 | | | 850,000 | | | | 964,649 | |
| Nordea Bank AB, FRN, 0.693%, 5/13/16 (n) | | | 3,520,000 | | | | 3,528,173 | |
| PNC Financial Services Group, Inc., FRN, 6.75%, 12/31/49 | | | 1,510,000 | | | | 1,657,225 | |
| Regions Financial Corp., 2%, 5/15/18 | | | 908,000 | | | | 899,170 | |
| Royal Bank of Scotland Group PLC, 5.5%, 3/23/20 | | EUR | 450,000 | | | | 674,846 | |
| Societe Generale, 4.25%, 7/13/22 | | EUR | 400,000 | | | | 607,690 | |
| Wells Fargo & Co., 5.9% to 6/15/24, FRN to 12/29/49 | | $ | 374,000 | | | | 376,805 | |
| | | | | | | | |
| | | | | | $ | 26,962,355 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.0% | | | | | |
| Becton, Dickinson and Co., 3.734%, 12/15/24 | | $ | 219,000 | | | $ | 225,385 | |
| | | | | | | | |
| Medical Equipment – 0.1% | | | | | |
| Medtronic, Inc., 3.5%, 3/15/25 (n) | | $ | 678,000 | | | $ | 693,574 | |
| | | | | | | | |
| Metals & Mining – 0.4% | | | | | |
| Barrick International (Barbados) Corp., 5.75%, 10/15/16 (n) | | $ | 1,121,000 | | | $ | 1,191,625 | |
| Cameco Corp., 5.67%, 9/02/19 | | CAD | 775,000 | | | | 745,929 | |
13
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Metals & Mining – continued | | | | | |
| Glencore Finance (Europe) S.A., 6.5%, 2/27/19 | | GBP | 250,000 | | | $ | 449,637 | |
| Plains Exploration & Production Co., 6.875%, 2/15/23 | | $ | 585,000 | | | | 650,813 | |
| Southern Copper Corp., 6.75%, 4/16/40 | | | 355,000 | | | | 372,395 | |
| Xstrata Finance (Canada) Ltd., 5.25%, 6/13/17 | | EUR | 450,000 | | | | 602,579 | |
| | | | | | | | |
| | | | | | $ | 4,012,978 | |
| | | | | | | | |
| Midstream – 0.5% | | | | | |
| Enbridge, Inc., 3.19%, 12/05/22 | | CAD | 895,000 | | | $ | 781,396 | |
| Energy Transfer Partners LP, 4.65%, 6/01/21 | | $ | 1,066,000 | | | | 1,114,329 | |
| Energy Transfer Partners LP, 3.6%, 2/01/23 | | | 745,000 | | | | 720,913 | |
| Enterprise Products Operating LLC, 3.9%, 2/15/24 | | | 513,000 | | | | 522,484 | |
| Enterprise Products Operating LLC, 4.85%, 3/15/44 | | | 231,000 | | | | 240,868 | |
| Kinder Morgan Energy Partners LP, 5.4%, 9/01/44 | | | 371,000 | | | | 371,760 | |
| Spectra Energy Partners LP, 4.75%, 3/15/24 | | | 899,000 | | | | 963,656 | |
| Sunoco Logistics Partners LP, 5.3%, 4/01/44 | | | 621,000 | | | | 625,938 | |
| | | | | | | | |
| | | | | | $ | 5,341,344 | |
| | | | | | | | |
| Mortgage-Backed – 4.9% | | | | | |
| Fannie Mae, 5.5%, 2/01/15 - 4/01/37 | | $ | 972,345 | | | $ | 1,039,723 | |
| Fannie Mae, 4.815%, 6/01/15 | | | 228,243 | | | | 230,088 | |
| Fannie Mae, 4.78%, 8/01/15 | | | 85,504 | | | | 86,639 | |
| Fannie Mae, 4.856%, 8/01/15 | | | 68,104 | | | | 68,993 | |
| Fannie Mae, 5.036%, 8/01/15 | | | 66,419 | | | | 66,658 | |
| Fannie Mae, 5.444%, 11/01/15 | | | 106,610 | | | | 109,298 | |
| Fannie Mae, 5.432%, 2/01/16 | | | 78,581 | | | | 80,825 | |
| Fannie Mae, 5.273%, 4/01/16 | | | 520,175 | | | | 539,153 | |
| Fannie Mae, 5.732%, 7/01/16 | | | 611,204 | | | | 644,795 | |
| Fannie Mae, 5.09%, 12/01/16 | | | 96,383 | | | | 102,522 | |
| Fannie Mae, 5.003%, 1/01/17 | | | 8,595 | | | | 8,587 | |
| Fannie Mae, 5.05%, 1/01/17 | | | 464,800 | | | | 488,761 | |
| Fannie Mae, 3.84%, 3/01/18 | | | 473,204 | | | | 504,338 | |
| Fannie Mae, 5.361%, 6/01/18 | | | 546,674 | | | | 602,401 | |
| Fannie Mae, 3.849%, 7/01/18 | | | 1,716,949 | | | | 1,829,048 | |
| Fannie Mae, 4.57%, 5/01/19 | | | 229,261 | | | | 252,319 | |
| Fannie Mae, 4.6%, 9/01/19 | | | 597,635 | | | | 658,568 | |
| Fannie Mae, 4.45%, 10/01/19 | | | 418,779 | | | | 461,156 | |
| Fannie Mae, 5%, 12/01/20 - 8/01/40 | | | 4,537,659 | | | | 5,032,672 | |
| Fannie Mae, 4.5%, 7/01/23 - 4/01/44 | | | 5,007,574 | | | | 5,469,744 | |
| Fannie Mae, 4%, 3/01/25 | | | 183,476 | | | | 197,185 | |
| Fannie Mae, 6%, 9/01/37 - 6/01/38 | | | 821,787 | | | | 931,933 | |
| Fannie Mae, 4%, 2/01/41 (f) | | | 2,237,732 | | | | 2,390,255 | |
| Fannie Mae, 3.5%, 5/01/43 | | | 4,703,670 | | | | 4,924,635 | |
| Freddie Mac, 3.882%, 11/25/17 | | | 1,357,000 | | | | 1,443,104 | |
| Freddie Mac, 2.699%, 5/25/18 | | | 705,000 | | | | 728,799 | |
| Freddie Mac, 2.323%, 10/25/18 | | | 447,000 | | | | 456,056 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Mortgage-Backed – continued | | | | | |
| Freddie Mac, 5.085%, 3/25/19 | | $ | 30,000 | | | $ | 33,681 | |
| Freddie Mac, 4.186%, 8/25/19 | | | 650,000 | | | | 709,896 | |
| Freddie Mac, 2.757%, 5/25/20 | | | 218,644 | | | | 225,390 | |
| Freddie Mac, 3.32%, 7/25/20 | | | 1,297,318 | | | | 1,356,666 | |
| Freddie Mac, 4%, 7/01/25 | | | 379,880 | | | | 405,462 | |
| Freddie Mac, 5.5%, 5/01/34 - 7/01/37 | | | 124,744 | | | | 140,383 | |
| Freddie Mac, 5%, 10/01/36 - 10/01/38 | | | 890,102 | | | | 981,749 | |
| Freddie Mac, 4.5%, 5/01/40 (f) | | | 553,889 | | | | 600,795 | |
| Freddie Mac, TBA, 4%, 1/01/45 | | | 4,400,000 | | | | 4,688,662 | |
| Ginnie Mae, 5%, 5/15/40 | | | 289,314 | | | | 320,168 | |
| Ginnie Mae, 3.5%, 6/20/43 | | | 5,138,888 | | | | 5,399,623 | |
| Ginnie Mae, TBA, 4%, 1/01/45 | | | 3,920,000 | | | | 4,193,846 | |
| | | | | | | | |
| | | | | | $ | 48,404,576 | |
| | | | | | | | |
| Natural Gas – Distribution – 0.1% | | | | | |
| Centrica PLC, 4.375%, 3/13/29 | | GBP | 350,000 | | | $ | 599,336 | |
| GDF SUEZ, 3% to 6/02/19, FRN to 6/29/49 | | EUR | 500,000 | | | | 618,645 | |
| | | | | | | | |
| | | | | | $ | 1,217,981 | |
| | | | | | | | |
| Network & Telecom – 0.4% | | | | | |
| British Telecom PLC, 5.75%, 12/07/28 | | GBP | 250,000 | | | $ | 476,308 | |
| Verizon Communications, Inc., 2.625%, 12/01/31 | | EUR | 600,000 | | | | 746,686 | |
| Verizon Communications, Inc., 6.4%, 9/15/33 | | $ | 1,095,000 | | | | 1,348,802 | |
| Verizon Communications, Inc., 6.55%, 9/15/43 | | | 779,000 | | | | 998,015 | |
| | | | | | | | |
| | | | | | $ | 3,569,811 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 1.7% | | | | | |
| Banco de Credito del Peru, 6.125% to 4/24/22, FRN to 4/24/27 (n) | | $ | 1,510,000 | | | $ | 1,593,050 | |
| Banque Federative du Credit Mutuel, 2%, 9/19/19 | | EUR | 500,000 | | | | 645,282 | |
| BBVA Bancomer S.A. de C.V., 6.75%, 9/30/22 (n) | | $ | 1,604,000 | | | | 1,764,400 | |
| BBVA Subordinated Capital S.A.U., 3.5% to 4/11/19, FRN to 4/11/24 | | EUR | 600,000 | | | | 750,863 | |
| BPCE S.A., 4.5%, 3/15/25 (n) | | $ | 384,000 | | | | 375,217 | |
| CaixaBank S.A., 3.25%, 1/22/16 | | EUR | 500,000 | | | | 622,712 | |
| Capital One Bank (USA) N.A., 3.375%, 2/15/23 | | $ | 978,000 | | | | 972,563 | |
| Discover Bank, 7%, 4/15/20 | | | 1,971,000 | | | | 2,322,908 | |
| Intesa Sanpaolo S.p.A., 4.125%, 9/19/16 | | EUR | 500,000 | | | | 640,396 | |
| Intesa Sanpaolo S.p.A., 5.25%, 1/28/22 | | GBP | 450,000 | | | | 793,463 | |
| KBC Internationale Financieringsmaatschappij N.V., 4.5%, 3/27/17 | | EUR | 450,000 | | | | 594,332 | |
| Lloyds TSB Bank PLC, 6.5%, 3/24/20 | | EUR | 500,000 | | | | 745,298 | |
| Macquarie Group Ltd., 3%, 12/03/18 (n) | | $ | 619,000 | | | | 633,776 | |
| Rabobank Nederland N.V., 4%, 9/19/22 | | GBP | 350,000 | | | | 601,554 | |
14
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Other Banks & Diversified Financials – continued | | | | | |
| Svenska Handelsbanken AB, FRN, 0.697%, 3/21/16 | | $ | 2,150,000 | | | $ | 2,156,861 | |
| Swedbank AB, 1.75%, 3/12/18 (n) | | | 1,294,000 | | | | 1,291,122 | |
| U.S. Bancorp, 2.95%, 7/15/22 | | | 402,000 | | | | 396,281 | |
| | | | | | | | |
| | | | | | $ | 16,900,078 | |
| | | | | | | | |
| Personal Computers & Peripherals – 0.1% | | | | | |
| Equifax, Inc., 3.3%, 12/15/22 | | $ | 717,000 | | | $ | 708,894 | |
| | | | | | | | |
| Pharmaceuticals – 0.5% | | | | | |
| Bayer AG, 3% to 7/01/20, FRN to 7/01/75 | | EUR | 455,000 | | | $ | 566,512 | |
| Bayer U.S. Finance LLC, 3.375%, 10/08/24 (n) | | $ | 354,000 | | | | 360,220 | |
| Celgene Corp., 1.9%, 8/15/17 | | | 717,000 | | | | 719,576 | |
| Gilead Sciences, Inc., 3.7%, 4/01/24 | | | 950,000 | | | | 996,389 | |
| Mylan, Inc., 2.55%, 3/28/19 | | | 319,000 | | | | 317,775 | |
| Teva Pharmaceutical Finance B.V., 2.95%, 12/18/22 | | | 1,134,000 | | | | 1,104,583 | |
| Watson Pharmaceuticals, Inc., 1.875%, 10/01/17 | | | 802,000 | | | | 798,948 | |
| | | | | | | | |
| | | | | | $ | 4,864,003 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.0% | | | | | |
| Teck Resources Ltd. Co., 6%, 8/15/40 | | $ | 150,000 | | | $ | 134,848 | |
| Teck Resources Ltd. Co., 5.4%, 2/01/43 | | | 225,000 | | | | 190,173 | |
| | | | | | | | |
| | | | | | $ | 325,021 | |
| | | | | | | | |
| Printing & Publishing – 0.0% | | | | | |
| WPP Finance S.A. Co., 2.25%, 9/22/26 | | EUR | 300,000 | | | $ | 383,493 | |
| | | | | | | | |
| Railroad & Shipping – 0.1% | | | | | |
| CSX Corp., 4.1%, 3/15/44 | | $ | 657,000 | | | $ | 650,829 | |
| | | | | | | | |
| Real Estate – Apartment – 0.1% | | | | | |
| AvalonBay Communities, Inc., REIT, 3.625%, 10/01/20 | | $ | 149,000 | | | $ | 154,974 | |
| Deutsche Annington Immobilien SE, 2.125%, 7/09/22 | | EUR | 550,000 | | | | 703,569 | |
| | | | | | | | |
| | | | | | $ | 858,543 | |
| | | | | | | | |
| Real Estate – Healthcare – 0.0% | | | | | |
| HCP, Inc., REIT, 3.875%, 8/15/24 | | $ | 367,000 | | | $ | 372,805 | |
| | | | | | | | |
| Real Estate – Office – 0.1% | | | | | |
| Boston Properties, Inc., REIT, 3.125%, 9/01/23 | | $ | 950,000 | | | $ | 927,613 | |
| | | | | | | | |
| Real Estate – Retail – 0.2% | | | | | |
| Hammerson PLC, REIT, 2.75%, 9/26/19 | | EUR | 450,000 | | | $ | 591,884 | |
| Hammerson PLC, REIT, 6%, 2/23/26 | | GBP | 325,000 | | | | 638,966 | |
| Simon Property Group, Inc., REIT, 5.65%, 2/01/20 | | $ | 948,000 | | | | 1,088,170 | |
| | | | | | | | |
| | | | | | $ | 2,319,020 | |
| | | | | | | | |
| Restaurants – 0.0% | | | | | |
| YUM! Brands, Inc., 5.35%, 11/01/43 | | $ | 250,000 | | | $ | 273,388 | |
| | | | | | | | |
| Retailers – 0.7% | | | | | |
| Bed Bath & Beyond, Inc., 5.165%, 8/01/44 | | $ | 472,000 | | | $ | 492,341 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Retailers – continued | | | | | |
| Cencosud S.A., 5.5%, 1/20/21 | | $ | 1,006,000 | | | $ | 1,044,196 | |
| Dollar General Corp., 4.125%, 7/15/17 | | | 742,000 | | | | 765,285 | |
| Gap, Inc., 5.95%, 4/12/21 | | | 1,307,000 | | | | 1,487,374 | |
| Home Depot, Inc., 5.95%, 4/01/41 | | | 1,029,000 | | | | 1,343,952 | |
| Marks & Spencer Group PLC, 4.75%, 6/12/25 | | GBP | 450,000 | | | | 772,373 | |
| Wal-Mart Stores, Inc., 4.3%, 4/22/44 | | $ | 500,000 | | | | 545,773 | |
| | | | | | | | |
| | | | | | $ | 6,451,294 | |
| | | | | | | | |
| Specialty Chemicals – 0.1% | | | | | |
| Ecolab, Inc., 3%, 12/08/16 | | $ | 742,000 | | | $ | 766,358 | |
| Mexichem S.A.B. de C.V., 6.75%, 9/19/42 (n) | | | 570,000 | | | | 591,375 | |
| | | | | | | | |
| | | | | | $ | 1,357,733 | |
| | | | | | | | |
| Supermarkets – 0.1% | | | | | |
| Delhaize Group, 3.125%, 2/27/20 | | EUR | 500,000 | | | $ | 667,887 | |
| William Morrison Supermarkets PLC, 3.5%, 7/27/26 | | GBP | 300,000 | | | | 428,476 | |
| | | | | | | | |
| | | | | | $ | 1,096,363 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.5% | | | | | |
| America Movil S.A.B. de C.V., 4.75%, 6/28/22 | | EUR | 800,000 | | | $ | 1,211,618 | |
| American Tower Corp., REIT, 4.7%, 3/15/22 | | $ | 327,000 | | | | 342,857 | |
| American Tower Corp., REIT, 3.5%, 1/31/23 | | | 812,000 | | | | 784,561 | |
| Bharti Airtel International (Netherlands) B.V., 3.375%, 5/20/21 (n) | | EUR | 389,000 | | | | 499,074 | |
| Crown Castle Towers LLC, 6.113%, 1/15/20 (n) | | $ | 1,380,000 | | | | 1,585,126 | |
| Rogers Communications, Inc., 5%, 3/15/44 | | | 489,000 | | | | 534,755 | |
| SBA Tower Trust, 2.898%, 10/15/19 (n) | | | 349,000 | | | | 349,920 | |
| | | | | | | | |
| | | | | | $ | 5,307,911 | |
| | | | | | | | |
| Telephone Services – 0.1% | | | | | |
| TELUS Corp., 5.05%, 7/23/20 | | CAD | 780,000 | | | $ | 748,311 | |
| | | | | | | | |
| Tobacco – 0.2% | | | | | |
| Altria Group, Inc., 2.85%, 8/09/22 | | $ | 690,000 | | | $ | 670,470 | |
| Lorillard Tobacco Co., 8.125%, 6/23/19 | | | 327,000 | | | | 396,431 | |
| Philip Morris International, Inc., 2.875%, 3/03/26 | | EUR | 400,000 | | | | 549,722 | |
| | | | | | | | |
| | | | | | $ | 1,616,623 | |
| | | | | | | | |
| Transportation – Services – 0.2% | | | | | |
| ERAC USA Finance Co., 2.75%, 3/15/17 (n) | | $ | 376,000 | | | $ | 386,044 | |
| ERAC USA Finance Co., 7%, 10/15/37 (n) | | | 824,000 | | | | 1,110,433 | |
| HIT Finance B.V., 4.875%, 10/27/21 | | EUR | 500,000 | | | | 753,038 | |
| | | | | | | | |
| | | | | | $ | 2,249,515 | |
| | | | | | | | |
15
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| U.S. Government Agencies and Equivalents – 0.4% | |
| Aid-Egypt, 4.45%, 9/15/15 | | $ | 649,000 | | | $ | 667,628 | |
| Small Business Administration, 5.09%, 10/01/25 | | | 18,802 | | | | 20,449 | |
| Small Business Administration, 5.21%, 1/01/26 | | | 658,280 | | | | 711,025 | |
| Small Business Administration, 5.31%, 5/01/27 | | | 185,104 | | | | 203,590 | |
| Small Business Administration, 2.22%, 3/01/33 | | | 2,102,979 | | | | 2,075,638 | |
| | | | | | | | |
| | | | | | $ | 3,678,330 | |
| | | | | | | | |
| U.S. Treasury Obligations – 4.0% | | | | | |
| U.S. Treasury Bonds, 4.5%, 8/15/39 (f) | | $ | 6,774,000 | | | $ | 9,033,766 | |
| U.S. Treasury Bonds, 3.625%, 2/15/44 | | | 3,693,000 | | | | 4,349,084 | |
| U.S. Treasury Notes, 3.5%, 5/15/20 (f) | | | 6,947,000 | | | | 7,576,572 | |
| U.S. Treasury Notes, 2.75%, 2/15/24 (f) | | | 18,050,000 | | | | 18,982,120 | |
| | | | | | | | |
| | | | | | $ | 39,941,542 | |
| | | | | | | | |
| Utilities – Electric Power – 0.8% | | | | | |
| Alabama Power Co., 4.15%, 8/15/44 | | $ | 300,000 | | | $ | 314,962 | |
| CMS Energy Corp., 5.05%, 3/15/22 | | | 954,000 | | | | 1,069,540 | |
| Colbun S.A., 4.5%, 7/10/24 (n) | | | 201,000 | | | | 200,851 | |
| E.ON International Finance B.V., 6.375%, 6/07/32 | | GBP | 350,000 | | | | 728,900 | |
| Empresa Nacional de Electricidad S.A., 4.25%, 4/15/24 | | $ | 231,000 | | | | 232,292 | |
| Enel Finance International N.V., 4.875%, 3/11/20 | | EUR | 500,000 | | | | 723,762 | |
| Enel S.p.A., 6.25%, 6/20/19 | | GBP | 450,000 | | | | 821,226 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Utilities – Electric Power – continued | | | | | |
| NGG Finance PLC, FRN, 5.625%, 6/18/73 | | GBP | 450,000 | | | $ | 743,453 | |
| PPL Capital Funding, Inc., 5%, 3/15/44 | | $ | 473,000 | | | | 526,418 | |
| PPL WEM Holdings PLC, 5.375%, 5/01/21 (n) | | | 280,000 | | | | 314,686 | |
| Progress Energy, Inc., 7.05%, 3/15/19 | | | 850,000 | | | | 1,007,296 | |
| Red Electrica de Espana, 4.75%, 2/16/18 | | EUR | 500,000 | | | | 682,253 | |
| Transelec S.A., 4.25%, 1/14/25 (n) | | $ | 201,000 | | | | 200,118 | |
| | | | | | | | |
| | | | | | $ | 7,565,757 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $604,339,402) | | | $ | 599,038,966 | |
| | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Number of Contracts | | | | |
| PUT OPTIONS PURCHASED – 0.0% | | | | | |
| Russell 2000 Index – June 2015 @ $950 (Premiums Paid, $412,518) | | | 255 | | | $ | 357,000 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | | |
| MONEY MARKET FUNDS – 3.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 30,994,218 | | | $ | 30,994,218 | |
| | | | | | | | |
Total Investments
(Identified Cost, $862,686,728) | | | $ | 975,083,424 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.4% | | | | | | | 14,203,390 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 989,286,814 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (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 $36,023,178, representing 3.6% of net assets. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for certain derivative transactions. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 | | | Value | |
| Cent LP, 2013-17A, “A1”, CLO, FRN, 1.532%, 1/30/25 | | 9/26/14 | | | $1,358,655 | | | | $1,348,861 | |
| Dryden Senior Loan Fund, 2013-26A, “A”, CLO, FRN, 1.33%, 7/15/25 | | 9/26/14 | | | 1,731,745 | | | | 1,720,507 | |
| ING Investment Management Ltd., 2013-2A, “A1”, CLO, FRN, 1.383%, 4/25/25 | | 9/26/14 | | | 1,576,294 | | | | 1,566,775 | |
| Republic of Indonesia, 2.875%, 7/08/21 | | 7/02/14 | | | 678,676 | | | | 612,588 | |
| Total Restricted Securities | | | | $5,248,731 | |
| % of Net assets | | | | 0.5% | |
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| CLO | | Collateralized Loan Obligation |
| FRN | | Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. |
16
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
| IPS | | International Preference Stock |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
Derivative Contracts at 12/31/14
Forward Foreign Currency Exchange Contracts at 12/31/14
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | |
| | SELL | | | AUD | | | Goldman Sachs International | | 105,284 | | 1/09/15 | | $ | 86,414 | | | $ | 85,929 | | | $ | 485 | |
| | SELL | | | AUD | | | JPMorgan Chase Bank N.A. | | 21,497,504 | | 2/23/15 | | | 18,371,208 | | | | 17,488,184 | | | | 883,024 | |
| | SELL | | | AUD | | | Westpac Banking Corporation | | 11,769,765 | | 1/09/15 | | | 10,185,495 | | | | 9,606,034 | | | | 579,461 | |
| | SELL | | | CAD | | | Goldman Sachs International | | 7,928,102 | | 1/09/15 | | | 7,055,111 | | | | 6,822,961 | | | | 232,150 | |
| | SELL | | | CAD | | | JPMorgan Chase Bank N.A. | | 21,190,884 | | 2/23/15 | | | 18,691,544 | | | | 18,218,805 | | | | 472,739 | |
| | SELL | | | CAD | | | Merrill Lynch International | | 5,084,492 | | 1/09/15 | | | 4,525,019 | | | | 4,375,737 | | | | 149,282 | |
| | SELL | | | CHF | | | Deutsche Bank AG | | 151,000 | | 1/09/15 | | | 152,235 | | | | 151,888 | | | | 347 | |
| | SELL | | | CHF | | | JPMorgan Chase Bank N.A. | | 55,890,659 | | 2/23/15 | | | 57,728,445 | | | | 56,264,032 | | | | 1,464,413 | |
| | SELL | | | CHF | | | UBS AG | | 1,559,000 | | 1/09/15 | | | 1,615,971 | | | | 1,568,170 | | | | 47,801 | |
| | SELL | | | DKK | | | Barclays Bank PLC | | 2,198,635 | | 1/09/15 | | | 372,146 | | | | 357,258 | | | | 14,888 | |
| | SELL | | | DKK | | | JPMorgan Chase Bank N.A. | | 10,498,333 | | 2/23/15 | | | 1,762,201 | | | | 1,706,609 | | | | 55,592 | |
| | SELL | | | DKK | | | UBS AG | | 2,198,635 | | 1/09/15 | | | 372,114 | | | | 357,258 | | | | 14,856 | |
| | SELL | | | EUR | | | Barclays Bank PLC | | 472,000 | | 1/09/15 | | | 598,359 | | | | 571,168 | | | | 27,191 | |
| | SELL | | | EUR | | | Citibank N.A. | | 2,054,629 | | 1/09/15 | | | 2,514,299 | | | | 2,486,310 | | | | 27,989 | |
| | SELL | | | EUR | | | Credit Suisse Group | | 30,544,147 | | 1/09/15 | | | 38,581,689 | | | | 36,961,526 | | | | 1,620,163 | |
| | SELL | | | EUR | | | Deutsche Bank AG | | 11,121,949 | | 1/09/15 | | | 13,861,470 | | | | 13,458,690 | | | | 402,780 | |
| | SELL | | | EUR | | | Goldman Sachs International | | 111,313,570 | | 1/09/15-2/23/15 | | | 138,461,328 | | | | 134,757,358 | | | | 3,703,970 | |
| | SELL | | | EUR | | | JPMorgan Chase Bank N.A. | | 30,933,039 | | 2/23/15 | | | 38,435,177 | | | | 37,448,272 | | | | 986,905 | |
| | SELL | | | EUR | | | Morgan Stanley Capital Services, Inc. | | 1,014,000 | | 1/09/15 | | | 1,246,609 | | | | 1,227,043 | | | | 19,566 | |
| | SELL | | | GBP | | | Barclays Bank PLC | | 3,053,237 | | 1/09/15 | | | 4,854,953 | | | | 4,758,629 | | | | 96,324 | |
17
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/14 – 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 | | | GBP | | | Goldman Sachs International | | 8,940,980 | | 1/09/15-2/23/15 | | $ | 14,220,734 | | | $ | 13,930,679 | | | $ | 290,055 | |
| | SELL | | | GBP | | | JPMorgan Chase Bank N.A. | | 29,724,942 | | 2/23/15 | | | 46,790,147 | | | | 46,311,342 | | | | 478,805 | |
| | BUY | | | JPY | | | Deutsche Bank AG | | 222,875,000 | | 1/09/15 | | | 1,859,255 | | | | 1,860,750 | | | | 1,495 | |
| | SELL | | | JPY | | | Citibank N.A. | | 147,304,000 | | 1/09/15 | | | 1,235,711 | | | | 1,229,819 | | | | 5,892 | |
| | SELL | | | JPY | | | Goldman Sachs International | | 478,693,000 | | 1/09/15 | | | 4,166,382 | | | | 3,996,536 | | | | 169,846 | |
| | SELL | | | JPY | | | JPMorgan Chase Bank N.A. | | 11,353,211,545 | | 1/09/15-2/23/15 | | | 99,073,961 | | | | 94,821,022 | | | | 4,252,939 | |
| | BUY | | | KRW | | | Deutsche Bank AG | | 763,015,900 | | 2/17/15 | | | 691,075 | | | | 692,702 | | | | 1,627 | |
| | BUY | | | KRW | | | JPMorgan Chase Bank N.A. | | 344,791,000 | | 2/17/15 | | | 311,450 | | | | 313,017 | | | | 1,567 | |
| | SELL | | | MXN | | | UBS AG | | 6,761,433 | | 1/09/15 | | | 500,106 | | | | 458,175 | | | | 41,931 | |
| | SELL | | | NOK | | | Barclays Bank PLC | | 37,442,279 | | 1/09/15 | | | 5,251,408 | | | | 5,023,199 | | | | 228,209 | |
| | SELL | | | NOK | | | Deutsche Bank AG | | 40,239,000 | | 1/09/15 | | | 6,094,233 | | | | 5,398,403 | | | | 695,830 | |
| | SELL | | | NOK | | | JPMorgan Chase Bank N.A. | | 59,445,339 | | 2/23/15 | | | 8,427,000 | | | | 7,964,864 | | | | 462,136 | |
| | BUY | | | NZD | | | Goldman Sachs International | | 30,202,438 | | 2/23/15 | | | 23,319,000 | | | | 23,448,717 | | | | 129,717 | |
| | SELL | | | SEK | | | Goldman Sachs International | | 51,854,667 | | 1/09/15 | | | 7,156,258 | | | | 6,651,918 | | | | 504,340 | |
| | SELL | | | SGD | | | JPMorgan Chase Bank N.A. | | 1,238,213 | | 2/23/15 | | | 958,765 | | | | 933,791 | | | | 24,974 | |
| | BUY | | | THB | | | JPMorgan Chase Bank N.A. | | 48,928,650 | | 1/15/15 | | | 1,482,192 | | | | 1,486,488 | | | | 4,296 | |
| | BUY | | | ZAR | | | Barclays Bank PLC | | 42,000 | | 1/09/15 | | | 3,619 | | | | 3,628 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 18,093,594 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Liability Derivatives | | | | | | | | | | | | | | | | |
| | SELL | | | AUD | | | Citibank N.A. | | 97,000 | | 1/09/15 | | $ | 79,089 | | | $ | 79,168 | | | $ | (79 | ) |
| | BUY | | | BRL | | | Barclays Bank PLC | | 678,798 | | 2/03/15 | | | 265,706 | | | | 253,372 | | | | (12,334 | ) |
| | BUY | | | CAD | | | Citibank N.A. | | 32,000 | | 1/09/15 | | | 27,550 | | | | 27,539 | | | | (11 | ) |
| | BUY | | | CAD | | | Credit Suisse Group | | 7,052,000 | | 1/09/15 | | | 6,268,667 | | | | 6,068,983 | | | | (199,684 | ) |
| | BUY | | | CAD | | | Goldman Sachs International | | 16,809,450 | | 1/09/15-2/23/15 | | | 14,688,430 | | | | 14,457,439 | | | | (230,991 | ) |
| | BUY | | | CHF | | | Credit Suisse Group | | 6,022,000 | | 1/09/15 | | | 6,283,533 | | | | 6,057,420 | | | | (226,113 | ) |
| | BUY | | | CHF | | | Goldman Sachs International | | 12,397,648 | | 2/23/15 | | | 12,707,000 | | | | 12,480,469 | | | | (226,531 | ) |
| | BUY | | | CZK | | | Barclays Bank PLC | | 15,672,000 | | 1/09/15 | | | 722,155 | | | | 684,631 | | | | (37,524 | ) |
| | BUY | | | EUR | | | Brown Brothers Harriman & Co. | | 2,497,176 | | 1/09/15 | | | 3,081,360 | | | | 3,021,837 | | | | (59,523 | ) |
| | BUY | | | EUR | | | Citibank N.A. | | 2,160,138 | | 1/09/15 | | | 2,693,623 | | | | 2,613,987 | | | | (79,636 | ) |
| | BUY | | | EUR | | | Credit Suisse Group | | 5,012,000 | | 1/09/15 | | | 6,278,758 | | | | 6,065,030 | | | | (213,728 | ) |
| | BUY | | | EUR | | | Deutsche Bank AG | | 6,852,943 | | 1/09/15-3/18/15 | | | 8,559,420 | | | | 8,297,249 | | | | (262,171 | ) |
| | BUY | | | EUR | | | Goldman Sachs International | | 5,212,157 | | 1/09/15 | | | 6,532,487 | | | | 6,307,240 | | | | (225,247 | ) |
| | BUY | | | EUR | | | JPMorgan Chase Bank N.A. | | 3,702,000 | | 1/09/15 | | | 4,637,272 | | | | 4,479,797 | | | | (157,475 | ) |
| | BUY | | | GBP | | | Credit Suisse Group | | 2,201,661 | | 1/09/15 | | | 3,522,288 | | | | 3,431,404 | | | | (90,884 | ) |
| | BUY | | | GBP | | | Merrill Lynch International | | 2,201,661 | | 1/09/15 | | | 3,524,849 | | | | 3,431,404 | | | | (93,445 | ) |
| | SELL | | | GBP | | | Goldman Sachs International | | 393,000 | | 1/09/15 | | | 611,834 | | | | 612,511 | | | | (677 | ) |
| | BUY | | | ILS | | | JPMorgan Chase Bank N.A. | | 342,844 | | 2/23/15 | | | 90,286 | | | | 87,906 | | | | (2,380 | ) |
| | BUY | | | JPY | | | Deutsche Bank AG | | 2,269,681,864 | | 1/09/15 | | | 20,986,708 | | | | 18,949,234 | | | | (2,037,474 | ) |
| | BUY | | | JPY | | | Goldman Sachs International | | 763,584,591 | | 1/09/15-2/23/15 | | | 6,638,932 | | | | 6,377,162 | | | | (261,770 | ) |
| | BUY | | | JPY | | | JPMorgan Chase Bank N.A. | | 726,782,000 | | 1/09/15 | | | 6,236,122 | | | | 6,067,794 | | | | (168,328 | ) |
| | BUY | | | JPY | | | UBS AG | | 6,107,000 | | 1/09/15 | | | 51,448 | | | | 50,986 | | | | (462 | ) |
| | SELL | | | KRW | | | JPMorgan Chase Bank N.A. | | 64,941,000 | | 2/17/15 | | | 58,920 | | | | 58,956 | | | | (36 | ) |
| | BUY | | | MYR | | | Barclays Bank PLC | | 4,168,756 | | 2/04/15 | | | 1,203,104 | | | | 1,189,401 | | | | (13,703 | ) |
| | BUY | | | NOK | | | Goldman Sachs International | | 275,737,737 | | 2/23/15 | | | 40,167,778 | | | | 36,945,095 | | | | (3,222,683 | ) |
| | BUY | | | NOK | | | JPMorgan Chase Bank N.A. | | 50,002,577 | | 1/09/15-2/23/15 | | | 7,580,939 | | | | 6,705,638 | | | | (875,301 | ) |
| | SELL | | | NZD | | | Barclays Bank PLC | | 4,450,164 | | 1/09/15 | | | 3,411,006 | | | | 3,470,327 | | | | (59,321 | ) |
| | SELL | | | NZD | | | JPMorgan Chase Bank N.A. | | 27,997,646 | | 1/09/15-2/23/15 | | | 21,500,696 | | | | 21,765,282 | | | | (264,586 | ) |
| | SELL | | | NZD | | | Westpac Banking Corporation | | 9,171,923 | | 1/09/15 | | | 7,097,509 | | | | 7,152,449 | | | | (54,940 | ) |
| | BUY | | | PLN | | | Goldman Sachs International | | 4,992,931 | | 1/09/15 | | | 1,510,918 | | | | 1,409,953 | | | | (100,965 | ) |
| | BUY | | | SEK | | | Goldman Sachs International | | 11,780,547 | | 2/23/15 | | | 1,585,613 | | | | 1,511,452 | | | | (74,161 | ) |
| | BUY | | | SEK | | | JPMorgan Chase Bank N.A. | | 75,880,115 | | 2/23/15 | | | 10,215,004 | | | | 9,735,467 | | | | (479,537 | ) |
18
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
Forward Foreign Currency Exchange Contracts at 12/31/14 – continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| | Liability Derivatives – continued | | | | | | | | | | | | | | | | |
| | BUY | | | SGD | | | Citibank N.A. | | 1,505,000 | | 1/09/15 | | $ | 1,178,567 | | | $ | 1,136,027 | | | $ | (42,540 | ) |
| | BUY | | | TRY | | | JPMorgan Chase Bank N.A. | | 2,638,000 | | 1/09/15 | | | 1,130,517 | | | | 1,128,102 | | | | (2,415 | ) |
| | BUY | | | ZAR | | | JPMorgan Chase Bank N.A. | | 18,522,135 | | 1/09/15 | | | 1,629,262 | | | | 1,600,165 | | | | (29,097 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (9,805,752 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Futures Contracts Outstanding at 12/31/14
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | | | | | |
| Equity Futures | | | | | | | | | | | | | | | | | | |
| AEX 25 Index (Long) | | | EUR | | | | 78 | | | | $7,974,088 | | | January - 2015 | | | $312,652 | |
| BIST 30 Index (Long) | | | TRY | | | | 7,018 | | | | 32,094,091 | | | February - 2015 | | | 161,573 | |
| Bovespa Index (Long) | | | BRL | | | | 1,339 | | | | 25,419,944 | | | February - 2015 | | | 1,492,667 | |
| CAC 40 Index (Long) | | | EUR | | | | 155 | | | | 7,974,213 | | | January - 2015 | | | 267,049 | |
| DAX Index (Long) | | | EUR | | | | 21 | | | | 6,206,130 | | | March - 2015 | | | 114,086 | |
| FTSE/MIB Index (Long) | | | EUR | | | | 146 | | | | 16,730,176 | | | March - 2015 | | | 220,038 | |
| Hang Seng China Enterprises Index (Long) | | | HKD | | | | 178 | | | | 13,847,269 | | | January - 2015 | | | 304,679 | |
| Hang Seng Index (Long) | | | HKD | | | | 81 | | | | 12,274,695 | | | January - 2015 | | | 124,089 | |
| IBEX 35 Index (Long) | | | EUR | | | | 197 | | | | 24,163,180 | | | January - 2015 | | | 87,048 | |
| MSCI Singapore Index (Long) | | | SGD | | | | 40 | | | | 2,301,058 | | | January - 2015 | | | 54,256 | |
| MSCI Taiwan Index (Long) | | | USD | | | | 304 | | | | 10,380,279 | | | January - 2015 | | | 215,808 | |
| SGX CNX Nifty Index (Long) | | | USD | | | | 582 | | | | 9,729,876 | | | January - 2015 | | | 36,087 | |
| OMX 30 Index (Long) | | | SEK | | | | 359 | | | | 6,707,612 | | | January - 2015 | | | 118,808 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $3,508,840 | |
| | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| US Treasury Note 10 yr (Long) | | | USD | | | | 1,081 | | | | $137,067,422 | | | March - 2015 | | | $679,389 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $4,188,229 | |
| | | | | | | | | | | | | | | | | | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| Equity Futures | | | | | | | | | | | | | | | | | | |
| E-Mini S&P 500 Index (Short) | | | USD | | | | 363 | | | | $37,251,060 | | | March - 2015 | | | $(599,135 | ) |
| FTSE 100 Index (Short) | | | GBP | | | | 114 | | | | 11,481,340 | | | March - 2015 | | | (430,886 | ) |
| FTSE JSE Top 40 Index (Short) | | | ZAR | | | | 105 | | | | 3,997,801 | | | March - 2015 | | | (168,581 | ) |
| KOSPI 200 Index (Long) | | | KRW | | | | 38 | | | | 4,194,742 | | | March - 2015 | | | (163,405 | ) |
| Mex Bolsa Index (Short) | | | MXN | | | | 411 | | | | 12,031,300 | | | March - 2015 | | | (599,505 | ) |
| Russell 2000 Index (Short) | | | USD | | | | 189 | | | | 22,693,230 | | | March - 2015 | | | (820,829 | ) |
| S&P ASX 200 Index (Short) | | | AUD | | | | 309 | | | | 33,727,083 | | | March - 2015 | | | (1,239,517 | ) |
| S&P TSX 60 Index (Short) | | | CAD | | | | 228 | | | | 33,424,824 | | | March - 2015 | | | (1,788,190 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $(5,810,048 | ) |
| | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| Australian Treasury Bond 10 yr (Short) | | | AUD | | | | 327 | | | | $34,209,944 | | | March - 2015 | | | $(303,923 | ) |
| Canadian Treasury Bond 10 yr (Short) | | | CAD | | | | 150 | | | | 17,884,317 | | | March - 2015 | | | (295,597 | ) |
| German Euro Bund (Short) | | | EUR | | | | 256 | | | | 48,284,294 | | | March - 2015 | | | (862,487 | ) |
| Japanese Government Bond 10 Yr (Short) | | | JPY | | | | 58 | | | | 71,563,032 | | | March - 2015 | | | (438,176 | ) |
| United Kingdom Gilt Bond (Short) | | | GBP | | | | 74 | | | | 13,786,169 | | | March - 2015 | | | (277,594 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $(2,177,777 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $(7,987,825 | ) |
| | | | | | | | | | | | | | | | | | |
19
MFS Global Tactical Allocation Portfolio
Portfolio of Investments – continued
At December 31, 2014, the fund had cash collateral of $6,589,334 and other liquid securities with an aggregate value of $25,537,215 to cover any commitments for certain derivative contracts. Cash collateral is comprised of “Restricted Cash” and “Deposits with brokers” on the Statement of Assets and Liabilities.
See Notes to Financial Statements
20
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $831,692,510) | | | $944,089,206 | | | | | |
Underlying affiliated funds, at cost and value | | | 30,994,218 | | | | | |
Total investments, at value (identified cost, $862,686,728) | | | $975,083,424 | | | | | |
Cash | | | 35,741 | | | | | |
Restricted cash | | | 1,400,000 | | | | | |
Foreign currency, at value (identified cost, $24) | | | 23 | | | | | |
Deposits with brokers | | | 5,189,334 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 18,093,594 | | | | | |
Daily variation margin on open futures contracts | | | 1,520,928 | | | | | |
Investments sold | | | 474,514 | | | | | |
Fund shares sold | | | 11,013 | | | | | |
Interest and dividends | | | 7,064,736 | | | | | |
Other assets | | | 8,083 | | | | | |
Total assets | | | | | | | $1,008,881,390 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $9,805,752 | | | | | |
Investments purchased | | | 388,630 | | | | | |
TBA purchase commitments | | | 8,857,358 | | | | | |
Fund shares reacquired | | | 346,451 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 32,525 | | | | | |
Shareholder servicing costs | | | 141 | | | | | |
Distribution and/or service fees | | | 12,527 | | | | | |
Payable for independent Trustees’ compensation | | | 24 | | | | | |
Accrued expenses and other liabilities | | | 151,168 | | | | | |
Total liabilities | | | | | | | $19,594,576 | |
Net assets | | | | | | | $989,286,814 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $833,616,981 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 116,186,171 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 8,043,024 | | | | | |
Undistributed net investment income | | | 31,440,638 | | | | | |
Net assets | | | | | | | $989,286,814 | |
Shares of beneficial interest outstanding | | | | | | | 60,939,493 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $76,670,433 | | | | 4,666,794 | | | | $16.43 | |
Service Class | | | 912,616,381 | | | | 56,272,699 | | | | 16.22 | |
See Notes to Financial Statements
21
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $18,460,650 | | | | | |
Dividends | | | 13,038,688 | | | | | |
Dividends from underlying affiliated funds | | | 36,872 | | | | | |
Foreign taxes withheld | | | (477,826 | ) | | | | |
Total investment income | | | | | | | $31,058,384 | |
Expenses | | | | | | | | |
Management fee | | | $7,214,411 | | | | | |
Distribution and/or service fees | | | 2,395,045 | | | | | |
Shareholder servicing costs | | | 30,524 | | | | | |
Administrative services fee | | | 149,162 | | | | | |
Independent Trustees’ compensation | | | 24,056 | | | | | |
Custodian fee | | | 194,802 | | | | | |
Shareholder communications | | | 51,575 | | | | | |
Audit and tax fees | | | 99,921 | | | | | |
Legal fees | | | 9,193 | | | | | |
Miscellaneous | | | 78,237 | | | | | |
Total expenses | | | | | | | $10,246,926 | |
Fees paid indirectly | | | (135 | ) | | | | |
Reduction of expenses by investment adviser | | | (49,338 | ) | | | | |
Net expenses | | | | | | | $10,197,453 | |
Net investment income | | | | | | | $20,860,931 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $16,475,837 | | | | | |
Written options | | | 799,321 | | | | | |
Futures contracts | | | (5,218,497 | ) | | | | |
Foreign currency | | | 31,171,910 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $43,228,571 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(15,973,780 | ) | | | | |
Futures contracts | | | (7,663,956 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | 2,959,729 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(20,678,007 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $22,550,564 | |
Change in net assets from operations | | | | | | | $43,411,495 | |
See Notes to Financial Statements
22
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $20,860,931 | | | | $19,300,653 | |
Net realized gain (loss) on investments and foreign currency | | | 43,228,571 | | | | 29,531,067 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (20,678,007 | ) | | | 39,302,169 | |
Change in net assets from operations | | | $43,411,495 | | | | $88,133,889 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(26,957,872 | ) | | | $(25,038,433 | ) |
From net realized gain on investments | | | (1,303,027 | ) | | | — | |
Total distributions declared to shareholders | | | $(28,260,899 | ) | | | $(25,038,433 | ) |
Change in net assets from fund share transactions | | | $(96,826,948 | ) | | | $(59,486,345 | ) |
Total change in net assets | | | $(81,676,352 | ) | | | $3,609,111 | |
Net assets | | | | | | | | |
At beginning of period | | | 1,070,963,166 | | | | 1,067,354,055 | |
At end of period (including undistributed net investment income of $31,440,638 and
$12,540,613, respectively) | | | $989,286,814 | | | | $1,070,963,166 | |
See Notes to Financial Statements
23
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $16.20 | | | | $15.27 | | | | $14.22 | | | | $14.20 | | | | $13.56 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.37 | | | | $0.32 | | | | $0.30 | | | | $0.32 | | | | $0.24 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.36 | | | | 1.02 | | | | 1.04 | | | | (0.10 | ) | | | 0.51 | |
Total from investment operations | | | $0.73 | | | | $1.34 | | | | $1.34 | | | | $0.22 | | | | $0.75 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.48 | ) | | | $(0.41 | ) | | | $(0.29 | ) | | | $(0.14 | ) | | | $(0.11 | ) |
From net realized gain on investments | | | (0.02 | ) | | | — | | | | — | | | | (0.06 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.50 | ) | | | $(0.41 | ) | | | $(0.29 | ) | | | $(0.20 | ) | | | $(0.11 | ) |
Net asset value, end of period (x) | | | $16.43 | | | | $16.20 | | | | $15.27 | | | | $14.22 | | | | $14.20 | |
Total return (%) (k)(r)(s)(x) | | | 4.46 | | | | 8.91 | | | | 9.49 | | | | 1.55 | | | | 5.53 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.76 | | | | 0.75 | | | | 0.76 | | | | 0.80 | | | | 0.93 | |
Expenses after expense reductions (f) | | | 0.75 | | | | 0.75 | | | | 0.76 | | | | 0.80 | | | | 0.90 | |
Net investment income | | | 2.23 | | | | 2.04 | | | | 2.02 | | | | 2.21 | | | | 1.76 | |
Portfolio turnover | | | 32 | | | | 65 | | | | 38 | | | | 56 | | | | 73 | |
Net assets at end of period (000 omitted) | | | $76,670 | | | | $75,559 | | | | $73,189 | | | | $77,255 | | | | $87,137 | |
See Notes to Financial Statements
24
MFS Global Tactical Allocation Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $15.99 | | | | $15.09 | | | | $14.06 | | | | $14.07 | | | | $13.46 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.33 | | | | $0.28 | | | | $0.26 | | | | $0.27 | | | | $0.20 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 0.35 | | | | 0.99 | | | | 1.03 | | | | (0.09 | ) | | | 0.51 | |
Total from investment operations | | | $0.68 | | | | $1.27 | | | | $1.29 | | | | $0.18 | | | | $0.71 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.43 | ) | | | $(0.37 | ) | | | $(0.26 | ) | | | $(0.13 | ) | | | $(0.10 | ) |
From net realized gain on investments | | | (0.02 | ) | | | — | | | | — | | | | (0.06 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.45 | ) | | | $(0.37 | ) | | | $(0.26 | ) | | | $(0.19 | ) | | | $(0.10 | ) |
Net asset value, end of period (x) | | | $16.22 | | | | $15.99 | | | | $15.09 | | | | $14.06 | | | | $14.07 | |
Total return (%) (k)(r)(s)(x) | | | 4.25 | | | | 8.54 | | | | 9.26 | | | | 1.29 | | | | 5.31 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.01 | | | | 1.00 | | | | 1.01 | | | | 1.05 | | | | 1.18 | |
Expenses after expense reductions (f) | | | 1.00 | | | | 1.00 | | | | 1.01 | | | | 1.05 | | | | 1.15 | |
Net investment income | | | 2.00 | | | | 1.79 | | | | 1.77 | | | | 1.92 | | | | 1.48 | |
Portfolio turnover | | | 32 | | | | 65 | | | | 38 | | | | 56 | | | | 73 | |
Net assets at end of period (000 omitted) | | | $912,616 | | | | $995,404 | | | | $994,165 | | | | $922,442 | | | | $400,318 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
25
MFS Global Tactical Allocation Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Global Tactical Allocation Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in derivatives as part of its principal investment strategy. Derivatives can be highly volatile and involve risks in addition to the risks of the underlying indicators on which the derivative is based. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Debt instruments and floating rate loans, 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 may be 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 at valuations provided by a third-party pricing service. 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 exchange 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.
26
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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 contracts and forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $186,237,891 | | | | $357,000 | | | | $— | | | | $186,594,891 | |
Japan | | | — | | | | 37,457,730 | | | | — | | | | 37,457,730 | |
United Kingdom | | | 1,368,744 | | | | 35,388,560 | | | | — | | | | 36,757,304 | |
Switzerland | | | — | | | | 23,665,890 | | | | — | | | | 23,665,890 | |
Germany | | | 9,513,068 | | | | 4,887,694 | | | | — | | | | 14,400,762 | |
France | | | — | | | | 14,021,574 | | | | — | | | | 14,021,574 | |
Canada | | | 7,539,641 | | | | — | | | | — | | | | 7,539,641 | |
Netherlands | | | — | | | | 6,723,328 | | | | — | | | | 6,723,328 | |
Sweden | | | 4,121,370 | | | | — | | | | — | | | | 4,121,370 | |
Other Countries | | | 4,587,870 | | | | 9,179,878 | | | | — | | | | 13,767,748 | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | — | | | | 43,619,871 | | | | — | | | | 43,619,871 | |
| Non-U.S. Sovereign Debt | | | — | | | | 336,287,236 | | | | — | | | | 336,287,236 | |
| U.S. Corporate Bonds | | | — | | | | 76,394,069 | | | | — | | | | 76,394,069 | |
| Residential Mortgage-Backed Securities | | | — | | | | 48,404,579 | | | | — | | | | 48,404,579 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 18,534,407 | | | | — | | | | 18,534,407 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 4,636,143 | | | | — | | | | 4,636,143 | |
| Foreign Bonds | | | — | | | | 71,162,663 | | | | — | | | | 71,162,663 | |
| Mutual Funds | | | 30,994,218 | | | | — | | | | — | | | | 30,994,218 | |
| Total Investments | | | $244,362,802 | | | | $730,720,622 | | | | $— | | | | $975,083,424 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts | | | $(3,777,293 | ) | | | $(22,303 | ) | | | $— | | | | $(3,799,596 | ) |
| Forward Foreign Currency Exchange Contracts | | | — | | | | 8,287,842 | | | | — | | | | 8,287,842 | |
27
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $118,072,520 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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 uses derivatives in an attempt to adjust exposure to markets, asset classes, and currencies based on the adviser’s assessment of the relative attractiveness of such markets, asset classes, and currencies. Derivatives are used to increase or decrease the fund’s exposure to markets, asset classes, or currencies resulting from the fund’s individual security selections, and to expose the fund to markets, asset classes, or currencies in which the fund’s individual security selection has resulted in little or no exposure. Derivatives are 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 or decrease market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.
The derivative instruments used by the fund were written options, purchased options, futures contracts and forward foreign currency exchange contracts. 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $679,389 | | | | $(2,177,777 | ) |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 18,093,594 | | | | (9,805,752 | ) |
| Equity | | Equity Futures | | | 3,508,840 | | | | (5,810,048 | ) |
| Equity | | Purchased Equity Options | | | 357,000 | | | | — | |
| Total | | | | | $22,638,823 | | | | $(17,793,577 | ) |
| (a) | The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. The value of futures contracts includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2014 as reported in the Statement of Operations:
| | | | | | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Foreign Currency | | | Investments (Purchased Options) | | | Written Options | |
| Interest Rate | | | $(3,924,748 | ) | | | $— | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | 31,516,716 | | | | (265,502 | ) | | | — | |
| Equity | | | (1,293,749 | ) | | | — | | | | (4,583,015 | ) | | | 799,321 | |
| Total | | | $(5,218,497 | ) | | | $31,516,716 | | | | $(4,848,517 | ) | | | $799,321 | |
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, 2014 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Translation of Assets and Liabilities in Foreign Currencies | | | Investments (Purchased Options) | |
| Interest Rate | | | $(2,179,422 | ) | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | 3,744,075 | | | | — | |
| Equity | | | (5,484,534 | ) | | | — | | | | 548,085 | |
| Total | | | $(7,663,956 | ) | | | $3,744,075 | | | | $548,085 | |
28
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, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
The following table presents the fund’s derivative assets and liabilities (by type) on a gross basis as of December 31, 2014:
| | | | | | | | |
| Gross Amounts of: | | Derivative Assets | | | Derivative Liabilities | |
| Futures Contracts (a) | | | $1,520,928 | | | | $— | |
| Forward Foreign Currency Exchange Contracts | | | 18,093,594 | | | | (9,805,752 | ) |
| Purchased Options | | | 357,000 | | | | — | |
| Total Gross Amount of Derivative Assets and Liabilities Presented in the Statement of Assets & Liabilities | | | $19,971,522 | | | | $(9,805,752 | ) |
Derivatives Assets and Liabilities Not Subject to a Master Netting Agreement or Similar Arrangement | | | 3,602,679 | | | | (730,871 | ) |
Total Gross Amount of Derivative Assets and Liabilities Subject to a Master Netting Agreement or Similar Arrangement | | | $16,368,843 | | | | $(9,074,881 | ) |
| (a) | The amount presented here represents the fund’s current day variation margin for futures contracts. This amount, which is recognized within the fund’s Statement of Assets and Liabilities, differs from the fair value of the futures contracts which is presented in the tables that follow the fund’s Portfolio of Investments. |
The following table presents (by counterparty) the fund’s derivative assets net of amounts available for offset under Master Netting Agreements (or similar arrangements) and net of the related collateral held by the fund at December 31, 2014:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the
Statement of Assets & Liabilities | | | | |
| | | Gross Amount of
Derivative Assets Subject
to a Master Netting
Agreement (or Similar
Arrangement) by
Counterparty | | | Financial
Instruments
Available
for Offset | | | Financial
Instruments
Collateral
Received (b) | | | Cash Collateral
Received (b) | | | Net Amount of
Derivative Assets by
Counterparty | |
| Barclays Bank PLC | | | $366,621 | | | | (122,882 | ) | | | — | | | | — | | | | $243,739 | |
| Citibank N.A. | | | 33,881 | | | | (33,881 | ) | | | — | | | | — | | | | — | |
| Deutsche Bank AG | | | 1,102,079 | | | | (1,102,079 | ) | | | — | | | | — | | | | — | |
| Goldman Sachs International | | | 5,030,563 | | | | (4,343,025 | ) | | | — | | | | — | | | | 687,538 | |
| JPMorgan Chase Bank N.A. | | | 9,087,390 | | | | (1,979,155 | ) | | | (7,108,235 | ) | | | — | | | | — | |
| Merrill Lynch International | | | 149,282 | | | | (93,445 | ) | | | — | | | | — | | | | 55,837 | |
| Morgan Stanley Capital Services, Inc. | | | 19,566 | | | | — | | | | — | | | | — | | | | 19,566 | |
| Westpac Banking Corporation | | | 579,461 | | | | (54,940 | ) | | | — | | | | — | | | | 524,521 | |
| Total | | | $16,368,843 | | | | (7,729,407 | ) | | | (7,108,235 | ) | | | — | | | | $1,531,201 | |
29
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The following table presents (by counterparty) the fund’s derivative liabilities net of amounts available for offset under Master Netting Agreements (or similar arrangements) and net of the related collateral pledged by the fund at December 31, 2014:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amounts Not Offset in the
Statement of Assets & Liabilities | | | | |
| | | Gross Amounts of
Derivative Liabilities Subject
to a Master Netting
Agreement (or Similar
Arrangement) by
Counterparty | | | Financial
Instruments
Available
for Offset | | | Financial
Instruments
Collateral
Pledged (b) | | | Cash Collateral
Pledged (b) | | | Net Amount of
Derivative Liabilities by
Counterparty | |
| Barclays Bank PLC | | | $(122,882 | ) | | | 122,882 | | | | — | | | | — | | | | $— | |
| Brown Brothers Harriman & Co. | | | (59,523 | ) | | | — | | | | — | | | | — | | | | (59,523 | ) |
| Citibank N.A. | | | (122,266 | ) | | | 33,881 | | | | — | | | | 88,385 | | | | — | |
| Deutsche Bank AG | | | (2,299,645 | ) | | | 1,102,079 | | | | — | | | | 1,150,000 | | | | (47,566 | ) |
| Goldman Sachs International | | | (4,343,025 | ) | | | 4,343,025 | | | | — | | | | — | | | | — | |
| JPMorgan Chase Bank N.A. | | | (1,979,155 | ) | | | 1,979,155 | | | | — | | | | — | | | | — | |
| Merrill Lynch International | | | (93,445 | ) | | | 93,445 | | | | — | | | | — | | | | — | |
| Westpac Banking Corporation | | | (54,940 | ) | | | 54,940 | | | | — | | | | — | | | | — | |
| Total | | | $(9,074,881 | ) | | | 7,729,407 | | | | — | | | | 1,238,385 | | | | $(107,089 | ) |
| (b) | The amount presented here may be less than the total amount of collateral (received)/pledged as the net amount of derivative assets and liabilities for a counterparty cannot be less than $0. |
Written Options – In exchange for a premium, the fund wrote put options on securities that it anticipated the price would increase. At the time the option was written, the fund believed the premium received exceeded the potential loss that could 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 in 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 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 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. Losses from writing options can exceed the premium received and can exceed the potential loss from an ordinary buy and sell transaction. 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.
The following table represents the written option activity in the fund during the year ended December 31, 2014:
| | | | | | | | |
| | | Number of contracts | | | Premiums received | |
| Outstanding, beginning of period | | | — | | | | $— | |
| Options written | | | 1,003 | | | | 799,321 | |
| Options expired | | | (1,003 | ) | | | (799,321 | ) |
| Outstanding, end of period | | | — | | | | $— | |
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
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
30
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
recorded as unrealized appreciation or depreciation. Premiums paid for purchased call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. 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 contracts 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 contracts 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 entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used 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.
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. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. 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 – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in the Statement of Operations. The dividend and
31
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
interest income earned on the securities loaned is accounted for in the same manner as other dividend and interest income. At December 31, 2014, there were no securities on loan or collateral outstanding.
Dollar Roll Transactions – The fund enters into dollar roll transactions, with respect to mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, in which the fund sells mortgage-backed securities to financial institutions and simultaneously agrees to purchase similar (same issuer, type and coupon) securities at a later date at an agreed-upon price. During the period between the sale and repurchase in a dollar roll transaction the fund will not be entitled to receive interest and principal payments on the securities sold but is compensated by interest earned on the proceeds of the initial sale and by a lower purchase price on the securities to be repurchased which enhances the fund’s total return. The fund accounts for dollar roll transactions as purchases and sales and realizes gains and losses on these transactions.
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 invests 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 purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. TBA securities resulting from these transactions are included in the Portfolio of Investments. TBA purchase commitments are held at carrying amount, which approximates fair value and are categorized as level 2 within the fair value hierarchy. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
To mitigate this risk of loss on TBA securities and other types of forward settling mortgage-backed securities, the fund whenever possible enters into a Master Securities Forward Transaction Agreement (“MSFTA”) on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The MSFTA 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. Upon an event of default or a termination of the MSFTA, the non-defaulting party has the right 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 MSFTA 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.
For mortgage-backed securities traded under a MSFTA, the collateral and margining requirements are contract specific. Collateral amounts across all transactions traded under such agreement are netted and one amount is posted from one party to the other to collateralize such obligations. Cash that has been pledged to cover the fund’s collateral or margin obligations under a MSFTA, if any, will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
32
MFS Global Tactical Allocation 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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, passive foreign investment companies, wash sale loss deferrals, straddle loss deferrals, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $26,957,872 | | | | $25,038,433 | |
| Long-term capital gains | | | 1,303,027 | | | | — | |
| Total distributions | | | $28,260,899 | | | | $25,038,433 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $871,867,992 | |
| Gross appreciation | | | 132,621,448 | |
| Gross depreciation | | | (29,406,016 | ) |
| Net unrealized appreciation (depreciation) | | | $103,215,432 | |
| Undistributed ordinary income | | | 46,021,257 | |
| Undistributed long-term capital gain | | | 14,844,240 | |
| Other temporary differences | | | (8,411,096 | ) |
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $2,198,183 | | | | $1,864,348 | | | | $97,259 | | | | $— | |
| Service Class | | | 24,759,689 | | | | 23,174,085 | | | | 1,205,768 | | | | — | |
| Total | | | $26,957,872 | | | | $25,038,433 | | | | $1,303,027 | | | | $— | |
| (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% | |
33
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
Effective August 1, 2014, MFS 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the period August 1, 2014 through December 31, 2014, the average daily net assets did not exceed $2.5 billion and therefore, the management fee was not reduced in accordance with this agreement. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $47,526, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.69% 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $30,400, which equated to 0.0029% 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, 2014, these costs amounted to $124.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0144% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $4,874 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $1,812, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
34
MFS Global Tactical Allocation Portfolio
Notes to Financial Statements – continued
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions and short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $115,352,012 | | | | $93,087,765 | |
| Investments (non-U.S. Government securities) | | | $198,033,300 | | | | $288,037,600 | |
| (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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 547,528 | | | | $8,899,172 | | | | 341,035 | | | | $5,412,102 | |
Service Class | | | 447,234 | | | | 7,203,969 | | | | 1,219,454 | | | | 18,943,545 | |
| | | 994,762 | | | | $16,103,141 | | | | 1,560,489 | | | | $24,355,647 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 138,280 | | | | $2,295,442 | | | | 121,061 | | | | $1,864,348 | |
Service Class | | | 1,583,260 | | | | 25,965,457 | | | | 1,522,608 | | | | 23,174,085 | |
| | | 1,721,540 | | | | $28,260,899 | | | | 1,643,669 | | | | $25,038,433 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (683,904 | ) | | | $(11,262,538 | ) | | | (588,704 | ) | | | $(9,294,608 | ) |
Service Class | | | (7,995,992 | ) | | | (129,928,450 | ) | | | (6,397,375 | ) | | | (99,585,817 | ) |
| | | (8,679,896 | ) | | | $(141,190,988 | ) | | | (6,986,079 | ) | | | $(108,880,425 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | 1,904 | | | | $(67,924 | ) | | | (126,608 | ) | | | $(2,018,158 | ) |
Service Class | | | (5,965,498 | ) | | | (96,759,024 | ) | | | (3,655,313 | ) | | | (57,468,187 | ) |
| | | (5,963,594 | ) | | | $(96,826,948 | ) | | | (3,781,921 | ) | | | $(59,486,345 | ) |
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, 2014, the fund’s commitment fee and interest expense were $3,897 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning Shares/Par Amount | | | Acquisitions Shares/Par Amount | | | Dispositions Shares/Par Amount | | | Ending Shares/Par Amount | |
| MFS Institutional Money Market Portfolio | | | 40,988,865 | | | | 288,003,929 | | | | (297,998,576 | ) | | | 30,994,218 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $36,872 | | | | $30,994,218 | |
35
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:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Global Tactical Allocation Portfolio (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Global Tactical Allocation Portfolio as of December 31, 2014, 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 13, 2015
36
MFS Global Tactical Allocation Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
37
MFS Global Tactical Allocation Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
38
MFS Global Tactical Allocation Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Nevin Chitkara Pablo De La Mata Pilar Gomez-Bravo Steven Gorham Richard Hawkins Benjamin Nastou Robert Persons Natalie Shapiro Benjamin Stone Erik Weisman Barnaby Wiener | | |
39
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 4th quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In addition to considering the performance information provided in connection with the contract review meetings, the Trustees noted that, in light of the Fund’s substandard relative performance at the time of their contract review meetings in 2013, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the Fund’s performance and MFS’ efforts to improve the Fund’s performance. The Trustees further noted that the Fund’s three-year performance relative to its Lipper performance universe improved for the period ended December 31, 2013, as compared to the
40
MFS Global Tactical Allocation Portfolio
Board Review of Investment Advisory Agreement – continued
prior year. Taking this information into account, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $300 million, and that MFS has agreed in writing to implement an additional breakpoint that reduces its advisory fee rate on the Fund’s average daily net assets over $2.5 billion, which may not be changed without the Trustees’ approval. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
41
MFS Global Tactical Allocation Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $1,434,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 16.58% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
42
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
43
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
44
ANNUAL REPORT
December 31, 2014
MFS® GOVERNMENT SECURITIES PORTFOLIO
MFS® Variable Insurance Trust II
GSS-ANN
MFS® GOVERNMENT SECURITIES PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Government Securities Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Government Securities Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| Mortgage-Backed Securities | | | 47.0% | |
| U.S. Treasury Securities | | | 43.3% | |
| U.S. Government Agencies | | | 8.1% | |
| Commercial Mortgage-Backed Securities | | | 3.3% | |
| Investment Grade Corporates | | | 0.7% | |
| Municipal Bonds | | | 0.4% | |
| Non-U.S. Government Bonds | | | 0.2% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 1.0% | |
| AA | | | 1.4% | |
| A | | | 0.9% | |
| BBB | | | 0.5% | |
| BB | | | 0.3% | |
| B | | | 0.5% | |
| U.S. Government | | | 43.3% | |
| Federal Agencies | | | 55.1% | |
| Cash & Other | | | (3.0)% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 4.4 | |
| Average Effective Maturity (m) | | | 5.9 yrs. | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. U.S. Government includes securities issued by the U.S. Department of the Treasury. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (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 due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
| (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. |
From time to time Cash & Other may be negative due to timing of cash receipts and/or equivalent exposure from any derivative holdings.
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Government Securities Portfolio (“fund”) provided a total return of 4.86%, while Service Class shares of the fund provided a total return of 4.67%. These compare with a return of 5.41% over the same period for the fund’s benchmark, the Barclays US Government/Mortgage Bond Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Factors Affecting Performance
Relative to the Barclays US Government/Mortgage Bond Index, the fund’s out-of-benchmark holdings of agency multi-family bonds and commercial mortgage-backed securities held back relative performance as these issues underperformed the benchmark during the period.
The fund’s greater exposure to lower coupon mortgage-backed securities benefited relative returns. Strong bond selection was another area of relative strength.
Respectfully,
Geoffrey Schechter
Portfolio Manager
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/12/85 | | 4.86% | | 3.33% | | 4.27% | | |
| | | Service Class | | 8/24/01 | | 4.67% | | 3.07% | | 4.01% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays U.S. Government/Mortgage Bond Index (f) | | 5.41% | | 3.69% | | 4.50% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Barclays 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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.59% | | | | $1,000.00 | | | | $1,016.64 | | | | $3.00 | |
| | Hypothetical (h) | | | 0.59% | | | | $1,000.00 | | | | $1,022.23 | | | | $3.01 | |
| Service Class | | Actual | | | 0.84% | | | | $1,000.00 | | | | $1,015.33 | | | | $4.27 | |
| | Hypothetical (h) | | | 0.84% | | | | $1,000.00 | | | | $1,020.97 | | | | $4.28 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
5
MFS Government Securities Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 102.6% | | | | | | | | |
| Agency – Other – 4.2% | |
| Financing Corp., 9.4%, 2/08/18 | | $ | 6,495,000 | | | $ | 8,079,033 | |
| Financing Corp., 9.8%, 4/06/18 | | | 7,760,000 | | | | 9,831,773 | |
| Financing Corp., 10.35%, 8/03/18 | | | 3,915,000 | | | | 5,106,859 | |
| Financing Corp., STRIPS, 0%, 11/30/17 | | | 10,160,000 | | | | 9,764,197 | |
| | | | | | | | |
| | | $ | 32,781,862 | |
| | | | | | | | |
| Asset-Backed & Securitized – 3.3% | |
| Citigroup/Deutsche Bank Commercial Mortgage Trust, 5.322%, 12/11/49 | | $ | 1,860,000 | | | $ | 1,969,065 | |
| Commercial Mortgage Pass-Through Certificates, “A4”, 5.306%, 12/10/46 | | | 3,765,167 | | | | 3,988,125 | |
| Credit Suisse Commercial Mortgage Trust, “A4”, FRN, 5.898%, 9/15/39 | | | 2,107,722 | | | | 2,266,804 | |
| Credit Suisse Commercial Mortgage Trust, “AM”, FRN, 5.702%, 6/15/39 | | | 1,983,044 | | | | 2,074,629 | |
| Credit Suisse Commercial Mortgage Trust, “C4”, FRN, 5.898%, 9/15/39 | | | 1,882,777 | | | | 2,031,934 | |
| CWCapital Cobalt Ltd., “A4”, FRN, 5.765%, 5/15/46 | | | 2,876,244 | | | | 3,121,671 | |
| Goldman Sachs Mortgage Securities Corp., FRN, 5.795%, 8/10/45 | | | 3,530,093 | | | | 3,822,600 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A3”, FRN, 5.939%, 2/15/51 | | | 118,364 | | | | 118,535 | |
| JPMorgan Chase Commercial Mortgage Securities Corp., “A4”, FRN, 5.787%, 6/15/49 | | | 3,985,116 | | | | 4,279,369 | |
| Morgan Stanley Capital I Trust, “AM”, FRN, 5.683%, 4/15/49 | | | 2,141,000 | | | | 2,228,042 | |
| | | | | | | | |
| | | $ | 25,900,774 | |
| | | | | | | | |
| Local Authorities – 0.7% | |
| Nashville & Davidson County, TN, Metropolitan Government Convention Center Authority (Build America Bonds), 6.731%, 7/01/43 | | $ | 2,225,000 | | | $ | 3,021,506 | |
| San Francisco, CA, City & County Public Utilities Commission, Water Rev. (Build America Bonds), 6%, 11/01/40 | | | 320,000 | | | | 411,491 | |
| University of California Rev. (Build America Bonds), 5.77%, 5/15/43 | | | 1,345,000 | | | | 1,728,769 | |
| | | | | | | | |
| | | $ | 5,161,766 | |
| | | | | | | | |
| Mortgage-Backed – 46.9% | |
| Fannie Mae, 4.85%, 2/01/15 | | $ | 528,136 | | | $ | 527,713 | |
| Fannie Mae, 4.56%, 3/01/15 | | | 1,086,451 | | | | 1,091,148 | |
| Fannie Mae, 4.89%, 3/01/15 | | | 703,395 | | | | 704,271 | |
| Fannie Mae, 4.74%, 4/01/15 | | | 693,889 | | | | 696,699 | |
| Fannie Mae, 4.869%, 4/01/15 | | | 617,595 | | | | 616,483 | |
| Fannie Mae, 4.815%, 6/01/15 | | | 876,640 | | | | 883,727 | |
| Fannie Mae, 5.1%, 6/01/15 - 3/01/19 | | | 247,850 | | | | 269,437 | |
| Fannie Mae, 2.38%, 8/01/15 | | | 625,000 | | | | 628,580 | |
| Fannie Mae, 4.78%, 8/01/15 | | | 836,602 | | | | 847,706 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – continued | |
| Fannie Mae, 4.81%, 8/01/15 | | $ | 951,496 | | | $ | 964,173 | |
| Fannie Mae, 4.856%, 8/01/15 | | | 285,867 | | | | 289,600 | |
| Fannie Mae, 5.036%, 8/01/15 | | | 36,228 | | | | 36,359 | |
| Fannie Mae, 5.444%, 11/01/15 | | | 2,346,636 | | | | 2,405,818 | |
| Fannie Mae, 5.139%, 2/01/16 | | | 1,261,334 | | | | 1,291,732 | |
| Fannie Mae, 5.432%, 2/01/16 | | | 1,480,666 | | | | 1,522,959 | |
| Fannie Mae, 5.732%, 7/01/16 | | | 1,466,890 | | | | 1,547,508 | |
| Fannie Mae, 6.5%, 11/01/16 - 10/01/37 | | | 1,807,795 | | | | 2,075,097 | |
| Fannie Mae, 5.003%, 1/01/17 | | | 738,295 | | | | 737,641 | |
| Fannie Mae, 6%, 4/01/17 - 7/01/37 | | | 2,768,933 | | | | 3,094,985 | |
| Fannie Mae, 5.5%, 8/01/17 - 3/01/38 | | | 20,903,259 | | | | 23,375,748 | |
| Fannie Mae, 1.18%, 9/01/17 | | | 859,674 | | | | 859,289 | |
| Fannie Mae, 5.236%, 1/01/18 | | | 840,707 | | | | 877,601 | |
| Fannie Mae, 3.8%, 2/01/18 | | | 622,935 | | | | 662,586 | |
| Fannie Mae, 5%, 2/01/18 - 3/01/41 | | | 15,170,232 | | | | 16,693,576 | |
| Fannie Mae, 4%, 3/01/18 - 2/01/41 | | | 7,513,932 | | | | 8,024,892 | |
| Fannie Mae, 4.19%, 3/01/18 | | | 380,747 | | | | 407,108 | |
| Fannie Mae, 3.99%, 4/01/18 | | | 600,000 | | | | 641,417 | |
| Fannie Mae, 3.743%, 6/01/18 | | | 617,256 | | | | 656,847 | |
| Fannie Mae, 5.68%, 6/01/18 | | | 484,942 | | | | 537,110 | |
| Fannie Mae, 5.6%, 1/01/19 | | | 513,724 | | | | 571,619 | |
| Fannie Mae, 4.5%, 6/01/19 - 4/01/44 | | | 31,357,900 | | | | 34,038,655 | |
| Fannie Mae, 4.864%, 8/01/19 | | | 2,072,911 | | | | 2,312,454 | |
| Fannie Mae, 5.05%, 8/01/19 | | | 312,100 | | | | 349,993 | |
| Fannie Mae, 4.67%, 9/01/19 | | | 523,429 | | | | 580,125 | |
| Fannie Mae, 4.83%, 9/01/19 | | | 371,643 | | | | 414,423 | |
| Fannie Mae, 1.99%, 10/01/19 | | | 996,922 | | | | 998,280 | |
| Fannie Mae, 1.97%, 11/01/19 | | | 384,973 | | | | 385,389 | |
| Fannie Mae, 4.88%, 3/01/20 | | | 354,009 | | | | 384,182 | |
| Fannie Mae, 4.14%, 8/01/20 | | | 446,102 | | | | 489,123 | |
| Fannie Mae, 2.56%, 10/01/21 | | | 244,100 | | | | 245,857 | |
| Fannie Mae, 2.67%, 3/01/22 | | | 476,368 | | | | 484,161 | |
| Fannie Mae, 2.73%, 4/01/23 | | | 534,549 | | | | 542,696 | |
| Fannie Mae, 2.41%, 5/01/23 | | | 674,506 | | | | 669,960 | |
| Fannie Mae, 2.55%, 5/01/23 | | | 581,587 | | | | 583,318 | |
| Fannie Mae, 2.59%, 5/01/23 | | | 369,224 | | | | 371,264 | |
| Fannie Mae, 4.5%, 5/01/25 | | | 277,271 | | | | 299,630 | |
| Fannie Mae, 3%, 3/01/27 - 4/01/27 | | | 3,790,020 | | | | 3,948,719 | |
| Fannie Mae, 2.5%, 5/01/28 | | | 1,095,096 | | | | 1,116,858 | |
| Fannie Mae, 3.5%, 1/01/42 | | | 2,094,888 | | | | 2,191,602 | |
| Fannie Mae, 3.5%, 4/01/43 | | | 1,389,131 | | | | 1,449,067 | |
| Fannie Mae, TBA, 4%, 2/01/45 | | | 35,700,000 | | | | 37,991,030 | |
| Fannie Mae, TBA, 3%, 1/01/30 | | | 3,435,000 | | | | 3,569,230 | |
| Fannie Mae, TBA, 3.5%, 1/01/45 | | | 2,527,000 | | | | 2,632,943 | |
| Fannie Mae, TBA, 4%, 1/01/45 | | | 7,823,000 | | | | 8,346,428 | |
| Freddie Mac, 3.034%, 10/25/20 | | | 1,327,000 | | | | 1,386,353 | |
| Freddie Mac, 1.655%, 11/25/16 | | | 2,969,038 | | | | 3,000,056 | |
| Freddie Mac, 1.426%, 8/25/17 | | | 5,495,000 | | | | 5,525,371 | |
| Freddie Mac, 3.882%, 11/25/17 | | | 2,158,000 | | | | 2,294,929 | |
| Freddie Mac, 3.154%, 2/25/18 | | | 2,151,000 | | | | 2,254,536 | |
| Freddie Mac, 5%, 9/01/18 - 6/01/40 | | | 2,956,294 | | | | 3,248,675 | |
| Freddie Mac, 2.22%, 12/25/18 | | | 1,500,000 | | | | 1,523,301 | |
6
MFS Government Securities Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – continued | |
| Freddie Mac, 2.086%, 3/25/19 | | $ | 1,800,000 | | | $ | 1,816,171 | |
| Freddie Mac, 5.085%, 3/25/19 | | | 2,191,000 | | | | 2,459,818 | |
| Freddie Mac, 1.883%, 5/25/19 | | | 3,750,000 | | | | 3,749,445 | |
| Freddie Mac, 6%, 8/01/19 - 10/01/38 | | | 6,794,959 | | | | 7,729,362 | |
| Freddie Mac, 2.456%, 8/25/19 | | | 1,862,000 | | | | 1,901,655 | |
| Freddie Mac, 4.186%, 8/25/19 | | | 814,000 | | | | 889,008 | |
| Freddie Mac, 1.869%, 11/25/19 | | | 3,000,000 | | | | 2,982,294 | |
| Freddie Mac, 4.251%, 1/25/20 | | | 1,449,000 | | | | 1,591,645 | |
| Freddie Mac, 2.313%, 3/25/20 | | | 3,022,000 | | | | 3,055,257 | |
| Freddie Mac, 4.224%, 3/25/20 | | | 1,911,350 | | | | 2,100,658 | |
| Freddie Mac, 3.32%, 7/25/20 - 2/25/23 | | | 2,679,411 | | | | 2,815,609 | |
| Freddie Mac, 5.5%, 5/01/22 - 6/01/41 | | | 5,523,162 | | | | 6,197,699 | |
| Freddie Mac, 2.682%, 10/25/22 | | | 1,500,000 | | | | 1,514,826 | |
| Freddie Mac, 4.5%, 11/01/22 - 8/01/40 | | | 3,000,926 | | | | 3,248,532 | |
| Freddie Mac, 3.25%, 4/25/23 | | | 3,500,000 | | | | 3,663,727 | |
| Freddie Mac, 3.3%, 4/25/23 | | | 1,997,044 | | | | 2,097,673 | |
| Freddie Mac, 3.06%, 7/25/23 | | | 886,000 | | | | 914,643 | |
| Freddie Mac, 3.458%, 8/25/23 | | | 1,852,000 | | | | 1,967,259 | |
| Freddie Mac, 4%, 7/01/25 - 11/01/43 | | | 4,047,646 | | | | 4,319,130 | |
| Freddie Mac, 2.5%, 2/01/28 - 7/01/28 | | | 17,014,376 | | | | 17,334,720 | |
| Freddie Mac, 6.5%, 8/01/32 - 5/01/37 | | | 1,145,746 | | | | 1,301,607 | |
| Freddie Mac, 3.5%, 12/01/41 - 8/01/43 | | | 24,204,765 | | | | 25,200,947 | |
| Freddie Mac, 3%, 4/01/43 - 5/01/43 | | | 11,980,193 | | | | 12,127,708 | |
| Freddie Mac, TBA, 4%, 1/01/45 | | | 5,773,000 | | | | 6,151,738 | |
| Ginnie Mae, 5.5%, 7/15/33 - 1/20/42 | | | 3,777,697 | | | | 4,242,535 | |
| Ginnie Mae, 4.5%, 8/15/39 - 9/20/41 | | | 9,476,141 | | | | 10,427,939 | |
| Ginnie Mae, 4%, 10/15/39 - 4/20/41 | | | 2,061,627 | | | | 2,216,249 | |
| Ginnie Mae, 3.5%, 12/15/41 - 6/20/43 | | | 15,490,084 | | | | 16,287,593 | |
| Ginnie Mae, 3%, 7/20/43 | | | 5,215,341 | | | | 5,336,985 | |
| Ginnie Mae, 5.612%, 4/20/58 | | | 1,236,415 | | | | 1,272,372 | |
| Ginnie Mae, 6.357%, 4/20/58 | | | 750,695 | | | | 778,588 | |
| Ginnie Mae, TBA, 4%, 2/01/45 | | | 12,062,000 | | | | 12,904,635 | |
| | | | | | | | |
| | | $ | 367,766,064 | |
| | | | | | | | |
| Municipals – 0.4% | | | | | |
| New York Dormitory Authority, State Personal Income Tax Rev., 5%, 2/15/24 | | $ | 2,800,000 | | | $ | 3,451,644 | |
| | | | | | | | |
| Supranational – 0.2% | | | | | |
| Inter-American Development Bank, 4.375%, 1/24/44 | | $ | 1,093,000 | | | $ | 1,347,858 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 3.8% | |
| Aid-Egypt, 4.45%, 9/15/15 | | $ | 3,162,000 | | | $ | 3,252,759 | |
| Government of Ukraine, 1.844%, 5/16/19 | | | 2,527,000 | | | | 2,544,057 | |
| Hashemite Kingdom of Jordan, 1.945%, 6/23/19 | | | 2,205,000 | | | | 2,219,965 | |
| Hashemite Kingdom of Jordan, 2.503%, 10/30/20 | | | 2,742,000 | | | | 2,787,684 | |
| Private Export Funding Corp., 2.25%, 3/15/20 | | | 594,000 | | | | 597,065 | |
| Private Export Funding Corp., 1.875%, 7/15/18 | | | 2,300,000 | | | | 2,324,697 | |
| Small Business Administration, 6.35%, 4/01/21 | | | 274,791 | | | | 297,889 | |
| Small Business Administration, 6.34%, 5/01/21 | | | 227,021 | | | | 245,248 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| U.S. Government Agencies and Equivalents – continued | |
| Small Business Administration, 6.44%, 6/01/21 | | $ | 372,494 | | | $ | 405,168 | |
| Small Business Administration, 6.625%, 7/01/21 | | | 502,087 | | | | 545,382 | |
| Small Business Administration, 6.07%, 3/01/22 | | | 333,519 | | | | 360,200 | |
| Small Business Administration, 4.98%, 11/01/23 | | | 411,776 | | | | 447,712 | |
| Small Business Administration, 4.77%, 4/01/24 | | | 799,738 | | | | 848,510 | |
| Small Business Administration, 5.52%, 6/01/24 | | | 432,350 | | | | 476,415 | |
| Small Business Administration, 4.99%, 9/01/24 | | | 68,307 | | | | 73,837 | |
| Small Business Administration, 5.11%, 4/01/25 | | | 707,501 | | | | 769,204 | |
| Small Business Administration, 2.21%, 2/01/33 | | | 1,341,923 | | | | 1,323,051 | |
| Small Business Administration, 2.22%, 3/01/33 | | | 2,396,439 | | | | 2,365,283 | |
| Small Business Administration, 3.15%, 7/01/33 | | | 2,195,740 | | | | 2,258,834 | |
| Small Business Administration, 3.16%, 8/01/33 | | | 1,212,563 | | | | 1,249,867 | |
| Small Business Administration, 3.62%, 9/01/33 | | | 767,058 | | | | 805,267 | |
| Tennessee Valley Authority, 1.75%, 10/15/18 | | | 1,889,000 | | | | 1,906,666 | |
| Tunisian Republic, 2.452%, 7/24/21 | | | 1,444,000 | | | | 1,466,167 | |
| U.S. Department of Housing & Urban Development, 6.36%, 8/01/16 | | | 290,000 | | | | 290,479 | |
| U.S. Department of Housing & Urban Development, 6.59%, 8/01/16 | | | 157,000 | | | | 157,803 | |
| | | | | | | | |
| | | $ | 30,019,209 | |
| | | | | | | | |
| U.S. Treasury Obligations – 43.1% | |
| U.S. Treasury Bonds, 9.25%, 2/15/16 | | $ | 19,000 | | | $ | 20,873 | |
| U.S. Treasury Bonds, 7.5%, 11/15/16 | | | 218,000 | | | | 245,574 | |
| U.S. Treasury Bonds, 7.875%, 2/15/21 | | | 177,000 | | | | 239,019 | |
| U.S. Treasury Bonds, 6.25%, 8/15/23 | | | 2,891,000 | | | | 3,848,644 | |
| U.S. Treasury Bonds, 6%, 2/15/26 | | | 2,699,000 | | | | 3,698,472 | |
| U.S. Treasury Bonds, 6.75%, 8/15/26 | | | 1,862,000 | | | | 2,716,773 | |
| U.S. Treasury Bonds, 6.375%, 8/15/27 | | | 326,000 | | | | 471,070 | |
| U.S. Treasury Bonds, 5.25%, 2/15/29 | | | 284,000 | | | | 381,980 | |
| U.S. Treasury Bonds, 5%, 5/15/37 | | | 488,000 | | | | 696,772 | |
| U.S. Treasury Bonds, 4.375%, 2/15/38 | | | 3,894,000 | | | | 5,099,925 | |
| U.S. Treasury Bonds, 4.5%, 8/15/39 | | | 26,680,500 | | | | 35,580,955 | |
| U.S. Treasury Bonds, 3.125%, 2/15/43 | | | 8,176,700 | | | | 8,784,842 | |
| U.S. Treasury Bonds, TIPS, 0.125%, 7/15/24 | | | 8,729,992 | | | | 8,420,348 | |
| U.S. Treasury Notes, 2.125%, 5/31/15 | | | 34,052,000 | | | | 34,331,329 | |
| U.S. Treasury Notes, 2.625%, 4/30/16 | | | 201,000 | | | | 206,794 | |
| U.S. Treasury Notes, 0.875%, 12/31/16 | | | 110,742,000 | | | | 111,131,369 | |
| U.S. Treasury Notes, 2.625%, 4/30/18 | | | 17,249,000 | | | | 18,029,241 | |
| U.S. Treasury Notes, 2.75%, 2/15/19 | | | 13,302,400 | | | | 13,993,500 | |
7
MFS Government Securities Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| U.S. Treasury Obligations – continued | |
| U.S. Treasury Notes, 3.125%, 5/15/19 | | $ | 4,427,000 | | | $ | 4,719,253 | |
| U.S. Treasury Notes, 1%, 6/30/19 | | | 27,685,000 | | | | 27,010,178 | |
| U.S. Treasury Notes, 2.625%, 8/15/20 | | | 8,002,000 | | | | 8,354,584 | |
| U.S. Treasury Notes, 2%, 11/30/20 | | | 4,541,000 | | | | 4,579,317 | |
| U.S. Treasury Notes, 3.125%, 5/15/21 | | | 1,901,000 | | | | 2,039,416 | |
| U.S. Treasury Notes, 1.75%, 5/15/22 | | | 23,412,000 | | | | 23,009,595 | |
| U.S. Treasury Notes, 2.5%, 8/15/23 | | | 19,499,000 | | | | 20,112,907 | |
| | | | | | | | |
| | | $ | 337,722,730 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $775,375,663) | | | $ | 804,151,907 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 5.0% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 39,506,081 | | | $ | 39,506,081 | |
| | | | | | | | |
Total Investments
(Identified Cost, $814,881,744) | | | | | | $ | 843,657,988 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (7.6)% | | | | (59,565,403 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 784,092,585 | |
| | | | | | | | |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 |
See Notes to Financial Statements
8
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $775,375,663) | | | $804,151,907 | | | | | |
Underlying affiliated funds, at cost and value | | | 39,506,081 | | | | | |
Total investments, at value (identified cost, $814,881,744) | | | $843,657,988 | | | | | |
Cash | | | 101,170 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 11,322,596 | | | | | |
TBA sale commitments | | | 7,973,194 | | | | | |
Interest | | | 3,562,354 | | | | | |
Other assets | | | 6,480 | | | | | |
Total assets | | | | | | | $866,623,782 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $6,144,504 | | | | | |
TBA purchase commitments | | | 73,164,058 | | | | | |
Fund shares reacquired | | | 3,100,717 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 19,394 | | | | | |
Shareholder servicing costs | | | 69 | | | | | |
Distribution and/or service fees | | | 4,118 | | | | | |
Payable for independent Trustees’ compensation | | | 55 | | | | | |
Accrued expenses and other liabilities | | | 98,282 | | | | | |
Total liabilities | | | | | | | $82,531,197 | |
Net assets | | | | | | | $784,092,585 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $757,077,692 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 28,776,244 | | | | | |
Accumulated net realized gain (loss) on investments | | | (21,216,101 | ) | | | | |
Undistributed net investment income | | | 19,454,750 | | | | | |
Net assets | | | | | | | $784,092,585 | |
Shares of beneficial interest outstanding | | | | | | | 60,369,231 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value
per share | |
Initial Class | | | $484,572,639 | | | | 37,208,859 | | | | $13.02 | |
Service Class | | | 299,519,946 | | | | 23,160,372 | | | | 12.93 | |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Interest | | | $21,822,898 | | | | | |
Dividends from underlying affiliated funds | | | 70,483 | | | | | |
Total investment income | | | | | | | $21,893,381 | |
Expenses | | | | | | | | |
Management fee | | | $4,573,544 | | | | | |
Distribution and/or service fees | | | 822,729 | | | | | |
Shareholder servicing costs | | | 15,847 | | | | | |
Administrative services fee | | | 121,875 | | | | | |
Independent Trustees’ compensation | | | 16,177 | | | | | |
Custodian fee | | | 88,033 | | | | | |
Shareholder communications | | | 30,968 | | | | | |
Audit and tax fees | | | 61,500 | | | | | |
Legal fees | | | 7,038 | | | | | |
Miscellaneous | | | 35,891 | | | | | |
Total expenses | | | | | | | $5,773,602 | |
Fees paid indirectly | | | (98 | ) | | | | |
Reduction of expenses by investment adviser | | | (39,572 | ) | | | | |
Net expenses | | | | | | | $5,733,932 | |
Net investment income | | | | | | | $16,159,449 | |
Realized and unrealized gain (loss) on investments | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $1,463,134 | | | | | |
Futures contracts | | | (23,057 | ) | | | | |
Net realized gain (loss) on investments | | | | | | | $1,440,077 | |
Change in unrealized appreciation (depreciation) on investments | | | | | | | $21,797,290 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $23,237,367 | |
Change in net assets from operations | | | | | | | $39,396,816 | |
See Notes to Financial Statements
10
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $16,159,449 | | | | $15,967,222 | |
Net realized gain (loss) on investments | | | 1,440,077 | | | | (8,435,679 | ) |
Net unrealized gain (loss) on investments | | | 21,797,290 | | | | (32,596,081 | ) |
Change in net assets from operations | | | $39,396,816 | | | | $(25,064,538 | ) |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(19,458,580 | ) | | | $(18,857,056 | ) |
From net realized gain on investments | | | — | | | | (7,216,557 | ) |
Total distributions declared to shareholders | | | $(19,458,580 | ) | | | $(26,073,613 | ) |
Change in net assets from fund share transactions | | | $(94,580,714 | ) | | | $(31,844,770 | ) |
Total change in net assets | | | $(74,642,478 | ) | | | $(82,982,921 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 858,735,063 | | | | 941,717,984 | |
At end of period (including undistributed net investment income of $19,454,750 and
$19,458,217, respectively) | | | $784,092,585 | | | | $858,735,063 | |
See Notes to Financial Statements
11
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $12.73 | | | | $13.49 | | | | $13.72 | | | | $13.27 | | | | $13.14 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.26 | | | | $0.25 | | | | $0.32 | | | | $0.39 | | | | $0.45 | |
Net realized and unrealized gain (loss) on investments | | | 0.35 | | | | (0.60 | ) | | | 0.03 | (g) | | | 0.58 | | | | 0.16 | |
Total from investment operations | | | $0.61 | | | | $(0.35 | ) | | | $0.35 | | | | $0.97 | | | | $0.61 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.32 | ) | | | $(0.30 | ) | | | $(0.45 | ) | | | $(0.52 | ) | | | $(0.48 | ) |
From net realized gain on investments | | | — | | | | (0.11 | ) | | | (0.13 | ) | | | (0.00 | )(w) | | | — | |
Total distributions declared to shareholders | | | $(0.32 | ) | | | $(0.41 | ) | | | $(0.58 | ) | | | $(0.52 | ) | | | $(0.48 | ) |
Net asset value, end of period (x) | | | $13.02 | | | | $12.73 | | | | $13.49 | | | | $13.72 | | | | $13.27 | |
Total return (%) (k)(r)(s)(x) | | | 4.86 | | | | (2.59 | ) | | | 2.53 | | | | 7.40 | | | | 4.75 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.60 | | | | 0.60 | | | | 0.60 | | | | 0.63 | | | | 0.64 | |
Expenses after expense reductions (f) | | | 0.59 | | | | 0.59 | | | | 0.60 | | | | N/A | | | | N/A | |
Net investment income | | | 2.04 | | | | 1.89 | | | | 2.33 | | | | 2.88 | | | | 3.39 | |
Portfolio turnover | | | 61 | | | | 130 | | | | 78 | | | | 29 | | | | 36 | |
Net assets at end of period (000 omitted) | | | $484,573 | | | | $510,317 | | | | $537,397 | | | | $264,328 | | | | $227,694 | |
See Notes to Financial Statements
12
MFS Government Securities Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $12.63 | | | | $13.39 | | | | $13.62 | | | | $13.18 | | | | $13.06 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.23 | | | | $0.21 | | | | $0.29 | | | | $0.35 | | | | $0.41 | |
Net realized and unrealized gain (loss) on investments | | | 0.36 | | | | (0.60 | ) | | | 0.02 | (g) | | | 0.57 | | | | 0.17 | |
Total from investment operations | | | $0.59 | | | | $(0.39 | ) | | | $0.31 | | | | $0.92 | | | | $0.58 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.29 | ) | | | $(0.26 | ) | | | $(0.41 | ) | | | $(0.48 | ) | | | $(0.46 | ) |
From net realized gain on investments | | | — | | | | (0.11 | ) | | | (0.13 | ) | | | (0.00 | )(w) | | | — | |
Total distributions declared to shareholders | | | $(0.29 | ) | | | $(0.37 | ) | | | $(0.54 | ) | | | $(0.48 | ) | | | $(0.46 | ) |
Net asset value, end of period (x) | | | $12.93 | | | | $12.63 | | | | $13.39 | | | | $13.62 | | | | $13.18 | |
Total return (%) (k)(r)(s)(x) | | | 4.67 | | | | (2.90 | ) | | | 2.27 | | | | 7.11 | | | | 4.49 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.85 | | | | 0.85 | | | | 0.85 | | | | 0.88 | | | | 0.89 | |
Expenses after expense reductions (f) | | | 0.84 | | | | 0.84 | | | | 0.85 | | | | N/A | | | | N/A | |
Net investment income | | | 1.79 | | | | 1.63 | | | | 2.16 | | | | 2.64 | | | | 3.13 | |
Portfolio turnover | | | 61 | | | | 130 | �� | | | 78 | | | | 29 | | | | 36 | |
Net assets at end of period (000 omitted) | | | $299,520 | | | | $348,419 | | | | $404,321 | | | | $420,164 | | | | $440,930 | |
| (d) | | Per share data is based on average shares outstanding. |
| (f) | | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (g) | | The per share amount varies from the net realized and unrealized gain/loss for the period because of the timing of sales of fund shares and the per share amount of realized and unrealized gains and losses at such time. |
| (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) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Government Securities Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Government Securities Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Debt instruments and floating rate loans, 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 may be valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as provided by a third-party pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to
14
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | $— | | | | $400,523,801 | | | | $— | | | | $400,523,801 | |
| Non-U.S. Sovereign Debt | | | — | | | | 1,347,858 | | | | — | | | | 1,347,858 | |
| Municipal Bonds | | | — | | | | 3,451,644 | | | | — | | | | 3,451,644 | |
| U.S. Corporate Bonds | | | — | | | | 5,161,766 | | | | — | | | | 5,161,766 | |
| Residential Mortgage-Backed Securities | | | — | | | | 367,766,064 | | | | — | | | | 367,766,064 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 25,900,774 | | | | — | | | | 25,900,774 | |
| Mutual Funds | | | 39,506,081 | | | | — | | | | — | | | | 39,506,081 | |
| Total Investments | | | $39,506,081 | | | | $804,151,907 | | | | $— | | | | $843,657,988 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Derivatives – The fund uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
The derivative instruments used by the fund were futures contracts.
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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Futures Contracts | |
| Interest Rate | | | $(23,057 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
15
MFS Government Securities Portfolio
Notes to Financial Statements – continued
Futures Contracts – The fund entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. 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 contracts 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 contracts 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.
Inflation-Adjusted Debt Securities – The fund invests in inflation-adjusted debt securities issued by the U.S. Treasury. The principal value of these debt securities is adjusted through income according to changes in the Consumer Price 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.
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 based on 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. 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 invests 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 purchased or sold debt securities on a when-issued or delayed delivery basis, or in a “To Be Announced” (TBA) or “forward commitment” transaction with delivery or payment to occur at a later date beyond the normal settlement period. At the time a fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the security acquired is reflected in the fund’s net asset value. The price of such security and the date that the security will be delivered and paid for are fixed at the time the transaction is negotiated. The value of the security may vary with market fluctuations. TBA securities resulting from these transactions are included in the Portfolio of Investments. TBA purchase commitments and TBA Sale commitments are held at carrying amount, which approximates fair value and are categorized as level 2 within the fair value hierarchy. No interest accrues to the fund until payment takes place. At the time that a fund enters into this type of transaction, the fund is required to have sufficient cash and/or liquid securities to cover its commitments. Losses may arise due to changes in the value of the underlying securities or if the counterparty does not perform under the contract’s terms, or if the issuer does not issue the securities due to political, economic or other factors. Additionally, losses may arise due to declines in the value of the securities prior to settlement date.
To mitigate this risk of loss on TBA securities and other types of forward settling mortgage-backed securities, the fund whenever possible enters into a Master Securities Forward Transaction Agreement (“MSFTA”) on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The MSFTA gives each party to the agreement the right
16
MFS Government Securities Portfolio
Notes to Financial Statements – continued
to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the MSFTA, the non-defaulting party has the right 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 MSFTA 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.
For mortgage-backed securities traded under a MSFTA, the collateral and margining requirements are contract specific. Collateral amounts across all transactions traded under such agreement are netted and one amount is posted from one party to the other to collateralize such obligations. Cash that has been pledged to cover the fund’s collateral or margin obligations under a MSFTA, if any, will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
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.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $19,458,580 | | | | $21,591,850 | |
| Long-term capital gains | | | — | | | | 4,481,763 | |
| Total distributions | | | $19,458,580 | | | | $26,073,613 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $824,729,449 | |
| Gross appreciation | | | 25,796,227 | |
| Gross depreciation | | | (6,867,688 | ) |
| Net unrealized appreciation (depreciation) | | | $18,928,539 | |
| Undistributed ordinary income | | | 19,475,209 | |
| Capital loss carryforwards | | | (11,298,663 | ) |
| Other temporary differences | | | (90,192 | ) |
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such losses are characterized as follows:
| | | | |
| Short-Term | | | $(3,114,841 | ) |
| Long-Term | | | (8,183,822 | ) |
| Total | | | $(11,298,663 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the above net capital losses may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses.
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
17
MFS Government Securities Portfolio
Notes to Financial Statements – continued
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $12,311,698 | | | | $11,556,212 | | | | $— | | | | $4,192,554 | |
| Service Class | | | 7,146,882 | | | | 7,300,844 | | | | — | | | | 3,024,003 | |
| Total | | | $19,458,580 | | | | $18,857,056 | | | | $— | | | | $7,216,557 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $38,116, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses such that total annual operating expenses do not exceed 0.61% of average daily net assets for the Initial Class shares and 0.86% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $15,669, which equated to 0.0019% 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, 2014, these costs amounted to $178.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0147% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms
18
MFS Government Securities Portfolio
Notes to Financial Statements – continued
of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $3,954 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $1,456, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $475,878,551 | | | | $533,375,522 | |
| Investments (non-U.S. Government securities) | | | $17,750,792 | | | | $5,536,405 | |
| (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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,121,600 | | | | $14,542,803 | | | | 3,159,387 | | | | $41,290,278 | |
Service Class | | | 1,250,442 | | | | 16,137,786 | | | | 3,693,154 | | | | 47,861,441 | |
| | | 2,372,042 | | | | $30,680,589 | | | | 6,852,541 | | | | $89,151,719 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 957,364 | | | | $12,311,698 | | | | 1,250,895 | | | | $15,748,766 | |
Service Class | | | 558,787 | | | | 7,146,882 | | | | 825,327 | | | | 10,324,847 | |
| | | 1,516,151 | | | | $19,458,580 | | | | 2,076,222 | | | | $26,073,613 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,972,533 | ) | | | $(64,521,879 | ) | | | (4,136,579 | ) | | | $(54,381,379 | ) |
Service Class | | | (6,227,538 | ) | | | (80,198,004 | ) | | | (7,128,122 | ) | | | (92,688,723 | ) |
| | | (11,200,071 | ) | | | $(144,719,883 | ) | | | (11,264,701 | ) | | | $(147,070,102 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (2,893,569 | ) | | | $(37,667,378 | ) | | | 273,703 | | | | $2,657,665 | |
Service Class | | | (4,418,309 | ) | | | (56,913,336 | ) | | | (2,609,641 | ) | | | (34,502,435 | ) |
| | | (7,311,878 | ) | | | $(94,580,714 | ) | | | (2,335,938 | ) | | | $(31,844,770 | ) |
The fund is one of several mutual funds in which certain of the MFS funds-of-funds may invest. The MFS funds-of-funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio and the MFS Conservative Allocation Portfolio were the owners of record of approximately 27%, and 10%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an
19
MFS Government Securities Portfolio
Notes to Financial Statements – continued
agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $3,126 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 94,206,127 | | | | 134,186,198 | | | | (188,886,244 | ) | | | 39,506,081 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $70,483 | | | | $39,506,081 | |
20
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Government Securities Portfolio as of December 31, 2014, 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 13, 2015
21
MFS Government Securities Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
22
MFS Government Securities Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
23
MFS Government Securities Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Geoffrey Schechter | | |
24
MFS Government Securities 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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In addition to considering the performance information provided in connection with the contract review meetings, the Trustees noted that, in light of the Fund’s substandard relative performance at the time of their contract review meetings in 2013, they had met at each of their regular meetings since then with MFS’ senior investment management personnel to discuss the Fund’s performance and MFS’ efforts to improve the Fund’s performance. The Trustees further noted that the Fund’s performance relative to its Lipper performance universe improved for the three-year period ended December 31, 2013, as compared to the prior year.
25
MFS Government Securities Portfolio
Board Review of Investment Advisory Agreement – continued
Taking this information into account, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
26
MFS Government Securities Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® HIGH YIELD PORTFOLIO
MFS® Variable Insurance Trust II
HYS-ANN
MFS® HIGH YIELD PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS High Yield Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS High Yield Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top five industries (i) | | | | |
| Energy – Independent | | | 7.2% | |
| Medical & Health Technology & Services | | | 5.7% | |
| Cable TV | | | 5.5% | |
| Midstream | | | 5.1% | |
| Metals & Mining | | | 4.8% | |
| | | | |
| Composition including fixed income credit quality (a)(i) | |
| BBB | | | 2.3% | |
| BB | | | 36.3% | |
| B | | | 47.1% | |
| CCC | | | 11.6% | |
| C | | | 0.1% | |
| D (o) | | | 0.0% | |
| Not Rated | | | (0.9)% | |
| Non-Fixed Income | | | 0.5% | |
| Cash & Other | | | 3.0% | |
| |
| Portfolio facts (i) | | | | |
| Average Duration (d) | | | 4.4 | |
| Average Effective Maturity (m) | | | 6.8 yrs. | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (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 due to the interest rate move. |
| (i) | | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
| (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. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS High Yield Portfolio (“fund”) provided a total return of 2.81%, while Service Class shares of the fund provided a total return of 2.53%. These compare with a return of 2.46% over the same period for the fund’s benchmark, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Contributors to Performance
Relative to the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index, the fund’s lesser exposure to “CCC” rated (r) securities benefited results as lower-quality issues underperformed higher-quality issues during the reporting period.
Strong bond selection further supported relative performance. Top individual contributors during the reporting period included the fund’s debt holdings of energy company El Paso Energy (h), mortgage lending services provider Dollar Tree, specialized real estate finance company Arbor Realty Mortgage Securities and financial services firm JPMorgan Chase.
Detractors from Performance
The fund’s greater exposure to “B” rated (r) securities detracted from relative performance. The portion of the fund’s return derived from yield, which was less than that of the benchmark, also weighed on relative results. A lesser exposure to the telecommunications sector further hindered relative returns as this market segment outpaced the benchmark during the reporting period.
Top individual detractors for the period included debt holdings of metallurgical coal producer and exporter Walter Energy, oil and natural gas producers Chaparral Energy, BreitBurn Energy Partners and SandRidge Energy, and diversified holding company Icahn Enterprises.
Respectfully,
| | |
| William Adams | | David Cole |
| Portfolio Manager | | Portfolio Manager |
| (h) | Security was not held in the portfolio at period end. |
| (r) | Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The sources for bond quality ratings are Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). 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.
3
MFS High Yield Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/12/85 | | 2.81% | | 8.63% | | 6.28% | | |
| | | Service Class | | 8/24/01 | | 2.53% | | 8.31% | | 6.00% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f) | | 2.46% | | 8.98% | | 7.73% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index – a component of the Barclays U.S. High-Yield Corporate Bond Index, which measures performance of non-investment grade, fixed rate debt. The index limits the maximum exposure to any one issuer to 2%.
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
4
MFS High Yield Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.73% | | | | $1,000.00 | | | | $978.22 | | | | $3.64 | |
| | Hypothetical (h) | | | 0.73% | | | | $1,000.00 | | | | $1,021.53 | | | | $3.72 | |
| Service Class | | Actual | | | 0.98% | | | | $1,000.00 | | | | $976.59 | | | | $4.88 | |
| | Hypothetical (h) | | | 0.98% | | | | $1,000.00 | | | | $1,020.27 | | | | $4.99 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Notes to Expense Table
Changes to the fund’s fee arrangements occurred during the six month period. Had these fee changes been in effect throughout the entire six month period, the annualized expense ratios, the actual expenses paid during the period and the hypothetical expenses paid during the period would have been approximately 0.72%, $3.59 and $3.67 for Initial Class and 0.97%, $4.83 and $4.94 for Service Class. For further information about the fund’s fee arrangements and changes to those fee arrangements, please see Note 3 in the Notes to Financial Statements.
5
MFS High Yield Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 91.2% | | | | | |
| Aerospace – 2.1% | | | | | |
| Bombardier, Inc., 7.75%, 3/15/20 (n) | | $ | 1,265,000 | | | $ | 1,372,525 | |
| Bombardier, Inc., 6.125%, 1/15/23 (n) | | | 1,155,000 | | | | 1,178,100 | |
| CPI International, Inc., 8.75%, 2/15/18 | | | 2,484,000 | | | | 2,552,310 | |
| Gencorp, Inc., 7.125%, 3/15/21 | | | 2,625,000 | | | | 2,749,163 | |
| Huntington Ingalls Industries, Inc., 7.125%, 3/15/21 | | | 2,585,000 | | | | 2,791,800 | |
| Huntington Ingalls Industries, Inc., 5%, 12/15/21 (n) | | | 260,000 | | | | 264,550 | |
| Kratos Defense & Security Solutions, Inc., 7%, 5/15/19 | | | 270,000 | | | | 229,500 | |
| TransDigm, Inc., 6%, 7/15/22 | | | 515,000 | | | | 513,713 | |
| TransDigm, Inc., 6.5%, 7/15/24 | | | 980,000 | | | | 984,900 | |
| | | | | | | | |
| | | | | | $ | 12,636,561 | |
| | | | | | | | |
| Apparel Manufacturers – 0.4% | | | | | |
| Hanesbrands, Inc., 6.375%, 12/15/20 | | $ | 1,430,000 | | | $ | 1,515,800 | |
| PVH Corp., 4.5%, 12/15/22 | | | 1,030,000 | | | | 1,017,125 | |
| | | | | | | | |
| | | | | | $ | 2,532,925 | |
| | | | | | | | |
| Asset-Backed & Securitized – 0.3% | | | | | |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.531%, 4/21/38 (z) | | $ | 1,136,457 | | | $ | 1,031,267 | |
| Citigroup Commercial Mortgage Trust, FRN, 5.71%, 12/10/49 | | | 2,086,863 | | | | 324,862 | |
| Crest Ltd., CDO, 7%, 1/28/40 (a)(p) | | | 1,366,873 | | | | 15,678 | |
| CWCapital Cobalt Ltd., CDO, 6.23%, 5/25/45 (a)(p)(z) | | | 2,735,836 | | | | 138,926 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.53%, 4/26/50 (a)(p)(z) | | | 1,085,651 | | | | 11 | |
| | | | | | | | |
| | | | | | $ | 1,510,744 | |
| | | | | | | | |
| Automotive – 3.2% | | | | | |
| Accuride Corp., 9.5%, 8/01/18 | | $ | 2,680,000 | | | $ | 2,760,400 | |
| Allison Transmission, Inc., 7.125%, 5/15/19 (n) | | | 2,525,000 | | | | 2,641,781 | |
| Goodyear Tire & Rubber Co., 6.5%, 3/01/21 | | | 2,670,000 | | | | 2,830,200 | |
| Goodyear Tire & Rubber Co., 7%, 5/15/22 | | | 1,220,000 | | | | 1,317,600 | |
| Jaguar Land Rover PLC, 8.125%, 5/15/21 (n) | | | 2,850,000 | | | | 3,120,750 | |
| Lear Corp., 4.75%, 1/15/23 | | | 1,640,000 | | | | 1,635,900 | |
| Lear Corp., 5.25%, 1/15/25 | | | 1,335,000 | | | | 1,351,688 | |
| Schaeffler Finance B.V., 6.875%, 8/15/18 (n)(p) | | | 1,530,000 | | | | 1,595,025 | |
| Schaeffler Finance B.V., 4.75%, 5/15/21 (n) | | | 1,330,000 | | | | 1,330,000 | |
| Schaeffler Holding Finance B.V., 6.25%, 11/15/19 (n)(p) | | | 560,000 | | | | 576,800 | |
| | | | | | | | |
| | | | | | $ | 19,160,144 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Broadcasting – 2.2% | | | | | |
| AMC Networks, Inc., 7.75%, 7/15/21 | | $ | 1,935,000 | | | $ | 2,070,450 | |
| Clear Channel Communications, Inc., 9%, 3/01/21 | | | 1,164,000 | | | | 1,140,720 | |
| Clear Channel Worldwide Holdings, Inc., “A”, 6.5%, 11/15/22 | | | 650,000 | | | | 661,375 | |
| Clear Channel Worldwide Holdings, Inc., “B”, 6.5%, 11/15/22 | | | 1,095,000 | | | | 1,127,850 | |
| Liberty Media Corp., 8.5%, 7/15/29 | | | 1,840,000 | | | | 2,014,800 | |
| Netflix, Inc., 5.375%, 2/01/21 | | | 1,645,000 | | | | 1,710,800 | |
| Nexstar Broadcasting, Inc., 6.875%, 11/15/20 | | | 2,020,000 | | | | 2,095,750 | |
| Univision Communications, Inc., 6.875%, 5/15/19 (n) | | | 210,000 | | | | 218,663 | |
| Univision Communications, Inc., 7.875%, 11/01/20 (n) | | | 1,980,000 | | | | 2,108,700 | |
| Univision Communications, Inc., 6.75%, 9/15/22 (n) | | | 226,000 | | | | 241,820 | |
| | | | | | | | |
| | | | | | $ | 13,390,928 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.6% | | | | | |
| E*TRADE Financial Corp., 6.375%, 11/15/19 | | $ | 3,120,000 | | | $ | 3,307,200 | |
| | | | | | | | |
| Building – 3.3% | | | | | |
| Allegion U.S. Holding Co., Inc., 5.75%, 10/01/21 | | $ | 2,720,000 | | | $ | 2,876,400 | |
| Associated Materials LLC, 9.125%, 11/01/17 | | | 340,000 | | | | 280,500 | |
| Building Materials Corp. of America, 5.375%, 11/15/24 (n) | | | 1,610,000 | | | | 1,605,975 | |
| Building Materials Holding Corp., 6.75%, 5/01/21 (n) | | | 1,620,000 | | | | 1,713,150 | |
| CEMEX S.A.B. de C.V., 5.875%, 3/25/19 (n) | | | 467,000 | | | | 474,005 | |
| CEMEX S.A.B. de C.V., 7.25%, 1/15/21 (n) | | | 684,000 | | | | 716,490 | |
| CEMEX S.A.B. de C.V., 5.7%, 1/11/25 (n) | | | 1,339,000 | | | | 1,298,830 | |
| Gibraltar Industries, Inc., 6.25%, 2/01/21 | | | 1,475,000 | | | | 1,504,500 | |
| HD Supply, Inc., 7.5%, 7/15/20 | | | 2,230,000 | | | | 2,335,925 | |
| Headwaters, Inc., 7.625%, 4/01/19 | | | 775,000 | | | | 807,938 | |
| Headwaters, Inc., 7.25%, 1/15/19 | | | 1,320,000 | | | | 1,372,800 | |
| Nortek, Inc., 8.5%, 4/15/21 | | | 2,005,000 | | | | 2,145,350 | |
| Roofing Supply Group LLC/Roofing Supply Finance, Inc., 10%, 6/01/20 (n) | | | 1,787,000 | | | | 1,772,525 | |
| USG Corp., 7.875%, 3/30/20 (n) | | | 830,000 | | | | 888,100 | |
| | | | | | | | |
| | | | | | $ | 19,792,488 | |
| | | | | | | | |
| Business Services – 0.9% | | | | | |
| Equinix, Inc., 4.875%, 4/01/20 | | $ | 1,325,000 | | | $ | 1,318,375 | |
| Equinix, Inc., 5.375%, 4/01/23 | | | 1,070,000 | | | | 1,070,000 | |
| Equinix, Inc., 5.375%, 1/01/22 | | | 530,000 | | | | 534,982 | |
| Iron Mountain, Inc., 8.375%, 8/15/21 | | | 210,000 | | | | 218,925 | |
| NeuStar, Inc., 4.5%, 1/15/23 | | | 2,310,000 | | | | 2,015,475 | |
| | | | | | | | |
| | | | | | $ | 5,157,757 | |
| | | | | | | | |
6
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Cable TV – 5.3% | | | | | |
| CCO Holdings LLC, 5.25%, 9/30/22 | | $ | 250,000 | | | $ | 249,375 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 8.125%, 4/30/20 | | | 2,385,000 | | | | 2,510,213 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 7.375%, 6/01/20 | | | 905,000 | | | | 959,300 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 5.75%, 1/15/24 | | | 1,620,000 | | | | 1,636,200 | |
| CCO Holdings LLC/CCO Holdings Capital Corp., 6.5%, 4/30/21 | | | 2,100,000 | | | | 2,205,000 | |
| Cequel Communications Holdings, 6.375%, 9/15/20 (n) | | | 1,650,000 | | | | 1,707,750 | |
| DISH DBS Corp., 6.75%, 6/01/21 | | | 1,165,000 | | | | 1,252,375 | |
| DISH DBS Corp., 5%, 3/15/23 | | | 1,590,000 | | | | 1,538,325 | |
| DISH DBS Corp., 5.875%, 11/15/24 (n) | | | 655,000 | | | | 658,275 | |
| Intelsat Jackson Holdings S.A., 6.625%, 12/15/22 | | | 1,315,000 | | | | 1,351,163 | |
| Intelsat Jackson Holdings S.A., 5.5%, 8/01/23 | | | 3,075,000 | | | | 3,056,243 | |
| Intelsat Luxembourg S.A., 8.125%, 6/01/23 | | | 1,450,000 | | | | 1,479,000 | |
| LGE Holdco VI B.V., 7.125%, 5/15/24 (z) | | EUR | 945,000 | | | | 1,258,879 | |
| Lynx I Corp., 5.375%, 4/15/21 (n) | | $ | 1,085,000 | | | | 1,120,263 | |
| Lynx II Corp., 6.375%, 4/15/23 (n) | | | 1,485,000 | | | | 1,555,538 | |
| Numericable Group S.A., 6%, 5/15/22 (n) | | | 2,145,000 | | | | 2,156,798 | |
| SIRIUS XM Radio, Inc., 4.625%, 5/15/23 (n) | | | 770,000 | | | | 719,950 | |
| SIRIUS XM Radio, Inc., 4.25%, 5/15/20 (n) | | | 635,000 | | | | 625,475 | |
| SIRIUS XM Radio, Inc., 5.875%, 10/01/20 (n) | | | 255,000 | | | | 262,650 | |
| SIRIUS XM Radio, Inc., 6%, 7/15/24 (n) | | | 1,155,000 | | | | 1,183,875 | |
| Unitymedia Hessen, 5.5%, 1/15/23 (n) | | | 1,605,000 | | | | 1,677,225 | |
| Unitymedia KabelBW GmbH, 6.125%, 1/15/25 (n) | | | 1,335,000 | | | | 1,378,388 | |
| UPCB Finance III Ltd., 6.625%, 7/01/20 (n) | | | 870,000 | | | | 913,500 | |
| | | | | | | | |
| | | | | | $ | 31,455,760 | |
| | | | | | | | |
| Chemicals – 3.0% | | | | | |
| Celanese U.S. Holdings LLC, 4.625%, 11/15/22 | | $ | 965,000 | | | $ | 955,350 | |
| Celanese U.S. Holdings LLC, 5.875%, 6/15/21 | | | 1,628,000 | | | | 1,725,680 | |
| Flash Dutch 2 B.V./U.S. Coatings Acquisition, 7.375%, 5/01/21 (n) | | | 1,765,000 | | | | 1,870,900 | |
| Hexion U.S. Finance Corp., 6.625%, 4/15/20 | | | 1,180,000 | | | | 1,156,400 | |
| Hexion U.S. Finance Corp./Hexion Nova Scotia Finance, 8.875%, 2/01/18 | | | 2,165,000 | | | | 1,926,850 | |
| Huntsman International LLC, 8.625%, 3/15/21 | | | 1,585,000 | | | | 1,699,913 | |
| INEOS Finance PLC, 7.5%, 5/01/20 (n) | | | 100,000 | | | | 105,000 | |
| INEOS Finance PLC, 8.375%, 2/15/19 (n) | | | 2,025,000 | | | | 2,151,563 | |
| INEOS Group Holdings S.A., 6.125%, 8/15/18 (n) | | | 1,380,000 | | | | 1,321,350 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Chemicals – continued | | | | | |
| INEOS Group Holdings S.A., 5.875%, 2/15/19 (n) | | $ | 865,000 | | | $ | 819,588 | |
| Tronox Finance LLC, 6.375%, 8/15/20 | | | 3,285,000 | | | | 3,293,204 | |
| W.R. Grace & Co., 5.125%, 10/01/21 (n) | | | 900,000 | | | | 922,500 | |
| | | | | | | | |
| | | | | | $ | 17,948,298 | |
| | | | | | | | |
| Computer Software – 0.5% | | | | | |
| Syniverse Holdings, Inc., 9.125%, 1/15/19 | | $ | 755,000 | | | $ | 788,975 | |
| VeriSign, Inc., 4.625%, 5/01/23 | | | 2,090,000 | | | | 2,048,200 | |
| | | | | | | | |
| | | | | | $ | 2,837,175 | |
| | | | | | | | |
| Computer Software – Systems – 0.6% | | | | | |
| Audatex North America, Inc., 6%, 6/15/21 (n) | | $ | 740,000 | | | $ | 762,200 | |
| CDW LLC/CDW Finance Corp., 8.5%, 4/01/19 | | | 565,000 | | | | 595,369 | |
| CDW LLC/CDW Finance Corp., 6%, 8/15/22 | | | 1,035,000 | | | | 1,068,638 | |
| CDW LLC/CDW Finance Corp., 5.5%, 12/01/24 | | | 915,000 | | | | 916,144 | |
| | | | | | | | |
| | | | | | $ | 3,342,351 | |
| | | | | | | | |
| Conglomerates – 2.1% | | | | | |
| Amsted Industries Co., 5%, 3/15/22 (n) | | $ | 2,320,000 | | | $ | 2,279,400 | |
| BC Mountain LLC, 7%, 2/01/21 (n) | | | 1,500,000 | | | | 1,282,500 | |
| Dynacast International LLC, 9.25%, 7/15/19 | | | 1,275,000 | | | | 1,367,438 | |
| EnPro Industries, Inc., 5.875%, 9/15/22 (n) | | | 1,425,000 | | | | 1,439,250 | |
| Entegris, Inc., 6%, 4/01/22 (n) | | | 2,225,000 | | | | 2,252,813 | |
| Renaissance Acquisition, 6.875%, 8/15/21 (n) | | | 2,265,000 | | | | 2,174,400 | |
| Rexel S.A., 6.125%, 12/15/19 (n) | | | 1,490,000 | | | | 1,534,700 | |
| | | | | | | | |
| | | | | | $ | 12,330,501 | |
| | | | | | | | |
| Construction – 0.3% | | | | | |
| Empresas ICA S.A.B. de C.V., 8.9%, 2/04/21 | | $ | 930,000 | | | $ | 892,800 | |
| Empresas ICA S.A.B. de C.V., 8.875%, 5/29/24 (n) | | | 807,000 | | | | 738,405 | |
| | | | | | | | |
| | | | | | $ | 1,631,205 | |
| | | | | | | | |
| Consumer Products – 0.8% | | | | | |
| Elizabeth Arden, Inc., 7.375%, 3/15/21 | | $ | 1,045,000 | | | $ | 958,788 | |
| Prestige Brands, Inc., 5.375%, 12/15/21 | | | 1,150,000 | | | | 1,129,875 | |
| Prestige Brands, Inc., 8.125%, 2/01/20 (n) | | | 971,000 | | | | 1,034,115 | |
| Spectrum Brands, Inc., 6.375%, 11/15/20 | | | 1,825,000 | | | | 1,902,563 | |
| | | | | | | | |
| | | | | | $ | 5,025,341 | |
| | | | | | | | |
| Consumer Services – 1.7% | | | | | |
| ADT Corp., 4.125%, 6/15/23 | | $ | 885,000 | | | $ | 800,925 | |
| ADT Corp., 6.25%, 10/15/21 | | | 1,690,000 | | | | 1,736,475 | |
| Garda World Security Corp., 7.25%, 11/15/21 (n) | | | 590,000 | | | | 584,100 | |
| Garda World Security Corp., 7.25%, 11/15/21 (n) | | | 1,445,000 | | | | 1,430,550 | |
| Grupo Posadas S.A.B. de C.V., 7.875%, 11/30/17 | | | 1,115,000 | | | | 1,059,250 | |
7
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Consumer Services – continued | | | | | |
| Monitronics International, Inc., 9.125%, 4/01/20 | | $ | 2,105,000 | | | $ | 1,987,909 | |
| Multi-Color Corp., 6.125%, 12/01/22 (n) | | | 870,000 | | | | 870,000 | |
| Service Corp. International, 5.375%, 5/15/24 | | | 1,025,000 | | | | 1,045,500 | |
| Service Corp. International, 7%, 6/15/17 | | | 650,000 | | | | 698,750 | |
| | | | | | | | |
| | | | | | $ | 10,213,459 | |
| | | | | | | | |
| Containers – 3.1% | | | | | |
| Ardagh Packaging Finance PLC, 7%, 11/15/20 (n) | | $ | 331,765 | | | $ | 335,082 | |
| Ardagh Packaging Finance PLC, 9.125%, 10/15/20 (n) | | | 200,000 | | | | 213,000 | |
| Ardagh Packaging Finance PLC, 9.125%, 10/15/20 (n) | | | 1,160,000 | | | | 1,229,600 | |
| Berry Plastics Group, Inc., 5.5%, 5/15/22 | | | 2,675,000 | | | | 2,715,125 | |
| Crown American LLC, 4.5%, 1/15/23 | | | 3,027,000 | | | | 2,936,190 | |
| Greif, Inc., 6.75%, 2/01/17 | | | 650,000 | | | | 695,500 | |
| Greif, Inc., 7.75%, 8/01/19 | | | 765,000 | | | | 864,450 | |
| Owens-Brockway Glass Container, Inc., 5%, 1/15/22 (n) | | | 615,000 | | | | 627,300 | |
| Reynolds Group, 5.75%, 10/15/20 | | | 1,265,000 | | | | 1,296,625 | |
| Reynolds Group, 8.25%, 2/15/21 | | | 1,570,000 | | | | 1,609,250 | |
| Reynolds Group, 9.875%, 8/15/19 | | | 940,000 | | | | 996,400 | |
| Reynolds Group, 7.125%, 4/15/19 | | | 1,235,000 | | | | 1,276,681 | |
| Sealed Air Corp., 4.875%, 12/01/22 (n) | | | 1,610,000 | | | | 1,597,925 | |
| Sealed Air Corp., 5.125%, 12/01/24 (n) | | | 255,000 | | | | 257,550 | |
| Signode Industrial Group, 6.375%, 5/01/22 (n) | | | 1,980,000 | | | | 1,930,500 | |
| | | | | | | | |
| | | | | | $ | 18,581,178 | |
| | | | | | | | |
| Defense Electronics – 0.4% | | | | | |
| Ducommun, Inc., 9.75%, 7/15/18 | | $ | 2,294,000 | | | $ | 2,454,580 | |
| | | | | | | | |
| Electrical Equipment – 0.4% | | | | | |
| Anixter, Inc., 5.125%, 10/01/21 | | $ | 1,800,000 | | | $ | 1,800,000 | |
| Avaya, Inc., 10.5%, 3/01/21 (z) | | | 400,000 | | | | 342,000 | |
| | | | | | | | |
| | | | | | $ | 2,142,000 | |
| | | | | | | | |
| Electronics – 2.0% | | | | | |
| Advanced Micro Devices, Inc., 7.5%, 8/15/22 | | $ | 735,000 | | | $ | 661,500 | |
| Advanced Micro Devices, Inc., 6.75%, 3/01/19 | | | 2,180,000 | | | | 2,049,200 | |
| Advanced Micro Devices, Inc., 7%, 7/01/24 | | | 570,000 | | | | 483,075 | |
| Micron Technology, Inc., 5.875%, 2/15/22 (n) | | | 1,130,000 | | | | 1,186,500 | |
| Micron Technology, Inc., 5.5%, 2/01/25 (n) | | | 1,085,000 | | | | 1,095,850 | |
| Nokia Corp., 6.625%, 5/15/39 | | | 900,000 | | | | 994,500 | |
| Nokia Corp., 5.375%, 5/15/19 | | | 570,000 | | | | 609,900 | |
| NXP B.V., 5.75%, 2/15/21 (n) | | | 745,000 | | | | 782,250 | |
| NXP B.V., 5.75%, 3/15/23 (n) | | | 1,495,000 | | | | 1,573,488 | |
| Sensata Technologies B.V., 6.5%, 5/15/19 (n) | | | 1,695,000 | | | | 1,758,563 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Electronics – continued | | | | | |
| Sensata Technologies B.V., 5.625%, 11/01/24 (z) | | $ | 960,000 | | | $ | 996,000 | |
| | | | | | | | |
| | | | | | $ | 12,190,826 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 0.1% | | | | | |
| NOVA Chemicals Corp., 5%, 5/01/25 (n) | | $ | 787,000 | | | $ | 781,098 | |
| | | | | | | | |
| Energy – Independent – 6.9% | | | | | |
| American Energy-Permian Basin LLC, 7.125%, 11/01/20 (n) | | $ | 830,000 | | | $ | 610,050 | |
| American Energy-Permian Basin LLC, 7.375%, 11/01/21 (n) | | | 1,340,000 | | | | 984,900 | |
| Antero Resources Finance Corp., 6%, 12/01/20 | | | 1,475,000 | | | | 1,471,313 | |
| Antero Resources Finance Corp., 5.375%, 11/01/21 | | | 1,835,000 | | | | 1,775,363 | |
| Baytex Energy Corp., 5.125%, 6/01/21 (n) | | | 285,000 | | | | 242,250 | |
| Baytex Energy Corp., 5.625%, 6/01/24 (n) | | | 2,010,000 | | | | 1,708,500 | |
| BreitBurn Energy Partners LP, 8.625%, 10/15/20 | | | 1,270,000 | | | | 1,092,200 | |
| BreitBurn Energy Partners LP, 7.875%, 4/15/22 | | | 1,510,000 | | | | 1,166,475 | |
| Chaparral Energy, Inc., 7.625%, 11/15/22 | | | 2,080,000 | | | | 1,362,400 | |
| Concho Resources, Inc., 6.5%, 1/15/22 | | | 1,560,000 | | | | 1,630,200 | |
| Concho Resources, Inc., 5.5%, 4/01/23 | | | 1,740,000 | | | | 1,748,178 | |
| Energy XXI Gulf Coast, Inc., 6.875%, 3/15/24 (n) | | | 405,000 | | | | 218,700 | |
| EP Energy LLC, 6.875%, 5/01/19 | | | 875,000 | | | | 888,125 | |
| EP Energy LLC, 7.75%, 9/01/22 | | | 2,565,000 | | | | 2,398,275 | |
| EP Energy LLC, 9.375%, 5/01/20 | | | 1,595,000 | | | | 1,610,950 | |
| Halcon Resources Corp., 8.875%, 5/15/21 | | | 1,955,000 | | | | 1,471,128 | |
| Harvest Operations Corp., 6.875%, 10/01/17 | | | 538,000 | | | | 518,498 | |
| Hilcorp Energy I/Hilcorp Finance Co., 8%, 2/15/20 (n) | | | 605,000 | | | | 617,100 | |
| Hilcorp Energy I/Hilcorp Finance Co., 5%, 12/01/24 (n) | | | 390,000 | | | | 343,200 | |
| Linn Energy LLC/Linn Energy Finance Corp., 7.75%, 2/01/21 | | | 2,419,000 | | | | 2,038,008 | |
| Linn Energy LLC/Linn Energy Finance Corp., 8.625%, 4/15/20 | | | 1,030,000 | | | | 896,100 | |
| Linn Energy LLC/Linn Energy Finance Corp., 6.5%, 9/15/21 | | | 675,000 | | | | 546,750 | |
| MEG Energy Corp., 6.5%, 3/15/21 (n) | | | 1,725,000 | | | | 1,574,063 | |
| MEG Energy Corp., 7%, 3/31/24 (n) | | | 1,160,000 | | | | 1,049,800 | |
| Northern Blizzard Resources, Inc., 7.25%, 2/01/22 (n) | | | 1,417,000 | | | | 1,147,770 | |
| Oasis Petroleum, Inc., 6.875%, 3/15/22 | | | 2,495,000 | | | | 2,270,450 | |
| Range Resources Corp., 5%, 8/15/22 | | | 1,785,000 | | | | 1,785,000 | |
| Rosetta Resources, Inc., 5.625%, 5/01/21 | | | 965,000 | | | | 883,072 | |
| RSP Permian, Inc., 6.625%, 10/01/22 (n) | | | 690,000 | | | | 641,700 | |
| Sanchez Energy Corp., 6.125%, 1/15/23 (n) | | | 2,880,000 | | | | 2,419,200 | |
| SandRidge Energy, Inc., 8.125%, 10/15/22 | | | 995,000 | | | | 626,850 | |
| SM Energy Co., 6.5%, 11/15/21 | | | 2,025,000 | | | | 1,964,250 | |
| SM Energy Co., 6.125%, 11/15/22 (n) | | | 1,060,000 | | | | 996,400 | |
| Whiting Petroleum Corp., 5.75%, 3/15/21 | | | 365,000 | | | | 338,528 | |
| | | | | | | | |
| | | | | | $ | 41,035,746 | |
| | | | | | | | |
8
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Entertainment – 1.7% | | | | | |
| Activision Blizzard, Inc., 6.125%, 9/15/23 (n) | | $ | 1,620,000 | | | $ | 1,745,550 | |
| Cedar Fair LP, 5.25%, 3/15/21 | | | 1,935,000 | | | | 1,944,675 | |
| Cedar Fair LP, 5.375%, 6/01/24 (n) | | | 880,000 | | | | 875,600 | |
| Cinemark USA, Inc., 5.125%, 12/15/22 | | | 1,415,000 | | | | 1,383,163 | |
| Cinemark USA, Inc., 4.875%, 6/01/23 | | | 1,020,000 | | | | 963,900 | |
| NCL Corp. Ltd., 5.25%, 11/15/19 (n) | | | 1,615,000 | | | | 1,627,113 | |
| Six Flags Entertainment Corp., 5.25%, 1/15/21 (n) | | | 1,700,000 | | | | 1,700,000 | |
| | | | | | | | |
| | | | | | $ | 10,240,001 | |
| | | | | | | | |
| Financial Institutions – 4.5% | | | | | |
| AerCap Ireland Capital Ltd., 5%, 10/01/21 (n) | | $ | 1,035,000 | | | $ | 1,071,225 | |
| Aircastle Ltd., 4.625%, 12/15/18 | | | 1,310,000 | | | | 1,316,550 | |
| Aircastle Ltd., 5.125%, 3/15/21 | | | 880,000 | | | | 880,000 | |
| Aviation Capital Group, 6.75%, 4/06/21 (n) | | | 935,000 | | | | 1,058,888 | |
| Aviation Capital Group, 4.625%, 1/31/18 (n) | | | 960,000 | | | | 997,713 | |
| CIT Group, Inc., 6.625%, 4/01/18 (n) | | | 1,925,000 | | | | 2,088,625 | |
| CIT Group, Inc., 5%, 8/15/22 | | | 2,245,000 | | | | 2,306,738 | |
| CIT Group, Inc., 5.5%, 2/15/19 (n) | | | 1,898,000 | | | | 2,002,390 | |
| CIT Group, Inc., 5.25%, 3/15/18 | | | 1,655,000 | | | | 1,725,338 | |
| Icahn Enterprises LP, 6%, 8/01/20 | | | 1,020,000 | | | | 1,050,804 | |
| Icahn Enterprises LP, 5.875%, 2/01/22 | | | 2,465,000 | | | | 2,475,784 | |
| Nationstar Mortgage LLC/Capital Corp., 7.875%, 10/01/20 | | | 2,660,000 | | | | 2,553,600 | |
| Nationstar Mortgage LLC/Capital Corp., 6.5%, 8/01/18 | | | 820,000 | | | | 781,050 | |
| SLM Corp., 8%, 3/25/20 | | | 2,930,000 | | | | 3,236,566 | |
| SLM Corp., 7.25%, 1/25/22 | | | 1,700,000 | | | | 1,844,500 | |
| SLM Corp., 6.125%, 3/25/24 | | | 1,055,000 | | | | 1,036,538 | |
| SLM Corp., 4.875%, 6/17/19 | | | 490,000 | | | | 491,421 | |
| | | | | | | | |
| | | | | | $ | 26,917,730 | |
| | | | | | | | |
| Food & Beverages – 1.5% | | | | | |
| B&G Foods, Inc., 4.625%, 6/01/21 | | $ | 1,415,000 | | | $ | 1,381,182 | |
| Constellation Brands, Inc., 3.75%, 5/01/21 | | | 335,000 | | | | 331,650 | |
| Constellation Brands, Inc., 4.25%, 5/01/23 | | | 1,755,000 | | | | 1,741,838 | |
| Darling Ingredients, Inc., 5.375%, 1/15/22 | | | 2,110,000 | | | | 2,078,350 | |
| H.J. Heinz Co., 4.25%, 10/15/20 | | | 1,710,000 | | | | 1,727,100 | |
| Sun Merger Sub, Inc., 5.875%, 8/01/21 (n) | | | 1,730,000 | | | | 1,764,600 | |
| | | | | | | | |
| | | | | | $ | 9,024,720 | |
| | | | | | | | |
| Forest & Paper Products – 0.5% | | | | | |
| Appvion, Inc., 9%, 6/01/20 (n) | | $ | 1,680,000 | | | $ | 1,150,800 | |
| Rayonier AM Products, Inc., 5.5%, 6/01/24 (z) | | | 395,000 | | | | 324,394 | |
| Tembec Industries, Inc., 9%, 12/15/19 (n) | | | 1,280,000 | | | | 1,259,200 | |
| | | | | | | | |
| | | | | | $ | 2,734,394 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Gaming & Lodging – 2.7% | | | | | |
| CCM Merger, Inc., 9.125%, 5/01/19 (n) | | $ | 2,095,000 | | | $ | 2,199,750 | |
| Chester Downs & Marina LLC, 9.25%, 2/01/20 (n) | | | 835,000 | | | | 609,550 | |
| Greektown Holdings LLC, 8.875%, 3/15/19 (n) | | | 1,970,000 | | | | 1,965,075 | |
| Hilton Worldwide Finance LLC/Hilton Worldwide Finance Corp., 5.625%, 10/15/21 | | | 1,975,000 | | | | 2,063,875 | |
| Isle of Capri Casinos, Inc., 8.875%, 6/15/20 | | | 620,000 | | | | 644,800 | |
| Isle of Capri Casinos, Inc., 5.875%, 3/15/21 | | | 1,285,000 | | | | 1,304,275 | |
| MGM Resorts International, 6.625%, 12/15/21 | | | 1,990,000 | | | | 2,089,500 | |
| MGM Resorts International, 6%, 3/15/23 | | | 1,320,000 | | | | 1,326,600 | |
| Ryman Hospitality Properties, Inc., REIT, 5%, 4/15/21 | | | 2,475,000 | | | | 2,462,625 | |
| Wynn Las Vegas LLC, 7.75%, 8/15/20 | | | 1,525,000 | | | | 1,624,476 | |
| | | | | | | | |
| | | | | | $ | 16,290,526 | |
| | | | | | | | |
| Industrial – 1.3% | | | | | |
| Dematic S.A., 7.75%, 12/15/20 (n) | | $ | 2,785,000 | | | $ | 2,917,288 | |
| Howard Hughes Corp., 6.875%, 10/01/21 (n) | | | 2,440,000 | | | | 2,525,400 | |
| SPL Logistics Escrow LLC, 8.875%, 8/01/20 (n) | | | 2,065,000 | | | | 2,188,900 | |
| | | | | | | | |
| | | | | | $ | 7,631,588 | |
| | | | | | | | |
| Machinery & Tools – 1.8% | | | | | |
| Ashtead Capital, Inc., 5.625%, 10/01/24 (n) | | $ | 2,385,000 | | | $ | 2,450,588 | |
| H&E Equipment Services Co., 7%, 9/01/22 | | | 2,400,000 | | | | 2,469,000 | |
| Jurassic Holdings III, Inc., 6.875%, 2/15/21 (n) | | | 2,035,000 | | | | 1,892,550 | |
| Light Tower Rentals, Inc., 8.125%, 8/01/19 (n) | | | 1,660,000 | | | | 1,290,650 | |
| RSC Equipment Rental, Inc., 8.25%, 2/01/21 | | | 1,460,000 | | | | 1,591,400 | |
| United Rentals North America, Inc., 7.625%, 4/15/22 | | | 1,183,000 | | | | 1,300,709 | |
| | | | | | | | |
| | | | | | $ | 10,994,897 | |
| | | | | | | | |
| Major Banks – 1.1% | | | | | |
| Bank of America Corp., FRN, 5.2%, 12/31/49 | | $ | 2,385,000 | | | $ | 2,203,144 | |
| JPMorgan Chase & Co., 6% to 8/01/23, FRN to 12/29/49 | | | 1,905,000 | | | | 1,881,188 | |
| Royal Bank of Scotland Group PLC, 7.648% to 9/30/31, FRN to 8/29/49 | | | 1,350,000 | | | | 1,572,750 | |
| Royal Bank of Scotland Group PLC, 6.99% to 10/04/17, FRN to 10/29/49 (n) | | | 850,000 | | | | 956,250 | |
| | | | | | | | |
| | | | | | $ | 6,613,332 | |
| | | | | | | | |
| Medical & Health Technology & Services – 5.3% | | | | | |
| CHS/Community Health Systems, Inc., 5.125%, 8/01/21 | | $ | 440,000 | | | $ | 456,500 | |
| CHS/Community Health Systems, Inc., 6.875%, 2/01/22 | | | 3,430,000 | | | | 3,633,656 | |
| Davita, Inc., 6.625%, 11/01/20 | | | 1,535,000 | | | | 1,611,750 | |
9
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Medical & Health Technology & Services – continued | |
| Davita, Inc., 5.125%, 7/15/24 | | $ | 1,065,000 | | | $ | 1,086,300 | |
| Fresenius Medical Care Capital Trust III, 5.875%, 1/31/22 (n) | | | 765,000 | | | | 830,025 | |
| Fresenius Medical Care Capital Trust III, 5.625%, 7/31/19 (n) | | | 1,030,000 | | | | 1,099,525 | |
| HCA, Inc., 4.75%, 5/01/23 | | | 200,000 | | | | 203,500 | |
| HCA, Inc., 7.5%, 2/15/22 | | | 3,125,000 | | | | 3,570,313 | |
| HCA, Inc., 5%, 3/15/24 | | | 1,450,000 | | | | 1,489,875 | |
| HCA, Inc., 5.875%, 3/15/22 | | | 1,435,000 | | | | 1,571,325 | |
| HCA, Inc., 4.25%, 10/15/19 | | | 1,260,000 | | | | 1,278,900 | |
| HealthSouth Corp., 8.125%, 2/15/20 | | | 2,575,000 | | | | 2,690,875 | |
| Kindred Escrow Corp. II, 8%, 1/15/20 (z) | | | 1,050,000 | | | | 1,115,625 | |
| LifePoint Hospitals, Inc., 5.5%, 12/01/21 | | | 2,775,000 | | | | 2,837,438 | |
| Tenet Healthcare Corp., 4.5%, 4/01/21 | | | 2,530,000 | | | | 2,536,325 | |
| Tenet Healthcare Corp., 8.125%, 4/01/22 | | | 1,345,000 | | | | 1,503,038 | |
| Tenet Healthcare Corp., 8%, 8/01/20 | | | 2,560,000 | | | | 2,700,800 | |
| Universal Health Services, Inc., 7.625%, 8/15/20 | | | 1,750,000 | | | | 1,505,000 | |
| | | | | | | | |
| | | | | | $ | 31,720,770 | |
| | | | | | | | |
| Medical Equipment – 0.9% | | | | | |
| Biomet, Inc., 6.5%, 8/01/20 | | $ | 1,240,000 | | | $ | 1,326,800 | |
| Physio-Control International, Inc., 9.875%, 1/15/19 (n) | | | 969,000 | | | | 1,027,140 | |
| Teleflex, Inc., 6.875%, 6/01/19 | | | 1,705,000 | | | | 1,777,463 | |
| Teleflex, Inc., 5.25%, 6/15/24 (n) | | | 1,330,000 | | | | 1,330,000 | |
| | | | | | | | |
| | | | | | $ | 5,461,403 | |
| | | | | | | | |
| Metals & Mining – 4.5% | | | | | |
| ArcelorMittal S.A., 6.75%, 2/25/22 | | $ | 630,000 | | | $ | 672,525 | |
| ArcelorMittal S.A., 7.25%, 3/01/41 | | | 885,000 | | | | 893,850 | |
| Arch Coal, Inc., 7.25%, 10/01/20 | | | 670,000 | | | | 217,750 | |
| Arch Coal, Inc., 8%, 1/15/19 (n) | | | 1,070,000 | | | | 593,850 | |
| Century Aluminum Co., 7.5%, 6/01/21 (n) | | | 1,890,000 | | | | 1,937,250 | |
| Commercial Metals Co., 4.875%, 5/15/23 | | | 1,243,000 | | | | 1,187,065 | |
| Consol Energy, Inc., 6.375%, 3/01/21 | | | 790,000 | | | | 790,000 | |
| Consol Energy, Inc., 5.875%, 4/15/22 (n) | | | 1,545,000 | | | | 1,436,850 | |
| EVRAZ, Inc. N.A. Canada, 7.5%, 11/15/19 (n) | | | 1,530,000 | | | | 1,480,275 | |
| First Quantum Minerals Ltd., 7.25%, 10/15/19 (n) | | | 3,146,000 | | | | 2,910,050 | |
| First Quantum Minerals Ltd., 7.25%, 5/15/22 (n) | | | 852,000 | | | | 766,800 | |
| Fortescue Metals Group Ltd., 8.25%, 11/01/19 (n) | | | 2,425,000 | | | | 2,206,750 | |
| GrafTech International Co., 6.375%, 11/15/20 | | | 2,170,000 | | | | 1,801,100 | |
| Lundin Mining Corp., 7.5%, 11/01/20 (n) | | | 1,030,000 | | | | 1,019,700 | |
| Lundin Mining Corp., 7.875%, 11/01/22 (n) | | | 1,030,000 | | | | 1,030,000 | |
| Steel Dynamics, Inc., 5.25%, 4/15/23 (n) | | | 1,000,000 | | | | 1,015,000 | |
| Steel Dynamics, Inc., 5.125%, 10/01/21 | | | 975,000 | | | | 993,281 | |
| Steel Dynamics, Inc., 5.5%, 10/01/24 (n) | | | 975,000 | | | | 999,375 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Metals & Mining – continued | | | | | |
| Suncoke Energy Partners LP/Suncoke Energy Partners Finance Corp., 7.375%, 2/01/20 (n) | | $ | 715,000 | | | $ | 742,706 | |
| Suncoke Energy, Inc., 7.625%, 8/01/19 | | | 1,620,000 | | | | 1,668,600 | |
| TMS International Corp., 7.625%, 10/15/21 (n) | | | 1,570,000 | | | | 1,636,725 | |
| Walter Energy, Inc., 9.5%, 10/15/19 (n) | | | 1,035,000 | | | | 786,600 | |
| Walter Energy, Inc., 8.5%, 4/15/21 | | | 1,060,000 | | | | 201,400 | |
| | | | | | | | |
| | | | | | $ | 26,987,502 | |
| | | | | | | | |
| Midstream – 5.0% | | | | | |
| AmeriGas Finance LLC, 6.75%, 5/20/20 | | $ | 2,730,000 | | | $ | 2,811,900 | |
| Atlas Pipeline Partners LP/Atlas Pipeline, 5.875%, 8/01/23 | | | 2,300,000 | | | | 2,277,000 | |
| Atlas Pipeline Partners LP/Atlas Pipeline, 4.75%, 11/15/21 | | | 660,000 | | | | 627,000 | |
| Blue Racer Midstream LLC/Blue Racer Finance Corp., 6.125%, 11/15/22 (n) | | | 670,000 | | | | 646,550 | |
| Crestwood Midstream Partners LP, 6%, 12/15/20 | | | 1,410,000 | | | | 1,350,075 | |
| Crestwood Midstream Partners LP, 6.125%, 3/01/22 | | | 905,000 | | | | 864,275 | |
| El Paso Corp., 7.75%, 1/15/32 | | | 3,725,000 | | | | 4,581,750 | |
| Energy Transfer Equity LP, 7.5%, 10/15/20 | | | 2,105,000 | | | | 2,336,550 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.5%, 5/01/21 | | | 790,000 | | | | 770,250 | |
| Ferrellgas LP/Ferrellgas Finance Corp., 6.75%, 1/15/22 | | | 2,710,000 | | | | 2,649,025 | |
| MarkWest Energy Partners LP/MarkWest Energy Finance Corp., 4.5%, 7/15/23 | | | 1,108,000 | | | | 1,066,450 | |
| MarkWest Energy Partners LP/MarkWest Energy Finance Corp., 5.5%, 2/15/23 | | | 2,115,000 | | | | 2,141,438 | |
| Sabine Pass Liquefaction LLC, 5.625%, 4/15/23 | | | 1,880,000 | | | | 1,837,700 | |
| Sabine Pass Liquefaction LLC, 5.625%, 2/01/21 | | | 2,020,000 | | | | 1,984,650 | |
| Sabine Pass Liquefaction LLC, 5.75%, 5/15/24 | | | 1,055,000 | | | | 1,035,219 | |
| Summit Midstream Holdings LLC/Summit Midstream Finance Corp., 7.5%, 7/01/21 | | | 570,000 | | | | 598,500 | |
| Summit Midstream Holdings LLC/Summit Midstream Finance Corp., 5.5%, 8/15/22 | | | 1,190,000 | | | | 1,130,500 | |
| Targa Resources Partners LP/Targa Resources Finance Corp., 4.125%, 11/15/19 (n) | | | 1,160,000 | | | | 1,116,500 | |
| | | | | | | | |
| | | | | | $ | 29,825,332 | |
| | | | | | | | |
| Network & Telecom – 1.6% | | | | | |
| Centurylink, Inc., 6.45%, 6/15/21 | | $ | 1,120,000 | | | $ | 1,201,200 | |
| Centurylink, Inc., 6.75%, 12/01/23 | | | 585,000 | | | | 640,575 | |
| Centurylink, Inc., 7.65%, 3/15/42 | | | 1,970,000 | | | | 1,960,150 | |
| Citizens Communications Co., 9%, 8/15/31 | | | 1,665,000 | | | | 1,747,792 | |
| Frontier Communications Corp., 8.125%, 10/01/18 | | | 495,000 | | | | 555,638 | |
| Telecom Italia Capital, 6%, 9/30/34 | | | 730,000 | | | | 730,000 | |
| Telecom Italia S.p.A., 5.303%, 5/30/24 (n) | | | 1,810,000 | | | | 1,832,625 | |
| Windstream Corp., 7.75%, 10/15/20 | | | 935,000 | | | | 960,713 | |
| | | | | | | | |
| | | | | | $ | 9,628,693 | |
| | | | | | | | |
10
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Oil Services – 1.2% | | | | | |
| Bristow Group, Inc., 6.25%, 10/15/22 | | $ | 2,588,000 | | | $ | 2,575,060 | |
| Pacific Drilling S.A., 5.375%, 6/01/20 (n) | | | 2,275,000 | | | | 1,854,125 | |
| Shale-Inland Holdings LLC/Finance Co., 8.75%, 11/15/19 (n) | | | 1,275,000 | | | | 1,287,750 | |
| Unit Corp., 6.625%, 5/15/21 | | | 1,695,000 | | | | 1,517,025 | |
| | | | | | | | |
| | | | | | $ | 7,233,960 | |
| | | | | | | | |
| Oils – 0.2% | | | | | |
| CITGO Petroleum Corp., 6.25%, 8/15/22 (n) | | $ | 1,350,000 | | | $ | 1,370,250 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 0.5% | | | | | |
| Groupe BPCE S.A., 12.5% to 9/30/19, FRN to 8/29/49 (n) | | $ | 2,447,000 | | | $ | 3,303,450 | |
| | | | | | | | |
| Pharmaceuticals – 1.5% | | | | | |
| Endo Finance LLC/Endo Finco, Inc., 7.25%, 1/15/22 (n) | | $ | 2,745,000 | | | $ | 2,937,150 | |
| Mallinckrodt International Finance S.A., 5.75%, 8/01/22 (n) | | | 1,260,000 | | | | 1,294,650 | |
| Valeant Pharmaceuticals International, Inc., 7%, 10/01/20 (n) | | | 3,035,000 | | | | 3,201,925 | |
| Valeant Pharmaceuticals International, Inc., 7.25%, 7/15/22 (n) | | | 1,135,000 | | | | 1,210,194 | |
| Vantage Point Imaging, 7.5%, 7/15/21 (n) | | | 320,000 | | | | 345,600 | |
| | | | | | | | |
| | | | | | $ | 8,989,519 | |
| | | | | | | | |
| Pollution Control – 0.0% | | | | | |
| Abengoa Finance S.A.U., 8.875%, 2/05/18 | | EUR | 230,000 | | | $ | 265,927 | |
| | | | | | | | |
| Precious Metals & Minerals – 0.6% | | | | | |
| Aurico Gold, Inc., 7.75%, 4/01/20 (n) | | $ | 1,735,000 | | | $ | 1,596,200 | |
| Eldorado Gold Corp., 6.125%, 12/15/20 (n) | | | 2,000,000 | | | | 1,940,000 | |
| | | | | | | | |
| | | | | | $ | 3,536,200 | |
| | | | | | | | |
| Printing & Publishing – 1.0% | | | | | |
| American Media, Inc., 13.5%, 6/15/18 (z) | | $ | 194,964 | | | $ | 208,246 | |
| Gannett Co., Inc., 5.125%, 7/15/20 | | | 935,000 | | | | 953,700 | |
| Gannett Co., Inc., 4.875%, 9/15/21 (n) | | | 555,000 | | | | 550,838 | |
| Gannett Co., Inc., 6.375%, 10/15/23 | | | 1,390,000 | | | | 1,473,400 | |
| Lamar Media Corp., 5%, 5/01/23 | | | 1,140,000 | | | | 1,128,600 | |
| Nielsen Finance LLC, 5%, 4/15/22 (n) | | | 1,465,000 | | | | 1,472,325 | |
| | | | | | | | |
| | | | | | $ | 5,787,109 | |
| | | | | | | | |
| Railroad & Shipping – 0.3% | | | | | |
| Watco Cos. LLC, 6.375%, 4/01/23 (n) | | $ | 1,630,000 | | | $ | 1,613,700 | |
| | | | | | | | |
| Real Estate – Healthcare – 1.0% | | | | | |
| Aviv Healthcare Properties LP/Aviv Healthcare, REIT, 6%, 10/15/21 | | $ | 2,475,000 | | | $ | 2,574,000 | |
| MPT Operating Partnership LP, REIT, 6.875%, 5/01/21 | | | 1,840,000 | | | | 1,968,800 | |
| MPT Operating Partnership LP, REIT, 6.375%, 2/15/22 | | | 1,380,000 | | | | 1,466,250 | |
| | | | | | | | |
| | | | | | $ | 6,009,050 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Real Estate – Other – 1.4% | | | | | |
| CNL Lifestyle Properties, Inc., REIT, 7.25%, 4/15/19 | | $ | 1,355,000 | | | $ | 1,385,488 | |
| DuPont Fabros Technology LP, REIT, 5.875%, 9/15/21 | | | 2,455,000 | | | | 2,501,031 | |
| EPR Properties, REIT, 7.75%, 7/15/20 | | | 1,520,000 | | | | 1,823,311 | |
| EPR Properties, REIT, 5.75%, 8/15/22 | | | 550,000 | | | | 600,801 | |
| Felcor Lodging LP, REIT, 5.625%, 3/01/23 | | | 2,380,000 | | | | 2,356,200 | |
| | | | | | | | |
| | | | | | $ | 8,666,831 | |
| | | | | | | | |
| Retailers – 1.7% | | | | | |
| Best Buy Co., Inc., 5.5%, 3/15/21 | | $ | 2,680,000 | | | $ | 2,787,200 | |
| Bon Ton Stores, Inc., 8%, 6/15/21 | | | 1,505,000 | | | | 1,256,675 | |
| DriveTime Automotive Group, Inc./DT Acceptance Corp., 8%, 6/01/21 (z) | | | 340,000 | | | | 305,575 | |
| Jo-Ann Stores Holdings, Inc., 9.75%, 10/15/19 (n)(p) | | | 1,695,000 | | | | 1,440,750 | |
| Limited Brands, Inc., 7%, 5/01/20 | | | 580,000 | | | | 658,300 | |
| Limited Brands, Inc., 6.95%, 3/01/33 | | | 735,000 | | | | 768,075 | |
| Neiman Marcus Group Ltd., 8%, 10/15/21 (n) | | | 990,000 | | | | 1,046,925 | |
| Rite Aid Corp., 9.25%, 3/15/20 | | | 1,350,000 | | | | 1,473,188 | |
| Sally Beauty Holdings, Inc., 6.875%, 11/15/19 | | | 585,000 | | | | 621,563 | |
| | | | | | | | |
| | | | | | $ | 10,358,251 | |
| | | | | | | | |
| Specialty Chemicals – 0.3% | | | | | |
| Chemtura Corp., 5.75%, 7/15/21 | | $ | 1,950,000 | | | $ | 1,901,250 | |
| | | | | | | | |
| Specialty Stores – 0.7% | | | | | |
| Group 1 Automotive, Inc., 5%, 6/01/22 (n) | | $ | 2,555,000 | | | $ | 2,497,513 | |
| Michaels Stores, Inc., 5.875%, 12/15/20 (n) | | | 1,440,000 | | | | 1,454,400 | |
| | | | | | | | |
| | | | | | $ | 3,951,913 | |
| | | | | | | | |
| Telecommunications – Wireless – 4.2% | | | | | |
| Crown Castle International Corp., 5.25%, 1/15/23 | | $ | 1,710,000 | | | $ | 1,744,200 | |
| Crown Castle International Corp., 4.875%, 4/15/22 | | | 725,000 | | | | 732,250 | |
| Digicel Group Ltd., 8.25%, 9/01/17 (n) | | | 1,050,000 | | | | 1,063,125 | |
| Digicel Group Ltd., 8.25%, 9/30/20 (n) | | | 765,000 | | | | 742,050 | |
| Digicel Group Ltd., 6%, 4/15/21 (n) | | | 785,000 | | | | 733,975 | |
| Digicel Group Ltd., 7.125%, 4/01/22 (n) | | | 1,102,000 | | | | 1,024,860 | |
| Eileme 2 AB, 11.625%, 1/31/20 (n) | | | 1,190,000 | | | | 1,332,800 | |
| Sprint Capital Corp., 6.875%, 11/15/28 | | | 1,915,000 | | | | 1,685,200 | |
| Sprint Corp., 7.875%, 9/15/23 | | | 1,745,000 | | | | 1,722,664 | |
| Sprint Corp., 7.125%, 6/15/24 | | | 1,885,000 | | | | 1,753,050 | |
| Sprint Nextel Corp., 9%, 11/15/18 (n) | | | 590,000 | | | | 671,066 | |
| Sprint Nextel Corp., 6%, 11/15/22 | | | 1,985,000 | | | | 1,826,200 | |
| T-Mobile USA, Inc., 6.125%, 1/15/22 | | | 300,000 | | | | 304,500 | |
| T-Mobile USA, Inc., 6.5%, 1/15/24 | | | 920,000 | | | | 943,000 | |
| T-Mobile USA, Inc., 6.633%, 4/28/21 | | | 1,185,000 | | | | 1,216,106 | |
| T-Mobile USA, Inc., 6.25%, 4/01/21 | | | 3,455,000 | | | | 3,536,193 | |
| Wind Acquisition Finance S.A., 7.375%, 4/23/21 (n) | | | 2,475,000 | | | | 2,335,905 | |
| Wind Acquisition Finance S.A., 4.75%, 7/15/20 (n) | | | 1,900,000 | | | | 1,776,500 | |
| | | | | | | | |
| | | | | | $ | 25,143,644 | |
| | | | | | | | |
11
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | |
| Telephone Services – 0.3% | | | | | |
| Cogent Communications Group, Inc., 8.375%, 2/15/18 (n) | | $ | 790,000 | | | $ | 825,550 | |
| Frontier Communications Corp., 6.25%, 9/15/21 | | | 620,000 | | | | 623,100 | |
| Level 3 Financing, Inc., 8.625%, 7/15/20 | | | 460,000 | | | | 496,225 | |
| | | | | | | | |
| | | | | | $ | 1,944,875 | |
| | | | | | | | |
| Transportation – Services – 2.1% | | | | | |
| Aguila American Resources Ltd., 7.875%, 1/31/18 (n) | | $ | 1,955,000 | | | $ | 1,891,463 | |
| Jack Cooper Holdings Corp., 9.25%, 6/01/20 (n) | | | 2,160,000 | | | | 2,235,600 | |
| Navios Logistics Finance (U.S.), Inc., 7.25%, 5/01/22 (n) | | | 712,000 | | | | 704,880 | |
| Navios Maritime Acquisition Corp., 8.125%, 11/15/21 (n) | | | 699,000 | | | | 681,525 | |
| Navios Maritime Holding, Inc., 7.375%, 1/15/22 (n) | | | 2,165,000 | | | | 2,002,625 | |
| Stena AB, 7%, 2/01/24 (n) | | | 3,205,000 | | | | 2,932,575 | |
| Syncreon Group BV/Syncre, 8.625%, 11/01/21 (n) | | | 1,405,000 | | | | 1,320,700 | |
| Ultrapetrol (Bahamas) Ltd., 8.875%, 6/15/21 | | | 585,000 | | | | 617,175 | |
| | | | | | | | |
| | | | | | $ | 12,386,543 | |
| | | | | | | | |
| Utilities – Electric Power – 1.6% | | | | | |
| AES Corp., 7.75%, 10/15/15 | | $ | 42,000 | | | $ | 43,785 | |
| AES Corp., 7.375%, 7/01/21 | | | 1,190,000 | | | | 1,344,700 | |
| Calpine Corp., 5.375%, 1/15/23 | | | 1,065,000 | | | | 1,075,650 | |
| Covanta Holding Corp., 7.25%, 12/01/20 | | | 1,570,000 | | | | 1,668,125 | |
| Covanta Holding Corp., 6.375%, 10/01/22 | | | 400,000 | | | | 424,000 | |
| NRG Energy, Inc., 6.625%, 3/15/23 | | | 2,385,000 | | | | 2,480,400 | |
| NRG Energy, Inc., 8.25%, 9/01/20 | | | 1,645,000 | | | | 1,756,038 | |
| NRG Energy, Inc., 6.25%, 7/15/22 | | | 910,000 | | | | 930,475 | |
| | | | | | | | |
| | | | | | $ | 9,723,173 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $562,864,465) | | | | | | $ | 545,714,798 | |
| | | | | | | | |
|
| FLOATING RATE LOANS (g)(r) – 4.8% | |
| AEROSPACE – 0.3% | | | | | |
| TransDigm, Inc., Term Loan C, 3.75%, 2/28/20 | | $ | 1,668,917 | | | $ | 1,635,538 | |
| | | | | | | | |
| BUILDING – 0.4% | | | | | |
| ABC Supply Co., Inc., Term Loan, 3.5%, 4/16/20 | | $ | 1,252,084 | | | $ | 1,211,001 | |
| HD Supply, Inc., Term Loan B, 6/28/18 | | | 1,114,343 | | | | 1,102,271 | |
| | | | | | | | |
| | | | | | $ | 2,313,272 | |
| | | | | | | | |
| BUSINESS SERVICES – 0.1% | | | | | |
| Fleetcor Technologies, Inc., Term Loan B, 9/24/21 (o) | | $ | 538,375 | | | $ | 538,375 | |
| | | | | | | | |
| CABLE TV – 0.2% | | | | | |
| Cequel Communications LLC, Term Loan B, 3.5%, 2/14/19 | | $ | 1,088,553 | | | $ | 1,070,637 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| FLOATING RATE LOANS (g)(r) – continued | |
| CONGLOMERATES – 0.5% | | | | | |
| Entegris, Inc., Term Loan B, 3.5%, 4/30/21 | | $ | 1,704,504 | | | $ | 1,664,022 | |
| Silver II U.S. Holdings LLC, Term Loan, 4%, 12/13/19 | | | 1,291,876 | | | | 1,195,254 | |
| | | | | | | | |
| | | | | | $ | 2,859,276 | |
| | | | | | | | |
| CONSUMER SERVICES – 0.2% | | | | | |
| Realogy Corp., Term Loan B, 3.75%, 3/05/20 | | $ | 1,350,521 | | | $ | 1,324,635 | |
| | | | | | | | |
| CONTAINERS – 0.1% | | | | | |
| Berry Plastics Group, Inc., Term Loan E, 3.75%, 1/06/21 | | $ | 944,700 | | | $ | 919,115 | |
| | | | | | | | |
| ELECTRONICS – 0.3% | | | | | |
| Avago Technologies Cayman Ltd., Term Loan B, 3.75%, 5/06/21 | | $ | 1,603,490 | | | $ | 1,594,804 | |
| | | | | | | | |
| ENERGY – INDEPENDENT – 0.2% | | | | | |
| MEG Energy Corp., Term Loan, 3.75%, 3/31/20 | | $ | 1,099,729 | | | $ | 1,049,141 | |
| | | | | | | | |
| ENTERTAINMENT – 0.1% | | | | | |
| Cedar Fair LP, Term Loan B, 3.25%, 3/06/20 | | $ | 959,456 | | | $ | 955,858 | |
| | | | | | | | |
| FOOD & BEVERAGES – 0.1% | | | | | |
| H.J. Heinz Co., Term Loan B2, 3.5%, 6/05/20 | | $ | 573,458 | | | $ | 569,054 | |
| | | | | | | | |
| GAMING & LODGING – 0.3% | | | | | |
| Hilton Worldwide Finance LLC, Term Loan B2, 3.5%, 10/25/20 | | $ | 1,786,243 | | | $ | 1,761,682 | |
| | | | | | | | |
| MEDICAL & HEALTH TECHNOLOGY & SERVICES – 0.3% | |
| Community Health Systems, Inc., Term Loan D, 4.25%, 1/27/21 | | $ | 340,230 | | | $ | 339,096 | |
| DaVita HealthCare Partners, Inc., Term Loan B, 3.5%, 6/24/21 (o) | | | 1,578,973 | | | | 1,558,953 | |
| | | | | | | | |
| | | | | | $ | 1,898,049 | |
| | | | | | | | |
| METALS & MINING – 0.2% | | | | | |
| FMG Resources Ltd., Term Loan B, 3.75%, 6/30/19 | | $ | 1,098,589 | | | $ | 998,343 | |
| | | | | | | | |
| PRINTING & PUBLISHING – 0.2% | | | | | |
| CBS Outdoor Americas Capital LLC, Term Loan B, 3%, 1/31/21 | | $ | 1,319,425 | | | $ | 1,285,120 | |
| | | | | | | | |
| RETAILERS – 0.3% | | | | | |
| Rite Aid Corp., Second Lien Term Loan, 4.87%, 6/21/21 | | $ | 428,335 | | | $ | 427,799 | |
| Dollar Tree, Inc., Bridge Term Loan, 8/08/15 (o) | | | 1,435,000 | | | | 1,435,000 | |
| | | | | | | | |
| | | | | | $ | 1,862,799 | |
| | | | | | | | |
| TELEPHONE SERVICES – 0.3% | | | | | |
| Level 3 Financing, Inc., Term Loan B, 4.5%, 1/31/22 | | $ | 1,601,566 | | | $ | 1,602,067 | |
| | | | | | | | |
| TRANSPORTATION – SERVICES – 0.3% | | | | | |
| Commercial Barge Line Co., First Lien Term Loan, 7.5%, 9/15/19 | | $ | 1,954,024 | | | $ | 1,944,254 | |
| | | | | | | | |
12
MFS High Yield Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| FLOATING RATE LOANS (g)(r) – continued | |
| UTILITIES – ELECTRIC POWER – 0.4% | | | | | |
| Calpine Construction Finance Co., Term Loan B1, 3%, 5/03/20 | | $ | 2,314,311 | | | $ | 2,230,417 | |
| | | | | | | | |
Total Floating Rate Loans
(Identified Cost, $29,018,833) | | | | | | $ | 28,412,436 | |
| | | | | | | | |
| |
| COMMON STOCKS – 0.5% | | | | | |
| Automotive – 0.0% | | | | | |
| Accuride Corp. (a) | | | 42,065 | | | $ | 182,562 | |
| | | | | | | | |
| Special Products & Services – 0.5% | | | | | |
| iShares iBoxx High Yield Corp. Bond ETF | | | 33,700 | | | $ | 3,019,520 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $3,608,836) | | | | | | $ | 3,202,082 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 2.3% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 13,904,801 | | | $ | 13,904,801 | |
| | | | | | | | |
Total Investments
(Identified Cost, $609,396,935) | | | | | | $ | 591,234,117 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.2% | | | | | | | 7,126,899 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 598,361,016 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (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 $202,048,094, representing 33.8% 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, if any, represents the weighted average coupon rate for settled amounts. |
| (p) | | Payment-in-kind security for which interest income may be received in additional securities and/or cash. During the period, the following amount of interest income was received in additional securities and/or cash: |
| | | | | | | | | | |
| Payment-in-kind Securities | | | | Cash | | | Additional
Securities | |
Jo-Ann Stores Holdings, Inc., 9.75%, 10/15/19 | | | | | $165,263 | | | | $— | |
Schaeffler Finance B.V., 6.875%, 8/15/18 | | | | | 52,594 | | | | — | |
Schaeffler Holding Finance B.V., 6.25%, 11/15/19 | | | | | — | | | | — | |
Total | | | | | $217,857 | | | | $— | |
| (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 affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 | | | Value | |
| American Media, Inc., 13.5%, 6/15/18 | | 12/22/10 | | | $196,770 | | | | $208,246 | |
| Arbor Realty Mortgage Securities, CDO, FRN, 2.531%, 4/21/38 | | 12/20/05 | | | 1,136,457 | | | | 1,031,267 | |
| Avaya, Inc., 10.5%, 3/01/21 | | 12/11/14-12/15/14 | | | 327,808 | | | | 342,000 | |
| CWCapital Cobalt Ltd., CDO, 6.23%, 5/25/45 | | 3/20/06-8/16/13 | | | 2,329,901 | | | | 138,926 | |
| CWCapital Cobalt Ltd., CDO, “F”, FRN, 1.53%, 4/26/50 | | 4/12/06 | | | 1,082,068 | | | | 11 | |
| DriveTime Automotive Group, Inc./DT Acceptance Corp., 8%, 6/01/21 | | 12/08/14 | | | 321,426 | | | | 305,575 | |
| Kindred Escrow Corp. II, 8%, 1/15/20 | | 12/11/14-12/12/14 | | | 1,050,000 | | | | 1,115,625 | |
| LGE Holdco VI B.V., 7.125%, 5/15/24 | | 7/21/11-3/15/12 | | | 1,398,736 | | | | 1,258,879 | |
| Rayonier AM Products, Inc., 5.5%, 6/01/24 | | 12/22/14 | | | 325,464 | | | | 324,394 | |
| Sensata Technologies B.V., 5.625%, 11/01/24 | | 10/07/14-10/16/14 | | | 964,098 | | | | 996,000 | |
| Total Restricted Securities | | | | $5,720,923 | |
| % of Net assets | | | | 1.0% | |
13
MFS High Yield Portfolio
Portfolio of Investments – continued
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:
Derivative Contracts at 12/31/14
Forward Foreign Currency Exchange Contracts at 12/31/14
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date Range | | In Exchange For | | | Contracts
at Value | | | Net Unrealized
Appreciation
(Depreciation) | |
| | Asset Derivatives | | | | | | | | | | | | | | | | |
| | SELL | | | EUR | | | Credit Suisse Group | | 1,208,511 | | 1/09/15 | | $ | 1,527,008 | | | $ | 1,462,421 | | | $ | 64,587 | |
| | SELL | | | EUR | | | Goldman Sachs International | | 12,625 | | 1/09/15 | | | 15,819 | | | | 15,278 | | | | 541 | |
| | SELL | | | EUR | | | Royal Bank of Scotland Group PLC | | 155,665 | | 1/09/15 | | | 194,997 | | | | 188,371 | | | | 6,626 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 71,754 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Liability Derivatives | | | | | | | | | | | | | | | | |
| | BUY | | | EUR | | | Citibank N.A. | | 291,098 | | 1/09/15 | | $ | 368,147 | | | $ | 352,258 | | | $ | (15,889 | ) |
| | BUY | | | EUR | | | Goldman Sachs International | | 37,800 | | 1/09/15 | | | 47,124 | | | | 45,741 | | | | (1,383 | ) |
| | BUY | | | EUR | | | UBS AG | | 982,423 | | 1/09/15 | | | 1,243,050 | | | | 1,188,832 | | | | (54,218 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | (71,490 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Futures Contracts Outstanding at 12/31/14
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration
Date | | | Unrealized
Appreciation
(Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Short) | | | USD | | | | 56 | | | $7,100,625 | | | March - 2015 | | | | $(37,821 | ) |
| | | | | | | | | | | | | | | | | | |
At December 31, 2014, the fund had cash collateral of $67,200 to cover any commitments for certain derivative contracts. Cash collateral is comprised of “Restricted cash” in the Statement of Assets and Liabilities
See Notes to Financial Statements
14
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $595,492,134) | | | $577,329,316 | | | | | |
Underlying affiliated funds, at cost and value | | | 13,904,801 | | | | | |
Total investments, at value (identified cost, $609,396,935) | | | $591,234,117 | | | | | |
Cash | | | 646,404 | | | | | |
Restricted cash | | | 67,200 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 71,754 | | | | | |
Fund shares sold | | | 72,388 | | | | | |
Interest | | | 9,943,733 | | | | | |
Receivable from investment adviser | | | 26,042 | | | | | |
Other assets | | | 5,165 | | | | | |
Total assets | | | | | | | $602,066,803 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $71,490 | | | | | |
Daily variation margin on open futures contracts | | | 12,250 | | | | | |
Investments purchased | | | 2,699,801 | | | | | |
Fund shares reacquired | | | 801,622 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 128 | | | | | |
Distribution and/or service fees | | | 1,156 | | | | | |
Payable for independent Trustees’ compensation | | | 25 | | | | | |
Accrued expenses and other liabilities | | | 119,315 | | | | | |
Total liabilities | | | | | | | $3,705,787 | |
Net assets | | | | | | | $598,361,016 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $625,915,552 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | (18,200,961 | ) | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (47,736,874 | ) | | | | |
Undistributed net investment income | | | 38,383,299 | | | | | |
Net assets | | | | | | | $598,361,016 | |
Shares of beneficial interest outstanding | | | | | | | 98,123,775 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $514,088,709 | | | | 84,171,596 | | | | $6.11 | |
Service Class | | | 84,272,307 | | | | 13,952,179 | | | | 6.04 | |
See Notes to Financial Statements
15
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Interest | | | $41,028,540 | | | | | |
Dividends | | | 107,952 | | | | | |
Dividends from underlying affiliated funds | | | 7,740 | | | | | |
Total investment income | | | | | | | $41,144,232 | |
Expenses | | | | | | | | |
Management fee | | | $4,661,893 | | | | | |
Distribution and/or service fees | | | 237,046 | | | | | |
Shareholder servicing costs | | | 29,925 | | | | | |
Administrative services fee | | | 99,291 | | | | | |
Independent Trustees’ compensation | | | 15,718 | | | | | |
Custodian fee | | | 73,272 | | | | | |
Shareholder communications | | | 105,656 | | | | | |
Audit and tax fees | | | 74,717 | | | | | |
Legal fees | | | 6,793 | | | | | |
Miscellaneous | | | 41,781 | | | | | |
Total expenses | | | | | | | $5,346,092 | |
Fees paid indirectly | | | (546 | ) | | | | |
Reduction of expenses by investment adviser | | | (189,015 | ) | | | | |
Net expenses | | | | | | | $5,156,531 | |
Net investment income | | | | | | | $35,987,701 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $11,045,539 | | | | | |
Futures contracts | | | (211,289 | ) | | | | |
Swap agreements | | | 330,761 | | | | | |
Foreign currency | | | 1,589 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $11,166,600 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(27,129,830 | ) | | | | |
Futures contracts | | | (37,821 | ) | | | | |
Swap agreements | | | (316,333 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | 189,047 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(27,294,937 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(16,128,337 | ) |
Change in net assets from operations | | | | | | | $19,859,364 | |
See Notes to Financial Statements
16
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $35,987,701 | | | | $32,196,425 | |
Net realized gain (loss) on investments and foreign currency | | | 11,166,600 | | | | 14,791,354 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (27,294,937 | ) | | | (8,037,754 | ) |
Change in net assets from operations | | | $19,859,364 | | | | $38,950,025 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(34,697,077 | ) | | | $(17,013,351 | ) |
Change in net assets from fund share transactions | | | $(90,410,935 | ) | | | $202,347,725 | |
Total change in net assets | | | $(105,248,648 | ) | | | $224,284,399 | |
Net assets | | | | | | | | |
At beginning of period | | | 703,609,664 | | | | 479,325,265 | |
At end of period (including undistributed net investment income of $38,383,299 and
$34,473,668, respectively) | | | $598,361,016 | | | | $703,609,664 | |
See Notes to Financial Statements
17
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $6.28 | | | | $6.05 | | | | $5.64 | | | | $5.96 | | | | $5.67 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.35 | | | | $0.36 | | | | $0.40 | | | | $0.41 | | | | $0.42 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.17 | ) | | | 0.02 | | | | 0.42 | | | | (0.18 | ) | | | 0.42 | |
Total from investment operations | | | $0.18 | | | | $0.38 | | | | $0.82 | | | | $0.23 | | | | $0.84 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.35 | ) | | | $(0.15 | ) | | | $(0.41 | ) | | | $(0.55 | ) | | | $(0.55 | ) |
Net asset value, end of period (x) | | | $6.11 | | | | $6.28 | | | | $6.05 | | | | $5.64 | | | | $5.96 | |
Total return (%) (k)(r)(s)(x) | | | 2.81 | | | | 6.42 | | | | 14.91 | | | | 4.13 | | | | 15.53 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.77 | | | | 0.76 | | | | 0.81 | | | | 0.86 | | | | 0.88 | |
Expenses after expense reductions (f) | | | 0.74 | | | | 0.75 | | | | 0.79 | | | | 0.81 | | | | 0.83 | |
Net investment income | | | 5.44 | | | | 5.79 | | | | 6.65 | | | | 6.97 | | | | 7.42 | |
Portfolio turnover | | | 43 | | | | 52 | | | | 48 | | | | 57 | | | | 62 | |
Net assets at end of period (000 omitted) | | | $514,089 | | | | $600,994 | | | | $368,899 | | | | $145,773 | | | | $122,666 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $6.21 | | | | $5.99 | | | | $5.59 | | | | $5.91 | | | | $5.63 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.33 | | | | $0.34 | | | | $0.38 | | | | $0.40 | | | | $0.41 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.16 | ) | | | 0.02 | | | | 0.41 | | | | (0.19 | ) | | | 0.40 | |
Total from investment operations | | | $0.17 | | | | $0.36 | | | | $0.79 | | | | $0.21 | | | | $0.81 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.34 | ) | | | $(0.14 | ) | | | $(0.39 | ) | | | $(0.53 | ) | | | $(0.53 | ) |
Net asset value, end of period (x) | | | $6.04 | | | | $6.21 | | | | $5.99 | | | | $5.59 | | | | $5.91 | |
Total return (%) (k)(r)(s)(x) | | | 2.53 | | | | 6.10 | | | | 14.54 | | | | 3.86 | | | | 15.17 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.02 | | | | 1.01 | | | | 1.06 | | | | 1.11 | | | | 1.13 | |
Expenses after expense reductions (f) | | | 0.99 | | | | 1.00 | | | | 1.04 | | | | 1.06 | | | | 1.08 | |
Net investment income | | | 5.19 | | | | 5.56 | | | | 6.46 | | | | 6.73 | | | | 7.18 | |
Portfolio turnover | | | 43 | | | | 52 | | | | 48 | | | | 57 | | | | 62 | |
Net assets at end of period (000 omitted) | | | $84,272 | | | | $102,616 | | | | $110,426 | | | | $83,400 | | | | $101,189 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
18
MFS High Yield Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS High Yield Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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 invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – Debt instruments and floating rate loans, 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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 at valuations provided by a third-party pricing service. 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 exchange 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. Swap agreements are generally valued at valuations provided by a third-party pricing service, which for cleared swaps includes an evaluation of any trading activity at the clearinghouses. 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
19
MFS High Yield Portfolio
Notes to Financial Statements – continued
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 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. 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 contracts and forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities | | | $3,202,082 | | | | $— | | | | $— | | | | $3,202,082 | |
| Non-U.S. Sovereign Debt | | | — | | | | 781,098 | | | | — | | | | 781,098 | |
| U.S. Corporate Bonds | | | — | | | | 440,664,637 | | | | — | | | | 440,664,637 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 324,862 | | | | — | | | | 324,862 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 1,185,881 | | | | — | | | | 1,185,881 | |
| Foreign Bonds | | | — | | | | 102,758,320 | | | | — | | | | 102,758,320 | |
| Floating Rate Loans | | | — | | | | 28,412,436 | | | | — | | | | 28,412,436 | |
Mutual Funds | | | 13,904,801 | | | | — | | | | — | | | | 13,904,801 | |
| Total Investments | | | $17,106,883 | | | | $574,127,234 | | | | $— | | | | $591,234,117 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts | | | $(37,821 | ) | | | $— | | | | $— | | | | $(37,821 | ) |
| Forward Foreign Currency Exchange Contracts | | | — | | | | 264 | | | | — | | | | 264 | |
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 fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/13 | | | $244,309 | |
Realized gain (loss) | | | (704,002 | ) |
Change in unrealized appreciation (depreciation) | | | 468,661 | |
Proceeds from tender offer | | | (8,968 | ) |
| Balance as of 12/31/14 | | | $— | |
20
MFS High Yield 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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
The derivative instruments used by the fund were 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $— | | | | $(37,821 | ) |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 71,754 | | | | (71,490 | ) |
| Total | | | | | $71,754 | | | | $(109,311 | ) |
| (a) | The value of futures contracts includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2014 as reported in the Statement of Operations:
| | | | | | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Foreign Currency | | | Investments
(Purchased Options) | |
| Interest Rate | | | $(211,289 | ) | | | $— | | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | 65,273 | | | | — | |
| Equity | | | — | | | | — | | | | — | | | | (98,065 | ) |
| Credit | | | — | | | | 330,761 | | | | — | | | | — | |
| Total | | | $(211,289 | ) | | | $330,761 | | | | $65,273 | | | | $(98,065 | ) |
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, 2014 as reported in the Statement of Operations:
| | | | | | | | | | | | |
| Risk | | Futures Contracts | | | Swap Agreements | | | Translation of
Assets and Liabilities in
Foreign Currencies | |
| Interest Rate | | | $(37,821 | ) | | | $— | | | | $— | |
| Foreign Exchange | | | — | | | | — | | | | 191,848 | |
| Credit | | | — | | | | (316,333 | ) | | | — | |
| Total | | | $(37,821 | ) | | | $(316,333 | ) | | | $191,848 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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
21
MFS High Yield Portfolio
Notes to Financial Statements – continued
the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Purchased Options – The fund purchased call options for a premium. Purchased call options entitle the holder to buy 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument.
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 call options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. 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 contracts 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 contracts 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 entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used 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.
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. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. This
22
MFS High Yield Portfolio
Notes to Financial Statements – continued
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 – During the period the fund entered into swap agreements. Certain types of swaps (“cleared swaps”) are required to be centrally cleared under provisions of the Dodd-Frank Regulatory Reform Bill. In a cleared swap transaction, the swap agreement is novated to a central counterparty (the “clearinghouse”) immediately following execution of the swap contract with an executing broker. Thereafter, throughout the term of the cleared swap, the fund interfaces indirectly with the clearinghouse through a clearing broker.
A swap agreement 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 agreements in the Statement of Operations. The value of the swap agreement, which is adjusted daily and includes any related interest accruals to be paid or received by the fund, is recorded in the Statement of Assets and Liabilities, as “Swaps, at value” for uncleared swaps and is included in “Due from brokers” or “Due to brokers” for cleared swaps. The daily change in value, including any related interest accruals to be paid or received, is recorded as unrealized appreciation or depreciation on swap agreements in the Statement of Operations. The daily change in valuation of cleared swaps is recorded as a receivable or payable for variation margin in the Statement of Assets and Liabilities. Amounts paid or received at the inception of the swap agreement are reflected as premiums paid or received in 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 agreements 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. The fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from/paid to the counterparty over the contract’s remaining life, to the extent that the amount is positive. To address counterparty risk, swap agreements are limited to only highly-rated counterparties. For uncleared swaps, that risk is further reduced 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. Although not covered by an ISDA Master Agreement, the fund’s counterparty risk due to cleared swaps is mitigated by the clearinghouses’ margining requirements and financial safeguards in the event of a clearing broker default.
The fund entered into credit default swap agreements in order 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 agreement, the protection buyer can make an upfront payment and will make a stream of payments to the protection seller based on a fixed percentage applied to the agreement notional amount 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 agreement-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 agreement. 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 agreement’s notional amount is recorded as realized gain or loss on swap agreements 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 agreement. For uncleared swaps, counterparty risk is reduced 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. For cleared swaps, the fund’s counterparty risk is mitigated by the clearinghouses’ margining requirements and financial safeguards in the event of a clearing broker default.
Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which contractually obligate the fund to supply additional cash to the borrower on demand. The fund generally provides this financial support in order to preserve its existing investment or to obtain a more senior secured interest in the assets of the borrower. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.
23
MFS High Yield 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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $34,697,077 | | | | $17,013,351 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $612,646,986 | |
| Gross appreciation | | | 7,523,727 | |
| Gross depreciation | | | (28,936,596 | ) |
| Net unrealized appreciation (depreciation) | | | $(21,412,869 | ) |
| Undistributed ordinary income | | | 38,419,572 | |
| Capital loss carryforwards | | | (44,524,644 | ) |
| Other temporary differences | | | (36,595 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term
24
MFS High Yield Portfolio
Notes to Financial Statements – continued
losses (“post-enactment losses”). Previously, net capital losses were carried forward for eight years and treated as short-term losses (“pre-enactment losses”). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment losses expire as follows:
| | | | |
| 12/31/15 | | | $(2,561,952 | ) |
| 12/31/16 | | | (30,768,220 | ) |
| 12/31/17 | | | (11,194,472 | ) |
| Total | | | $(44,524,644 | ) |
The availability of $10,086,800 of the capital loss carryforwards, which were acquired on August 16, 2013 in connection with the MFS High Income Series merger, may be limited in a given year.
The availability of $34,437,844 of the capital loss carryforwards of the fund may be limited in a given year due to a change in ownership of the fund on July 31, 2013.
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $29,997,899 | | | | $14,745,171 | |
| Service Class | | | 4,699,178 | | | | 2,268,180 | |
| Total | | | $34,697,077 | | | | $17,013,351 | |
| (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 | | | 0.70% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $30,321, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.75% of average daily net assets for the Initial Class shares and 1.00% of average daily net assets for the Service Class shares. This written agreement expired on July 31, 2014. For the period January 1, 2014 through July 31, 2014, this reduction amounted to $15,865, which is included in the reduction of total expenses in the Statement of Operations. Effective August 1, 2014, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses do not exceed 0.72% of average daily net assets for the Initial Class shares and 0.97% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the period August 1, 2014 through December 31, 2014, this reduction amounted to $141,648, which is included in the 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
25
MFS High Yield Portfolio
Notes to Financial Statements – continued
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, 2014, the fee was $29,172, which equated to 0.0044% 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, 2014, these costs amounted to $753.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0149% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $3,000 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $1,181, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions and short-term obligations, aggregated $278,557,509 and $369,596,111, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 2,991,264 | | | | $19,007,846 | | | | 6,128,557 | | | | $37,619,278 | |
Service Class | | | 2,757,244 | | | | 16,995,501 | | | | 2,045,810 | | | | 12,424,302 | |
| | | 5,748,508 | | | | $36,003,347 | | | | 8,174,367 | | | | $50,043,580 | |
| Shares issued in connection with acquisition of MFS High Income Series | | | | | | | | | | | | | | | | |
Initial Class | | | | | | | | | | | 40,398,005 | | | | $250,063,649 | |
Service Class | | | | | | | | | | | 857,657 | | | | 5,248,862 | |
| | | | | | | | | | | 41,255,662 | | | | $255,312,511 | |
26
MFS High Yield Portfolio
Notes to Financial Statements – continued
| | | | | | | | | | | | | | | | |
| | | Year ended 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 4,791,997 | | | | $29,997,899 | | | | 2,453,439 | | | | $14,745,171 | |
Service Class | | | 757,932 | | | | 4,699,178 | | | | 381,207 | | | | 2,268,180 | |
| | | 5,549,929 | | | | $34,697,077 | | | | 2,834,646 | | | | $17,013,351 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (19,315,849 | ) | | | $(123,140,577 | ) | | | (14,297,350 | ) | | | $(88,123,651 | ) |
Service Class | | | (6,083,157 | ) | | | (37,970,782 | ) | | | (5,214,014 | ) | | | (31,898,066 | ) |
| | | (25,399,006 | ) | | | $(161,111,359 | ) | | | (19,511,364 | ) | | | $(120,021,717 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (11,532,588 | ) | | | $(74,134,832 | ) | | | 34,682,651 | | | | $214,304,447 | |
Service Class | | | (2,567,981 | ) | | | (16,276,103 | ) | | | (1,929,340 | ) | | | (11,956,722 | ) |
| | | (14,100,569 | ) | | | $(90,410,935 | ) | | | 32,753,311 | | | | $202,347,725 | |
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Conservative Allocation Portfolio, and the MFS Growth Allocation Portfolio were the owners of record of approximately 18%, 7%, and 5%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $2,587 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning Shares/Par Amount | | | Acquisitions Shares/Par Amount | | | Dispositions Shares/Par Amount | | | Ending Shares/Par Amount | |
| MFS Institutional Money Market Portfolio | | | 6,453,869 | | | | 195,154,013 | | | | (187,703,081 | ) | | | 13,904,801 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $7,740 | | | | $13,904,801 | |
At close of business on August 16, 2013, the fund with net assets of approximately $449,129,071, acquired all of the assets and liabilities of MFS High Income Series, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of MFS High Income Series 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 approximately 41,255,662 shares of the fund (valued at approximately $255,312,511) for all of the assets and liabilities of MFS High Income Series. MFS High Income Series then distributed the shares of the fund that MFS High Income Series received from the fund to its shareholders. MFS High Income Series’ investments on that date were valued at approximately $253,346,986 with a cost basis of approximately $254,786,054. 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 High Income Series 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.
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS High Yield Portfolio as of December 31, 2014, 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 13, 2015
28
MFS High Yield Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
29
MFS High Yield Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
30
MFS High Yield Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers William Adams 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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
32
MFS High Yield 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, and that MFS has agreed to further reduce such expense limitation for the fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
33
MFS High Yield Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
34
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
35
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. • MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. • MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
36
ANNUAL REPORT
December 31, 2014
MFS® INTERNATIONAL GROWTH PORTFOLIO
MFS® Variable Insurance Trust II
FCI-ANN
MFS® INTERNATIONAL GROWTH PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Growth Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS International Growth Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Nestle S.A. | | | 3.4% | |
| Danone S.A. | | | 2.7% | |
| Bayer AG | | | 2.6% | |
| Canadian National Railway Co. | | | 2.5% | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 2.5% | |
| Compass Group PLC | | | 2.4% | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 2.3% | |
| Roche Holding AG | | | 2.3% | |
| Accenture PLC, “A” | | | 2.3% | |
| UBS AG | | | 2.2% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 19.1% | |
| Financial Services | | | 13.5% | |
| Health Care | | | 10.2% | |
| Technology | | | 9.7% | |
| Special Products & Services | | | 9.5% | |
| Industrial Goods & Services | | | 7.5% | |
| Basic Materials | | | 7.5% | |
| Retailing | | | 7.1% | |
| Transportation | | | 4.4% | |
| Leisure | | | 3.9% | |
| Autos & Housing | | | 3.6% | |
| Energy | | | 2.6% | |
| Utilities & Communications | | | 0.7% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United Kingdom | | | 19.3% | |
| France | | | 13.7% | |
| Switzerland | | | 12.2% | |
| Japan | | | 10.4% | |
| Germany | | | 8.9% | |
| United States | | | 4.4% | |
| Canada | | | 3.9% | |
| Denmark | | | 3.3% | |
| Taiwan | | | 3.0% | |
| Other Countries | | | 20.9% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 26.6% | |
| British Pound Sterling | | | 19.3% | |
| Swiss Franc | | | 12.2% | |
| Japanese Yen | | | 10.4% | |
| United States Dollar | | | 10.1% | |
| Hong Kong Dollar | | | 3.5% | |
| Danish Krone | | | 3.3% | |
| Taiwan Dollar | | | 3.0% | |
| Brazilian Real | | | 2.5% | |
| Other Currencies | | | 9.1% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS International Growth Portfolio (“fund”) provided a total return of –4.98%, while Service Class shares of the fund provided a total return of –5.19%. These compare with a return of –2.29% over the same period for the fund’s benchmark, the MSCI All Country World (ex-US) Growth Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Stock selection in the consumer staples sector was a primary detractor from performance relative to the MSCI All Country World (ex-US) Growth Index. Within this sector, an overweight position in Denmark-based brewer Carlsberg hindered relative results. Shares of Carlsberg traded lower during the second half of the reporting period due to a weakening macro-economic situation in Russia, where the company has the largest market share.
Security selection and, to a lesser extent, an underweight position in the autos & housing sector was another detractor from relative performance, led by an overweight position in Japanese auto-maker Honda Motor (Japan). The stock’s weak performance was driven by recalls of vehicles as a result of faulty airbags, a competitive environment and plant shutdowns in North America due to adverse weather conditions.
Elsewhere, holdings of Panama-based airline Copa Holdings (b) and UK-based banking group Standard Chartered (b) were among the fund’s top relative detractors. Shares of Copa Holdings weighed on relative performance after the company announced disappointing guidance on earnings for 2014 and 2015. The firm, along with many other companies that engage in business with Venezuela, ran into difficulties repatriating cash from the country after the Venezuelan President’s decision to cut off diplomatic relations with Panama. Overweight positions in British engine maker Rolls-Royce, oil and gas turnkey contractor Saipem (h) (Italy), sportswear and sports equipment manufacturer Adidas AG (h) (Germany), oil and gas company BG Group (United Kingdom), product safety testing company Intertek Group (United Kingdom) and cable solutions company Prysmian (Italy) also weakened relative results.
Contributors to Performance
Stock selection within the basic materials sector contributed to relative performance. The timing of the fund’s ownership in shares of German flavors and fragrance supplier Symrise, and avoiding weak-performing diversified natural resources company BHP Billiton (Australia), bolstered relative results. Shares of Symrise rose after the company surpassed market expectations during the period due to better margin performance and strong growth supported by the Diana Group acquisition.
Stock selection in the technology sector also benefited relative returns. Overweight positions in semiconductor manufacturer Taiwan Semiconductor (Taiwan) and data recording products provider NICE Systems (Israel) supported relative returns as both stocks outperformed the benchmark. Shares of Taiwan Semiconductor traded higher after the company reported strong sales figures driven by orders of Apple’s 20nm application processor. Healthy inventory levels also benefited the stock.
Other top relative contributors during the period included overweight positions in Canadian railway company Canadian National Railway, Indian banking firm HDFC Bank, biopharmaceutical company Shire (United Kingdom) and financial services provider Credicorp. Shares of banking firm HDFC Bank appreciated during the reporting period after the company reported robust growth in operating profit on the back of strong net interest income and contained operating expenses. Holdings of global scales and analytical instruments manufacturer Mettler Toledo (b) (Switzerland) and management consulting firm Accenture (b) (Ireland) also helped.
3
MFS International Growth Portfolio
Management Review – continued
The fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, was another positive factor for 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 exposure than the benchmark.
Respectfully,
| | |
| David Antonelli | | Kevin Dwan |
| 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 International Growth Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/03/96 | | (4.98)% | | 5.90% | | 6.45% | | |
| | | Service Class | | 8/24/01 | | (5.19)% | | 5.64% | | 6.19% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI All Country World (ex-US) Growth Index (f) | | (2.29)% | | 5.54% | | 5.77% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending
Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 1.01% | | | | $1,000.00 | | | | $916.12 | | | | $4.88 | |
| | Hypothetical (h) | | | 1.01% | | | | $1,000.00 | | | | $1,020.11 | | | | $5.14 | |
| Service Class | | Actual | | | 1.26% | | | | $1,000.00 | | | | $915.04 | | | | $6.08 | |
| | Hypothetical (h) | | | 1.26% | | | | $1,000.00 | | | | $1,018.85 | | | | $6.41 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS International Growth Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.3% | | | | | | | | |
| Aerospace – 1.2% | | | | | | | | |
| Rolls-Royce Holdings PLC | | | 169,893 | | | $ | 2,288,640 | |
| | | | | | | | |
| Airlines – 1.3% | | | | | | | | |
| Copa Holdings S.A., “A” | | | 24,978 | | | $ | 2,588,720 | |
| | | | | | | | |
| Alcoholic Beverages – 5.5% | | | | | | | | |
| AmBev S.A., ADR | | | 187,891 | | | $ | 1,168,682 | |
| Carlsberg A.S., “B” | | | 30,187 | | | | 2,344,190 | |
| Diageo PLC | | | 105,006 | | | | 3,011,693 | |
| Pernod Ricard S.A. | | | 37,371 | | | | 4,143,583 | |
| | | | | | | | |
| | | | | | $ | 10,668,148 | |
| | | | | | | | |
| Apparel Manufacturers – 5.0% | | | | | | | | |
| Burberry Group PLC | | | 102,521 | | | $ | 2,597,742 | |
| Compagnie Financiere Richemont S.A. | | | 17,383 | | | | 1,539,740 | |
| Li & Fung Ltd. | | | 763,200 | | | | 714,517 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 30,896 | | | | 4,885,710 | |
| | | | | | | | |
| | | | | | $ | 9,737,709 | |
| | | | | | | | |
| Automotive – 3.1% | | | | | | | | |
| Guangzhou Automobile Group Co. Ltd., “H” | | | 1,162,000 | | | $ | 1,050,198 | |
| Honda Motor Co. Ltd. | | | 116,900 | | | | 3,399,417 | |
| Toyota Motor Corp. | | | 25,400 | | | | 1,583,958 | |
| | | | | | | | |
| | | | | | $ | 6,033,573 | |
| | | | | | | | |
| Broadcasting – 1.8% | | | | | | | | |
| Publicis Groupe S.A. | | | 12,720 | | | $ | 911,047 | |
| WPP PLC | | | 125,026 | | | | 2,593,814 | |
| | | | | | | | |
| | | | | | $ | 3,504,861 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.3% | |
| BM&F Bovespa S.A. | | | 143,364 | | | $ | 531,237 | |
| | | | | | | | |
| Business Services – 9.5% | | | | | | | | |
| Accenture PLC, “A” | | | 50,816 | | | $ | 4,538,377 | |
| Amadeus IT Holding S.A. | | | 36,883 | | | | 1,465,628 | |
| Brenntag AG | | | 50,202 | | | | 2,825,340 | |
| Capita Group PLC | | | 124,797 | | | | 2,091,495 | |
| Compass Group PLC | | | 275,844 | | | | 4,701,577 | |
| Experian Group Ltd. | | | 66,627 | | | | 1,123,846 | |
| Intertek Group PLC | | | 48,140 | | | | 1,745,020 | |
| | | | | | | | |
| | | | | | $ | 18,491,283 | |
| | | | | | | | |
| Computer Software – 2.6% | | | | | | | | |
| Dassault Systems S.A. | | | 23,271 | | | $ | 1,416,236 | |
| OBIC Co. Ltd. | | | 71,600 | | | | 2,297,281 | |
| SAP AG | | | 20,234 | | | | 1,430,655 | |
| | | | | | | | |
| | | | | | $ | 5,144,172 | |
| | | | | | | | |
| Computer Software – Systems – 1.4% | |
| NICE Systems Ltd., ADR | | | 53,503 | | | $ | 2,709,927 | |
| | | | | | | | |
| Construction – 0.5% | | | | | | | | |
| Bellway PLC | | | 32,965 | | | $ | 990,263 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – 4.0% | | | | | | | | |
| L’Oreal S.A. | | | 14,735 | | | $ | 2,473,816 | |
| Reckitt Benckiser Group PLC | | | 39,503 | | | | 3,186,762 | |
| Uni-Charm Corp. | | | 89,800 | | | | 2,161,003 | |
| | | | | | | | |
| | | | | | $ | 7,821,581 | |
| | | | | | | | |
| Electrical Equipment – 4.4% | | | | | | | | |
| Legrand S.A. | | | 20,891 | | | $ | 1,093,620 | |
| Mettler-Toledo International, Inc. (a) | | | 9,470 | | | | 2,864,296 | |
| Prysmian S.p.A. | | | 83,514 | | | | 1,520,055 | |
| Schneider Electric S.A. | | | 42,396 | | | | 3,080,572 | |
| | | | | | | | |
| | | | | | $ | 8,558,543 | |
| | | | | | | | |
| Electronics – 4.1% | | | | | | | | |
| MediaTek, Inc. | | | 91,000 | | | $ | 1,324,771 | |
| Samsung Electronics Co. Ltd. | | | 1,811 | | | | 2,176,916 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 204,758 | | | | 4,582,484 | |
| | | | | | | | |
| | | | | | $ | 8,084,171 | |
| | | | | | | | |
| Energy – Independent – 0.9% | | | | | | | | |
| INPEX Corp. | | | 153,500 | | | $ | 1,703,135 | |
| | | | | | | | |
| Energy – Integrated – 1.7% | | | | | | | | |
| BG Group PLC | | | 151,286 | | | $ | 2,013,728 | |
| Suncor Energy, Inc. | | | 40,968 | | | | 1,301,187 | |
| | | | | | | | |
| | | | | | $ | 3,314,915 | |
| | | | | | | | |
| Food & Beverages – 8.2% | | | | | | | | |
| Chr. Hansen Holding A.S. | | | 33,123 | | | $ | 1,473,803 | |
| Danone S.A. | | | 80,916 | | | | 5,323,180 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 32,879 | | | | 1,125,570 | |
| Nestle S.A. | | | 89,774 | | | | 6,580,573 | |
| Want Want China Holdings Ltd. | | | 1,204,000 | | | | 1,579,466 | |
| | | | | | | | |
| | | | | | $ | 16,082,592 | |
| | | | | | | | |
| Food & Drug Stores – 1.2% | | | | | | | | |
| Dairy Farm International Holdings Ltd. | | | 64,800 | | | $ | 583,200 | |
| Loblaw Cos. Ltd. | | | 9,528 | | | | 509,860 | |
| Sundrug Co. Ltd. | | | 30,000 | | | | 1,214,245 | |
| | | | | | | | |
| | | | | | $ | 2,307,305 | |
| | | | | | | | |
| Gaming & Lodging – 0.7% | | | | | | | | |
| Paddy Power PLC | | | 15,687 | | | $ | 1,282,874 | |
| | | | | | | | |
| General Merchandise – 0.7% | | | | | | | | |
| Dollarama, Inc. | | | 16,880 | | | $ | 863,033 | |
| Lojas Renner S.A. | | | 18,016 | | | | 513,866 | |
| | | | | | | | |
| | | | | | $ | 1,376,899 | |
| | | | | | | | |
| Insurance – 1.8% | | | | | | | | |
| AIA Group Ltd. | | | 649,200 | | | $ | 3,574,795 | |
| | | | | | | | |
| Internet – 0.4% | | | | | | | | |
| NAVER Corp. (a) | | | 1,299 | | | $ | 839,181 | |
| | | | | | | | |
7
MFS International Growth Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Machinery & Tools – 1.9% | | | | | | | | |
| Atlas Copco AB, “A” | | | 17,570 | | | $ | 489,098 | |
| Schindler Holding AG | | | 8,439 | | | | 1,217,688 | |
| Weir Group PLC | | | 72,156 | | | | 2,065,245 | |
| | | | | | | | |
| | | | | | $ | 3,772,031 | |
| | | | | | | | |
| Major Banks – 1.7% | | | | | | | | |
| HSBC Holdings PLC | | | 186,495 | | | $ | 1,762,468 | |
| Standard Chartered PLC | | | 107,463 | | | | 1,612,947 | |
| | | | | | | | |
| | | | | | $ | 3,375,415 | |
| | | | | | | | |
| Medical & Health Technology & Services – 1.0% | | | | | |
| Fresenius Medical Care AG & Co. KGaA | | | 27,173 | | | $ | 2,033,671 | |
| | | | | | | | |
| Medical Equipment – 2.1% | | | | | | | | |
| Essilor International S.A. | | | 13,166 | | | $ | 1,465,595 | |
| Sonova Holding AG | | | 17,631 | | | | 2,584,583 | |
| | | | | | | | |
| | | | | | $ | 4,050,178 | |
| | | | | | | | |
| Metals & Mining – 0.8% | | | | | | | | |
| Rio Tinto Ltd. | | | 32,321 | | | $ | 1,516,088 | |
| | | | | | | | |
| Network & Telecom – 1.1% | | | | | | | | |
| Ericsson, Inc., “B” | | | 184,119 | | | $ | 2,228,403 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 9.7% | | | | | |
| Aeon Credit Service Co. Ltd. | | | 64,000 | | | $ | 1,251,143 | |
| Credicorp Ltd. | | | 19,067 | | | | 3,054,152 | |
| HDFC Bank Ltd. | | | 174,993 | | | | 2,624,319 | |
| Itau Unibanco Holding S.A., ADR | | | 111,329 | | | | 1,448,390 | |
| Julius Baer Group Ltd. | | | 40,763 | | | | 1,860,221 | |
| Kasikornbank PLC, NVDR | | | 281,300 | | | | 1,942,438 | |
| KBC Group N.V. (a) | | | 34,641 | | | | 1,922,593 | |
| Sberbank of Russia (a) | | | 557,530 | | | | 503,842 | |
| UBS AG (a) | | | 252,024 | | | | 4,332,217 | |
| | | | | | | | |
| | | | | | $ | 18,939,315 | |
| | | | | | | | |
| Pharmaceuticals – 7.1% | | | | | | | | |
| Bayer AG | | | 37,260 | | | $ | 5,094,771 | |
| Novo Nordisk A.S., “B” | | | 60,318 | | | | 2,551,126 | |
| Roche Holding AG | | | 16,765 | | | | 4,543,993 | |
| Shire PLC | | | 22,561 | | | | 1,593,966 | |
| | | | | | | | |
| | | | | | $ | 13,783,856 | |
| | | | | | | | |
| Railroad & Shipping – 3.1% | | | | | | | | |
| Canadian National Railway Co. | | | 71,164 | | | $ | 4,903,911 | |
| Kuehne & Nagel, Inc. AG | | | 7,922 | | | | 1,076,848 | |
| | | | | | | | |
| | | | | | $ | 5,980,759 | |
| | | | | | | | |
| Restaurants – 1.4% | | | | | | | | |
| Whitbread PLC | | | 37,719 | | | $ | 2,783,548 | |
| | | | | | | | |
| Specialty Chemicals – 6.7% | | | | | | | | |
| Akzo Nobel N.V. | | | 17,079 | | | $ | 1,184,338 | |
| Croda International PLC | | | 36,675 | | | | 1,511,154 | |
| L’Air Liquide S.A. | | | 15,583 | | | | 1,922,764 | |
| Linde AG | | | 18,112 | | | | 3,379,513 | |
| Nippon Paint Co. Ltd. | | | 44,000 | | | | 1,277,120 | |
| Nitto Denko Corp. | | | 19,900 | | | | 1,112,878 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Specialty Chemicals – continued | | | | | | | | |
| Symrise AG | | | 44,194 | | | $ | 2,680,800 | |
| | | | | | | | |
| | | | | | $ | 13,068,567 | |
| | | | | | | | |
| Specialty Stores – 0.2% | | | | | | | | |
| Inditex | | | 14,922 | | | $ | 428,026 | |
| | | | | | | | |
| Telecommunications – Wireless – 0.8% | | | | | |
| SoftBank Corp. | | | 24,600 | | | $ | 1,464,001 | |
| | | | | | | | |
| Tobacco – 1.4% | | | | | | | | |
| Japan Tobacco, Inc. | | | 100,400 | | | $ | 2,756,795 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $149,548,693) | | | $ | 193,815,177 | |
| | | | | | | | |
|
| MONEY MARKET FUNDS – 1.2% | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 2,302,854 | | | $ | 2,302,854 | |
| | | | | | | | |
Total Investments
(Identified Cost, $151,851,547) | | | | | | $ | 196,118,031 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.5)% | | | | | | | (1,028,849 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 195,089,182 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary Receipt |
| NVDR | | Non-Voting Depositary Receipt |
| 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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $149,548,693) | | | $193,815,177 | | | | | |
Underlying affiliated funds, at cost and value | | | 2,302,854 | | | | | |
Total investments, at value (identified cost, $151,851,547) | | | $196,118,031 | | | | | |
Cash | | | 38,964 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 71,835 | | | | | |
Fund shares sold | | | 21 | | | | | |
Interest and dividends | | | 344,374 | | | | | |
Other assets | | | 5,563 | | | | | |
Total assets | | | | | | | $196,578,788 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $48,572 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 1,163,083 | | | | | |
Fund shares reacquired | | | 158,194 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 8,693 | | | | | |
Shareholder servicing costs | | | 41 | | | | | |
Distribution and/or service fees | | | 420 | | | | | |
Payable for independent Trustees’ compensation | | | 74 | | | | | |
Deferred country tax expense payable | | | 40,397 | | | | | |
Accrued expenses and other liabilities | | | 70,132 | | | | | |
Total liabilities | | | | | | | $1,489,606 | |
Net assets | | | | | | | $195,089,182 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $143,390,794 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $40,397 deferred country tax) | | | 44,209,367 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 4,620,688 | | | | | |
Undistributed net investment income | | | 2,868,333 | | | | | |
Net assets | | | | | | | $195,089,182 | |
Shares of beneficial interest outstanding | | | | | | | 14,699,508 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $164,724,368 | | | | 12,396,681 | | | | $13.29 | |
Service Class | | | 30,364,814 | | | | 2,302,827 | | | | 13.19 | |
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 12/31/14 | | | | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Dividends | | | $5,500,733 | | | | | |
Interest | | | 96,949 | | | | | |
Dividends from underlying affiliated funds | | | 1,251 | | | | | |
Foreign taxes withheld | | | (484,088 | ) | | | | |
Total investment income | | | | | | | $5,114,845 | |
Expenses | | | | | | | | |
Management fee | | | $1,876,070 | | | | | |
Distribution and/or service fees | | | 78,798 | | | | | |
Shareholder servicing costs | | | 8,981 | | | | | |
Administrative services fee | | | 38,573 | | | | | |
Independent Trustees’ compensation | | | 8,906 | | | | | |
Custodian fee | | | 102,476 | | | | | |
Shareholder communications | | | 10,357 | | | | | |
Audit and tax fees | | | 62,015 | | | | | |
Legal fees | | | 1,833 | | | | | |
Miscellaneous | | | 12,868 | | | | | |
Total expenses | | | | | | | $2,200,877 | |
Fees paid indirectly | | | (10 | ) | | | | |
Reduction of expenses by investment adviser | | | (9,905 | ) | | | | |
Net expenses | | | | | | | $2,190,962 | |
Net investment income | | | | | | | $2,923,883 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $5,323 country tax) | | | $7,447,175 | | | | | |
Foreign currency | | | (38,613 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $7,408,562 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $39,616 increase in deferred country tax) | | | $(20,382,761 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (21,280 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(20,404,041 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(12,995,479 | ) |
Change in net assets from operations | | | | | | | $(10,071,596 | ) |
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,923,883 | | | | $2,005,186 | |
Net realized gain (loss) on investments and foreign currency | | | 7,408,562 | | | | 9,354,954 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (20,404,041 | ) | | | 16,685,447 | |
Change in net assets from operations | | | $(10,071,596 | ) | | | $28,045,587 | |
Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(1,789,349 | ) | | | $(2,766,125 | ) |
From net realized gain on investments | | | (9,240,204 | ) | | | (133,342 | ) |
Total distributions declared to shareholders | | | $(11,029,553 | ) | | | $(2,899,467 | ) |
Change in net assets from fund share transactions | | | $(3,440,851 | ) | | | $(10,242,055 | ) |
Total change in net assets | | | $(24,542,000 | ) | | | $14,904,065 | |
Net assets | | | | | | | | |
At beginning of period | | | 219,631,182 | | | | 204,727,117 | |
At end of period (including undistributed net investment income of $2,868,333 and
$1,784,098, respectively) | | | $195,089,182 | | | | $219,631,182 | |
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $14.77 | | | | $13.13 | | | | $11.08 | | | | $13.85 | | | | $12.13 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.21 | | | | $0.14 | | | | $0.15 | | | | $0.15 | | | | $0.15 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.90 | ) | | | 1.70 | | | | 2.02 | | | | (1.60 | ) | | | 1.68 | |
Total from investment operations | | | $(0.69 | ) | | | $1.84 | | | | $2.17 | | | | $(1.45 | ) | | | $1.83 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.13 | ) | | | $(0.19 | ) | | | $(0.12 | ) | | | $(0.15 | ) | | | $(0.11 | ) |
From net realized gain on investments | | | (0.66 | ) | | | (0.01 | ) | | | — | | | | (1.17 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.79 | ) | | | $(0.20 | ) | | | $(0.12 | ) | | | $(1.32 | ) | | | $(0.11 | ) |
Net asset value, end of period (x) | | | $13.29 | | | | $14.77 | | | | $13.13 | | | | $11.08 | | | | $13.85 | |
Total return (%) (k)(r)(s)(x) | | | (4.98 | ) | | | 14.09 | | | | 19.71 | | | | (10.89 | ) | | | 15.16 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.02 | | | | 1.03 | | | | 1.04 | | | | 1.06 | | | | 1.09 | |
Expenses after expense reductions (f) | | | 1.01 | | | | 1.03 | | | | 1.04 | | | | N/A | | | | N/A | |
Net investment income | | | 1.44 | | | | 0.98 | | | | 1.23 | | | | 1.16 | | | | 1.21 | |
Portfolio turnover | | | 22 | | | | 26 | | | | 49 | | | | 52 | | | | 66 | |
Net assets at end of period (000 omitted) | | | $164,724 | | | | $186,566 | | | | $175,946 | | | | $188,066 | | | | $221,456 | |
See Notes to Financial Statements
12
MFS International Growth Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $14.66 | | | | $13.04 | | | | $11.00 | | | | $13.76 | | | | $12.06 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.17 | | | | $0.10 | | | | $0.12 | | | | $0.11 | | | | $0.11 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.88 | ) | | | 1.68 | | | | 2.01 | | | | (1.58 | ) | | | 1.67 | |
Total from investment operations | | | $(0.71 | ) | | | $1.78 | | | | $2.13 | | | | $(1.47 | ) | | | $1.78 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.10 | ) | | | $(0.15 | ) | | | $(0.09 | ) | | | $(0.12 | ) | | | $(0.08 | ) |
From net realized gain on investments | | | (0.66 | ) | | | (0.01 | ) | | | — | | | | (1.17 | ) | | | — | |
Total distributions declared to shareholders | | | $(0.76 | ) | | | $(0.16 | ) | | | $(0.09 | ) | | | $(1.29 | ) | | | $(0.08 | ) |
Net asset value, end of period (x) | | | $13.19 | | | | $14.66 | | | | $13.04 | | | | $11.00 | | | | $13.76 | |
Total return (%) (k)(r)(s)(x) | | | (5.19 | ) | | | 13.76 | | | | 19.45 | | | | (11.11 | ) | | | 14.86 | |
Ratios (%) (to average net assets) and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.27 | | | | 1.28 | | | | 1.29 | | | | 1.31 | | | | 1.34 | |
Expenses after expense reductions (f) | | | 1.26 | | | | 1.28 | | | | 1.29 | | | | N/A | | | | N/A | |
Net investment income | | | 1.19 | | | | 0.72 | | | | 0.98 | | | | 0.89 | | | | 0.94 | |
Portfolio turnover | | | 22 | | | | 26 | | | | 49 | | | | 52 | | | | 66 | |
Net assets at end of period (000 omitted) | | | $30,365 | | | | $33,065 | | | | $28,781 | | | | $28,910 | | | | $31,348 | |
| (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. |
| (x) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS International Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS International Growth Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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
14
MFS International Growth Portfolio
Notes to Financial Statements – continued
significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United Kingdom | | | $3,206,913 | | | | $34,466,995 | | | | $— | | | | $37,673,908 | |
France | | | — | | | | 26,716,123 | | | | — | | | | 26,716,123 | |
Switzerland | | | 4,332,217 | | | | 19,403,646 | | | | — | | | | 23,735,863 | |
Japan | | | — | | | | 20,220,976 | | | | — | | | | 20,220,976 | |
Germany | | | 16,014,095 | | | | 1,430,655 | | | | — | | | | 17,444,750 | |
Canada | | | 7,577,991 | | | | — | | | | — | | | | 7,577,991 | |
United States | | | 7,402,673 | | | | — | | | | — | | | | 7,402,673 | |
Denmark | | | 2,551,126 | | | | 3,817,993 | | | | — | | | | 6,369,119 | |
Taiwan | | | 4,582,484 | | | | 1,324,771 | | | | — | | | | 5,907,255 | |
Other Countries | | | 16,580,824 | | | | 24,185,695 | | | | — | | | | 40,766,519 | |
| Mutual Funds | | | 2,302,854 | | | | — | | | | — | | | | 2,302,854 | |
| Total Investments | | | $64,551,177 | | | | $131,566,854 | | | | $— | | | | $196,118,031 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $110,377,844 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $3,265,643 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when
15
MFS International Growth Portfolio
Notes to Financial Statements – continued
such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 “Interest” income in 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, 2014, there were no securities on loan or collateral outstanding.
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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $2,702,095 | | | | $2,766,125 | |
| Long-term capital gains | | | 8,327,458 | | | | 133,342 | |
| Total distributions | | | $11,029,553 | | | | $2,899,467 | |
16
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 12/31/14 | | | | |
| Cost of investments | | | $154,188,760 | |
| Gross appreciation | | | 48,931,610 | |
| Gross depreciation | | | (7,002,339 | ) |
| Net unrealized appreciation (depreciation) | | | $41,929,271 | |
| Undistributed ordinary income | | | 3,852,973 | |
Undistributed long-term capital gain | | | 5,981,497 | |
| Other temporary differences | | | (65,353 | ) |
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $1,588,243 | | | | $2,421,918 | | | | $7,863,786 | | | | $113,721 | |
| Service Class | | | 201,106 | | | | 344,207 | | | | 1,376,418 | | | | 19,621 | |
| Total | | | $1,789,349 | | | | $2,766,125 | | | | $9,240,204 | | | | $133,342 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $9,537, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.90% of the fund’s average daily net assets.
The investment adviser had agreed in writing to pay a portion of the fund’s total annual operating expenses, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses, such that total annual operating expenses did 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 terminated on April 30, 2014. For the period ended January 1, 2014 through April 30, 2014, 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 related to this agreement.
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, 2014, the fee was $8,789, which equated to 0.0042% 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, 2014, these costs amounted to $192.
17
MFS International 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 $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0185% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $980 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $368, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, aggregated $45,860,155 and $58,733,417, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 624,699 | | | | $8,840,275 | | | | 828,432 | | | | $11,471,846 | |
Service Class | | | 390,985 | | | | 5,447,027 | | | | 383,339 | | | | 5,304,278 | |
| | | 1,015,684 | | | | $14,287,302 | | | | 1,211,771 | | | | $16,776,124 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 665,636 | | | | $9,452,029 | | | | 184,142 | | | | $2,535,639 | |
Service Class | | | 111,802 | | | | 1,577,524 | | | | 26,596 | | | | 363,828 | |
| | | 777,438 | | | | $11,029,553 | | | | 210,738 | | | | $2,899,467 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,527,528 | ) | | | $(22,235,720 | ) | | | (1,774,326 | ) | | | $(24,921,995 | ) |
Service Class | | | (455,584 | ) | | | (6,521,986 | ) | | | (360,982 | ) | | | (4,995,651 | ) |
| | | (1,983,112 | ) | | | $(28,757,706 | ) | | | (2,135,308 | ) | | | $(29,917,646 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (237,193 | ) | | | $(3,943,416 | ) | | | (761,752 | ) | | | $(10,914,510 | ) |
Service Class | | | 47,203 | | | | 502,565 | | | | 48,953 | | | | 672,455 | |
| | | (189,990 | ) | | | $(3,440,851 | ) | | | (712,799 | ) | | | $(10,242,055 | ) |
18
MFS International Growth Portfolio
Notes to Financial Statements – continued
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio, were the owners of record of approximately 32%, 14%, and 8%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $800 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning Shares/Par Amount | | | Acquisitions Shares/Par Amount | | | Dispositions Shares/Par Amount | | | Ending Shares/Par Amount | |
| MFS Institutional Money Market Portfolio | | | 101 | | | | 34,819,753 | | | | (32,517,000 | ) | | | 2,302,854 | |
| | | | |
| Underlying Affiliated Fund | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $1,251 | | | | $2,302,854 | |
19
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian. 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, 2014, 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 13, 2015
20
MFS International Growth Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
21
MFS International Growth Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
22
MFS International Growth Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers David Antonelli Kevin Dwan | | |
23
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 4th quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 5th quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
The Trustees expressed concern to MFS about the substandard investment performance of the Fund. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, including more recent performance information, as well as during investment review meetings conducted with portfolio management personnel during the course of the year, as to MFS’ efforts to improve the Fund’s performance, including assigning an additional portfolio manager for the Fund in 2012. In addition, the Trustees requested that they receive a separate update on the
24
MFS International Growth Portfolio
Board Review of Investment Advisory Agreement – continued
Fund’s performance at each of their regular meetings. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that MFS’ responses and efforts and plans to improve investment performance were sufficient to support approval of the continuance of the investment advisory agreement for an additional one-year period, but that they would continue to closely monitor the performance of the Fund.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher then the Lipper expense group median and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $1 billion and $2 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
25
MFS International Growth Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $9,161,000 as capital gain dividends paid during the fiscal year.
Income derived from foreign sources was $4,773,139. The fund intends to pass through foreign tax credits of $379,377 for the fiscal year.
26
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
27
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® INTERNATIONAL VALUE PORTFOLIO
MFS® Variable Insurance Trust II
FCG-ANN
MFS® INTERNATIONAL VALUE PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS International Value Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS International Value Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top ten holdings | | | | |
| Nestle S.A. | | | 3.7% | |
| Danone S.A. | | | 3.6% | |
| Reckitt Benckiser Group PLC | | | 3.0% | |
| Kao Corp. | | | 3.0% | |
| Compass Group PLC | | | 2.9% | |
| KDDI Corp. | | | 2.9% | |
| Novartis AG | | | 2.5% | |
| Henkel KGaA, IPS | | | 2.3% | |
| GlaxoSmithKline PLC | | | 2.3% | |
| Brambles Ltd. | | | 2.2% | |
| |
| Equity sectors | | | | |
| Consumer Staples | | | 26.1% | |
| Financial Services | | | 19.6% | |
| Health Care | | | 10.7% | |
| Technology | | | 9.5% | |
| Special Products & Services | | | 9.2% | |
| Basic Materials | | | 6.3% | |
| Utilities & Communications | | | 4.6% | |
| Industrial Goods & Services | | | 4.4% | |
| Autos & Housing | | | 2.0% | |
| Transportation | | | 1.7% | |
| Leisure | | | 1.7% | |
| Energy | | | 1.5% | |
| Retailing | | | 0.6% | |
| | | | |
| Issuer country weightings (i)(x) | | | | |
| Japan | | | 22.5% | |
| United Kingdom | | | 20.8% | |
| Switzerland | | | 13.2% | |
| Germany | | | 11.8% | |
| France | | | 7.9% | |
| United States | | | 7.7% | |
| Netherlands | | | 3.0% | |
| Australia | | | 2.9% | |
| Sweden | | | 2.0% | |
| Other Countries | | | 8.2% | |
| |
| Currency exposure weightings (i)(y) | | | | |
| Euro | | | 25.3% | |
| British Pound Sterling | | | 20.8% | |
| Japanese Yen | | | 20.4% | |
| Swiss Franc | | | 13.2% | |
| United States Dollar | | | 9.2% | |
| Australian Dollar | | | 2.9% | |
| Swedish Krona | | | 2.0% | |
| Canadian Dollar | | | 1.7% | |
| Taiwan Dollar | | | 1.6% | |
| Other Currencies | | | 2.9% | |
| (i) | For purposes of this presentation, the components include the value of securities, less any securities sold short, and reflect the impact of the equivalent exposure of derivative positions. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS International Value Portfolio (“fund”) provided a total return of 1.34%, while Service Class shares of the fund provided a total return of 1.13%. These compare with a return of –4.92% over the same period for the fund’s benchmark, the MSCI EAFE Value Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Contributors to Performance
Strong stock selection in the basic materials sector contributed to performance relative to the MSCI EAFE Value Index. The fund’s holdings of life science and technology material company Sigma-Aldrich (b) (United States) and fragrance and flavor products manufacturers, Givaudan (b) (Switzerland) and Symrise (b) (Germany), bolstered relative performance. Shares of Givaudan rose as the company posted earnings results that beat consensus forecasts based on solid organic revenue growth and lower raw material input costs associated with lower commodity prices.
The combination of strong stock selection and an overweight position in the consumer staples sector also supported relative returns, led by the fund’s holdings of consumer and chemical products manufacturer Kao (b) (Japan) and household products manufacturer Reckitt Benckiser Group (b) (United Kingdom). Shares of Reckitt Benckiser Group outpaced the benchmark over the reporting period, despite having traded lower in December 2014 after the company completed a spin-off of its specialty pharmaceutical business Indivior.
Positive stock selection in the financial services sector further strengthened relative performance. The fund’s overweight position in real estate company Deutsche Wohnen (Germany), and holdings of financial services holding company Fairfax Financial Holdings (b) (Canada), were notable contributors as both stocks turned in strong performance over the period.
Elsewhere, the fund’s position in semiconductor manufacturer Taiwan Semiconductor Manufacturing (b) (Taiwan) boosted relative results. Shares of Taiwan Semiconductor Manufacturing rose over the reporting period due to strong orders of Apple’s 20nm application processors and healthy inventory levels. Holdings of catering company Compass Group (b) (United Kingdom) and distribution and outsourcing service provider Bunzl (b) (United Kingdom) were also among the fund’s top relative contributors.
Detractors from Performance
An underweight position and, to a lesser extent, weak stock selection in the utilities & communications sector detracted from relative performance. Not owning shares of telecommunication services company Orange (France) and electricity and gas distributor National Grid (United Kingdom) hurt relative returns as both stocks outperformed the benchmark during the reporting period. Shares of Orange rose on higher-than-expected earnings results which were attributable to good progress on indirect cost savings and strong performance in its French mobile business segment.
Weak stock selection in the leisure sector also hurt relative results. Here, the fund’s holdings of television network operator Fuji Television Network (b) (Japan), and an overweight position in international media and education company Pearson (h) (United Kingdom), weighed on relative performance. Shares of Fuji Television Network declined on below-consensus earnings due to weak non-broadcasting sales from movie and DVD titles produced in-house. Additionally, the company lowered its full-year operating profit guidance on lower expected broadcasting revenues, higher program production expenses and a more severe non-broadcasting earnings outlook.
3
MFS International Value Portfolio
Management Review – continued
Elsewhere, not owning shares of strong-performing pharmaceutical company AstraZeneca (United Kingdom), automotive manufacturer Toyota Motor (Japan) and generic drug manufacturer Teva Pharmaceutical Industries (Israel) held back relative returns. Shares of Toyota Motor rose on robust performance during the period due to improved cost controls, favorable exchange rates and better product mix. Additionally, investors appeared to have reacted favorably to Toyota’s announcement of a consolidation of operations aimed at improving efficiencies in development and maximizing the use of common parts. The fund’s holdings of retail company Esprit Holdings (b) (Hong Kong) and oil and gas equipment company Cairn Energy (b) (United Kingdom), and an overweight position in pharmaceutical firm GlaxoSmithKline (United Kingdom), were other notable relative detractors during the reporting period.
Respectfully,
| | | | |
| Pablo De La Mata | | Benjamin Stone | | Barnaby Weiner |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| (b) | Security is not a benchmark constituent. |
| (h) | Security was not held in the portfolio at period end. |
Note to Contract Owners: Effective September 30, 2014, Pablo De La Mata is also a Portfolio Manager of the Fund. Effective December 31, 2014, Barnaby Wiener is no longer a Portfolio Manager of the Fund.
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 10/02/95 | | 1.34% | | 10.11% | | 8.33% | | |
| | | Service Class | | 8/24/01 | | 1.13% | | 9.84% | | 8.06% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI EAFE Value Index (f) | | (4.92)% | | 5.00% | | 4.48% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS International Value Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending
Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.94% | | | | $1,000.00 | | | | $958.60 | | | | $4.64 | |
| | Hypothetical (h) | | | 0.94% | | | | $1,000.00 | | | | $1,020.47 | | | | $4.79 | |
| Service Class | | Actual | | | 1.19% | | | | $1,000.00 | | | | $957.63 | | | | $5.87 | |
| | Hypothetical (h) | | | 1.19% | | | | $1,000.00 | | | | $1,019.21 | | | | $6.06 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS International Value Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 95.6% | | | | | |
| Aerospace – 1.5% | | | | | | | | |
| Cobham PLC | | | 3,582,223 | | | $ | 17,962,715 | |
| | | | | | | | |
| Alcoholic Beverages – 3.3% | | | | | | | | |
| Heineken N.V. | | | 281,123 | | | $ | 19,970,776 | |
| Pernod Ricard S.A. | | | 179,115 | | | | 19,859,726 | |
| | | | | | | | |
| | | | | | $ | 39,830,502 | |
| | | | | | | | |
| Automotive – 0.8% | | | | | | | | |
| USS Co. Ltd. | | | 657,400 | | | $ | 10,116,719 | |
| | | | | | | | |
| Broadcasting – 0.9% | | | | | | | | |
| Fuji Television Network, Inc. | | | 438,600 | | | $ | 5,394,922 | |
| Nippon Television Holdings, Inc. | | | 368,400 | | | | 5,420,679 | |
| | | | | | | | |
| | | | | | $ | 10,815,601 | |
| | | | | | | | |
| Brokerage & Asset Managers – 1.8% | |
| Computershare Ltd. | | | 847,505 | | | $ | 8,105,312 | |
| Daiwa Securities Group, Inc. | | | 784,000 | | | | 6,105,489 | |
| IG Group Holdings PLC | | | 694,033 | | | | 7,735,711 | |
| | | | | | | | |
| | | | | | $ | 21,946,512 | |
| | | | | | | | |
| Business Services – 9.2% | | | | | | | | |
| Accenture PLC, “A” | | | 73,740 | | | $ | 6,585,719 | |
| Amadeus IT Holding S.A. | | | 411,035 | | | | 16,333,386 | |
| Brenntag AG | | | 195,409 | | | | 10,997,508 | |
| Bunzl PLC | | | 887,462 | | | | 24,192,091 | |
| Compass Group PLC | | | 2,078,083 | | | | 35,419,535 | |
| Nomura Research, Inc. | | | 562,200 | | | | 17,262,878 | |
| | | | | | | | |
| | | | | | $ | 110,791,117 | |
| | | | | | | | |
| Chemicals – 1.6% | | | | | | | | |
| Givaudan S.A. | | | 10,701 | | | $ | 19,133,995 | |
| | | | | | | | |
| Computer Software – 1.3% | | | | | | | | |
| Dassault Systems S.A. | | | 118,662 | | | $ | 7,221,581 | |
| OBIC Co. Ltd. | | | 280,000 | | | | 8,983,782 | |
| | | | | | | | |
| | | | | | $ | 16,205,363 | |
| | | | | | | | |
| Construction – 1.2% | | | | | | | | |
| Geberit AG | | | 42,193 | | | $ | 14,338,587 | |
| | | | | | | | |
| Consumer Products – 9.1% | | | | | | | | |
| Colgate-Palmolive Co. | | | 324,249 | | | $ | 22,434,788 | |
| Kao Corp. | | | 901,400 | | | | 35,559,852 | |
| Kobayashi Pharmaceutical Co. Ltd. | | | 144,100 | | | | 8,408,406 | |
| KOSE Corp. | | | 164,000 | | | | 6,414,979 | |
| Reckitt Benckiser Group PLC | | | 450,401 | | | | 36,334,478 | |
| | | | | | | | |
| | | | | | $ | 109,152,503 | |
| | | | | | | | |
| Containers – 2.2% | | | | | | | | |
| Brambles Ltd. | | | 3,077,734 | | | $ | 26,505,049 | |
| | | | | | | | |
| Electrical Equipment – 1.5% | | | | | | | | |
| Legrand S.A. | | | 230,256 | | | $ | 12,053,643 | |
| Spectris PLC | | | 196,491 | | | | 6,406,659 | |
| | | | | | | | |
| | | | | | $ | 18,460,302 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Electronics – 6.1% | | | | | | | | |
| Analog Devices, Inc. | | | 278,463 | | | $ | 15,460,266 | |
| ASM International N.V. | | | 90,600 | | | | 3,814,797 | |
| Halma PLC | | | 976,390 | | | | 10,408,992 | |
| Hirose Electric Co. Ltd. | | | 87,500 | | | | 10,186,422 | |
| Infineon Technologies AG | | | 739,010 | | | | 7,922,960 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 834,380 | | | | 18,673,424 | |
| Texas Instruments, Inc. | | | 129,996 | | | | 6,950,236 | |
| | | | | | | | |
| | | | | | $ | 73,417,097 | |
| | | | | | | | |
| Energy – Independent – 0.7% | | | | | | | | |
| Cairn Energy PLC (a) | | | 1,149,722 | | | $ | 3,156,045 | |
| INPEX Corp. | | | 470,000 | | | | 5,214,811 | |
| | | | | | | | |
| | | | | | $ | 8,370,856 | |
| | | | | | | | |
| Energy – Integrated – 0.8% | | | | | | | | |
| Royal Dutch Shell PLC, “A” | | | 276,561 | | | $ | 9,167,028 | |
| | | | | | | | |
| Food & Beverages – 8.1% | | | | | | | | |
| Danone S.A. | | | 665,559 | | | $ | 43,784,791 | |
| ITO EN Ltd. | | | 122,600 | | | | 2,208,841 | |
| Nestle S.A. | | | 609,366 | | | | 44,667,467 | |
| Toyo Suisan Kaisha Ltd. | | | 192,000 | | | | 6,199,524 | |
| | | | | | | | |
| | | | | | $ | 96,860,623 | |
| | | | | | | | |
| Insurance – 7.1% | | | | | | | | |
| Amlin PLC | | | 525,237 | | | $ | 3,885,415 | |
| Catlin Group Ltd. | | | 535,565 | | | | 5,569,099 | |
| Euler Hermes Group | | | 37,347 | | | | 3,864,791 | |
| Fairfax Financial Holdings Ltd. | | | 38,304 | | | | 20,071,191 | |
| Hiscox Ltd. | | | 629,818 | | | | 7,072,680 | |
| ING Groep N.V. (a) | | | 947,364 | | | | 12,266,102 | |
| Jardine Lloyd Thompson Group PLC | | | 371,195 | | | | 5,149,244 | |
| Sony Financial Holdings, Inc. | | | 540,200 | | | | 7,965,788 | |
| Zurich Insurance Group AG | | | 63,039 | | | | 19,740,210 | |
| | | | | | | | |
| | | | | | $ | 85,584,520 | |
| | | | | | | | |
| Leisure & Toys – 0.6% | | | | | | | | |
| Sankyo Co. Ltd. | | | 99,100 | | | $ | 3,415,405 | |
| Yamaha Corp. | | | 241,500 | | | | 3,587,058 | |
| | | | | | | | |
| | | | | | $ | 7,002,463 | |
| | | | | | | | |
| Machinery & Tools – 1.4% | | | | | | | | |
| Glory Ltd. | | | 173,600 | | | $ | 4,639,493 | |
| Neopost S.A. | | | 141,736 | | | | 8,044,597 | |
| Schindler Holding AG | | | 25,130 | | | | 3,626,080 | |
| | | | | | | | |
| | | | | | $ | 16,310,170 | |
| | | | | | | | |
| Major Banks – 2.5% | | | | | | | | |
| Bank of Ireland (a) | | | 13,506,439 | | | $ | 5,115,506 | |
| HSBC Holdings PLC | | | 1,590,854 | | | | 15,034,338 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 279,700 | | | | 10,106,261 | |
| | | | | | | | |
| | | | | | $ | 30,256,105 | |
| | | | | | | | |
7
MFS International Value Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Medical Equipment – 1.1% | | | | | | | | |
| Nihon Kohden Corp. | | | 135,500 | | | $ | 6,669,218 | |
| Terumo Corp. | | | 265,900 | | | | 6,055,790 | |
| | | | | | | | |
| | | | | | $ | 12,725,008 | |
| | | | | | | | |
| Network & Telecom – 2.0% | | | | | | | | |
| Ericsson, Inc., “B” | | | 2,023,801 | | | $ | 24,494,183 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 3.6% | |
| Chiba Bank Ltd. | | | 591,000 | | | $ | 3,878,903 | |
| DnB NOR A.S.A. | | | 896,622 | | | | 13,220,126 | |
| Hachijuni Bank Ltd. | | | 580,000 | | | | 3,733,407 | |
| Joyo Bank Ltd. | | | 835,000 | | | | 4,143,610 | |
| Julius Baer Group Ltd. | | | 117,957 | | | | 5,382,973 | |
| Jyske Bank A.S. (a) | | | 57,955 | | | | 2,921,401 | |
| North Pacific Bank Ltd. | | | 869,300 | | | | 3,364,183 | |
| Sydbank A.S. (a) | | | 110,382 | | | | 3,386,077 | |
| UniCredit S.p.A. | | | 573,360 | | | | 3,654,315 | |
| | | | | | | | |
| | | | | | $ | 43,684,995 | |
| | | | | | | | |
| Pharmaceuticals – 9.7% | |
| Bayer AG | | | 188,163 | | | $ | 25,728,594 | |
| GlaxoSmithKline PLC | | | 1,286,181 | | | | 27,517,908 | |
| Indivior PLC (a) | | | 417,432 | | | | 972,011 | |
| Novartis AG | | | 332,511 | | | | 30,580,200 | |
| Roche Holding AG | | | 80,113 | | | | 21,713,865 | |
| Santen Pharmaceutical Co. Ltd. | | | 184,200 | | | | 9,857,627 | |
| | | | | | | | |
| | | | | | $ | 116,370,205 | |
| | | | | | | | |
| Printing & Publishing – 0.2% | |
| United Business Media Ltd. | | | 301,371 | | | $ | 2,249,296 | |
| | | | | | | | |
| Real Estate – 4.5% | |
| Deutsche Annington Immobilien SE | | | 335,608 | | | $ | 11,417,572 | |
| Deutsche Wohnen AG | | | 785,956 | | | | 18,674,500 | |
| GAGFAH S.A. (a) | | | 473,820 | | | | 10,606,901 | |
| LEG Immobilien AG | | | 110,424 | | | | 8,283,016 | |
| TAG Immobilien AG | | | 473,920 | | | | 5,516,752 | |
| | | | | | | | |
| | | | | | $ | 54,498,741 | |
| | | | | | | | |
| Specialty Chemicals – 2.5% | |
| Sigma-Aldrich Corp. | | | 114,707 | | | $ | 15,745,830 | |
| Symrise AG | | | 237,954 | | | | 14,434,246 | |
| | | | | | | | |
| | | | | | $ | 30,180,076 | |
| | | | | | | | |
| Specialty Stores – 0.6% | |
| Esprit Holdings Ltd. | | | 5,814,958 | | | $ | 6,958,768 | |
| | | | | | | | |
| Telecommunications – Wireless – 3.9% | |
| KDDI Corp. | | | 561,900 | | | $ | 35,158,210 | |
| Vodafone Group PLC | | | 3,452,083 | | | | 11,828,434 | |
| | | | | | | | |
| | | | | | $ | 46,986,644 | |
| | | | | | | | |
| Telephone Services – 0.7% | |
| TDC A.S. | | | 1,084,906 | | | $ | 8,267,687 | |
| | | | | | | | |
| Tobacco – 3.3% | |
| British American Tobacco PLC | | | 379,728 | | | $ | 20,632,092 | |
| Japan Tobacco, Inc. | | | 713,400 | | | | 19,588,597 | |
| | | | | | | | |
| | | | | | $ | 40,220,689 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Trucking – 1.8% | |
| Yamato Holdings Co. Ltd. | | | 1,070,800 | | | $ | 21,084,496 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $953,198,476) | | | | | | $ | 1,149,948,615 | |
| | | | | | | | |
|
| PREFERRED STOCKS – 2.3% | |
| Henkel KGaA (Identified Cost, $18,369,961) | | | 254,332 | | | $ | 27,519,406 | |
| | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Par Amount
of Contracts | | | | |
|
| PUT OPTIONS PURCHASED – 0.1% | |
| JPY Currency – July 2015 @ $116.5 (Premium Paid, $282,654) | | JPY | 3,439,078,196 | | | $ | 1,344,680 | |
| | | | | | | | |
|
| CALL OPTIONS PURCHASED – 0.0% | |
| EUR Currency – September 2015 @ JPY 152.25 (Premium Paid, $256,307) | | EUR | 21,036,926 | | | $ | 418,656 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | | |
| MONEY MARKET FUNDS – 2.1% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 25,223,593 | | | $ | 25,223,593 | |
| | | | | | | | |
Total Investments
(Identified Cost, $997,330,991) | | | | | | $ | 1,204,454,950 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (1,355,140 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 1,203,099,810 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary Receipt |
| PLC | | Public Limited Company |
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
See Notes to Financial Statements
8
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $972,107,398) | | | $1,179,231,357 | | | | | |
Underlying affiliated funds, at cost and value | | | 25,223,593 | | | | | |
Total investments, at value (identified cost, $997,330,991) | | | $1,204,454,950 | | | | | |
Foreign currency, at value (identified cost, $1,438) | | | 1,439 | | | | | |
Receivables for | | | | | | | | |
Investments sold | | | 469,998 | | | | | |
Fund shares sold | | | 641,694 | | | | | |
Interest and dividends | | | 2,318,974 | | | | | |
Other assets | | | 10,583 | | | | | |
Total assets | | | | | | | $1,207,897,638 | |
Liabilities | | | | | | | | |
Payable for fund shares reacquired | | | $4,590,116 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 52,212 | | | | | |
Shareholder servicing costs | | | 273 | | | | | |
Distribution and/or service fees | | | 13,653 | | | | | |
Accrued expenses and other liabilities | | | 141,574 | | | | | |
Total liabilities | | | | | | | $4,797,828 | |
Net assets | | | | | | | $1,203,099,810 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $966,919,125 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 207,007,834 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 4,747,312 | | | | | |
Undistributed net investment income | | | 24,425,539 | | | | | |
Net assets | | | | | | | $1,203,099,810 | |
Shares of beneficial interest outstanding | | | | | | | 55,983,663 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value per share | |
Initial Class | | | $218,258,117 | | | | 10,042,806 | | | | $21.73 | |
Service Class | | | 984,841,693 | | | | 45,940,857 | | | | 21.44 | |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $42,635,481 | | | | | |
Interest | | | 315,984 | | | | | |
Dividends from underlying affiliated funds | | | 37,979 | | | | | |
Foreign taxes withheld | | | (2,433,494 | ) | | | | |
Total investment income | | | | | | | $40,555,950 | |
Expenses | | | | | | | | |
Management fee | | | $10,386,433 | | | | | |
Distribution and/or service fees | | | 2,374,830 | | | | | |
Shareholder servicing costs | | | 56,018 | | | | | |
Administrative services fee | | | 168,419 | | | | | |
Independent Trustees’ compensation | | | 24,426 | | | | | |
Custodian fee | | | 280,429 | | | | | |
Shareholder communications | | | 77,219 | | | | | |
Audit and tax fees | | | 62,123 | | | | | |
Legal fees | | | 10,392 | | | | | |
Miscellaneous | | | 30,773 | | | | | |
Total expenses | | | | | | | $13,471,062 | |
Fees paid indirectly | | | (12 | ) | | | | |
Reduction of expenses by investment adviser | | | (56,548 | ) | | | | |
Net expenses | | | | | | | $13,414,502 | |
Net investment income | | | | | | | $27,141,448 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $8,620,328 | | | | | |
Foreign currency | | | (183,204 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $8,437,124 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(25,248,781 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (154,991 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(25,403,772 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(16,966,648 | ) |
Change in net assets from operations | | | | | | | $10,174,800 | |
See Notes to Financial Statements
10
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $27,141,448 | | | | $15,956,053 | |
Net realized gain (loss) on investments and foreign currency | | | 8,437,124 | | | | 21,744,568 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (25,403,772 | ) | | | 178,837,451 | |
Change in net assets from operations | | | $10,174,800 | | | | $216,538,072 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(21,861,189 | ) | | | $(13,075,520 | ) |
Change in net assets from fund share transactions | | | $114,480,515 | | | | $173,034,754 | |
Total change in net assets | | | $102,794,126 | | | | $376,497,306 | |
| Net assets | | | | | | | | |
At beginning of period | | | 1,100,305,684 | | | | 723,808,378 | |
At end of period (including undistributed net investment income of $24,425,539 and
$21,813,058, respectively) | | | $1,203,099,810 | | | | $1,100,305,684 | |
See Notes to Financial Statements
11
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.86 | | | | $17.34 | | | | $15.16 | | | | $15.59 | | | | $14.51 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.57 | | | | $0.40 | | | | $0.38 | | | | $0.36 | | | | $0.26 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.27 | ) | | | 4.42 | | | | 2.05 | | | | (0.59 | ) | | | 1.05 | |
Total from investment operations | | | $0.30 | | | | $4.82 | | | | $2.43 | | | | $(0.23 | ) | | | $1.31 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.43 | ) | | | $(0.30 | ) | | | $(0.25 | ) | | | $(0.20 | ) | | | $(0.23 | ) |
Net asset value, end of period (x) | | | $21.73 | | | | $21.86 | | | | $17.34 | | | | $15.16 | | | | $15.59 | |
Total return (%) (k)(r)(s)(x) | | | 1.34 | | | | 27.98 | | | | 16.16 | | | | (1.52 | ) | | | 9.11 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.95 | | | | 0.96 | | | | 0.98 | | | | 1.01 | | | | 1.06 | |
Expenses after expense reductions (f) | | | 0.94 | | | | 0.96 | | | | 0.98 | | | | N/A | | | | N/A | |
Net investment income | | | 2.58 | | | | 2.00 | | | | 2.33 | | | | 2.28 | | | | 1.79 | |
Portfolio turnover | | | 22 | | | | 11 | | | | 16 | | | | 16 | | | | 28 | |
Net assets at end of period (000 omitted) | | | $218,258 | | | | $223,444 | | | | $182,382 | | | | $60,532 | | | | $68,356 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $21.58 | | | | $17.14 | | | | $14.99 | | | | $15.43 | | | | $14.38 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.49 | | | | $0.33 | | | | $0.38 | | | | $0.31 | | | | $0.20 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.24 | ) | | | 4.38 | | | | 2.00 | | | | (0.58 | ) | | | 1.05 | |
Total from investment operations | | | $0.25 | | | | $4.71 | | | | $2.38 | | | | $(0.27 | ) | | | $1.25 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.39 | ) | | | $(0.27 | ) | | | $(0.23 | ) | | | $(0.17 | ) | | | $(0.20 | ) |
Net asset value, end of period (x) | | | $21.44 | | | | $21.58 | | | | $17.14 | | | | $14.99 | | | | $15.43 | |
Total return (%) (k)(r)(s)(x) | | | 1.13 | | | | 27.63 | | | | 15.93 | | | | (1.78 | ) | | | 8.78 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.20 | | | | 1.21 | | | | 1.23 | | | | 1.26 | | | | 1.31 | |
Expenses after expense reductions (f) | | | 1.19 | | | | 1.21 | | | | 1.23 | | | | N/A | | | | N/A | |
Net investment income | | | 2.25 | | | | 1.68 | | | | 2.35 | | | | 1.98 | | | | 1.43 | |
Portfolio turnover | | | 22 | | | | 11 | | | | 16 | | | | 16 | | | | 28 | |
Net assets at end of period (000 omitted) | | | $984,842 | | | | $876,862 | | | | $541,427 | | | | $381,569 | | | | $325,202 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
12
MFS International Value Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS International Value Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 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
13
MFS International Value Portfolio
Notes to Financial Statements – continued
traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
Japan | | | $— | | | | $270,725,349 | | | | $— | | | | $270,725,349 | |
United Kingdom | | | 8,044,691 | | | | 242,649,080 | | | | — | | | | 250,693,771 | |
Switzerland | | | — | | | | 159,183,377 | | | | — | | | | 159,183,377 | |
Germany | | | 114,503,996 | | | | 26,597,460 | | | | — | | | | 141,101,456 | |
France | | | — | | | | 94,829,130 | | | | — | | | | 94,829,130 | |
United States | | | 67,176,840 | | | | — | | | | — | | | | 67,176,840 | |
Netherlands | | | — | | | | 36,051,675 | | | | — | | | | 36,051,675 | |
Australia | | | — | | | | 34,610,361 | | | | — | | | | 34,610,361 | |
Sweden | | | 24,494,183 | | | | — | | | | — | | | | 24,494,183 | |
Other Countries | | | 50,818,888 | | | | 47,782,991 | | | | — | | | | 98,601,879 | |
| Purchased Currency Options | | | — | | | | 1,763,336 | | | | — | | | | 1,763,336 | |
| Mutual Funds | | | 25,223,593 | | | | — | | | | — | | | | 25,223,593 | |
| Total Investments | | | $290,262,191 | | | | $914,192,759 | | | | $— | | | | $1,204,454,950 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $832,322,116 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value.
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
14
MFS International Value Portfolio
Notes to Financial Statements – continued
The derivative instruments used by the fund were purchased options. The fund’s period end derivatives, as presented in the Portfolio of Investments, 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | |
| Foreign Exchange | | Purchased Currency Options | | | $1,763,336 | |
| (a) | The value of purchased options outstanding is included in total investments, at value, 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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Foreign Exchange | | | $(1,022,972 | ) |
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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Foreign Exchange | | | $(615,224 | ) |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
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 call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. For over-the-counter options, this
15
MFS International Value Portfolio
Notes to Financial Statements – continued
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 – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in 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, 2014, there were no securities on loan or collateral outstanding.
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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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 and wash sale loss deferrals.
16
MFS International Value Portfolio
Notes to Financial Statements – continued
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $21,861,189 | | | | $13,075,520 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $1,006,330,756 | |
| Gross appreciation | | | 223,939,221 | |
| Gross depreciation | | | (25,815,027 | ) |
| Net unrealized appreciation (depreciation) | | | $198,124,194 | |
| Undistributed ordinary income | | | 25,039,666 | |
| Undistributed long-term capital gain | | | 13,188,063 | |
| Other temporary differences | | | (171,238 | ) |
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $4,343,693 | | | | $3,069,631 | |
| Service Class | | | 17,517,496 | | | | 10,005,889 | |
| Total | | | $21,861,189 | | | | $13,075,520 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $54,530, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.88% 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, 2014, the fee was $54,953, which equated to 0.0047% 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, 2014, these costs amounted to $1,065.
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.
17
MFS International Value Portfolio
Notes to Financial Statements – continued
The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0144% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $5,244 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $2,018, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions and short-term obligations, aggregated $378,327,770 and $246,822,662, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 1,261,658 | | | | $27,635,403 | | | | 1,633,979 | | | | $32,222,129 | |
Service Class | | | 14,401,961 | | | | 313,063,075 | | | | 13,094,627 | | | | 257,293,254 | |
| | | 15,663,619 | | | | $340,698,478 | | | | 14,728,606 | | | | $289,515,383 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 193,443 | | | | $4,315,705 | | | | 153,175 | | | | $3,069,631 | |
Service Class | | | 795,527 | | | | 17,517,496 | | | | 505,093 | | | | 10,005,889 | |
| | | 988,970 | | | | $21,833,201 | | | | 658,268 | | | | $13,075,520 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,635,061 | ) | | | $(36,108,710 | ) | | | (2,079,399 | ) | | | $(40,729,245 | ) |
Service Class | | | (9,887,509 | ) | | | (211,942,454 | ) | | | (4,549,729 | ) | | | (88,826,904 | ) |
| | | (11,522,570 | ) | | | $(248,051,164 | ) | | | (6,629,128 | ) | | | $(129,556,149 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (179,960 | ) | | | $(4,157,602 | ) | | | (292,245 | ) | | | $(5,437,485 | ) |
Service Class | | | 5,309,979 | | | | 118,638,117 | | | | 9,049,991 | | | | 178,472,239 | |
| | | 5,130,019 | | | | $114,480,515 | | | | 8,757,746 | | | | $173,034,754 | |
18
MFS International Value Portfolio
Notes to Financial Statements – continued
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 5%, 2%, and 1%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $4,272 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 40,151,730 | | | | 230,628,960 | | | | (245,557,097 | ) | | | 25,223,593 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $37,979 | | | | $25,223,593 | |
19
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS International Value Portfolio as of December 31, 2014, 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 13, 2015
20
MFS International Value Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
21
MFS International Value Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
22
MFS International Value Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers Pablo De La Mata Benjamin Stone Barnaby Weiner | | |
23
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for each of the one- and five-year periods ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
24
MFS International 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $1 billion and $2 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
25
MFS International Value Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” 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 $32,002,105. The fund intends to pass through foreign tax credits of $1,939,353 for the fiscal year.
26
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
27
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® MASSACHUSETTS INVESTORS GROWTH STOCK PORTFOLIO
MFS® Variable Insurance Trust II
MIS-ANN
MFS® MASSACHUSETTS INVESTORS GROWTH STOCK PORTFOLIO
CONTENTS
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 OR CREDIT UNION 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 CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Massachusetts Investors Growth Stock Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Google, Inc., “A” | | | 4.2% | |
| Accenture PLC, “A” | | | 4.1% | |
| Visa, Inc., “A” | | | 4.0% | |
| Colgate-Palmolive Co. | | | 3.5% | |
| Danaher Corp. | | | 3.3% | |
| United Technologies Corp. | | | 3.1% | |
| Oracle Corp. | | | 2.9% | |
| CVS Health Corp. | | | 2.8% | |
| Schlumberger Ltd. | | | 2.8% | |
| EMC Corp. | | | 2.5% | |
| | | | |
| Equity sectors | | | | |
| Industrial Goods & Services | | | 14.2% | |
| Health Care | | | 14.0% | |
| Technology | | | 13.6% | |
| Consumer Staples | | | 12.3% | |
| Retailing | | | 9.8% | |
| Financial Services | | | 9.2% | |
| Leisure | | | 9.2% | |
| Special Products & Services | | | 7.6% | |
| Energy | | | 3.2% | |
| Basic Materials | | | 3.2% | |
| Autos & Housing | | | 2.1% | |
| Transportation | | | 0.6% | |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Massachusetts Investors Growth Stock Portfolio (“fund”) provided a total return of 11.51%, while Service Class shares of the fund provided a total return of 11.23%. These compare with a return of 13.05% over the same period for the fund’s benchmark, the Russell 1000 Growth Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Stock selection in the technology sector detracted from the fund’s performance relative to the Russell 1000 Growth Index. An underweight position in computer and personal electronics maker Apple and not holding software giant Microsoft and social networking service provider Facebook dampened relative results as all three stocks outpaced the benchmark during the reporting period. An overweight position in poor-performing internet giant Google further weighed on relative returns. Shares of Google fell as the company missed analysts’ estimates for both revenue and income for four consecutive quarters. The company continued to face headwinds from a maturing internet search market, challenges with monetizing mobile search and regulatory anti-trust rulings in the European Union.
Stock selection and an underweight position in the transportation sector also had a negative impact on relative performance. Not holding railroad and freight transportation services provider Union Pacific hindered relative results. Shares of Union Pacific benefited from positive earnings primarily due to increased volume, a beneficial pricing environment and share repurchases.
Stock selection within the health care sector also hurt relative returns. However, there were no individual stocks within this sector that were among the fund’s top relative detractors during the reporting period.
Other individual stocks that held back relative performance included an overweight position in global media company Discovery Communications, investment management firm Franklin Resources and oil field services company Schlumberger. Holdings of French international food producer Danone (b) and French luxury goods company LVMH Moet Hennessy Louis Vuitton (b) also dampened relative performance as both stocks outperformed the benchmark during the reporting period. Shares of Danone fell due to weak sales in the Eurozone and the United States, two of the company’s key dairy markets, and poor results in its Baby Food segment. Additionally, investors appeared to have been concerned about the negative impact on sales that resulted from the Fonterra product recall in mainland China.
During the reporting period, the fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposures to holdings of securities denominated in foreign currencies, 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 portfolios to have different currency exposure than the benchmark.
Contributors to Performance
The combination of an underweight position and stock selection in the energy sector benefited relative returns. There were no individual stocks within this sector that were among the fund’s top relative contributors during the reporting period.
Strong stock selection within the industrial goods & services sector further supported relative performance, led by the fund’s holdings of sensors and controls manufacturer Sensata Technologies Holding (b). Shares of Sensata Technologies Holding appreciated after the company reported results showing positive earnings trends, particularly in the European auto segment.
3
MFS Massachusetts Investors Growth Stock Portfolio
Management Review – continued
Elsewhere, not holding shares of internet retailer Amazon.com and telecommunications company Verizon Communications strengthened relative performance. Overweight positions in drugstore retailer CVS Health, animal health products manufacturer Zoetis, paint and coating company Sherwin-Williams and data storage systems provider EMC also aided relative results. Shares of EMC benefited from revenues that came in ahead of consensus and the company’s announcement of an acceleration in its buyback program for the rest of 2014. Holdings of media firm Time Warner (b) and semiconductor manufacturer Taiwan Semiconductor Manufacturing (b) (Taiwan), and an underweight position in poor-performing diversified technology products and services company International Business Machines (IBM) (h) further supported relative returns.
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 11.51% | | 14.22% | | 7.93% | | |
| | | Service Class | | 8/24/01 | | 11.23% | | 13.93% | | 7.66% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | Russell 1000 Growth Index (f) | | 13.05% | | 15.81% | | 8.49% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
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, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.80% | | | | $1,000.00 | | | | $1,064.68 | | | | $4.16 | |
| | Hypothetical (h) | | | 0.80% | | | | $1,000.00 | | | | $1,021.17 | | | | $4.08 | |
| Service Class | | Actual | | | 1.05% | | | | $1,000.00 | | | | $1,063.41 | | | | $5.46 | |
| | Hypothetical (h) | | | 1.05% | | | | $1,000.00 | | | | $1,019.91 | | | | $5.35 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Massachusetts Investors Growth Stock Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 99.0% | | | | | |
| Aerospace – 4.0% | | | | | | | | |
| Precision Castparts Corp. | | | 22,690 | | | $ | 5,465,566 | |
| United Technologies Corp. | | | 161,370 | | | | 18,557,550 | |
| | | | | | | | |
| | | $ | 24,023,116 | |
| | | | | | | | |
| Alcoholic Beverages – 2.1% | | | | | |
| AmBev S.A., ADR | | | 652,289 | | | $ | 4,057,238 | |
| Pernod Ricard S.A. | | | 77,109 | | | | 8,549,611 | |
| | | | | | | | |
| | | $ | 12,606,849 | |
| | | | | | | | |
| Apparel Manufacturers – 5.2% | | | | | |
| Burberry Group PLC | | | 162,408 | | | $ | 4,115,197 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 76,861 | | | | 12,154,343 | |
| NIKE, Inc., “B” | | | 73,812 | | | | 7,097,024 | |
| VF Corp. | | | 98,187 | | | | 7,354,206 | |
| | | | | | | | |
| | | $ | 30,720,770 | |
| | | | | | | | |
| Automotive – 0.9% | | | | | |
| Johnson Controls, Inc. | | | 108,455 | | | $ | 5,242,715 | |
| | | | | | | | |
| Broadcasting – 8.4% | | | | | |
| Discovery Communications, Inc., “A” (a) | | | 210,971 | | | $ | 7,267,951 | |
| Omnicom Group, Inc. | | | 29,578 | | | | 2,291,408 | |
| Time Warner, Inc. | | | 160,005 | | | | 13,667,627 | |
| Twenty-First Century Fox, Inc. | | | 366,041 | | | | 14,057,805 | |
| Viacom, Inc., “B” | | | 31,376 | | | | 2,361,044 | |
| Walt Disney Co. | | | 106,854 | | | | 10,064,578 | |
| | | | | | | | |
| | | $ | 49,710,413 | |
| | | | | | | | |
| Brokerage & Asset Managers – 4.0% | | | | | |
| Charles Schwab Corp. | | | 97,392 | | | $ | 2,940,264 | |
| CME Group, Inc. | | | 95,180 | | | | 8,437,707 | |
| Franklin Resources, Inc. | | | 219,243 | | | | 12,139,485 | |
| | | | | | | | |
| | | $ | 23,517,456 | |
| | | | | | | | |
| Business Services – 7.6% | | | | | |
| Accenture PLC, “A” | | | 272,843 | | | $ | 24,367,608 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 135,237 | | | | 7,121,580 | |
| Equifax, Inc. | | | 96,093 | | | | 7,771,041 | |
| Fidelity National Information Services, Inc. | | | 97,069 | | | | 6,037,692 | |
| | | | | | | | |
| | | $ | 45,297,921 | |
| | | | | | | | |
| Chemicals – 1.6% | | | | | |
| Monsanto Co. | | | 79,744 | | | $ | 9,527,016 | |
| | | | | | | | |
| Computer Software – 2.9% | | | | | |
| Oracle Corp. | | | 388,050 | | | $ | 17,450,609 | |
| | | | | | | | |
| Computer Software – Systems – 3.3% | | | | | |
| Apple, Inc. | | | 47,906 | | | $ | 5,287,864 | |
| EMC Corp. | | | 489,936 | | | | 14,570,697 | |
| | | | | | | | |
| | | $ | 19,858,561 | |
| | | | | | | | |
| Construction – 1.2% | | | | | |
| Sherwin-Williams Co. | | | 27,773 | | | $ | 7,305,410 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Products – 6.4% | | | | | |
| Church & Dwight Co., Inc. | | | 49,895 | | | $ | 3,932,225 | |
| Colgate-Palmolive Co. | | | 300,579 | | | | 20,797,061 | |
| L’Oreal S.A. | | | 28,024 | | | | 4,704,868 | |
| Procter & Gamble Co. | | | 94,007 | | | | 8,563,098 | |
| | | | | | | | |
| | | $ | 37,997,252 | |
| | | | | | | | |
| Electrical Equipment – 9.2% | | | | | |
| Amphenol Corp., “A” | | | 86,763 | | | $ | 4,668,717 | |
| Danaher Corp. | | | 230,483 | | | | 19,754,698 | |
| Mettler-Toledo International, Inc. (a) | | | 35,608 | | | | 10,769,996 | |
| Sensata Technologies Holding B.V. (a) | | | 150,414 | | | | 7,883,198 | |
| W.W. Grainger, Inc. | | | 45,143 | | | | 11,506,499 | |
| | | | | | | | |
| | | $ | 54,583,108 | |
| | | | | | | | |
| Electronics – 2.4% | | | | | |
| Microchip Technology, Inc. | | | 152,299 | | | $ | 6,870,208 | |
| Taiwan Semiconductor Manufacturing Co. Ltd., ADR | | | 326,762 | | | | 7,312,934 | |
| | | | | | | | |
| | | $ | 14,183,142 | |
| | | | | | | | |
| Energy – Independent – 0.4% | | | | | |
| Occidental Petroleum Corp. | | | 30,061 | | | $ | 2,423,217 | |
| | | | | | | | |
| Food & Beverages – 3.8% | | | | | |
| Danone S.A. | | | 146,992 | | | $ | 9,670,088 | |
| Mead Johnson Nutrition Co., “A” | | | 95,201 | | | | 9,571,509 | |
| PepsiCo, Inc. | | | 32,024 | | | | 3,028,189 | |
| | | | | | | | |
| | | $ | 22,269,786 | |
| | | | | | | | |
| Food & Drug Stores – 2.8% | | | | | |
| CVS Health Corp. | | | 174,784 | | | $ | 16,833,447 | |
| | | | | | | | |
| Internet – 4.9% | | | | | |
| eBay, Inc. (a) | | | 75,120 | | | $ | 4,215,734 | |
| Google, Inc., “A” (a) | | | 46,759 | | | | 24,813,131 | |
| | | | | | | | |
| | | $ | 29,028,865 | |
| | | | | | | | |
| Machinery & Tools – 1.0% | | | | | |
| Colfax Corp. (a) | | | 114,430 | | | $ | 5,901,155 | |
| | | | | | | | |
| Medical & Health Technology & Services – 2.8% | | | | | |
| Express Scripts Holding Co. (a) | | | 163,521 | | | $ | 13,845,323 | |
| Patterson Cos., Inc. | | | 59,972 | | | | 2,884,653 | |
| | | | | | | | |
| | | $ | 16,729,976 | |
| | | | | | | | |
| Medical Equipment – 7.9% | | | | | |
| Abbott Laboratories | | | 195,667 | | | $ | 8,808,928 | |
| DENTSPLY International, Inc. | | | 242,330 | | | | 12,908,919 | |
| St. Jude Medical, Inc. | | | 47,398 | | | | 3,082,292 | |
| Thermo Fisher Scientific, Inc. | | | 113,411 | | | | 14,209,264 | |
| Waters Corp. (a) | | | 70,281 | | | | 7,922,074 | |
| | | | | | | | |
| | | $ | 46,931,477 | |
| | | | | | | | |
| Oil Services – 2.8% | | | | | |
| Schlumberger Ltd. | | | 193,756 | | | $ | 16,548,700 | |
| | | | | | | | |
7
MFS Massachusetts Investors Growth Stock Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Other Banks & Diversified Financials – 5.3% | | | | | |
| MasterCard, Inc., “A” | | | 89,138 | | | $ | 7,680,130 | |
| Visa, Inc., “A” | | | 90,455 | | | | 23,717,301 | |
| | | | | | | | |
| | | $ | 31,397,431 | |
| | | | | | | | |
| Pharmaceuticals – 3.3% | | | | | |
| Allergan, Inc. | | | 16,815 | | | $ | 3,574,701 | |
| Johnson & Johnson | | | 39,740 | | | | 4,155,612 | |
| Zoetis, Inc. | | | 268,952 | | | | 11,573,005 | |
| | | | | | | | |
| | | $ | 19,303,318 | |
| | | | | | | | |
| Restaurants – 0.8% | | | | | |
| McDonald’s Corp. | | | 53,327 | | | $ | 4,996,740 | |
| | | | | | | | |
| Specialty Chemicals – 1.6% | | | | | |
| Praxair, Inc. | | | 72,395 | | | $ | 9,379,496 | |
| | | | | | | | |
| Specialty Stores – 1.8% | | | | | |
| AutoZone, Inc. (a) | | | 14,616 | | | $ | 9,048,912 | |
| Hermes International | | | 3,788 | | | | 1,351,266 | |
| | | | | | | | |
| | | $ | 10,400,178 | |
| | | | | | | | |
| Trucking – 0.6% | | | | | |
| Expeditors International of Washington, Inc. | | | 79,229 | | | $ | 3,534,406 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $423,326,707) | | | $ | 587,702,530 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| MONEY MARKET FUNDS – 1.0% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 5,748,391 | | | $ | 5,748,391 | |
| | | | | | | | |
Total Investments
(Identified Cost, $429,075,098) | | | | | | $ | 593,450,921 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.0% | | | | 110,130 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 593,561,051 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary 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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $423,326,707) | | | $587,702,530 | | | | | |
Underlying affiliated funds, at cost and value | | | 5,748,391 | | | | | |
Total investments, at value (identified cost, $429,075,098) | | | $593,450,921 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 17,617 | | | | | |
Interest and dividends | | | 969,918 | | | | | |
Other assets | | | 4,862 | | | | | |
Total assets | | | | | | | $594,443,318 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $170,965 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 93,754 | | | | | |
Fund shares reacquired | | | 517,717 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 21,536 | | | | | |
Shareholder servicing costs | | | 72 | | | | | |
Distribution and/or service fees | | | 704 | | | | | |
Payable for independent Trustees’ compensation | | | 2 | | | | | |
Accrued expenses and other liabilities | | | 77,517 | | | | | |
Total liabilities | | | | | | | $882,267 | |
Net assets | | | | | | | $593,561,051 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $379,038,227 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 164,382,337 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 45,490,120 | | | | | |
Undistributed net investment income | | | 4,650,367 | | | | | |
Net assets | | | | | | | $593,561,051 | |
Shares of beneficial interest outstanding | | | | | | | 33,733,905 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $542,830,173 | | | | 30,831,698 | | | | $17.61 | |
Service Class | | | 50,730,878 | | | | 2,902,207 | | | | 17.48 | |
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $9,801,225 | | | | | |
Interest | | | 48,206 | | | | | |
Dividends from underlying affiliated funds | | | 2,621 | | | | | |
Foreign taxes withheld | | | (368,808 | ) | | | | |
Total investment income | | | | | | | $9,483,244 | |
Expenses | | | | | | | | |
Management fee | | | $4,431,877 | | | | | |
Distribution and/or service fees | | | 126,946 | | | | | |
Shareholder servicing costs | | | 15,265 | | | | | |
Administrative services fee | | | 89,824 | | | | | |
Independent Trustees’ compensation | | | 15,495 | | | | | |
Custodian fee | | | 68,788 | | | | | |
Shareholder communications | | | 30,192 | | | | | |
Audit and tax fees | | | 58,361 | | | | | |
Legal fees | | | 5,080 | | | | | |
Miscellaneous | | | 21,362 | | | | | |
Total expenses | | | | | | | $4,863,190 | |
Fees paid indirectly | | | (1 | ) | | | | |
Reduction of expenses by investment adviser | | | (28,177 | ) | | | | |
Net expenses | | | | | | | $4,835,012 | |
Net investment income | | | | | | | $4,648,232 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $66,419,716 | | | | | |
Foreign currency | | | 4,712 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $66,424,428 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(7,509,508 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (9,224 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(7,518,732 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $58,905,696 | |
Change in net assets from operations | | | | | | | $63,553,928 | |
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $4,648,232 | | | | $3,056,279 | |
Net realized gain (loss) on investments and foreign currency | | | 66,424,428 | | | | 66,910,941 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (7,518,732 | ) | | | 83,829,857 | |
Change in net assets from operations | | | $63,553,928 | | | | $153,797,077 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(3,051,249 | ) | | | $(3,950,113 | ) |
From net realized gain on investments | | | (48,654,855 | ) | | | — | |
Total distributions declared to shareholders | | | $(51,706,104 | ) | | | $(3,950,113 | ) |
Change in net assets from fund share transactions | | | $(36,052,511 | ) | | | $(73,294,055 | ) |
Total change in net assets | | | $(24,204,687 | ) | | | $76,552,909 | |
| Net assets | | | | | | | | |
At beginning of period | | | 617,765,738 | | | | 541,212,829 | |
At end of period (including undistributed net investment income of $4,650,367 and
$3,048,672, respectively) | | | $593,561,051 | | | | $617,765,738 | |
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $17.31 | | | | $13.37 | | | | $11.45 | | | | $11.43 | | | | $10.13 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.14 | | | | $0.08 | | | | $0.09 | | | | $0.06 | | | | $0.06 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | 1.77 | | | | 3.97 | | | | 1.88 | | | | 0.03 | | | | 1.27 | |
Total from investment operations | | | $1.91 | | | | $4.05 | | | | $1.97 | | | | $0.09 | | | | $1.33 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.10 | ) | | | $(0.11 | ) | | | $(0.05 | ) | | | $(0.07 | ) | | | $(0.03 | ) |
From net realized gain on investments | | | (1.51 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.61 | ) | | | $(0.11 | ) | | | $(0.05 | ) | | | $(0.07 | ) | | | $(0.03 | ) |
Net asset value, end of period (x) | | | $17.61 | | | | $17.31 | | | | $13.37 | | | | $11.45 | | | | $11.43 | |
Total return (%) (k)(r)(s)(x) | | | 11.51 | | | | 30.39 | | | | 17.25 | | | | 0.80 | | | | 13.15 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.80 | | | | 0.80 | | | | 0.80 | | | | 0.83 | | | | 0.86 | |
Expenses after expense reductions (f) | | | 0.80 | | | | 0.80 | | | | 0.80 | | | | 0.82 | | | | 0.82 | |
Net investment income | | | 0.81 | | | | 0.55 | | | | 0.74 | | | | 0.47 | | | | 0.55 | |
Portfolio turnover | | | 23 | | | | 26 | | | | 30 | | | | 24 | | | | 45 | |
Net assets at end of period (000 omitted) | | | $542,830 | | | | $561,066 | | | | $490,630 | | | | $485,484 | | | | $429,925 | |
See Notes to Financial Statements
12
MFS Massachusetts Investors Growth Stock Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $17.19 | | | | $13.27 | | | | $11.37 | | | | $11.34 | | | | $10.06 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.10 | | | | $0.05 | | | | $0.06 | | | | $0.03 | | | | $0.03 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | 1.75 | | | | 3.94 | | | | 1.86 | | | | 0.03 | | | | 1.26 | |
Total from investment operations | | | $1.85 | | | | $3.99 | | | | $1.92 | | | | $0.06 | | | | $1.29 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.05 | ) | | | $(0.07 | ) | | | $(0.02 | ) | | | $(0.03 | ) | | | $(0.01 | ) |
From net realized gain on investments | | | (1.51 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(1.56 | ) | | | $(0.07 | ) | | | $(0.02 | ) | | | $(0.03 | ) | | | $(0.01 | ) |
Net asset value, end of period (x) | | | $17.48 | | | | $17.19 | | | | $13.27 | | | | $11.37 | | | | $11.34 | |
Total return (%) (k)(r)(s)(x) | | | 11.23 | | | | 30.13 | | | | 16.85 | | | | 0.57 | | | | 12.83 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.05 | | | | 1.05 | | | | 1.05 | | | | 1.08 | | | | 1.11 | |
Expenses after expense reductions (f) | | | 1.05 | | | | 1.05 | | | | 1.05 | | | | 1.07 | | | | 1.07 | |
Net investment income | | | 0.55 | | | | 0.30 | | | | 0.48 | | | | 0.22 | | | | 0.30 | |
Portfolio turnover | | | 23 | | | | 26 | | | | 30 | | | | 24 | | | | 45 | |
Net assets at end of period (000 omitted) | | | $50,731 | | | | $56,699 | | | | $50,583 | | | | $53,620 | | | | $69,714 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Massachusetts Investors Growth Stock Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Massachusetts Investors Growth Stock Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price
14
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $535,786,985 | | | | $— | | | | $— | | | | $535,786,985 | |
France | | | 1,351,266 | | | | 35,078,910 | | | | — | | | | 36,430,176 | |
Taiwan | | | 7,312,934 | | | | — | | | | — | | | | 7,312,934 | |
United Kingdom | | | — | | | | 4,115,197 | | | | — | | | | 4,115,197 | |
Brazil | | | 4,057,238 | | | | — | | | | — | | | | 4,057,238 | |
| Mutual Funds | | | 5,748,391 | | | | — | | | | — | | | | 5,748,391 | |
| Total Investments | | | $554,256,814 | | | | $39,194,107 | | | | $— | | | | $593,450,921 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $30,374,042 would have been considered level 1 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in 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, 2014, there were no securities on loan or collateral outstanding.
15
MFS Massachusetts Investors Growth Stock 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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $3,051,249 | | | | $3,950,113 | |
| Long-term capital gains | | | 48,654,855 | | | | — | |
| Total distributions | | | $51,706,104 | | | | $3,950,113 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $429,287,826 | |
| Gross appreciation | | | 166,108,370 | |
| Gross depreciation | | | (1,945,275 | ) |
| Net unrealized appreciation (depreciation) | | | $164,163,095 | |
| Undistributed ordinary income | | | 4,650,367 | |
| Undistributed long-term capital gain | | | 54,304,764 | |
| Capital loss carryforwards | | | (8,601,916 | ) |
| Other temporary differences | | | 6,514 | |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses (“post-enactment losses”). Previously, net capital losses were carried forward for eight years and treated as short-term losses (“pre-enactment losses”). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses.
16
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment 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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $2,911,001 | | | | $3,715,623 | | | | $44,499,260 | | | | $— | |
| Service Class | | | 140,248 | | | | 234,490 | | | | 4,155,595 | | | | — | |
| Total | | | $3,051,249 | | | | $3,950,113 | | | | $48,654,855 | | | | $— | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $27,150, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $15,117, which equated to 0.0026% 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, 2014, these costs amounted to $148.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0152% of the fund’s average daily net assets.
17
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $2,741 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $1,027, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, aggregated $137,680,150 and $223,958,801, 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 137,774 | | | | $2,413,075 | | | | 238,166 | | | | $3,647,730 | |
Service Class | | | 102,013 | | | | 1,781,081 | | | | 254,141 | | | | 4,038,206 | |
| | | 239,787 | | | | $4,194,156 | | | | 492,307 | | | | $7,685,936 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 2,835,542 | | | | $47,410,261 | | | | 241,118 | | | | $3,715,623 | |
Service Class | | | 258,474 | | | | 4,295,843 | | | | 15,306 | | | | 234,490 | |
| | | 3,094,016 | | | | $51,706,104 | | | | 256,424 | | | | $3,950,113 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (4,551,831 | ) | | | $(79,010,040 | ) | | | (4,777,215 | ) | | | $(73,125,831 | ) |
Service Class | | | (755,852 | ) | | | (12,942,731 | ) | �� | | (782,451 | ) | | | (11,804,273 | ) |
| | | (5,307,683 | ) | | | $(91,952,771 | ) | | | (5,559,666 | ) | | | $(84,930,104 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (1,578,515 | ) | | | $(29,186,704 | ) | | | (4,297,931 | ) | | | $(65,762,478 | ) |
Service Class | | | (395,365 | ) | | | (6,865,807 | ) | | | (513,004 | ) | | | (7,531,577 | ) |
| | | (1,973,880 | ) | | | $(36,052,511 | ) | | | (4,810,935 | ) | | | $(73,294,055 | ) |
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
18
MFS Massachusetts Investors Growth Stock Portfolio
Notes to Financial Statements – continued
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, 2014, the fund’s commitment fee and interest expense were $2,197 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 139 | | | | 106,672,932 | | | | (100,924,680 | ) | | | 5,748,391 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $2,621 | | | | $5,748,391 | |
19
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Massachusetts Investors Growth Stock Portfolio as of December 31, 2014, 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 13, 2015
20
MFS Massachusetts Investors Growth Stock Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
21
MFS Massachusetts Investors Growth Stock Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
22
MFS Massachusetts Investors Growth Stock Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Jeffrey Constantino | | |
23
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and the 3rd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
24
MFS Massachusetts Investors Growth Stock 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
25
MFS Massachusetts Investors Growth Stock Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $53,521,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 100% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
26
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
27
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® MONEY
MARKET PORTFOLIO
MFS® Variable Insurance Trust II
MKS-ANN
MFS® MONEY MARKET PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Money Market Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Money Market Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (u)
| | | | |
| Composition including fixed income credit quality (a)(u) | |
| A-1+ | | | 21.7% | |
| A-1 | | | 78.9% | |
| Not Rated | | | 0.0% | |
| Other Assets Less Liabilities | | | (0.6)% | |
| | | | |
| Maturity breakdown (u) | | | | |
| 0 - 7 days | | | 15.7% | |
| 8 - 29 days | | | 50.1% | |
| 30 - 59 days | | | 18.1% | |
| 60 - 89 days | | | 8.7% | |
| 90 - 365 days | | | 8.0% | |
| Other Assets Less Liabilities | | | (0.6)% | |
| (a) | Ratings are assigned to portfolio securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P scale. All ratings are subject to change. The fund is not rated by these agencies. |
| (u) | For purposes of this presentation, accrued interest, where applicable, is included. |
From time to time Other Assets Less Liabilities may be negative due to timing of cash receipts.
Percentages are based on net assets as of 12/31/14.
The portfolio is actively managed and current holdings may be different.
2
MFS Money Market Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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.
| | | | | | | | | | |
| | | Share Class | | Inception | | 1-Year Total Return | | Current 7-day yield | | |
| | | Initial Class | | 7/19/85 | | 0.00% | | 0.00% | | |
| | | Service Class | | 8/24/01 | | 0.00% | | 0.00% | | |
Notes to Performance Summary
Yields quoted are based on the latest seven days ended as of December 31, 2014, 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 gain distributions.
3
MFS Money Market Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending
Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.10% | | | | $1,000.00 | | | | $1,000.00 | | | | $0.50 | |
| | Hypothetical (h) | | | 0.10% | | | | $1,000.00 | | | | $1,024.70 | | | | $0.51 | |
| Service Class | | Actual | | | 0.10% | | | | $1,000.00 | | | | $1,000.00 | | | | $0.50 | |
| | Hypothetical (h) | | | 0.10% | | | | $1,000.00 | | | | $1,024.70 | | | | $0.51 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Notes to Expense Table
As more fully disclosed in footnote 3 to the financial statements, the expense ratios reported above include additional expense reductions to avoid a negative yield.
4
MFS Money Market Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| CERTIFICATES OF DEPOSIT – 27.3% | | | | | |
| Major Banks – 18.9% | | | | | |
| Bank of Montreal/Chicago Branch, 0.12%, due 1/02/15 | | $ | 1,210,000 | | | $ | 1,210,000 | |
| Bank of Montreal/Chicago Branch, 0.11%, due 1/05/15 | | | 12,845,000 | | | | 12,845,000 | |
| Bank of Nova Scotia/Houston Branch, 0.17%, due 1/05/15 | | | 10,770,000 | | | | 10,770,000 | |
| Canadian Imperial Bank of Commerce/New York Branch, 0.1%, due 1/20/15 | | | 17,398,000 | | | | 17,398,000 | |
| Chase Bank USA N.A., 0.25%, due 7/30/15 | | | 12,480,000 | | | | 12,480,000 | |
| Royal Bank of Canada/New York Branch, 0.16%, due 3/16/15 | | | 3,500,000 | | | | 3,500,000 | |
| Toronto Dominion Bank/New York Branch, 0.145%, due 1/15/15 | | | 690,000 | | | | 690,000 | |
| Toronto Dominion Bank/New York Branch, 0.105%, due 1/20/15 | | | 16,725,000 | | | | 16,725,000 | |
| Wells Fargo & Co., 0.23%, due 6/03/15 | | | 3,500,000 | | | | 3,500,000 | |
| | | | | | | | |
| | | | | | $ | 79,118,000 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 8.4% | | | | | |
| Branch Banking & Trust Co., 0.11%, due 2/02/15 | | $ | 13,470,000 | | | $ | 13,470,000 | |
| Branch Banking & Trust Co., 0.11%, due 2/04/15 | | | 3,800,000 | | | | 3,800,000 | |
| Mizuho Corporate Bank (USA)/New York Branch, 0.22%, due 1/21/15 | | | 18,000,000 | | | | 18,000,000 | |
| | | | | | | | |
| | | | | | $ | 35,270,000 | |
| | | | | | | | |
| Total Certificates of Deposit, at Cost and Value | | | | | | $ | 114,388,000 | |
| | | | | | | | |
| |
| COMMERCIAL PAPER (y) – 38.0% | | | | | |
| Automotive – 8.1% | | | | | |
| American Honda Finance Corp., 0.08%, due 1/07/15 | | $ | 5,000,000 | | | $ | 4,999,933 | |
| American Honda Finance Corp., 0.11%, due 1/08/15 | | | 11,150,000 | | | | 11,149,761 | |
| American Honda Finance Corp., 0.11%, due 1/12/15 | | | 250,000 | | | | 249,992 | |
| Toyota Motor Credit Corp., 0.11%, due 1/13/15 | | | 17,782,000 | | | | 17,781,348 | |
| | | | | | | | |
| | | | | | $ | 34,181,034 | |
| | | | | | | | |
| Consumer Products – 1.2% | | | | | |
| Procter & Gamble Co., 0.08%, due 1/28/15 (t) | | $ | 4,819,000 | | | $ | 4,818,711 | |
| | | | | | | | |
| Electronics – 1.9% | | | | | |
| Emerson Electric Co., 0.14%, due 1/16/15 (t) | | $ | 4,000,000 | | | $ | 3,999,767 | |
| Emerson Electric Co., 0.1%, due 2/06/15 (t) | | | 4,000,000 | | | | 3,999,600 | |
| | | | | | | | |
| | | | | | $ | 7,999,367 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMERCIAL PAPER (y) – continued | | | | | |
| Financial Institutions – 4.1% | | | | | |
| General Electric Capital Corp., 0.09%, due 1/20/15 | | $ | 11,230,000 | | | $ | 11,229,467 | |
| General Electric Capital Corp., 0.15%, due 3/20/15 | | | 6,024,000 | | | | 6,022,042 | |
| | | | | | | | |
| | | | | | $ | 17,251,509 | |
| | | | | | | | |
| Food & Beverages – 10.2% | | | | | |
| Anheuser-Busch InBev Worldwide, Inc., 0.11%, due 1/22/15 (t) | | $ | 7,224,000 | | | $ | 7,223,536 | |
| Anheuser-Busch InBev Worldwide, Inc., 0.11%, due 1/27/15 (t) | | | 10,730,000 | | | | 10,729,148 | |
| Coca-Cola Co., 0.09%, due 1/26/15 (t) | | | 1,840,000 | | | | 1,839,885 | |
| Coca-Cola Co., 0.18%, due 3/24/15 (t) | | | 15,500,000 | | | | 15,493,645 | |
| Nestle Capital Corp., 0.1%, due 1/20/15 (t) | | | 7,000,000 | | | | 6,999,631 | |
| Pepsico, Inc., 0.1%, due 1/21/15 (t) | | | 500,000 | | | | 499,972 | |
| | | | | | | | |
| | | | | | $ | 42,785,817 | |
| | | | | | | | |
| Major Banks – 8.3% | | | | | |
| ANZ National (International) Ltd., 0.16%, due 3/02/15 (t) | | $ | 10,000,000 | | | $ | 9,997,333 | |
| Royal Bank of Canada, 0.06%, due 1/07/15 | | | 4,400,000 | | | | 4,399,956 | |
| Royal Bank of Canada, 0.06%, due 1/23/15 | | | 6,923,000 | | | | 6,922,746 | |
| Wells Fargo & Co., 0.13%, due 2/02/15 | | | 3,300,000 | | | | 3,299,619 | |
| Wells Fargo & Co., 0.22%, due 2/17/15 | | | 10,000,000 | | | | 9,997,128 | |
| | | | | | | | |
| | | | | | $ | 34,616,782 | |
| | | | | | | | |
| Oils – 0.2% | | | | | |
| Exxon Mobil Corp., 0.07%, due 1/09/15 | | $ | 990,000 | | | $ | 989,985 | |
| | | | | | | | |
| Pharmaceuticals – 4.0% | | | | | |
| Johnson & Johnson, 0.07%, due 1/09/15 (t) | | $ | 16,950,000 | | | $ | 16,949,736 | |
| | | | | | | | |
| Total Commercial Paper, at Amortized Cost and Value | | | | | | $ | 159,592,941 | |
| | | | | | | | |
| |
| U.S. GOVERNMENT AGENCIES AND EQUIVALENTS (y) – 34.0% | | | | | |
| Fannie Mae, 0.085%, due 1/20/15 | | $ | 2,550,000 | | | $ | 2,549,886 | |
| Fannie Mae, 0.085%, due 1/28/15 | | | 6,000,000 | | | | 5,999,617 | |
| Fannie Mae, 0.09%, due 2/02/15 | | | 2,300,000 | | | | 2,299,816 | |
| Fannie Mae, 0.08%, due 2/04/15 | | | 1,200,000 | | | | 1,199,909 | |
| Federal Home Loan Bank, 0.05%, due 1/02/15 | | | 4,001,000 | | | | 4,000,994 | |
| Federal Home Loan Bank, 0.053%, due 1/07/15 | | | 6,055,000 | | | | 6,054,947 | |
| Federal Home Loan Bank, 0.05%, due 1/09/15 | | | 24,305,000 | | | | 24,304,730 | |
| Federal Home Loan Bank, 0.066%, due 1/14/15 | | | 1,659,000 | | | | 1,658,960 | |
| Federal Home Loan Bank, 0.09%, due 1/14/15 | | | 3,400,000 | | | | 3,399,889 | |
| Federal Home Loan Bank, 0.08%, due 1/16/15 | | | 3,300,000 | | | | 3,299,890 | |
| Federal Home Loan Bank, 0.075%, due 1/21/15 | | | 1,208,000 | | | | 1,207,950 | |
5
MFS Money Market Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| U.S. GOVERNMENT AGENCIES AND EQUIVALENTS (y) – continued | | | | | |
| Federal Home Loan Bank, 0.065%, due 1/23/15 | | $ | 4,185,000 | | | $ | 4,184,834 | |
| Federal Home Loan Bank, 0.065%, due 1/28/15 | | | 14,286,000 | | | | 14,285,304 | |
| Federal Home Loan Bank, 0.075%, due 1/28/15 | | | 990,000 | | | | 989,944 | |
| Federal Home Loan Bank, 0.065%, due 1/30/15 | | | 4,100,000 | | | | 4,099,785 | |
| Federal Home Loan Bank, 0.09%, due 2/27/15 | | | 15,000,000 | | | | 14,997,862 | |
| Federal Home Loan Bank, 0.06%, due 3/04/15 | | | 1,327,000 | | | | 1,326,863 | |
| U.S. Treasury Bill, 0.025%, due 1/08/15 | | | 5,000,000 | | | | 4,999,976 | |
| U.S. Treasury Bill, 0.02%, due 1/29/15 | | | 1,000,000 | | | | 999,985 | |
| U.S. Treasury Bill, 0.021%, due 2/05/15 | | | 2,990,000 | | | | 2,989,939 | |
| U.S. Treasury Bill, 0.03%, due 2/12/15 | | | 15,000,000 | | | | 14,999,475 | |
| U.S. Treasury Bill, 0.02%, due 2/26/15 | | | 5,000,000 | | | | 4,999,844 | |
| U.S. Treasury Bill, 0.053%, due 5/07/15 | | | 17,705,000 | | | | 17,701,747 | |
| | | | | | | | |
| Total U.S. Government Agencies and Equivalents, at Amortized Cost and Value | | | | | | $ | 142,552,146 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| FLOATING RATE DEMAND NOTES – 1.3% | |
| East Baton Rouge, LA, Pollution Control Rev. (Exxon Mobil Corp.), 0.01%, due 1/02/15 | | $ | 3,300,000 | | | $ | 3,300,000 | |
| Lincoln County, WY, Pollution Control Rev. (Exxon Mobil Corp.), 0.01%, due 1/02/15 | | | 1,125,000 | | | | 1,125,000 | |
| Lincoln County, WY, Pollution Control Rev. (Exxon Mobil Corp.), “C”, 0.01%, due 1/02/15 | | | 1,020,000 | | | | 1,020,000 | |
| | | | | | | | |
Total Floating Rate Demand Notes,
at Cost and Value | | | $ | 5,445,000 | |
| | | | | | | | |
| Total Investments, at Amortized Cost and Value | | | | | | $ | 421,978,087 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.6)% | | | | | | | (2,409,579 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 419,568,508 | |
| | | | | | | | |
| (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. |
See Notes to Financial Statements
6
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments, at amortized cost and value | | | $421,978,087 | | | | | |
Cash | | | 862 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 69,757 | | | | | |
Interest | | | 31,212 | | | | | |
Receivable from investment adviser and distributor | | | 673 | | | | | |
Other assets | | | 3,855 | | | | | |
Total assets | | | | | | | $422,084,446 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | $999,985 | | | | | |
Fund shares reacquired | | | 1,461,747 | | | | | |
Payable for shareholder servicing costs | | | 60 | | | | | |
Payable for independent Trustees’ compensation | | | 11 | | | | | |
Accrued expenses and other liabilities | | | 54,135 | | | | | |
Total liabilities | | | | | | | $2,515,938 | |
Net assets | | | | | | | $419,568,508 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $419,790,870 | | | | | |
Accumulated net realized gain (loss) on investments | | | (222,362 | ) | | | | |
Net assets | | | | | | | $419,568,508 | |
Shares of beneficial interest outstanding | | | | | | | 419,791,965 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $214,018,842 | | | | 214,143,958 | | | | $1.00 | |
Service Class | | | 205,549,666 | | | | 205,648,007 | | | | 1.00 | |
See Notes to Financial Statements
7
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Interest income | | | | | | | $441,572 | |
Expenses | | | | | | | | |
Management fee | | | $2,282,840 | | | | | |
Distribution and/or service fees | | | 577,241 | | | | | |
Shareholder servicing costs | | | 14,072 | | | | | |
Administrative services fee | | | 71,836 | | | | | |
Independent Trustees’ compensation | | | 9,485 | | | | | |
Custodian fee | | | 35,673 | | | | | |
Shareholder communications | | | 21,333 | | | | | |
Audit and tax fees | | | 36,652 | | | | | |
Legal fees | | | 3,782 | | | | | |
Miscellaneous | | | 17,959 | | | | | |
Total expenses | | | | | | | $3,070,873 | |
Fees paid indirectly | | | (131 | ) | | | | |
Reduction of expenses by investment adviser and distributor | | | (2,629,170 | ) | | | | |
Net expenses | | | | | | | $441,572 | |
Net investment income | | | | | | | $0 | |
Net realized gain (loss) on investments | | | | | | | $347 | |
Change in net assets from operations | | | | | | | $347 | |
See Notes to Financial Statements
8
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $0 | | | | $0 | |
Net realized gain (loss) on investments | | | 347 | | | | 736 | |
Change in net assets from operations | | | $347 | | | | $736 | |
Change in net assets from fund share transactions | | | $(56,068,675 | ) | | | $(56,771,401 | ) |
Total change in net assets | | | $(56,068,328 | ) | | | $(56,770,665 | ) |
| Net assets | | | | | | | | |
At beginning of period | | | 475,636,836 | | | | 532,407,501 | |
At end of period | | | $419,568,508 | | | | $475,636,836 | |
See Notes to Financial Statements
9
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
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 | | | | $0.00 | | | | $0.00 | | | | $0.00 | | | | $0.00 | |
Net realized and unrealized gain (loss) on investments | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | | | | 0.00 | (w) | | | 0.00 | (w) |
Total from investment operations | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | | | | $0.00 | (w) | | | $0.00 | (w) |
Net asset value, end of period (m) | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | |
Total return (%) (k)(m)(r) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.55 | | | | 0.55 | | | | 0.55 | | | | 0.58 | | | | 0.59 | |
Expenses after expense reductions (f) | | | 0.10 | | | | 0.12 | | | | 0.16 | | | | 0.15 | | | | 0.27 | |
Net investment income | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Net assets at end of period (000 omitted) | | | $214,019 | | | | $228,673 | | | | $242,646 | | | | $188,106 | | | | $172,365 | |
| |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
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 | | | | $0.00 | | | | $0.00 | | | | $0.00 | | | | $0.00 | |
Net realized and unrealized gain (loss) on investments | | | 0.00 | (w) | | | 0.00 | (w) | | | 0.00 | | | | 0.00 | (w) | | | 0.00 | (w) |
Total from investment operations | | | $0.00 | (w) | | | $0.00 | (w) | | | $0.00 | | | | $0.00 | (w) | | | $0.00 | (w) |
Net asset value, end of period (m) | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | | | | $1.00 | |
Total return (%) (k)(m)(r) | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.80 | | | | 0.80 | | | | 0.80 | | | | 0.83 | | | | 0.84 | |
Expenses after expense reductions (f) | | | 0.10 | | | | 0.12 | | | | 0.15 | | | | 0.16 | | | | 0.27 | |
Net investment income | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Net assets at end of period (000 omitted) | | | $205,550 | | | | $246,964 | | | | $289,762 | | | | $131,924 | | | | $168,459 | |
| (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. |
| (m) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
| (r) | | Certain expenses have been reduced without which performance would have been lower. |
| (w) | | Per share amount was less than $0.01. |
See Notes to Financial Statements
10
MFS Money Market Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Money Market Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
On July 23, 2014, the U.S. Securities and Exchange Commission adopted amendments to its money market fund regulations. At this time, management is evaluating the potential implications of the changes.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Short term securities | | | $— | | | | $421,978,087 | | | | $— | | | | $421,978,087 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Repurchase Agreements – The fund enters into repurchase agreements under the terms of Master 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. Upon an event of default under a Master Repurchase Agreement, the non-defaulting party may close out all transactions traded under such agreement and net amounts owed under each transaction to one net amount payable by one party to the other. Absent an event of
11
MFS Money Market Portfolio
Notes to Financial Statements – continued
default, the Master Repurchase Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. 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.
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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
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, 2014, there were no significant adjustments due to differences between book and tax accounting.
The fund declared no distributions for the years ended December 31, 2014 and December 31, 2013.
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $421,978,087 | |
| Capital loss carryforwards | | | (222,362 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses (“post-enactment losses”). Previously, net capital losses were carried forward for eight years and treated as short-term losses (“pre-enactment losses”). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment losses expire as follows:
| | | | |
| 12/31/15 | | | $(29,437 | ) |
| 12/31/16 | | | (192,925 | ) |
| Total | | | $(222,362 | ) |
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 generally due to differences in separate class expenses.
12
MFS Money Market 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 $500 million of average daily net assets | | | 0.50% | |
| Average daily net assets in excess of $500 million | | | 0.45% | |
During the year ended December 31, 2014, MFS voluntarily waived receipt of $2,030,231 of the fund’s management fee in order to avoid a negative yield. For the year ended December 31, 2014, this voluntary waiver had the effect of reducing the management fee by 0.44% of average daily net assets on an annualized basis. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $20,898, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.05% 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, MFD voluntarily waived receipt of $577,241 of the fund’s distribution and/or service fee in order to avoid a negative yield. For the year ended December 31, 2014, this voluntary waiver had the effect of reducing the distribution and/or service fee 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, 2014 were 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, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2014, the fee was $13,815, which equated to 0.0030% 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, 2014, these costs amounted to $257.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0157% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to
13
MFS Money Market Portfolio
Notes to Financial Statements – continued
November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $2,178 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $800, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
| (4) | | 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 63,587,502 | | | | $63,587,502 | | | | 69,206,829 | | | | $69,206,829 | |
Service Class | | | 75,670,502 | | | | 75,670,502 | | | | 81,127,636 | | | | 81,127,636 | |
| | | 139,258,004 | | | | $139,258,004 | | | | 150,334,465 | | | | $150,334,465 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (78,241,619 | ) | | | $(78,241,619 | ) | | | (83,180,040 | ) | | | $(83,180,040 | ) |
Service Class | | | (117,085,060 | ) | | | (117,085,060 | ) | | | (123,925,826 | ) | | | (123,925,826 | ) |
| | | (195,326,679 | ) | | | $(195,326,679 | ) | | | (207,105,866 | ) | | | $(207,105,866 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (14,654,117 | ) | | | $(14,654,117 | ) | | | (13,973,211 | ) | | | $(13,973,211 | ) |
Service Class | | | (41,414,558 | ) | | | (41,414,558 | ) | | | (42,798,190 | ) | | | (42,798,190 | ) |
| | | (56,068,675 | ) | | | $(56,068,675 | ) | | | (56,771,401 | ) | | | $(56,771,401 | ) |
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, 2014, the fund’s commitment fee and interest expense were $1,716 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
14
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Money Market Portfolio as of December 31, 2014, 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 13, 2015
15
MFS Money Market Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
16
MFS Money Market Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
17
MFS Money Market Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Edward O’Dette | | |
18
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 3rd quintile for the one-year period and the 5th quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. In addition, the Trustees noted the market conditions affecting all money market funds, in particular the low interest rate environment, and MFS’ voluntary waiver of its fees to ensure that the Fund avoids a negative
19
MFS Money Market Portfolio
Board Review of Investment Advisory Agreement – continued
yield. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $500 million. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
20
MFS Money Market Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
21
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
22
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® RESEARCH INTERNATIONAL PORTFOLIO
MFS® Variable Insurance Trust II
RSS-ANN
MFS® RESEARCH INTERNATIONAL PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Research International Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Research International Portfolio
PORTFOLIO COMPOSITION
Portfolio structure
| | | | |
| Top ten holdings | | | | |
| Roche Holding AG | | | 3.3% | |
| Novartis AG | | | 3.1% | |
| Royal Dutch Shell PLC, “A” | | | 3.0% | |
| Nestle S.A. | | | 2.7% | |
| HSBC Holdings PLC | | | 2.3% | |
| Bayer AG | | | 2.2% | |
| Rio Tinto Ltd. | | | 2.0% | |
| DENSO Corp. | | | 2.0% | |
| KDDI Corp. | | | 1.9% | |
| Schneider Electric S.A. | | | 1.8% | |
| |
| Global equity sectors | | | | |
| Financial Services | | | 25.3% | |
| Capital Goods | | | 22.3% | |
| Health Care | | | 11.1% | |
| Energy | | | 9.5% | |
| Consumer Staples | | | 9.2% | |
| Consumer Cyclicals | | | 8.1% | |
| Technology | | | 7.9% | |
| Telecommunications/Cable Television | | | 5.2% | |
| | | | |
| Issuer country weightings (x) | | | | |
| United Kingdom | | | 18.3% | |
| Japan | | | 17.9% | |
| Switzerland | | | 14.4% | |
| France | | | 10.4% | |
| Germany | | | 8.0% | |
| United States | | | 5.0% | |
| Netherlands | | | 4.3% | |
| Hong Kong | | | 4.0% | |
| Australia | | | 3.5% | |
| Other Countries | | | 14.2% | |
| |
| Currency exposure weightings (y) | | | | |
| Euro | | | 26.0% | |
| British Pound Sterling | | | 18.3% | |
| Japanese Yen | | | 17.9% | |
| Swiss Franc | | | 14.4% | |
| United States Dollar | | | 5.0% | |
| Hong Kong Dollar | | | 4.5% | |
| Australian Dollar | | | 3.5% | |
| Swedish Krona | | | 2.9% | |
| Taiwan Dollar | | | 2.5% | |
| Other Currencies | | | 5.0% | |
| (x) | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
| (y) | Represents the portfolio’s exposure to a particular currency as a percentage of a portfolio’s net assets. For purposes of this presentation, United States Dollar includes Cash & Other. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Research International Portfolio (“fund”) provided a total return of –6.88%, while Service Class shares of the fund provided a total return of –7.16%. These compare with a return of –4.48% over the same period for the fund’s benchmark, the MSCI EAFE Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Stock selection within the capital goods sector detracted from performance relative to the MSCI EAFE Index, led by the fund’s overweight position in engineering and construction company JGC Corp. (Japan). Concerns about possible cancellations of LNG plant construction projects, a major source of revenue for the company, appeared to have weighed heavily on the stock as energy companies announced reductions in capital expenditures in the face of sharply declining oil prices. Overweight positions in automotive manufacturer Honda Motor (Japan), mining company Iluka Resources (Australia) and the fund’s holdings of steel producer Gerdau (b) (Brazil) also detracted from relative performance.
Elsewhere, overweight positions in banking and financial services firm Sumitomo Mitsui Financial (Japan), financial services company Erste Group Bank (Austria), casino and resort operator Sands China (Hong Kong) and real estate company Mitsubishi Estate (h) (Japan) were among the fund’s top relative detractors. Holdings of Russian commercial banking firm Sberbank (b), and the timing of the fund’s ownership in shares of weak-performing pharmaceutical and diagnostic company Roche Holding (Switzerland) also held back relative returns. Shares of Roche Holding declined after two disappointing trial results for the company’s breast cancer drug Kadcyla and Alzheimer’s drug Gantenerumab.
Contributors to Performance
Stock selection within the technology sector was a positive factor for relative performance. Most notably, the fund’s position in semiconductor manufacturer Taiwan Semiconductor (b) (Taiwan) strengthened relative performance as the stock rose on strong orders of Apple’s 20nm application processor and healthy inventory levels.
Stock selection in the telecommunications/cable television sector also contributed to relative returns. Within this sector, an overweight position in major mobile phone carrier KDDI Corp. (Japan) lifted relative results. The company released positive results due, in part, to strong fundamentals and continued robust profit growth. Additionally, the stock benefited from what appeared to have been waning concerns related to competitive and regulatory pressures.
Elsewhere, overweight positions in pharmaceutical companies Novartis (Switzerland) and Santen Pharmaceutical (Japan), hotel and restaurant operator Whitbread (United Kingdom) and financial services firm DBS Group (Singapore) strengthened relative returns. Holdings of banking and financial services firms HDFC Bank (b) (India), Kasikornbank (b) (Thailand) and automotive safety parts manufacturer Autoliv (b) (Sweden) were also among the fund’s top relative contributors. The fund’s avoidance of poor-performing Australian mining company BHP Billiton further benefited relative performance as lower oil and iron-ore prices drove the stock’s decline during the reporting period.
3
MFS Research International Portfolio
Management Review – continued
The fund’s relative currency exposure, resulting primarily from differences between the fund’s and the benchmark’s exposure to holdings of securities denominated in foreign currencies, was another 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 exposure than the benchmark.
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | (6.88)% | | 4.96% | | 4.90% | | |
| | | Service Class | | 8/24/01 | | (7.16)% | | 4.70% | | 4.63% | | |
| | | | |
| Comparative benchmark | | | | | | | | |
| | | MSCI EAFE Index (f) | | (4.48)% | | 5.81% | | 4.91% | | |
| (f) | Source: FactSet Research Systems Inc. |
Benchmark Definition
MSCI EAFE 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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Research International Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.99% | | | | $1,000.00 | | | | $904.23 | | | | $4.75 | |
| | Hypothetical (h) | | | 0.99% | | | | $1,000.00 | | | | $1,020.21 | | | | $5.04 | |
| Service Class | | Actual | | | 1.24% | | | | $1,000.00 | | | | $902.88 | | | | $5.95 | |
| | Hypothetical (h) | | | 1.24% | | | | $1,000.00 | | | | $1,018.95 | | | | $6.31 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
MFS Research International Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 98.2% | | | | | |
| Alcoholic Beverages – 1.3% | | | | | |
| Pernod Ricard S.A. | | | 39,084 | | | $ | 4,333,515 | |
| | | | | | | | |
| Apparel Manufacturers – 1.4% | | | | | |
| Global Brands Group Holding Ltd. (a) | | | 4,160,000 | | | $ | 813,135 | |
| Li & Fung Ltd. | | | 646,000 | | | | 604,793 | |
| LVMH Moet Hennessy Louis Vuitton S.A. | | | 20,990 | | | | 3,319,234 | |
| | | | | | | | |
| | | $ | 4,737,162 | |
| | | | | | | | |
| Automotive – 4.5% | | | | | |
| Autoliv, Inc. | | | 33,463 | | | $ | 3,551,094 | |
| DENSO Corp. | | | 137,900 | | | | 6,426,912 | |
| Honda Motor Co. Ltd. | | | 158,300 | | | | 4,603,316 | |
| | | | | | | | |
| | | $ | 14,581,322 | |
| | | | | | | | |
| Broadcasting – 1.6% | | | | | |
| ProSiebenSat.1 Media AG | | | 33,650 | | | $ | 1,418,214 | |
| WPP PLC | | | 176,191 | | | | 3,655,293 | |
| | | | | | | | |
| | | $ | 5,073,507 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.5% | | | | | |
| Computershare Ltd. | | | 170,782 | | | $ | 1,633,313 | |
| | | | | | | | |
| Business Services – 3.2% | | | | | |
| Brenntag AG | | | 20,810 | | | $ | 1,171,175 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 60,188 | | | | 3,169,500 | |
| Compass Group PLC | | | 148,253 | | | | 2,526,873 | |
| Mitsubishi Corp. | | | 99,700 | | | | 1,828,485 | |
| Nomura Research, Inc. | | | 52,800 | | | | 1,621,274 | |
| | | | | | | | |
| | | $ | 10,317,307 | |
| | | | | | | | |
| Computer Software – 0.5% | | | | | |
| Dassault Systems S.A. | | | 28,405 | | | $ | 1,728,683 | |
| | | | | | | | |
| Conglomerates – 0.8% | | | | | |
| Hutchison Whampoa Ltd. | | | 241,000 | | | $ | 2,759,114 | |
| | | | | | | | |
| Consumer Products – 2.2% | | | | | |
| L’Oreal S.A. | | | 20,728 | | | $ | 3,479,964 | |
| Reckitt Benckiser Group PLC | | | 44,325 | | | | 3,575,760 | |
| | | | | | | | |
| | | $ | 7,055,724 | |
| | | | | | | | |
| Electrical Equipment – 3.8% | | | | | |
| Legrand S.A. | | | 20,004 | | | $ | 1,047,187 | |
| Schneider Electric S.A. | | | 82,693 | | | | 6,008,627 | |
| Siemens AG | | | 47,311 | | | | 5,367,064 | |
| | | | | | | | |
| | | $ | 12,422,878 | |
| | | | | | | | |
| Electronics – 3.1% | | | | | |
| Infineon Technologies AG | | | 194,978 | | | $ | 2,090,368 | |
| MediaTek, Inc. | | | 286,000 | | | | 4,163,567 | |
| Taiwan Semiconductor Manufacturing Co. Ltd. | | | 895,804 | | | | 3,952,942 | |
| | | | | | | | |
| | | $ | 10,206,877 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Energy – Independent – 1.6% | | | | | |
| Cairn Energy PLC (a) | | | 162,145 | | | $ | 445,096 | |
| Cenovus Energy, Inc. | | | 38,395 | | | | 792,157 | |
| Galp Energia SGPS S.A., “B” | | | 78,787 | | | | 797,083 | |
| INPEX Corp. | | | 125,500 | | | | 1,392,465 | |
| Oil Search Ltd. | | | 121,258 | | | | 783,427 | |
| Reliance Industries Ltd. | | | 80,036 | | | | 1,125,862 | |
| | | | | | | | |
| | | $ | 5,336,090 | |
| | | | | | | | |
| Energy – Integrated – 3.8% | | | | | |
| BG Group PLC | | | 181,314 | | | $ | 2,413,422 | |
| Royal Dutch Shell PLC, “A” | | | 298,163 | | | | 9,883,059 | |
| | | | | | | | |
| | | $ | 12,296,481 | |
| | | | | | | | |
| Engineering – Construction – 0.6% | | | | | |
| JGC Corp. | | | 95,000 | | | $ | 1,957,862 | |
| | | | | | | | |
| Food & Beverages – 4.7% | | | | | |
| Danone S.A. | | | 79,826 | | | $ | 5,251,472 | |
| M. Dias Branco S.A. Industria e Comercio de Alimentos | | | 42,539 | | | | 1,456,267 | |
| Nestle S.A. | | | 119,317 | | | | 8,746,120 | |
| | | | | | | | |
| | | $ | 15,453,859 | |
| | | | | | | | |
| Food & Drug Stores – 0.5% | | | | | |
| Sundrug Co. Ltd. | | | 41,800 | | | $ | 1,691,848 | |
| | | | | | | | |
| Gaming & Lodging – 0.5% | | | | | |
| Sands China Ltd. | | | 337,600 | | | $ | 1,642,019 | |
| | | | | | | | |
| General Merchandise – 0.3% | | | | | |
| Lojas Renner S.A. | | | 35,206 | | | $ | 1,004,172 | |
| | | | | | | | |
| Health Maintenance Organizations – 0.2% | | | | | |
| OdontoPrev S.A. | | | 205,243 | | | $ | 761,303 | |
| | | | | | | | |
| Insurance – 6.4% | | | | | | | | |
| AIA Group Ltd. | | | 1,008,800 | | | $ | 5,554,918 | |
| Hiscox Ltd. | | | 131,191 | | | | 1,473,238 | |
| ING Groep N.V. (a) | | | 371,157 | | | | 4,805,597 | |
| Prudential PLC | | | 128,587 | | | | 2,959,064 | |
| Sony Financial Holdings, Inc. | | | 76,900 | | | | 1,133,967 | |
| Zurich Insurance Group AG | | | 16,092 | | | | 5,039,094 | |
| | | | | | | | |
| | | $ | 20,965,878 | |
| | | | | | | | |
| Machinery & Tools – 3.4% | | | | | |
| Atlas Copco AB, “A” | | | 188,946 | | | $ | 5,259,714 | |
| Joy Global, Inc. | | | 46,973 | | | | 2,185,184 | |
| Schindler Holding AG | | | 25,226 | | | | 3,639,932 | |
| | | | | | | | |
| | | $ | 11,084,830 | |
| | | | | | | | |
| Major Banks – 10.0% | | | | | |
| BNP Paribas | | | 76,606 | | | $ | 4,501,697 | |
| BOC Hong Kong Holdings Ltd. | | | 290,500 | | | | 967,193 | |
| HSBC Holdings PLC | | | 785,293 | | | | 7,421,398 | |
| Mitsubishi UFJ Financial Group, Inc. | | | 755,300 | | | | 4,139,907 | |
| Royal Bank of Scotland Group PLC (a) | | | 653,704 | | | | 3,968,326 | |
7
MFS Research International Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Major Banks – continued | | | | | |
| Standard Chartered PLC | | | 177,412 | | | $ | 2,662,835 | |
| Sumitomo Mitsui Financial Group, Inc. | | | 96,000 | | | | 3,468,720 | |
| Westpac Banking Corp. | | | 214,416 | | | | 5,764,300 | |
| | | | | | | | |
| | | | | | $ | 32,894,376 | |
| | | | | | | | |
| Medical Equipment – 0.8% | | | | | |
| Sonova Holding AG | | | 6,187 | | | $ | 906,972 | |
| Terumo Corp. | | | 81,200 | | | | 1,849,305 | |
| | | | | | | | |
| | | | | | $ | 2,756,277 | |
| | | | | | | | |
| Metals & Mining – 2.7% | | | | | |
| Gerdau S.A., ADR | | | 224,858 | | | $ | 798,246 | |
| Iluka Resources Ltd. | | | 309,935 | | | | 1,489,911 | |
| Rio Tinto Ltd. | | | 141,362 | | | | 6,512,909 | |
| | | | | | | | |
| | | | | | $ | 8,801,066 | |
| | | | | | | | |
| Natural Gas – Distribution – 2.8% | | | | | |
| Centrica PLC | | | 390,639 | | | $ | 1,681,295 | |
| China Resources Gas Group Ltd. | | | 582,000 | | | | 1,505,495 | |
| GDF SUEZ | | | 139,288 | | | | 3,253,113 | |
| Tokyo Gas Co. Ltd. | | | 488,000 | | | | 2,633,327 | |
| | | | | | | | |
| | | | | | $ | 9,073,230 | |
| | | | | | | | |
| Natural Gas – Pipeline – 0.5% | | | | | |
| APA Group | | | 287,789 | | | $ | 1,750,384 | |
| | | | | | | | |
| Network & Telecom – 1.1% | | | | | |
| Ericsson, Inc., “B” | | | 284,333 | | | $ | 3,441,299 | |
| | | | | | | | |
| Oil Services – 0.3% | | | | | |
| Technip | | | 16,577 | | | $ | 991,216 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 7.5% | | | | | |
| Aeon Credit Service Co. Ltd. | | | 69,700 | | | $ | 1,362,573 | |
| DBS Group Holdings Ltd. | | | 239,000 | | | | 3,690,742 | |
| Erste Group Bank AG | | | 78,850 | | | | 1,807,748 | |
| HDFC Bank Ltd., ADR | | | 25,287 | | | | 1,283,315 | |
| Julius Baer Group Ltd. | | | 56,429 | | | | 2,575,140 | |
| Kasikornbank PLC, NVDR | | | 182,900 | | | | 1,262,965 | |
| KBC Group N.V. (a) | | | 71,120 | | | | 3,947,197 | |
| Sberbank of Russia, ADR | | | 134,668 | | | | 541,133 | |
| UBS AG (a) | | | 329,415 | | | | 5,662,545 | |
| UniCredit S.p.A. | | | 365,680 | | | | 2,330,665 | |
| | | | | | | | |
| | | | | | $ | 24,464,023 | |
| | | | | | | | |
| Pharmaceuticals – 10.0% | | | | | |
| Bayer AG | | | 51,880 | | | $ | 7,093,847 | |
| Indivior PLC (a) | | | 39,188 | | | | 91,251 | |
| Novartis AG | | | 108,792 | | | | 10,005,327 | |
| Roche Holding AG | | | 39,434 | | | | 10,688,210 | |
| Santen Pharmaceutical Co. Ltd. | | | 89,800 | | | | 4,805,727 | |
| | | | | | | | |
| | | | | | $ | 32,684,362 | |
| | | | | | | | |
| Printing & Publishing – 0.9% | | | | | |
| Reed Elsevier N.V. | | | 118,343 | | | $ | 2,828,248 | |
| | | | | | | | |
| Real Estate – 0.9% | | | | | |
| Deutsche Wohnen AG | | | 66,275 | | | $ | 1,574,710 | |
| Intu Properties PLC, REIT | | | 275,776 | | | | 1,426,095 | |
| | | | | | | | |
| | | | | | $ | 3,000,805 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Restaurants – 2.2% | | | | | |
| Whitbread PLC | | | 57,988 | | | $ | 4,279,339 | |
| YUM! Brands, Inc. | | | 38,107 | | | | 2,776,095 | |
| | | | | | | | |
| | | | | | $ | 7,055,434 | |
| | | | | | | | |
| Specialty Chemicals – 5.0% | | | | | |
| Akzo Nobel N.V. | | | 73,738 | | | $ | 5,113,338 | |
| JSR Corp. | | | 233,900 | | | | 4,016,489 | |
| Linde AG | | | 28,238 | | | | 5,268,921 | |
| Symrise AG | | | 34,685 | | | | 2,103,986 | |
| | | | | | | | |
| | | | | | $ | 16,502,734 | |
| | | | | | | | |
| Specialty Stores – 0.8% | | | | | |
| Esprit Holdings Ltd. | | | 725,800 | | | $ | 868,566 | |
| Hennes & Mauritz AB, “B” | | | 17,374 | | | | 720,705 | |
| Ryohin Keikaku Co. Ltd. | | | 8,400 | | | | 1,037,933 | |
| | | | | | | | |
| | | | | | $ | 2,627,204 | |
| | | | | | | | |
| Telecommunications – Wireless – 3.4% | | | | | |
| KDDI Corp. | | | 100,700 | | | $ | 6,300,822 | |
| Mobile TeleSystems OJSC (a) | | | 139,449 | | | | 388,047 | |
| Philippine Long Distance Telephone Co. | | | 14,310 | | | | 929,634 | |
| Vodafone Group PLC | | | 1,035,721 | | | | 3,548,860 | |
| | | | | | | | |
| | | | | | $ | 11,167,363 | |
| | | | | | | | |
| Telephone Services – 1.4% | | | | | |
| BT Group PLC | | | 243,457 | | | $ | 1,511,275 | |
| Hellenic Telecommunications Organization S.A. (a) | | | 89,474 | | | | 985,239 | |
| Royal KPN N.V. | | | 451,168 | | | | 1,422,434 | |
| Telefonica Brasil S.A., ADR | | | 39,098 | | | | 691,253 | |
| | | | | | | | |
| | | | | | $ | 4,610,201 | |
| | | | | | | | |
| Tobacco – 1.0% | | | | | |
| Japan Tobacco, Inc. | | | 122,400 | | | $ | 3,360,869 | |
| | | | | | | | |
| Trucking – 1.5% | | | | | |
| Yamato Holdings Co. Ltd. | | | 245,300 | | | $ | 4,830,059 | |
| | | | | | | | |
| Utilities – Electric Power – 0.5% | | | | | |
| Canadian Utilities Ltd. | | | 49,380 | | | $ | 1,738,798 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $312,954,947) | | | | | | $ | 321,621,692 | |
| | | | | | | | |
| |
| PREFERRED STOCKS – 0.4% | | | | | |
| Telephone Services – 0.4% | | | | | |
Telecom Italia S.p.A
(Identified Cost, $1,391,448) | | | 1,454,169 | | | $ | 1,215,445 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.3% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 4,372,179 | | | $ | 4,372,179 | |
| | | | | | | | |
Total Investments
(Identified Cost, $318,718,574) | | | | | | $ | 327,209,316 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 0.1% | | | | | | | 174,733 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 327,384,049 | |
| | | | | | | | |
8
MFS Research International Portfolio
Portfolio of Investments – continued
| (a) | | Non-income producing security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 Depositary Receipt |
| NVDR | | Non-Voting Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $314,346,395) | | | $322,837,137 | | | | | |
Underlying affiliated funds, at cost and value | | | 4,372,179 | | | | | |
Total investments, at value (identified cost, $318,718,574) | | | $327,209,316 | | | | | |
Cash | | | 9,895 | | | | | |
Receivables for interest and dividends | | | 609,254 | | | | | |
Other assets | | | 3,109 | | | | | |
Total assets | | | | | | | $327,831,574 | |
Liabilities | | | | | | | | |
Payable to custodian | | | $33,152 | | | | | |
Payables for | | | | | | | | |
Investments purchased | | | 16,396 | | | | | |
Fund shares reacquired | | | 267,589 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 14,572 | | | | | |
Shareholder servicing costs | | | 27 | | | | | |
Distribution and/or service fees | | | 1,031 | | | | | |
Payable for independent Trustees’ compensation | | | 58 | | | | | |
Deferred country tax expense payable | | | 18,669 | | | | | |
Accrued expenses and other liabilities | | | 96,031 | | | | | |
Total liabilities | | | | | | | $447,525 | |
Net assets | | | | | | | $327,384,049 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $308,438,862 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (net of $18,669 deferred country tax) | | | 8,437,855 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 2,179,216 | | | | | |
Undistributed net investment income | | | 8,328,116 | | | | | |
Net assets | | | | | | | $327,384,049 | |
Shares of beneficial interest outstanding | | | | | | | 22,543,403 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
Initial Class | | | $253,000,596 | | | | 17,375,565 | | | | $14.56 | |
Service Class | | | 74,383,453 | | | | 5,167,838 | | | | 14.39 | |
See Notes to Financial Statements
10
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 12/31/14 | | | | | | | | |
Net investment income | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $13,323,638 | | | | | |
Interest | | | 114,182 | | | | | |
Dividends from underlying affiliated funds | | | 1,617 | | | | | |
Foreign taxes withheld | | | (892,399 | ) | | | | |
Total investment income | | | | | | | $12,547,038 | |
Expenses | | | | | | | | |
Management fee | | | $3,231,566 | | | | | |
Distribution and/or service fees | | | 209,644 | | | | | |
Shareholder servicing costs | | | 6,191 | | | | | |
Administrative services fee | | | 58,584 | | | | | |
Independent Trustees’ compensation | | | 9,284 | | | | | |
Custodian fee | | | 170,937 | | | | | |
Shareholder communications | | | 17,458 | | | | | |
Audit and tax fees | | | 63,328 | | | | | |
Legal fees | | | 3,157 | | | | | |
Miscellaneous | | | 16,316 | | | | | |
Total expenses | | | | | | | $3,786,465 | |
Fees paid indirectly | | | (19 | ) | | | | |
Reduction of expenses by investment adviser | | | (17,031 | ) | | | | |
Net expenses | | | | | | | $3,769,415 | |
Net investment income | | | | | | | $8,777,623 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments (net of $7,381 country tax) | | | $3,189,372 | | | | | |
Foreign currency | | | (103,247 | ) | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $3,086,125 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments (net of $18,669 increase in deferred country tax) | | | $(35,723,297 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | (51,464 | ) | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(35,774,761 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(32,688,636 | ) |
Change in net assets from operations | | | | | | | $(23,911,013 | ) |
See Notes to Financial Statements
11
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
| From operations | | | | | | | | |
Net investment income | | | $8,777,623 | | | | $5,994,382 | |
Net realized gain (loss) on investments and foreign currency | | | 3,086,125 | | | | 24,114,662 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (35,774,761 | ) | | | 34,532,172 | |
Change in net assets from operations | | | $(23,911,013 | ) | | | $64,641,216 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(6,321,260 | ) | | | $(2,462,043 | ) |
From net realized gain on investments | | | (3,617,932 | ) | | | — | |
Total distributions declared to shareholders | | | $(9,939,192 | ) | | | $(2,462,043 | ) |
Change in net assets from fund share transactions | | | $(18,301,964 | ) | | | $(43,194,634 | ) |
Total change in net assets | | | $(52,152,169 | ) | | | $18,984,539 | |
| Net assets | | | | | | | | |
At beginning of period | | | 379,536,218 | | | | 360,551,679 | |
At end of period (including undistributed net investment income of $8,328,116 and
$6,309,133, respectively) | | | $327,384,049 | | | | $379,536,218 | |
See Notes to Financial Statements
12
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $16.09 | | | | $13.62 | | | | $11.94 | | | | $13.69 | | | | $12.54 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.39 | | | | $0.25 | | | | $0.19 | | | | $0.25 | | | | $0.20 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | (1.46 | ) | | | 2.33 | | | | 1.77 | | | | (1.72 | ) | | | 1.12 | |
Total from investment operations | | | $(1.07 | ) | | | $2.58 | | | | $1.96 | | | | $(1.47 | ) | | | $1.32 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.30 | ) | | | $(0.11 | ) | | | $(0.28 | ) | | | $(0.28 | ) | | | $(0.17 | ) |
From net realized gain on investments | | | (0.16 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.46 | ) | | | $(0.11 | ) | | | $(0.28 | ) | | | $(0.28 | ) | | | $(0.17 | ) |
Net asset value, end of period (x) | | | $14.56 | | | | $16.09 | | | | $13.62 | | | | $11.94 | | | | $13.69 | |
Total return (%) (k)(r)(s)(x) | | | (6.88 | ) | | | 19.01 | | | | 16.59 | | | | (10.88 | ) | | | 10.63 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.00 | | | | 1.00 | | | | 1.07 | | | | 1.14 | | | | 1.12 | |
Expenses after expense reductions (f) | | | 0.99 | | | | 0.99 | | | | 1.07 | | | | 1.10 | | | | 1.10 | |
Net investment income | | | 2.49 | | | | 1.68 | | | | 1.44 | | | | 1.89 | | | | 1.66 | |
Portfolio turnover | | | 27 | | | | 35 | | | | 46 | | | | 45 | | | | 60 | |
Net assets at end of period (000 omitted) | | | $253,001 | | | | $286,763 | | | | $269,211 | | | | $40,134 | | | | $52,239 | |
See Notes to Financial Statements
13
MFS Research International Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $15.91 | | | | $13.46 | | | | $11.80 | | | | $13.52 | | | | $12.39 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.36 | | | | $0.21 | | | | $0.23 | | | | $0.22 | | | | $0.16 | |
Net realized and unrealized gain (loss) on investments and foreign currency | | | (1.47 | ) | | | 2.31 | | | | 1.67 | | | | (1.70 | ) | | | 1.11 | |
Total from investment operations | | | $(1.11 | ) | | | $2.52 | | | | $1.90 | | | | $(1.48 | ) | | | $1.27 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.25 | ) | | | $(0.07 | ) | | | $(0.24 | ) | | | $(0.24 | ) | | | $(0.14 | ) |
From net realized gain on investments | | | (0.16 | ) | | | — | | | | — | | | | — | | | | — | |
Total distributions declared to shareholders | | | $(0.41 | ) | | | $(0.07 | ) | | | $(0.24 | ) | | | $(0.24 | ) | | | $(0.14 | ) |
Net asset value, end of period (x) | | | $14.39 | | | | $15.91 | �� | | | $13.46 | | | | $11.80 | | | | $13.52 | |
Total return (%) (k)(r)(s)(x) | | | (7.16 | ) | | | 18.77 | | | | 16.29 | | | | (11.06 | ) | | | 10.34 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.25 | | | | 1.25 | | | | 1.34 | | | | 1.39 | | | | 1.37 | |
Expenses after expense reductions (f) | | | 1.24 | | | | 1.24 | | | | 1.34 | | | | 1.35 | | | | 1.35 | |
Net investment income | | | 2.30 | | | | 1.45 | | | | 1.87 | | | | 1.64 | | | | 1.31 | |
Portfolio turnover | | | 27 | | | | 35 | | | | 46 | | | | 45 | | | | 60 | |
Net assets at end of period (000 omitted) | | | $74,383 | | | | $92,773 | | | | $91,341 | | | | $96,969 | | | | $121,479 | |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
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 diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be
15
MFS Research International Portfolio
Notes to Financial Statements – continued
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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United Kingdom | | | $4,227,324 | | | | $55,808,064 | | | | $— | | | | $60,035,388 | |
Japan | | | — | | | | 58,461,860 | | | | — | | | | 58,461,860 | |
Switzerland | | | 5,662,545 | | | | 41,600,795 | | | | — | | | | 47,263,340 | |
France | | | 991,216 | | | | 32,923,492 | | | | — | | | | 33,914,708 | |
Germany | | | 22,423,207 | | | | 3,665,078 | | | | — | | | | 26,088,285 | |
Netherlands | | | — | | | | 14,169,617 | | | | — | | | | 14,169,617 | |
Hong Kong | | | 1,473,359 | | | | 11,736,379 | | | | — | | | | 13,209,738 | |
United States | | | 11,681,873 | | | | — | | | | — | | | | 11,681,873 | |
Australia | | | 1,750,384 | | | | 9,670,951 | | | | — | | | | 11,421,335 | |
Other Countries | | | 12,877,511 | | | | 33,713,482 | | | | — | | | | 46,590,993 | |
| Mutual Funds | | | 4,372,179 | | | | — | | | | — | | | | 4,372,179 | |
| Total Investments | | | $65,459,598 | | | | $261,749,718 | | | | $— | | | | $327,209,316 | |
For further information regarding security characteristics, see the Portfolio of Investments.
Of the level 2 investments presented above, equity investments amounting to $218,588,460 would have been considered level 1 investments at the beginning of the period. Of the level 1 investments presented above, equity investments amounting to $604,793 would have been considered level 2 investments at the beginning of the period. The primary reason for changes in the classifications between levels 1 and 2 occurs when foreign equity securities are fair valued using other observable market-based inputs in place of the closing exchange price due to events occurring after the close of the exchange or market on which the investment is principally traded. The fund’s foreign equity securities may often be valued at fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period.
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.
Security Loans – Under its Securities Lending Agency Agreement with the fund, State Street Bank and Trust Company (“State Street”), as lending agent, loans 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. On loans collateralized by cash, the cash collateral is invested in a money market fund. 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. In the event of Borrower default, State Street will for the benefit of the fund either purchase securities identical to those loaned or, when such purchase is commercially impracticable, pay the fund the market value of the loaned securities. In return, State Street assumes the fund’s rights to the related collateral. If the collateral value is less than the cost to purchase identical securities, State Street is
16
MFS Research International Portfolio
Notes to Financial Statements – continued
responsible for the shortfall, but only to the extent that such shortfall is not due to a decline in collateral value resulting from collateral reinvestment for which the fund bears the risk of loss. 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 in 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, 2014, there were no securities on loan or collateral outstanding.
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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $6,321,260 | | | | $2,462,043 | |
| Long-term capital gains | | | 3,617,932 | | | | — | |
| Total distributions | | | $9,939,192 | | | | $2,462,043 | |
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 12/31/14 | | | | |
| Cost of investments | | | $320,121,109 | |
| Gross appreciation | | | 31,525,982 | |
| Gross depreciation | | | (24,437,775 | ) |
| Net unrealized appreciation (depreciation) | | | $7,088,207 | |
| Undistributed ordinary income | | | 9,232,337 | |
| Undistributed long-term capital gain | | | 2,703,093 | |
| Other temporary differences | | | (78,450 | ) |
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 in 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
12/31/14 | | | Year ended
12/31/13 | | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $5,055,408 | | | | $2,027,031 | | | | $2,792,651 | | | | $— | |
| Service Class | | | 1,265,852 | | | | 435,012 | | | | 825,281 | | | | — | |
| Total | | | $6,321,260 | | | | $2,462,043 | | | | $3,617,932 | | | | $— | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $16,396, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $6,086, which equated to 0.0017% 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, 2014, these costs amounted to $105.
18
MFS Research International 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 $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0163% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $1,697 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $635, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, aggregated $96,999,981 and $122,193,365 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 435,339 | | | | $6,745,737 | | | | 417,506 | | | | $6,253,033 | |
Service Class | | | 527,667 | | | | 7,890,126 | | | | 441,949 | | | | 6,588,565 | |
| | | 963,006 | | | | $14,635,863 | | | | 859,455 | | | | $12,841,598 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 493,589 | | | | $7,848,059 | | | | 136,685 | | | | $2,027,031 | |
Service Class | | | 132,939 | | | | 2,091,133 | | | | 29,653 | | | | 435,012 | |
| | | 626,528 | | | | $9,939,192 | | | | 166,338 | | | | $2,462,043 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,374,605 | ) | | | $(22,106,656 | ) | | | (2,502,197 | ) | | | $(37,492,324 | ) |
Service Class | | | (1,325,345 | ) | | | (20,770,363 | ) | | | (1,424,891 | ) | | | (21,005,951 | ) |
| | | (2,699,950 | ) | | | $(42,877,019 | ) | | | (3,927,088 | ) | | | $(58,498,275 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (445,677 | ) | | | $(7,512,860 | ) | | | (1,948,006 | ) | | | $(29,212,260 | ) |
Service Class | | | (664,739 | ) | | | (10,789,104 | ) | | | (953,289 | ) | | | (13,982,374 | ) |
| | | (1,110,416 | ) | | | $(18,301,964 | ) | | | (2,901,295 | ) | | | $(43,194,634 | ) |
19
MFS Research International Portfolio
Notes to Financial Statements – continued
The fund is one of several mutual funds in which certain MFS funds may invest. The MFS funds do not invest in the underlying funds for the purpose of exercising management or control. At the end of the period, the MFS Moderate Allocation Portfolio, the MFS Growth Allocation Portfolio, and the MFS Conservative Allocation Portfolio were the owners of record of approximately 43%, 15%, and 10%, respectively, of the value of outstanding voting shares of the fund.
The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the year ended December 31, 2014, the fund’s commitment fee and interest expense were $1,380 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 1,847,504 | | | | 47,965,702 | | | | (45,441,027 | ) | | | 4,372,179 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $1,617 | | | | $4,372,179 | |
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Research International Portfolio as of December 31, 2014, 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 13, 2015
21
MFS Research International Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
22
MFS Research International Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
23
MFS Research International Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | 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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 3rd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 4th quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
25
MFS Research International 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate was higher than the Lipper expense group median and the Fund’s total expense ratio was approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to contractual breakpoints that reduce the Fund’s advisory fee rate on average daily net assets over $1 billion and $2 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoints and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
26
MFS Research International Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $3,980,000 as capital gain dividends paid during the fiscal year.
Income derived from foreign sources was $9,763,292. The fund intends to pass through foreign tax credits of $675,308 for the fiscal year.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
ANNUAL REPORT
December 31, 2014
MFS® STRATEGIC
INCOME PORTFOLIO
MFS® Variable Insurance Trust II
SIS-ANN
MFS® STRATEGIC INCOME PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Strategic Income Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Strategic Income Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Fixed income sectors (i) | | | | |
| Investment Grade Corporates | | | 42.2% | |
| High Yield Corporates | | | 33.0% | |
| Non-U.S. Government Bonds | | | 13.4% | |
| Emerging Markets Bonds | | | 3.5% | |
| Floating Rate Loans | | | 1.4% | |
| Commercial Mortgage-Backed Securities | | | 1.1% | |
| U.S. Government Agencies | | | 0.9% | |
| Mortgage-Backed Securities | | | 0.6% | |
| Asset-Backed Securities | | | 0.5% | |
| Municipal Bonds | | | 0.3% | |
| Collateralized Debt Obligations (o) | | | 0.0% | |
| U.S. Treasury Securities | | | (9.8)% | |
|
| Composition including fixed income credit quality (a)(i) | |
| AAA | | | 3.4% | |
| AA | | | 4.6% | |
| A | | | 17.1% | |
| BBB | | | 33.4% | |
| BB | | | 16.3% | |
| B | | | 16.6% | |
| CCC | | | 3.7% | |
| C | | | 0.3% | |
| Federal Agencies | | | 1.5% | |
| Not Rated | | | (9.8)% | |
| Non-Fixed Income | | | 0.3% | |
| Cash & Other | | | 12.6% | |
| | | | |
| Portfolio facts (i) | |
| Average Duration (d) | | | 4.4 | |
| Average Effective Maturity (m) | | | 6.8 yrs. | |
|
| Issuer country weightings (i)(x) | |
| United States | | | 66.0% | |
| United Kingdom | | | 6.3% | |
| Italy | | | 3.5% | |
| France | | | 3.1% | |
| Japan | | | 2.9% | |
| Netherlands | | | 2.6% | |
| Canada | | | 2.5% | |
| Germany | | | 1.5% | |
| Australia | | | 1.4% | |
| Other Countries | | | 10.2% | |
| (a) | | For all securities other than those specifically described below, ratings are assigned to underlying securities utilizing ratings from Moody’s, Fitch, and Standard & Poor’s rating agencies and applying the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). Securities rated BBB or higher are considered investment grade. All ratings are subject to change. Federal Agencies includes rated and unrated U.S. Agency fixed-income securities, U.S. Agency mortgage-backed securities, and collateralized mortgage obligations of U.S. Agency mortgage-backed securities. Not Rated includes fixed income securities, including fixed income futures contracts, which have not been rated by any rating agency. Non-Fixed Income includes equity securities (including convertible bonds and equity derivatives) and commodities. The fund may not hold all of these instruments. The fund is not rated by these agencies. |
| (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 due to the interest rate move. |
2
MFS Strategic Income Portfolio
Portfolio Composition – continued
| (i) | | For purposes of this presentation, the components include the value of securities, and reflect the impact of the equivalent exposure of derivative positions, if any. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. The bond component will include any accrued interest amounts. |
| (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. |
| (x) | | Represents the portfolio’s exposure to issuer countries as a percentage of a portfolio’s net assets. For purposes of this presentation, United States includes Cash & Other. |
Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.
The fund invests a portion of its assets in the MFS High Yield Pooled Portfolio. Percentages reflect exposure to the underlying holdings of the MFS High Yield Pooled Portfolio and not to the exposure from investing directly in the MFS High Yield Pooled Portfolio itself.
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
The portfolio is actively managed and current holdings may be different.
3
MFS Strategic Income Portfolio
MANAGEMENT REVIEW
Summary of Results
For the twelve months ended December 31, 2014, Initial Class shares of the MFS Strategic Income Portfolio (“fund”) provided a total return of 3.27%, while Service Class shares of the fund provided a total return of 2.99%. These compare with a return of 2.46% over the same period for the fund’s benchmark, the Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index. For the same period, the fund’s other benchmark, the MFS Strategic Income Blended Index (“Blended Index”), generated a return of 4.35%. 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
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Relative to the Blended Index, the fund’s lesser exposure to the long end (centered around maturities of 10 or more years) of the U.S. Treasury yield curve (y) detracted from performance as the yield curve flattened during the period.
The fund’s greater exposure to “BBB” and “BB” rated (r) bonds also held back relative returns as corporate spreads within these credit quality segments widened over the reporting period.
The portion of the fund’s return derived from yield, which was less than that of the Blended Index, was another factor that weakened relative results.
Contributors to Performance
The fund’s greater exposure to corporate bonds in the financial, banking, and industrial sectors aided relative performance as these market segments posted strong returns over the period.
Additionally, positive security selection, particularly within the industrial, telecommunications and banking sectors, benefited relative results.
Respectfully,
| | | | | | |
| William Adams | | Ward Brown | | James Calmas | | David Cole |
| Portfolio Manager | | Portfolio Manager | | Portfolio Manager | | Portfolio Manager |
| | | |
| Robert Persons | | Matthew Ryan | | Erik Weisman | | |
| 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 source for bond quality ratings is Moody’s Investors Service, Standard & Poor’s and Fitch, Inc. and are applied using the following hierarchy: If all three agencies provide a rating, the middle rating (after dropping the highest and lowest ratings) is assigned; if two of the three agencies rate a security, the lower of the two is assigned. Ratings are shown in the S&P and Fitch scale (e.g., AAA). 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. |
4
MFS Strategic Income Portfolio
Management Review – continued
The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.
5
MFS Strategic Income Portfolio
PERFORMANCE SUMMARY THROUGH 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 5/06/98 | | 3.27% | | 5.96% | | 5.25% | | |
| | | Service Class | | 8/24/01 | | 2.99% | | 5.68% | | 4.98% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index (f) | | 2.46% | | 8.98% | | 7.73% | | |
| | | MFS Strategic Income Blended Index (f)(w) | | 4.35% | | 6.06% | | 6.04% | | |
| | | Barclays U.S. Credit Bond Index (f) | | 7.53% | | 6.25% | | 5.46% | | |
| | | Barclays U.S. Government/Mortgage Bond Index (f) | | 5.41% | | 3.69% | | 4.50% | | |
| | | Citigroup World Government Bond Non-Dollar Hedged Index (f) | | 9.77% | | 4.61% | | 4.70% | | |
| | | Citigroup World Government Bond Non-Dollar Index (f) | | (2.68)% | | 0.85% | | 2.64% | | |
| | | JPMorgan Emerging Markets Bond Index Global (f) | | 5.53% | | 7.27% | | 7.68% | | |
| (f) | | Source: FactSet Research Systems Inc. |
| (w) | | As of December 31, 2014 the MFS Strategic Income Blended Index was comprised of 10% Barclays U.S. Credit Bond Index, 33% Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped 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 U.S. Government/Mortgage Bond Index. |
Benchmark Definitions
Barclays 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 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).
6
MFS Strategic Income Portfolio
Performance Summary – continued
Barclays U.S. High-Yield Corporate Bond 2% Issuer Capped Index – a component of the Barclays U.S. High-Yield Corporate Bond Index, which measures performance of non-investment grade, fixed rate debt. The index limits the maximum exposure to any one issuer to 2%.
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
7
MFS Strategic Income Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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.
In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying MFS Pooled Portfolio in which the fund invests. MFS Pooled Portfolios are mutual funds advised by MFS that do not pay management fees to MFS but do incur investment and operating costs. If these transactional and indirect costs were included, your costs would have been higher.
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.80% | | | | $1,000.00 | | | | $987.37 | | | | $4.01 | |
| | Hypothetical (h) | | | 0.80% | | | | $1,000.00 | | | | $1,021.17 | | | | $4.08 | |
| Service Class | | Actual | | | 1.05% | | | | $1,000.00 | | | | $985.23 | | | | $5.25 | |
| | Hypothetical (h) | | | 1.05% | | | | $1,000.00 | | | | $1,019.91 | | | | $5.35 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying funds in which the fund invests. If these indirect costs were included, your costs would have been higher. |
8
MFS Strategic Income Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – 64.3% | | | | | | | | |
| Asset-Backed & Securitized – 1.6% | | | | | | | | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.769%, 12/28/40 (z) | | $ | 288,295 | | | $ | 172,069 | |
| Credit Suisse Commercial Mortgage Trust, “A4”, FRN, 5.898%, 9/15/39 | | | 125,805 | | | | 135,306 | |
| Crest Ltd., CDO 7%, 1/28/40 (a)(p) | | | 556,178 | | | | 6,379 | |
| Falcon Franchise Loan LLC, FRN, 4.312%, 1/05/23 (i)(z) | | | 54,397 | | | | 4,335 | |
| Falcon Franchise Loan LLC, FRN, 20.252%, 1/05/25 (i)(z) | | | 54,437 | | | | 13,745 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.735%, 1/12/43 (i)(z) | | | 21,594 | | | | 36 | |
| First Union-Lehman Brothers Bank of America, FRN, 0.623%, 11/18/35 (i) | | | 1,103,963 | | | | 18,250 | |
| HLSS Servicer Advance Receivables Trust, 2013-T1, “A2”, 1.495%, 1/16/46 (n) | | | 150,000 | | | | 149,880 | |
| JPMorgan Chase Commercial Mortgage Trust, 2007-LD11, “AM”, FRN, 5.787%, 6/15/49 | | | 293,049 | | | | 303,747 | |
| Lehman Brothers Commercial Conduit Mortgage Trust, FRN, 1.175%, 2/18/30 (i) | | | 55,612 | | | | 1,257 | |
| Morgan Stanley Capital I Trust, “AM”, FRN, 5.683%, 4/15/49 | | | 300,000 | | | | 312,197 | |
| Morgan Stanley Capital I, Inc., FRN, 1.417%, 4/28/39 (i)(z) | | | 876,662 | | | | 4,418 | |
| | | | | | | | |
| | | $ | 1,121,619 | |
| | | | | | | | |
| Automotive – 0.8% | | | | | | | | |
| General Motors Financial Co., Inc., 2.625%, 7/10/17 | | $ | 368,000 | | | $ | 369,620 | |
| Hyundai Capital America, 1.875%, 8/09/16 (n) | | | 180,000 | | | | 181,291 | �� |
| | | | | | | | |
| | | $ | 550,911 | |
| | | | | | | | |
| Biotechnology – 0.4% | | | | | | | | |
| Life Technologies Corp., 6%, 3/01/20 | | $ | 240,000 | | | $ | 274,192 | |
| | | | | | | | |
| Broadcasting – 0.2% | | | | | | | | |
| Scripps Networks Interactive, 2.75%, 11/15/19 | | $ | 44,000 | | | $ | 44,184 | |
| SES Global Americas Holdings GP, 2.5%, 3/25/19 (n) | | | 102,000 | | | | 101,487 | |
| | | | | | | | |
| | | $ | 145,671 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.5% | | | | | |
| TD Ameritrade Holding Corp., 5.6%, 12/01/19 | | $ | 285,000 | | | $ | 327,159 | |
| | | | | | | | |
| Building – 1.2% | | | | | | | | |
| CRH PLC, 8.125%, 7/15/18 | | $ | 200,000 | | | $ | 239,361 | |
| Martin Marietta Materials, Inc., 1.356%, 6/30/17 | | | 300,000 | | | | 303,289 | |
| Martin Marietta Materials, Inc., 4.25%, 7/02/24 | | | 215,000 | | | | 220,241 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Building – continued | | | | | | | | |
| Owens Corning, Inc., 4.2%, 12/15/22 | | $ | 105,000 | | | $ | 106,562 | |
| | | | | | | | |
| | | $ | 869,453 | |
| | | | | | | | |
| Cable TV – 1.1% | | | | | | | | |
| Cox Communications, Inc., 3.25%, 12/15/22 (n) | | $ | 306,000 | | | $ | 300,443 | |
| NBCUniversal Enterprise, Inc., 1.974%, 4/15/19 (n) | | | 104,000 | | | | 102,976 | |
| Time Warner Cable, Inc., 8.25%, 4/01/19 | | | 310,000 | | | | 379,484 | |
| | | | | | | | |
| | | $ | 782,903 | |
| | | | | | | | |
| Chemicals – 0.8% | | | | | | | | |
| Dow Chemical Co., 8.55%, 5/15/19 | | $ | 430,000 | | | $ | 534,596 | |
| Israel Chemicals Ltd., 4.5%, 12/02/24 (n) | | | 8,000 | | | | 8,000 | |
| | | | | | | | |
| | | $ | 542,596 | |
| | | | | | | | |
| Computer Software – 0.3% | | | | | | | | |
| Oracle Corp., 5.375%, 7/15/40 | | $ | 169,000 | | | $ | 202,734 | |
| | | | | | | | |
| Computer Software – Systems – 0.2% | | | | | |
| Seagate HDD Cayman, 3.75%, 11/15/18 (n) | | $ | 107,000 | | | $ | 109,809 | |
| | | | | | | | |
| Consumer Products – 0.5% | | | | | | | | |
| Newell Rubbermaid, Inc., 2.875%, 12/01/19 | | $ | 110,000 | | | $ | 110,041 | |
| Reckitt Benckiser Treasury Services PLC, 3.625%, 9/21/23 (n) | | | 259,000 | | | | 271,441 | |
| | | | | | | | |
| | | $ | 381,482 | |
| | | | | | | | |
| Consumer Services – 0.6% | | | | | | | | |
| Experian Finance PLC, 2.375%, 6/15/17 (n) | | $ | 400,000 | | | $ | 403,096 | |
| | | | | | | | |
| Defense Electronics – 0.7% | | | | | | | | |
| BAE Systems Holdings, Inc., 5.2%, 8/15/15 (n) | | $ | 381,000 | | | $ | 391,029 | |
| BAE Systems Holdings, Inc., 6.375%, 6/01/19 (n) | | | 100,000 | | | | 115,452 | |
| | | | | | | | |
| | | $ | 506,481 | |
| | | | | | | | |
| Electrical Equipment – 0.1% | | | | | | | | |
| Arrow Electronics, Inc., 3%, 3/01/18 | | $ | 84,000 | | | $ | 86,137 | |
| | | | | | | | |
| Electronics – 0.1% | | | | | |
| Tyco Electronics Group S.A., 3.5%, 2/03/22 | | $ | 79,000 | | | $ | 81,582 | |
| | | | | | | | |
| Emerging Market Quasi-Sovereign – 1.0% | |
| Ecopetrol S.A., 5.875%, 5/28/45 | | $ | 5,000 | | | $ | 4,625 | |
| IIRSA Norte Finance Ltd., 8.75%, 5/30/24 | | | 190,711 | | | | 225,516 | |
| Petroleos Mexicanos, 5.5%, 1/21/21 | | | 216,000 | | | | 233,820 | |
| Petroleos Mexicanos, 4.875%, 1/24/22 | | | 64,000 | | | | 67,034 | |
| Petroleos Mexicanos, 4.875%, 1/18/24 | | | 10,000 | | | | 10,390 | |
| Petroleos Mexicanos, 6.5%, 6/02/41 | | | 80,000 | | | | 91,800 | |
9
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Emerging Market Quasi-Sovereign – continued | |
| Ras Laffan Liquefied Natural Gas Co. Ltd., 5.832%, 9/30/16 (n) | | $ | 94,750 | | | $ | 98,658 | |
| | | | | | | | |
| | | $ | 731,843 | |
| | | | | | | | |
| Emerging Market Sovereign – 0.3% | |
| Oriental Republic of Uruguay, 4.5%, 8/14/24 | | $ | 11,000 | | | $ | 11,550 | |
| Republic of Hungary, 5.375%, 2/21/23 | | | 14,000 | | | | 15,085 | |
| Republic of Philippines, 6.375%, 10/23/34 | | | 100,000 | | | | 134,000 | |
| Republic of Poland, 5%, 3/23/22 | | | 37,000 | | | | 41,447 | |
| Republic of Romania, 4.375%, 8/22/23 (n) | | | 8,000 | | | | 8,410 | |
| Republic of Romania, 4.875%, 1/22/24 (n) | | | 8,000 | | | | 8,720 | |
| United Mexican States, 4%, 10/02/23 | | | 4,000 | | | | 4,150 | |
| | | | | | | | |
| | | $ | 223,362 | |
| | | | | | | | |
| Energy – Independent – 0.9% | |
| Anadarko Petroleum Corp., 3.45%, 7/15/24 | | $ | 390,000 | | | $ | 380,733 | |
| EQT Corp., 4.875%, 11/15/21 | | | 122,000 | | | | 131,797 | |
| Hess Corp., 8.125%, 2/15/19 | | | 90,000 | | | | 107,081 | |
| | | | | | | | |
| | | $ | 619,611 | |
| | | | | | | | |
| Energy – Integrated – 0.6% | |
| BP Capital Markets PLC, 4.5%, 10/01/20 | | $ | 75,000 | | | $ | 81,148 | |
| BP Capital Markets PLC, 4.742%, 3/11/21 | | | 220,000 | | | | 239,472 | |
| Pacific Rubiales Energy Corp., 7.25%, 12/12/21 (n) | | | 115,000 | | | | 100,050 | |
| | | | | | | | |
| | | $ | 420,670 | |
| | | | | | | | |
| Financial Institutions – 1.8% | |
| CIT Group, Inc., 3.875%, 2/19/19 | | $ | 450,000 | | | $ | 448,875 | |
| General Electric Capital Corp., 6%, 8/07/19 | | | 80,000 | | | | 93,054 | |
| General Electric Capital Corp., 5.5%, 1/08/20 | | | 205,000 | | | | 234,638 | |
| General Electric Capital Corp., 3.15%, 9/07/22 | | | 187,000 | | | | 190,462 | |
| General Electric Capital Corp., 3.1%, 1/09/23 | | | 125,000 | | | | 126,562 | |
| LeasePlan Corp. N.V., 3%, 10/23/17 (n) | | | 200,000 | | | | 204,863 | |
| | | | | | | | |
| | | $ | 1,298,454 | |
| | | | | | | | |
| Food & Beverages – 2.7% | |
| Anadolu Efes Biracilik ve Malt Sanayii A.S., 3.375%, 11/01/22 | | $ | 221,000 | | | $ | 202,768 | |
| Conagra Foods, Inc., 3.2%, 1/25/23 | | | 138,000 | | | | 135,173 | |
| Kerry Group Financial Services, 3.2%, 4/09/23 (n) | | | 320,000 | | | | 313,069 | |
| Kraft Foods Group, Inc., 6.125%, 8/23/18 | | | 250,000 | | | | 285,854 | |
| Mead Johnson Nutrition Co., “A”, 4.9%, 11/01/19 | | | 69,000 | | | | 75,831 | |
| SABMiller Holdings, Inc., 3.75%, 1/15/22 (n) | | | 205,000 | | | | 213,961 | |
| Tyson Foods, Inc., 6.6%, 4/01/16 | | | 190,000 | | | | 202,579 | |
| Tyson Foods, Inc., 4.5%, 6/15/22 | | | 124,000 | | | | 134,253 | |
| Wm. Wrigley Jr. Co., 2.4%, 10/21/18 (n) | | | 91,000 | | | | 91,641 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Food & Beverages – continued | |
| Wm. Wrigley Jr. Co., 3.375%, 10/21/20 (n) | | $ | 277,000 | | | $ | 283,129 | |
| | | | | | | | |
| | | $ | 1,938,258 | |
| | | | | | | | |
| Food & Drug Stores – 0.5% | |
| Walgreens Boots Alliance, Inc., 3.3%, 11/18/21 | | $ | 316,000 | | | $ | 318,198 | |
| | | | | | | | |
| Forest & Paper Products – 0.4% | |
| Georgia-Pacific LLC, 3.734%, 7/15/23 (n) | | $ | 263,000 | | | $ | 268,985 | |
| | | | | | | | |
| Gaming & Lodging – 0.5% | |
| Wyndham Worldwide Corp., 5.625%, 3/01/21 | | $ | 320,000 | | | $ | 357,823 | |
| | | | | | | | |
| Insurance – 2.3% | |
| American International Group, Inc., 5.85%, 1/16/18 | | $ | 139,000 | | | $ | 155,416 | |
| American International Group, Inc., 3.375%, 8/15/20 | | | 190,000 | | | | 197,372 | |
| MetLife, Inc., 1.756%, 12/15/17 | | | 51,000 | | | | 51,172 | |
| Principal Financial Group, Inc., 8.875%, 5/15/19 | | | 210,000 | | | | 264,223 | |
| Prudential Financial, Inc., 6.2%, 1/15/15 | | | 210,000 | | | | 210,377 | |
| Unum Group, 7.125%, 9/30/16 | | | 250,000 | | | | 273,166 | |
| Unum Group, 4%, 3/15/24 | | | 323,000 | | | | 329,875 | |
| Voya Financial, Inc., 2.9%, 2/15/18 | | | 107,000 | | | | 109,542 | |
| | | | | | | | |
| | | $ | 1,591,143 | |
| | | | | | | | |
| Insurance – Property & Casualty – 0.9% | |
| AXIS Capital Holdings Ltd., 5.875%, 6/01/20 | | $ | 90,000 | | | $ | 101,950 | |
| CNA Financial Corp., 5.875%, 8/15/20 | | | 260,000 | | | | 296,799 | |
| Liberty Mutual Group, Inc., 4.95%, 5/01/22 (n) | | | 187,000 | | | | 202,310 | |
| | | | | | | | |
| | | $ | 601,059 | |
| | | | | | | | |
| International Market Quasi-Sovereign – 0.9% | |
| EDF Energies Nouvelles S.A., 6.5%, 1/26/19 (n) | | $ | 350,000 | | | $ | 409,661 | |
| Eksportfinans A.S.A., 5.5%, 5/25/16 | | | 240,000 | | | | 250,764 | |
| | | | | | | | |
| | | $ | 660,425 | |
| | | | | | | | |
| International Market Sovereign – 12.3% | |
| Commonwealth of Australia, 5.75%, 5/15/21 | | AUD | 252,000 | | | $ | 245,622 | |
| Federal Republic of Germany, 4.25%, 7/04/18 | | EUR | 200,000 | | | | 278,820 | |
| Federal Republic of Germany, 3.25%, 7/04/21 | | EUR | 66,000 | | | | 95,963 | |
| Federal Republic of Germany, 6.25%, 1/04/30 | | EUR | 116,000 | | | | 245,472 | |
| Federal Republic of Germany, 2.5%, 7/04/44 | | EUR | 52,000 | | | | 80,000 | |
| Government of Canada, 4.25%, 6/01/18 | | CAD | 66,000 | | | | 62,691 | |
| Government of Canada, 3.25%, 6/01/21 | | CAD | 154,000 | | | | 146,812 | |
| Government of Canada, 5.75%, 6/01/33 | | CAD | 38,000 | | | | 50,058 | |
| Government of Japan, 1.1%, 6/20/20 | | JPY | 50,500,000 | | | | 445,950 | |
10
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| International Market Sovereign – continued | |
| Government of Japan, 0.8%, 6/20/23 | | JPY | 21,000,000 | | | $ | 183,946 | |
| Government of Japan, 2.1%, 9/20/24 | | JPY | 45,750,000 | | | | 447,390 | |
| Government of Japan, 2.2%, 9/20/27 | | JPY | 40,550,000 | | | | 409,372 | |
| Government of Japan, 2.4%, 3/20/37 | | JPY | 38,350,000 | | | | 398,013 | |
| Government of Japan, 1.8%, 3/20/43 | | JPY | 13,050,000 | | | | 123,178 | |
| Government of New Zealand, 5%, 3/15/19 | | NZD | 115,000 | | | | 94,704 | |
| Government of New Zealand, 5.5%, 4/15/23 | | NZD | 20,000 | | | | 17,624 | |
| Government of Norway, 3.75%, 5/25/21 | | NOK | 500,000 | | | | 77,378 | |
| Kingdom of Belgium, 5.5%, 9/28/17 | | EUR | 240,000 | | | | 334,514 | |
| Kingdom of Belgium, 4.25%, 9/28/21 | | EUR | 122,000 | | | | 185,607 | |
| Kingdom of Denmark, 3%, 11/15/21 | | DKK | 541,000 | | | | 103,881 | |
| Kingdom of Spain, 5.4%, 1/31/23 | | EUR | 168,000 | | | | 265,855 | |
| Kingdom of Spain, 4.6%, 7/30/19 | | EUR | 339,000 | | | | 480,272 | |
| Kingdom of Sweden, 5%, 12/01/20 | | SEK | 560,000 | | | | 90,994 | |
| Kingdom of Sweden, 3.5%, 6/01/22 | | SEK | 335,000 | | | | 51,912 | |
| Kingdom of the Netherlands, 3.5%, 7/15/20 | | EUR | 46,000 | | | | 65,903 | |
| Kingdom of the Netherlands, 5.5%, 1/15/28 | | EUR | 103,000 | | | | 194,316 | |
| Republic of Austria, 4.65%, 1/15/18 | | EUR | 148,000 | | | | 204,419 | |
| Republic of Austria, 1.75%, 10/20/23 | | EUR | 62,000 | | | | 82,645 | |
| Republic of Finland, 3.875%, 9/15/17 | | EUR | 82,000 | | | | 109,701 | |
| Republic of France, 2.5%, 10/25/20 | | EUR | 69,000 | | | | 94,209 | |
| Republic of France, 6%, 10/25/25 | | EUR | 130,000 | | | | 239,362 | |
| Republic of France, 4.75%, 4/25/35 | | EUR | 193,000 | | | | 359,579 | |
| Republic of Ireland, 4.5%, 4/18/20 | | EUR | 26,000 | | | | 37,904 | |
| Republic of Ireland, 5.4%, 3/13/25 | | EUR | 24,000 | | | | 40,015 | |
| Republic of Italy, 5.25%, 8/01/17 | | EUR | 535,000 | | | | 723,878 | |
| Republic of Italy, 3.75%, 3/01/21 | | EUR | 652,000 | | | | 907,573 | |
| United Kingdom Treasury, 8%, 6/07/21 | | GBP | 53,000 | | | | 116,339 | |
| United Kingdom Treasury, 2.25%, 9/07/23 | | GBP | 120,000 | | | | 195,972 | |
| United Kingdom Treasury, 4.25%, 12/07/27 | | GBP | 51,000 | | | | 100,115 | |
| United Kingdom Treasury, 4.25%, 3/07/36 | | GBP | 104,000 | | | | 212,306 | |
| United Kingdom Treasury, 3.25%, 1/22/44 | | GBP | 50,000 | | | | 89,905 | |
| | | | | | | | |
| | | $ | 8,690,169 | |
| | | | | | | | |
| Machinery & Tools – 0.5% | | | | | | | | |
| Atlas Copco AB, 5.6%, 5/22/17 (n) | | $ | 349,000 | | | $ | 380,766 | |
| | | | | | | | |
| Major Banks – 7.6% | | | | | | | | |
| ABN AMRO Bank N.V., 4.25%, 2/02/17 (n) | | $ | 200,000 | | | $ | 210,732 | |
| Bank of America Corp., 6.5%, 8/01/16 | | | 295,000 | | | | 317,887 | |
| Bank of America Corp., 3.3%, 1/11/23 | | | 212,000 | | | | 212,016 | |
| Bank of America Corp., 4.125%, 1/22/24 | | | 325,000 | | | | 341,300 | |
| Barclays Bank PLC, 5.125%, 1/08/20 | | | 230,000 | | | | 257,883 | |
| BNP Paribas, 2.7%, 8/20/18 | | | 220,000 | | | | 224,843 | |
| BNP Paribas, 7.195% to 6/25/37, FRN to 6/29/49 (n) | | | 200,000 | | | | 231,750 | |
| Commonwealth Bank of Australia, 5%, 10/15/19 (n) | | | 220,000 | | | | 245,624 | |
| DBS Bank Ltd., 2.35%, 2/28/17 (n) | | | 200,000 | | | | 204,369 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Major Banks – continued | | | | | | | | |
| Goldman Sachs Group, Inc., 5.125%, 1/15/15 | | $ | 140,000 | | | $ | 140,180 | |
| Goldman Sachs Group, Inc., 5.75%, 1/24/22 | | | 334,000 | | | | 386,367 | |
| Goldman Sachs Group, Inc., FRN, 1.25%, 10/23/19 | | | 160,000 | | | | 160,744 | |
| ING Bank N.V., 5.8%, 9/25/23 (n) | | | 322,000 | | | | 357,188 | |
| JPMorgan Chase & Co., 2%, 8/15/17 | | | 55,000 | | | | 55,527 | |
| JPMorgan Chase & Co., 4.625%, 5/10/21 | | | 230,000 | | | | 253,137 | |
| Merrill Lynch & Co., Inc., 6.4%, 8/28/17 | | | 120,000 | | | | 133,709 | |
| Morgan Stanley, 7.3%, 5/13/19 | | | 100,000 | | | | 118,615 | |
| Morgan Stanley, 5.625%, 9/23/19 | | | 200,000 | | | | 225,759 | |
| Morgan Stanley, 3.7%, 10/23/24 | | | 277,000 | | | | 280,773 | |
| Morgan Stanley, FRN, 1.482%, 2/25/16 | | | 220,000 | | | | 221,780 | |
| Royal Bank of Scotland PLC, 2.55%, 9/18/15 | | | 140,000 | | | | 141,400 | |
| Royal Bank of Scotland PLC, 6%, 12/19/23 | | | 380,000 | | | | 411,311 | |
| Standard Chartered PLC, 3.85%, 4/27/15 (n) | | | 250,000 | | | | 252,386 | |
| | | | | | | | |
| | | $ | 5,385,280 | |
| | | | | | | | |
| Medical & Health Technology & Services – 0.2% | |
| McKesson Corp., 5.7%, 3/01/17 | | $ | 130,000 | | | $ | 141,186 | |
| | | | | | | | |
| Metals & Mining – 1.6% | | | | | | | | |
| Barrick Gold Corp., 4.1%, 5/01/23 | | $ | 337,000 | | | $ | 327,968 | |
| Freeport-McMoRan Copper & Gold, Inc., 2.375%, 3/15/18 | | | 130,000 | | | | 128,571 | |
| Freeport-McMoRan Copper & Gold, Inc., 3.1%, 3/15/20 | | | 200,000 | | | | 194,547 | |
| Glencore Funding LLC, FRN, 1.395%, 5/27/16 (n) | | | 280,000 | | | | 281,396 | |
| Kinross Gold Corp., 5.95%, 3/15/24 (n) | | | 217,000 | | | | 203,620 | |
| | | | | | | | |
| | | $ | 1,136,102 | |
| | | | | | | | |
| Midstream – 2.6% | | | | | | | | |
| DCP Midstream LLC, 3.875%, 3/15/23 | | $ | 167,000 | | | $ | 159,808 | |
| Enterprise Products Partners LP, 6.3%, 9/15/17 | | | 230,000 | | | | 257,160 | |
| Kinder Morgan Energy Partners LP, 6.375%, 3/01/41 | | | 320,000 | | | | 356,386 | |
| ONEOK Partners LP, 3.2%, 9/15/18 | | | 120,000 | | | | 121,623 | |
| Plains All American Pipeline LP, 3.6%, 11/01/24 | | | 214,000 | | | | 210,087 | |
| Spectra Energy Capital LLC, 8%, 10/01/19 | | | 230,000 | | | | 278,326 | |
| Sunoco Logistics Partners LP, 4.25%, 4/01/24 | | | 109,000 | | | | 110,226 | |
| Williams Cos., Inc., 3.7%, 1/15/23 | | | 74,000 | | | | 66,458 | |
| Williams Cos., Inc., 4.55%, 6/24/24 | | | 295,000 | | | | 274,344 | |
| | | | | | | | |
| | | $ | 1,834,418 | |
| | | | | | | | |
| Miscellaneous Revenue – Other – 0.4% | |
| Florida Hurricane Catastrophe Fund Finance Corp. Rev, “A”, 2.107%, 7/01/18 | | $ | 245,000 | | | $ | 246,695 | |
| | | | | | | | |
11
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Mortgage-Backed – 0.6% | | | | | | | | |
| Fannie Mae, 6%, 5/01/17 | | $ | 8,323 | | | $ | 8,542 | |
| Fannie Mae, 5.5%, 3/01/20 - 9/01/34 | | | 86,883 | | | | 93,759 | |
| Fannie Mae, 6.5%, 4/01/32 | | | 43,511 | | | | 50,207 | |
| Freddie Mac, 4.224%, 3/25/20 | | | 241,289 | | | | 265,187 | |
| | | | | | | | |
| | | $ | 417,695 | |
| | | | | | | | |
| Network & Telecom – 1.0% | | | | | | | | |
| Centurylink, Inc., 7.65%, 3/15/42 | | $ | 223,000 | | | $ | 221,885 | |
| Verizon Communications, Inc., 5.15%, 9/15/23 | | | 334,000 | | | | 368,814 | |
| Verizon Communications, Inc., FRN, 1.012%, 6/17/19 | | | 140,000 | | | | 140,725 | |
| | | | | | | | |
| | | $ | 731,424 | |
| | | | | | | | |
| Oil Services – 0.4% | | | | | | | | |
| Transocean, Inc., 2.5%, 10/15/17 | | $ | 86,000 | | | $ | 76,033 | |
| Transocean, Inc., 6%, 3/15/18 | | | 180,000 | | | | 173,134 | |
| | | | | | | | |
| | | $ | 249,167 | |
| | | | | | | | |
| Oils – 0.2% | | | | | | | | |
| Marathon Petroleum Corp., 3.625%, 9/15/24 | | $ | 140,000 | | | $ | 137,200 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 4.2% | |
| Abbey National Treasury Services PLC, 3.05%, 8/23/18 | | $ | 90,000 | | | $ | 93,179 | |
| Banco GNB Sudameris S.A., 3.875%, 5/02/18 (n) | | | 18,000 | | | | 17,415 | |
| Bancolombia S.A., 5.125%, 9/11/22 | | | 7,000 | | | | 6,939 | |
| Citigroup, Inc., 6.01%, 1/15/15 | | | 160,000 | | | | 160,228 | |
| Citigroup, Inc., 8.5%, 5/22/19 | | | 229,000 | | | | 285,349 | |
| Citigroup, Inc., 3.75%, 6/16/24 | | | 213,000 | | | | 217,871 | |
| Groupe BPCE S.A., 12.5% to 9/30/19, FRN to 8/29/49 (n) | | | 259,000 | | | | 349,650 | |
| Intesa Sanpaolo S.p.A., 5.017%, 6/26/24 (n) | | | 445,000 | | | | 431,879 | |
| Lloyds TSB Bank PLC, 5.8%, 1/13/20 (n) | | | 210,000 | | | | 242,664 | |
| Macquarie Bank Ltd., 5%, 2/22/17 (n) | | | 190,000 | | | | 202,666 | |
| Macquarie Group Ltd., 6%, 1/14/20 (n) | | | 134,000 | | | | 151,778 | |
| Rabobank Nederland N.V., 3.375%, 1/19/17 | | | 151,000 | | | | 157,530 | |
| Rabobank Nederland N.V., 3.95%, 11/09/22 | | | 250,000 | | | | 254,657 | |
| SunTrust Banks, Inc., 3.5%, 1/20/17 | | | 176,000 | | | | 183,482 | |
| Swedbank AB, 2.125%, 9/29/17 (n) | | | 200,000 | | | | 202,320 | |
| | | | | | | | |
| | | $ | 2,957,607 | |
| | | | | | | | |
| Pharmaceuticals – 1.0% | | | | | | | | |
| Celgene Corp., 3.95%, 10/15/20 | | $ | 290,000 | | | $ | 306,776 | |
| Hospira, Inc., 6.05%, 3/30/17 | | | 160,000 | | | | 172,516 | |
| Perrigo Finance PLC, 3.5%, 12/15/21 | | | 254,000 | | | | 256,963 | |
| | | | | | | | |
| | | $ | 736,255 | |
| | | | | | | | |
| Pollution Control – 0.3% | | | | | | | | |
| Republic Services, Inc., 5.25%, 11/15/21 | | $ | 210,000 | | | $ | 237,780 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Railroad & Shipping – 0.5% | | | | | | | | |
| CSX Corp., 4.1%, 3/15/44 | | $ | 220,000 | | | $ | 217,934 | |
| Panama Canal Railway Co., 7%, 11/01/26 (n) | | | 166,000 | | | | 163,925 | |
| | | | | | | | |
| | | $ | 381,859 | |
| | | | | | | | |
| Real Estate – Apartment – 0.4% | | | | | | | | |
| AvalonBay Communities, Inc., REIT, 3.625%, 10/01/20 | | $ | 240,000 | | | $ | 249,622 | |
| | | | | | | | |
| Real Estate – Healthcare – 0.5% | | | | | | | | |
| HCP, Inc., REIT, 5.375%, 2/01/21 | | $ | 236,000 | | | $ | 263,543 | |
| Health Care REIT, Inc., 2.25%, 3/15/18 | | | 81,000 | | | | 81,507 | |
| | | | | | | | |
| | | $ | 345,050 | |
| | | | | | | | |
| Real Estate – Office – 0.4% | | | | | | | | |
| Boston Properties LP, REIT, 3.7%, 11/15/18 | | $ | 120,000 | | | $ | 126,532 | |
| Vornado Realty LP, REIT, 2.5%, 6/30/19 | | | 165,000 | | | | 163,571 | |
| | | | | | | | |
| | | $ | 290,103 | |
| | | | | | | | |
| Real Estate – Retail – 0.3% | | | | | | | | |
| Kimco Realty Corp., REIT, 6.875%, 10/01/19 | | $ | 58,000 | | | $ | 68,740 | |
| Simon Property Group LP, REIT, 3.375%, 10/01/24 | | | 160,000 | | | | 162,746 | |
| | | | | | | | |
| | | $ | 231,486 | |
| | | | | | | | |
| Retailers – 1.4% | | | | | | | | |
| Bed Bath & Beyond, Inc., 5.165%, 8/01/44 | | $ | 368,000 | | | $ | 383,859 | |
| Gap, Inc., 5.95%, 4/12/21 | | | 306,000 | | | | 348,230 | |
| Kohl’s Corp., 3.25%, 2/01/23 | | | 124,000 | | | | 120,737 | |
| Target Corp., 3.5%, 7/01/24 | | | 124,000 | | | | 128,733 | |
| | | | | | | | |
| | | $ | 981,559 | |
| | | | | | | | |
| Supermarkets – 0.4% | | | | | | | | |
| Kroger Co., 3.85%, 8/01/23 | | $ | 262,000 | | | $ | 271,661 | |
| | | | | | | | |
| Supranational – 0.5% | | | | | | | | |
| Corporacion Andina de Fomento, 4.375%, 6/15/22 | | $ | 340,000 | | | $ | 365,451 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.3% | |
| American Tower Corp., REIT, 4.625%, 4/01/15 | | $ | 120,000 | | | $ | 121,076 | |
| American Tower Corp., REIT, 4.7%, 3/15/22 | | | 208,000 | | | | 218,086 | |
| Crown Castle Towers LLC, 6.113%, 1/15/20 (n) | | | 261,000 | | | | 299,796 | |
| SBA Tower Trust, 2.898%, 10/15/19 (n) | | | 255,000 | | | | 255,672 | |
| | | | | | | | |
| | | $ | 894,630 | |
| | | | | | | | |
| Tobacco – 0.8% | | | | | | | | |
| Altria Group, Inc., 9.25%, 8/06/19 | | $ | 76,000 | | | $ | 97,678 | |
| Altria Group, Inc., 4%, 1/31/24 | | | 103,000 | | | | 107,386 | |
| Lorillard Tobacco Co., 8.125%, 6/23/19 | | | 173,000 | | | | 209,733 | |
| Lorillard Tobacco Co., 6.875%, 5/01/20 | | | 120,000 | | | | 141,345 | |
| | | | | | | | |
| | | $ | 556,142 | |
| | | | | | | | |
12
MFS Strategic Income Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Transportation – Services – 0.5% | | | | | | | | |
| ERAC USA Finance Co., 6.375%, 10/15/17 (n) | | $ | 290,000 | | | $ | 325,635 | |
| | | | | | | | |
| U.S. Government Agencies and Equivalents – 0.9% | |
| National Credit Union Administration Guaranteed Note, 2.9%, 10/29/20 | | $ | 70,000 | | | $ | 71,892 | |
| Small Business Administration, 6.35%, 4/01/21 | | | 13,740 | | | | 14,894 | |
| Small Business Administration, 4.34%, 3/01/24 | | | 132,410 | | | | 139,024 | |
| Small Business Administration, 4.77%, 4/01/24 | | | 61,379 | | | | 65,122 | |
| Small Business Administration, 4.99%, 9/01/24 | | | 50,391 | | | | 54,470 | |
| Small Business Administration, 4.86%, 1/01/25 | | | 69,554 | | | | 74,760 | |
| Small Business Administration, 4.625%, 2/01/25 | | | 88,126 | | | | 93,531 | |
| Small Business Administration, 5.11%, 8/01/25 | | | 85,684 | | | | 92,773 | |
| | | | | | | | |
| | | $ | 606,466 | |
| | | | | | | | |
| Utilities – Electric Power – 1.6% | | | | | | | | |
| CMS Energy Corp., 5.05%, 3/15/22 | | $ | 163,000 | | | $ | 182,741 | |
| Empresa Nacional de Electricidad S.A., 4.25%, 4/15/24 | | | 2,000 | | | | 2,011 | |
| Enel Finance International S.A., 6.25%, 9/15/17 (n) | | | 140,000 | | | | 155,402 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| BONDS – continued | | | | | | | | |
| Utilities – Electric Power – continued | | | | | |
| Exelon Generation Co. LLC, 5.2%, 10/01/19 | | $ | 135,000 | | | $ | 149,178 | |
| Exelon Generation Co. LLC, 4.25%, 6/15/22 | | | 75,000 | | | | 77,939 | |
| Oncor Electric Delivery Co., 4.1%, 6/01/22 | | | 245,000 | | | | 263,122 | |
| PPL WEM Holdings PLC, 3.9%, 5/01/16 (n) | | | 310,000 | | | | 319,211 | |
| | | | | | | | |
| | | $ | 1,149,604 | |
| | | | | | | | |
Total Bonds
(Identified Cost, $44,364,029) | | | $ | 45,346,668 | |
| | | | | | | | |
|
| UNDERLYING AFFILIATED FUNDS – 33.5% | |
| MFS High Yield Pooled Portfolio (v) (Identified Cost, $24,560,725) | | | 2,497,529 | | | $ | 23,651,595 | |
| | | | | | | | |
| |
| MONEY MARKET FUNDS – 1.2% | | | | | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 845,214 | | | $ | 845,214 | |
| | | | | | | | |
Total Investments
(Identified Cost, $69,769,968) | | | | | | $ | 69,843,477 | |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – 1.0% | | | | 700,085 | |
| | | | | | | | |
| NET ASSETS – 100.0% | | | $ | 70,543,562 | |
| | | | | | | | |
| (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 $9,824,205, representing 13.9% of net assets. |
| (p) | | Payment-in-kind security. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio 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 | | | Value | |
| Bayview Financial Revolving Mortgage Loan Trust, FRN, 1.769%, 12/28/40 | | 3/01/06 | | | $288,295 | | | | $172,069 | |
| Falcon Franchise Loan LLC, FRN, 4.312%, 1/05/23 | | 1/18/02 | | | 1,567 | | | | 4,335 | |
| Falcon Franchise Loan LLC, FRN, 20.252%, 1/05/25 | | 1/29/03 | | | 3,965 | | | | 13,745 | |
| First Union National Bank Commercial Mortgage Trust, FRN, 1.735%, 1/12/43 | | 12/11/03 | | | 35 | | �� | | 36 | |
| Morgan Stanley Capital I, Inc., FRN, 1.417%, 4/28/39 | | 7/20/04 | | | 11,162 | | | | 4,418 | |
| Total Restricted Securities | | | | $194,603 | |
| % of Net assets | | | | 0.3% | |
13
MFS Strategic Income Portfolio
Portfolio of Investments – continued
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:
Derivative Contracts at 12/31/14
Forward Foreign Currency Exchange Contracts at 12/31/14
| | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | Currency | | | Counterparty | | Contracts to
Deliver/Receive | | Settlement Date
Range | | In Exchange For | | | Contracts at Value | | | Net Unrealized
Appreciation (Depreciation) | |
| Asset Derivatives | | | | | | | | | | | | | | |
| SELL | | | AUD | | | Westpac Banking Corp. | | 288,822 | | 1/09/15 | | $ | 249,945 | | | $ | 235,728 | | | $ | 14,217 | |
| SELL | | | CAD | | | Merrill Lynch International Bank | | 304,721 | | 1/09/15 | | | 271,191 | | | | 262,244 | | | | 8,947 | |
| SELL | | | DKK | | | Citibank N.A. | | 610,520 | | 1/09/15 | | | 103,340 | | | | 99,204 | | | | 4,136 | |
| SELL | | | EUR | | | Credit Suisse Group | | 1,364,439 | | 1/09/15 | | | 1,724,030 | | | | 1,651,110 | | | | 72,920 | |
| SELL | | | EUR | | | Deutsche Bank AG | | 105,129 | | 1/09/15 | | | 130,771 | | | | 127,217 | | | | 3,554 | |
| SELL | | | EUR | | | Goldman Sachs International | | 155,063 | | 1/09/15 | | | 198,533 | | | | 187,642 | | | | 10,891 | |
| SELL | | | GBP | | | Barclays Bank PLC | | 63,433 | | 1/09/15 | | | 101,813 | | | | 98,864 | | | | 2,949 | |
| SELL | | | GBP | | | Credit Suisse Group | | 185,550 | | 1/09/15 | | | 296,849 | | | | 289,189 | | | | 7,660 | |
| SELL | | | GBP | | | Merrill Lynch International Bank | | 185,550 | | 1/09/15 | | | 297,065 | | | | 289,189 | | | | 7,876 | |
| SELL | | | JPY | | | Deutsche Bank AG | | 7,297,286 | | 1/09/15 | | | 67,475 | | | | 60,924 | | | | 6,551 | |
| SELL | | | NOK | | | Barclays Bank PLC | | 579,594 | | 1/09/15 | | | 81,290 | | | | 77,757 | | | | 3,533 | |
| SELL | | | SEK | | | Goldman Sachs International | | 992,686 | | 1/09/15 | | | 137,276 | | | | 127,342 | | | | 9,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | $ | 153,168 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Liability Derivatives | | | | | | | | | | | | | | |
| SELL | | | NZD | | | Westpac Banking Corp. | | 143,580 | | 1/09/15 | | $ | 111,107 | | | $ | 111,967 | | | $ | (860 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Futures Contracts at 12/31/14
| | | | | | | | | | | | | | | | | | |
| Description | | Currency | | | Contracts | | | Value | | Expiration Date | | | Unrealized Appreciation (Depreciation) | |
| Liability Derivatives | | | | | | | | | | | | | | | | | | |
| Interest Rate Futures | | | | | | | | | | | | | | | | | | |
| U.S. Treasury Note 10 yr (Short) | | | USD | | | | 53 | | | $6,720,234 | | | March - 2015 | | | | $(35,795 | ) |
| | | | | | | | | | | | | | | | | | |
At December 31, 2014, the fund had cash collateral of $69,960 to cover any commitments for certain derivative contracts. Cash collateral includes “Restricted cash” in the Statement of Assets and Liabilities.
See Notes to Financial Statements
14
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $44,364,029) | | | $45,346,668 | | | | | |
Underlying affiliated funds, at value (identified cost, $25,405,939) | | | 24,496,809 | | | | | |
Total investments, at value (identified cost, $69,769,968) | | | $69,843,477 | | | | | |
Cash | | | 7,209 | | | | | |
Restricted cash | | | 69,960 | | | | | |
Receivables for | | | | | | | | |
Forward foreign currency exchange contracts | | | 153,168 | | | | | |
Investments sold | | | 62,189 | | | | | |
Fund shares sold | | | 279 | | | | | |
Interest | | | 529,059 | | | | | |
Receivable from investment adviser | | | 24 | | | | | |
Other assets | | | 937 | | | | | |
Total assets | | | | | | | $70,666,302 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Forward foreign currency exchange contracts | | | $860 | | | | | |
Daily variation margin on open futures contracts | | | 11,594 | | | | | |
Fund shares reacquired | | | 47,360 | | | | | |
Payable to affiliates | | | | | | | | |
Shareholder servicing costs | | | 92 | | | | | |
Distribution and/or service fees | | | 147 | | | | | |
| Payable for independent Trustees’ compensation | | | 89 | | | | | |
Accrued expenses and other liabilities | | | 62,598 | | | | | |
Total liabilities | | | | | | | $122,740 | |
Net assets | | | | | | | $70,543,562 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $70,476,590 | | | | | |
Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies | | | 183,162 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | (3,424,634 | ) | | | | |
Undistributed net investment income | | | 3,308,444 | | | | | |
Net assets | | | | | | | $70,543,562 | |
Shares of beneficial interest outstanding | | | | | | | 7,059,070 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares outstanding | | | Net asset value
per share | |
Initial Class | | | $59,824,217 | | | | 5,978,760 | | | | $10.01 | |
Service Class | | | 10,719,345 | | | | 1,080,310 | | | | 9.92 | |
See Notes to Financial Statements
15
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 12/31/14 | | | | | | | | |
Net investment income | | | | | |
Income | | | | | | | | |
Interest | | | $1,991,982 | | | | | |
Dividends from underlying affiliated funds | | | 1,601,390 | | | | | |
Total investment income | | | | | | | $3,593,372 | |
Expenses | | | | | | | | |
Management fee | | | $518,039 | | | | | |
Distribution and/or service fees | | | 30,291 | | | | | |
Shareholder servicing costs | | | 20,884 | | | | | |
Administrative services fee | | | 20,688 | | | | | |
Independent Trustees’ compensation | | | 2,783 | | | | | |
Custodian fee | | | 25,191 | | | | | |
Shareholder communications | | | 13,314 | | | | | |
Audit and tax fees | | | 76,565 | | | | | |
Legal fees | | | 1,042 | | | | | |
Miscellaneous | | | 15,288 | | | | | |
Total expenses | | | | | | | $724,085 | |
Fees paid indirectly | | | (23 | ) | | | | |
Reduction of expenses by investment adviser | | | (101,167 | ) | | | | |
Net expenses | | | | | | | $622,895 | |
Net investment income | | | | | | | $2,970,477 | |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments: | | | | | | | | |
Non-affiliated issuers | | | $429,825 | | | | | |
Underlying affiliated funds | | | 314,567 | | | | | |
Capital gain distributions from underlying affiliated funds | | | 181,787 | | | | | |
Futures contracts | | | (267,423 | ) | | | | |
Foreign currency | | | 143,363 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $802,119 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $(1,402,324 | ) | | | | |
Futures contracts | | | (186,187 | ) | | | | |
Translation of assets and liabilities in foreign currencies | | | 205,542 | | | | | |
Net unrealized gain (loss) on investments and foreign currency translation | | | | | | | $(1,382,969 | ) |
Net realized and unrealized gain (loss) on investments and foreign currency | | | | | | | $(580,850 | ) |
Change in net assets from operations | | | | | | | $2,389,627 | |
See Notes to Financial Statements
16
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment income | | | $2,970,477 | | | | $2,474,654 | |
Net realized gain (loss) on investments and foreign currency | | | 802,119 | | | | 1,085,657 | |
Net unrealized gain (loss) on investments and foreign currency translation | | | (1,382,969 | ) | | | (2,223,877 | ) |
Change in net assets from operations | | | $2,389,627 | | | | $1,336,434 | |
| Distributions declared to shareholders | | | | | | | | |
From net investment income | | | $(2,339,793 | ) | | | $(2,370,012 | ) |
Change in net assets from fund share transactions | | | $(4,655,060 | ) | | | $23,750,933 | |
Total change in net assets | | | $(4,605,226 | ) | | | $22,717,355 | |
Net assets | | | | | | | | |
At beginning of period | | | 75,148,788 | | | | 52,431,433 | |
At end of period (including undistributed net investment income of $3,308,444 and
$2,277,327, respectively) | | | $70,543,562 | | | | $75,148,788 | |
See Notes to Financial Statements
17
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $10.01 | | | | $10.19 | | | | $9.74 | | | | $9.87 | | | | $9.46 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.41 | | | | $0.42 | | | | $0.44 | | | | $0.48 | | | | $0.49 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.08 | ) | | | (0.28 | ) | | | 0.56 | | | | (0.02 | ) | | | 0.45 | |
Total from investment operations | | | $0.33 | | | | $0.14 | | | | $1.00 | | | | $0.46 | | | | $0.94 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.33 | ) | | | $(0.32 | ) | | | $(0.55 | ) | | | $(0.59 | ) | | | $(0.53 | ) |
Net asset value, end of period (x) | | | $10.01 | | | | $10.01 | | | | $10.19 | | | | $9.74 | | | | $9.87 | |
Total return (%) (k)(r)(s)(x) | | | 3.27 | | | | 1.46 | | | | 10.42 | | | | 4.67 | | | | 10.27 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f)(h) | | | 0.94 | | | | 1.00 | | | | 1.02 | | | | 1.05 | | | | 1.06 | |
Expenses after expense reductions (f)(h) | | | 0.80 | | | | 0.85 | | | | 0.90 | | | | 0.90 | | | | 0.90 | |
Net investment income | | | 4.05 | | | | 4.18 | | | | 4.35 | | | | 4.79 | | | | 5.11 | |
Portfolio turnover | | | 21 | | | | 28 | | | | 40 | | | | 29 | | | | 48 | |
Net assets at end of period (000 omitted) | | | $59,824 | | | | $63,319 | | | | $43,564 | | | | $38,563 | | | | $40,927 | |
See Notes to Financial Statements
18
MFS Strategic Income Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $9.93 | | | | $10.12 | | | | $9.67 | | | | $9.81 | | | | $9.40 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (d) | | | $0.39 | | | | $0.39 | | | | $0.41 | | | | $0.45 | | | | $0.47 | |
Net realized and unrealized gain (loss) on investments
and foreign currency | | | (0.09 | ) | | | (0.28 | ) | | | 0.56 | | | | (0.03 | ) | | | 0.45 | |
Total from investment operations | | | $0.30 | | | | $0.11 | | | | $0.97 | | | | $0.42 | | | | $0.92 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net investment income | | | $(0.31 | ) | | | $(0.30 | ) | | | $(0.52 | ) | | | $(0.56 | ) | | | $(0.51 | ) |
Net asset value, end of period (x) | | | $9.92 | | | | $9.93 | | | | $10.12 | | | | $9.67 | | | | $9.81 | |
Total return (%) (k)(r)(s)(x) | | | 2.99 | | | | 1.18 | | | | 10.18 | | | | 4.31 | | | | 10.05 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f)(h) | | | 1.19 | | | | 1.25 | | | | 1.27 | | | | 1.30 | | | | 1.31 | |
Expenses after expense reductions (f)(h) | | | 1.05 | | | | 1.10 | | | | 1.15 | | | | 1.15 | | | | 1.15 | |
Net investment income | | | 3.80 | | | | 3.93 | | | | 4.11 | | | | 4.54 | | | | 4.87 | |
Portfolio turnover | | | 21 | | | | 28 | | | | 40 | | | | 29 | | | | 48 | |
Net assets at end of period (000 omitted) | | | $10,719 | | | | $11,829 | | | | $8,867 | | | | $10,368 | | | | $10,942 | |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (h) | In addition to the fees and expenses which the fund bears directly, the fund indirectly bears a pro rata share of the fees and expenses of the underlying affiliated funds in which the fund invests. Accordingly, the expense ratio for the fund reflects only those fees and expenses borne directly by the fund. Because the underlying affiliated funds have varied expense and fee levels and the fund may own different proportions of the underlying affiliated funds at different times, the amount of fees and expenses incurred indirectly by the fund will vary. |
| (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) | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
19
MFS Strategic Income Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Strategic Income Portfolio (the fund) is a diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in the MFS High Yield Pooled Portfolio (“High Yield Pooled Portfolio”). The accounting policies of the High Yield Pooled Portfolio are outlined in its shareholder report, which is available without charge by calling 1-800-225-2606 and on the Securities and Exchange Commission (SEC) web site at http://www.sec.gov or at the SEC’s public reference room in Washington, D.C. The accounting policies detailed in the Significant Accounting Policies note cover both the fund and the High Yield Pooled Portfolio. For purposes of this policy disclosure, “fund” refers to both the fund and the High Yield Pooled Portfolio in which the fund invests. The High Yield Pooled Portfolio’s shareholder report is not covered by this report. The fund and the High Yield Pooled Portfolio invest 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 invests 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.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
Investment Valuations – The investments of the fund and the High Yield Pooled Portfolio are valued as described below.
Debt instruments and floating rate loans, 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. Short-term instruments with a maturity at issuance of 60 days or less may be 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 at valuations provided by a third-party pricing service. 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
20
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Forward foreign currency exchange 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. Swap agreements are generally valued at valuations provided by a third-party pricing service, which for cleared swaps includes an evaluation of any trading activity at the clearinghouses. 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 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. 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 contracts and forward foreign currency exchange contracts. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| U.S. Treasury Bonds & U.S. Government Agency & Equivalents | | | $— | | | | $606,466 | | | | $— | | | | $606,466 | |
| Non-U.S. Sovereign Debt | | | — | | | | 10,671,250 | | | | — | | | | 10,671,250 | |
| Municipal Bonds | | | — | | | | 246,695 | | | | — | | | | 246,695 | |
| U.S. Corporate Bonds | | | — | | | | 23,292,566 | | | | — | | | | 23,292,566 | |
| Residential Mortgage-Backed Securities | | | — | | | | 417,695 | | | | — | | | | 417,695 | |
| Commercial Mortgage-Backed Securities | | | — | | | | 793,291 | | | | — | | | | 793,291 | |
| Asset-Backed Securities (including CDOs) | | | — | | | | 328,328 | | | | — | | | | 328,328 | |
| Foreign Bonds | | | — | | | | 8,990,377 | | | | — | | | | 8,990,377 | |
| Mutual Funds | | | 24,496,809 | | | | — | | | | — | | | | 24,496,809 | |
| Total Investments | | | $24,496,809 | | | | $45,346,668 | | | | $— | | | | $69,843,477 | |
| | | | |
| Other Financial Instruments | | | | | | | | | | | | |
| Futures Contracts | | | $(35,795 | ) | | | $— | | | | $— | | | | $(35,795 | ) |
| Forward Foreign Currency Exchange Contracts | | | — | | | | 152,308 | | | | — | | | | 152,308 | |
For further information regarding security characteristics, see the Portfolio of Investments.
21
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. The fund’s policy is to recognize transfers between the levels as of the end of the period. The table presents the activity of level 3 securities held at the beginning and the end of the period.
| | | | |
| | | Equity Securities | |
| Balance as of 12/31/13 | | | $12,670 | |
Realized gain/loss | | | (36,513 | ) |
Change in unrealized appreciation (depreciation) | | | 24,308 | |
Proceeds from tender offer | | | (465 | ) |
| Balance as of 12/31/14 | | | $— | |
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
The derivative instruments used by the fund were futures contracts and forward foreign currency exchange contracts. 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | | | Liability Derivatives | |
| Interest Rate | | Interest Rate Futures | | | $— | | | | $(35,795 | ) |
| Foreign Exchange | | Forward Foreign Currency Exchange | | | 153,168 | | | | (860 | ) |
| Total | | | | | $153,168 | | | | $(36,655 | ) |
| (a) | The value of futures contracts includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities. |
The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended December 31, 2014 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Futures Contracts | | | Foreign Currency | |
| Interest Rate | | | $(267,423 | ) | | | $— | |
| Foreign Exchange | | | — | | | | 148,757 | |
| Total | | | $(267,423 | ) | | | $148,757 | |
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, 2014 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Futures Contracts | | | Translation of Assets and Liabilities in Foreign Currencies | |
| Interest Rate | | | $(186,187 | ) | | | $— | |
| Foreign Exchange | | | — | | | | 214,206 | |
| Total | | | $(186,187 | ) | | | $214,206 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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
22
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
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 call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered into futures contracts which may be used to hedge against or obtain broad market exposure, interest rate exposure, currency exposure, or to manage duration. 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 contracts 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 contracts 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 entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used 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.
23
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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.
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. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to the use of Continuous Linked Settlement, an industry accepted settlement system. 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 – During the period the fund entered into swap agreements. Certain types of swaps (“cleared swaps”) are required to be centrally cleared under provisions of the Dodd-Frank Regulatory Reform Bill. In a cleared swap transaction, the swap agreement is novated to a central counterparty (the “clearinghouse”) immediately following execution of the swap contract with an executing broker. Thereafter, throughout the term of the cleared swap, the fund interfaces indirectly with the clearinghouse through a clearing broker.
A swap agreement 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 agreements in the Statement of Operations. The value of the swap agreement, which is adjusted daily and includes any related interest accruals to be paid or received by the fund, is recorded in the Statement of Assets and Liabilities, as “Swaps, at value” for uncleared swaps and is included in “Due from brokers” or “Due to brokers” for cleared swaps. The daily change in value, including any related interest accruals to be paid or received, is recorded as unrealized appreciation or depreciation on swap agreements in the Statement of Operations. The daily change in valuation of cleared swaps is recorded as a receivable or payable for variation margin in the Statement of Assets and Liabilities. Amounts paid or received at the inception of the swap agreement are reflected as premiums paid or received in 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 agreements 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. The fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from/paid to the counterparty over the contract’s remaining life, to the extent that the amount is positive. To address counterparty risk, swap agreements are limited to only highly-rated counterparties. For uncleared swaps, that risk is further reduced 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. Although not covered by an ISDA Master Agreement, the fund’s counterparty risk due to cleared swaps is mitigated by the clearinghouses’ margining requirements and financial safeguards in the event of a clearing broker default.
The fund entered into credit default swap agreements in order 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 agreement, the protection buyer can make an upfront payment and will make a stream of payments to the protection seller based on a fixed percentage applied to the agreement notional amount 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 agreement-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 agreement. 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 agreement’s notional amount is recorded as realized gain or loss on swap agreements in the Statement of Operations.
Credit default swap agreements 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 maximum amount of future, undiscounted payments that the fund, as protection seller, could be required to make is equal to the swap agreement’s notional amount. The protection seller’s payment obligation would be offset to the extent of the value of the agreement’s deliverable obligation. At December 31, 2014, the fund did not hold any credit default swap agreements at an unrealized loss where it is the protection seller.
24
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
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 agreement. For uncleared swaps, counterparty risk is reduced 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. For cleared swaps, the fund’s counterparty risk is mitigated by the clearinghouses’ margining requirements and financial safeguards in the event of a clearing broker default.
Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which contractually obligate the fund to supply additional cash to the borrower on demand. The fund generally provides this financial support in order to preserve its existing investment or to obtain a more senior secured interest in the assets of the borrower. 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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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, straddle loss deferrals, and derivative transactions.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $2,339,793 | | | | $2,370,012 | |
25
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $70,356,658 | |
| Gross appreciation | | | 2,087,499 | |
| Gross depreciation | | | (2,600,680 | ) |
| Net unrealized appreciation (depreciation) | | | $(513,181 | ) |
| Undistributed ordinary income | | | 3,552,544 | |
| Capital loss carryforwards | | | (2,852,509 | ) |
| Other temporary differences | | | (119,882 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses (“post-enactment losses”). Previously, net capital losses were carried forward for eight years and treated as short-term losses (“pre-enactment losses”). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses.
As of December 31, 2014, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment losses expire as follows:
| | | | |
| 12/31/16 | | | $(1,210,491 | ) |
| 12/31/17 | | | (1,642,018 | ) |
| Total | | | $(2,852,509 | ) |
The availability of $2,686,608 of the capital loss carryforwards of the fund may be limited in a given year due to a change in ownership of the fund on July 31, 2013.
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net investment
income | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $1,978,200 | | | | $1,984,721 | |
| Service Class | | | 361,593 | | | | 385,291 | |
| Total | | | $2,339,793 | | | | $2,370,012 | |
| (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 | | | 0.70% | |
| Average daily net assets in excess of $1 billion | | | 0.65% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $3,399, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 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, excluding interest, taxes, extraordinary expenses, brokerage and transaction costs, and investment-related expenses (such as fees and expenses associated with investments in investment companies and other similar investment vehicles), such that total annual operating expenses do not exceed 0.80% of average daily net assets for the Initial Class shares and 1.05% of average daily net assets for the Service Class shares. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, this reduction amounted to $97,639, which is included in the reduction of total expenses in the Statement of Operations.
26
MFS Strategic Income 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, receives a fee from the fund for its services as shareholder servicing agent. For the year ended December 31, 2014, the fee was $20,163, which equated to 0.0272% 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, 2014, these costs amounted to $721.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0279% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $333 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $129, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
The fund invests in the High Yield Pooled Portfolio. The High Yield Pooled Portfolio is a mutual fund advised by MFS that does not pay management fees to MFS but does incur investment and operating costs. The High Yield Pooled Portfolio is designed to be used by MFS funds to invest in a particular security type rather than invest in the security type directly. The fund invests in the High Yield Pooled Portfolio to gain exposure to high income debt instruments, rather than investing in high income debt instruments directly.
At close of business on March 22, 2013, the fund and certain other MFS funds transferred high income debt instruments, accrued interest and cash to the High Yield Pooled Portfolio, a series of MFS Series Trust III, in exchange for shares of the High Yield Pooled Portfolio. The purpose of the transaction was to pool the portion of the assets of the fund and certain other MFS funds invested in high income debt instruments in the High Yield Pooled Portfolio. The transfer was accomplished by a tax-free exchange by the fund of investments valued at approximately $16,047,838 with a cost basis of approximately $15,174,703, accrued interest of approximately $311,800 and cash of approximately $105,160 for approximately 1,646,480 shares of the High Yield Pooled Portfolio (valued at approximately $16,464,798). For financial reporting purposes, investments transferred and shares received by the fund were recorded at fair value; however, the cost basis of the investments delivered to the High Yield Pooled Portfolio was carried
27
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
forward to the shares received. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. The High Yield Pooled Portfolio does not pay a management fee, distribution and/or service fee, or sales charge.
For the year ended December 31, 2014, purchases and sales of investments, other than short-term obligations, were as follows:
| | | | | | | | |
| | | Purchases | | | Sales | |
| U.S. Government securities | | | $— | | | | $57,026 | |
| Investments (non-U.S. Government securities) | | | $15,187,454 | | | | $20,604,661 | |
| (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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 511,783 | | | | $5,236,392 | | | | 590,237 | | | | $5,949,795 | |
Service Class | | | 205,156 | | | | 2,071,961 | | | | 86,083 | | | | 862,199 | |
| | | 716,939 | | | | $7,308,353 | | | | 676,320 | | | | $6,811,994 | |
| Shares issued in connection with acquisition of MFS Strategic Income Series | | | | | | | | | | | | | | | | |
Initial Class | | | | | | | | | | | 2,282,990 | | | | $22,989,704 | |
Service Class | | | | | | | | | | | 495,499 | | | | 4,950,037 | |
| | | | | | | | | | | 2,778,489 | | | | $27,939,741 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 194,513 | | | | $1,978,200 | | | | 204,400 | | | | $1,984,721 | |
Service Class | | | 35,837 | | | | 361,593 | | | | 39,968 | | | | 385,291 | |
| | | 230,350 | | | | $2,339,793 | | | | 244,368 | | | | $2,370,012 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (1,054,095 | ) | | | $(10,746,054 | ) | | | (1,026,105 | ) | | | $(10,319,438 | ) |
Service Class | | | (351,664 | ) | | | (3,557,152 | ) | | | (306,342 | ) | | | (3,051,376 | ) |
| | | (1,405,759 | ) | | | $(14,303,206 | ) | | | (1,332,447 | ) | | | $(13,370,814 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (347,799 | ) | | | $(3,531,462 | ) | | | 2,051,522 | | | | $20,604,782 | |
Service Class | | | (110,671 | ) | | | (1,123,598 | ) | | | 315,208 | | | | 3,146,151 | |
| | | (458,470 | ) | | | $(4,655,060 | ) | | | 2,366,730 | | | | $23,750,933 | |
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, 2014, the fund’s commitment fee and interest expense were $279 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
28
MFS Strategic Income Portfolio
Notes to Financial Statements – continued
| (7) | | Transactions in Underlying Affiliated 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 Affiliated Funds | | Beginning Shares/Par Amount | | | Acquisitions Shares/Par Amount | | | Dispositions Shares/Par Amount | | | Ending Shares/Par Amount | |
| MFS High Yield Pooled Portfolio | | | 2,550,585 | | | | 351,828 | | | | (404,884 | ) | | | 2,497,529 | |
| MFS Institutional Money Market Portfolio | | | 1,045,572 | | | | 17,286,142 | | | | (17,486,500 | ) | | | 845,214 | |
| | | | |
| Underlying Affiliated Funds | | Realized Gain (Loss) | | | Capital Gain Distributions | | | Dividend Income | | | Ending Value | |
| MFS High Yield Pooled Portfolio | | | $314,567 | | | | $181,787 | | | | $1,600,945 | | | | $23,651,595 | |
| MFS Institutional Money Market Portfolio | | | — | | | | — | | | | 445 | | | | 845,214 | |
| | | | | | | | | | | | | | | | |
| | | $314,567 | | | | $181,787 | | | | $1,601,390 | | | | $24,496,809 | |
| | | | | | | | | | | | | | | | |
At close of business on August 16, 2013, the fund with net assets of approximately $48,029,922, acquired all of the assets and liabilities of MFS Strategic Income Series, a series of MFS Variable Insurance Trust. The purpose of the transaction was to provide shareholders of MFS Strategic Income Series 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 approximately 2,778,489 shares of the fund (valued at approximately $27,939,741) for all of the assets and liabilities of MFS Strategic Income Series. MFS Strategic Income Series then distributed the shares of the fund that MFS Strategic Income Series received from the fund to its shareholders. MFS Strategic Income Series’ investments on that date were valued at approximately $27,816,780 with a cost basis of approximately $27,558,597. 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 Income Series 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.
29
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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Strategic Income Portfolio as of December 31, 2014, 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 13, 2015
30
MFS Strategic Income Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
31
MFS Strategic Income Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
32
MFS Strategic Income Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Managers William Adams Ward Brown James Calmas David Cole Robert Persons Matthew Ryan Erik Weisman | | |
33
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 2nd quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 1st quintile for the one-year period and the 2nd quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
34
MFS Strategic Income 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
35
MFS Strategic Income Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
36
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
37
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. |
38
ANNUAL REPORT
December 31, 2014
MFS® TECHNOLOGY PORTFOLIO
MFS® Variable Insurance Trust II
TKS-ANN
MFS® TECHNOLOGY PORTFOLIO
CONTENTS
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 OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
MFS Technology Portfolio
LETTER FROM THE CHAIRMAN
Dear Contract Owners:
As 2015 begins, sharply lower oil prices are reshaping the global economy, adding to deflationary pressures in the eurozone and exacerbating challenges faced by oil exporters such as Russia. The U.S. economy stands on firmer ground, having expanded steadily over the past year. The U.S. labor market has regained momentum, consumer confidence is buoyant and gasoline prices have tumbled, boosting prospects for a stronger economic rebound in 2015.
Other regions are struggling. The eurozone economy is barely expanding, and the European Central Bank (ECB) has introduced large-scale asset purchases.
Despite Japan’s efforts to strengthen its economy, its sales tax increase last spring tipped the country into a recession, leading to additional monetary stimulus from the Bank of Japan. China’s economy is slowing as it transitions to a more sustainable basis, and its growth rate will likely continue to decline.
As always, active risk management is integral to how we at MFS® manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global investment team uses a diversified, multidisciplined, long-term approach.
Applying proven principles, such as asset allocation and diversification, can best serve investors over the long term. We are confident that this approach can help you as you work with your financial advisors to reach your goals in the years ahead.
Respectfully,
Robert J. Manning
Chairman
MFS Investment Management
February 13, 2015
The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed.
1
MFS Technology Portfolio
PORTFOLIO COMPOSITION
Portfolio structure (i)
| | | | |
| Top ten holdings (i) | | | | |
| Google, Inc., “A” | | | 8.1% | |
| Apple, Inc. | | | 5.2% | |
| Hewlett-Packard Co. | | | 4.8% | |
| Visa, Inc., “A” | | | 4.7% | |
| Oracle Corp. | | | 4.7% | |
| Facebook, Inc., “A” | | | 4.6% | |
| EMC Corp. | | | 4.1% | |
| Microsoft Corp. | | | 4.1% | |
| MasterCard, Inc., “A” | | | 3.2% | |
| Yahoo!, Inc. | | | 3.1% | |
| | | | |
| Top five industries (i) | | | | |
| Internet | | | 21.4% | |
| Computer Software – Systems (s) | | | 16.6% | |
| Computer Software | | | 15.6% | |
| Other Banks & Diversified Financials | | | 8.0% | |
| Electronics (s) | | | 6.7% | |
| (i) | For purposes of this presentation, the components include the value of securities, less any securities sold short, and reflect the impact of the equivalent exposure of derivative positions. These amounts may be negative from time to time. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than value. |
| (s) | Includes securities sold short. |
Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities.
Percentages are based on net assets as of 12/31/14.
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, 2014, Initial Class shares of the MFS Technology Portfolio (“fund”) provided a total return of 10.71%, while Service Class shares of the fund provided a total return of 10.40%. These compare with a return of 13.69% over the same period for the fund’s benchmark, the Standard & Poor’s 500 Stock Index, and a return of 15.28% for the fund’s other benchmark, the Standard & Poor’s North American Technology Sector Index.
Market Environment
Early in the period, US equities suffered what proved to be a temporary setback due to concerns over emerging markets as well as what was perceived at the time to be a pause in US economic growth, partially caused by extreme weather events and a weak December 2013 labor market report. Markets soon recovered as the economic pause concluded and investors appeared to have become increasingly comfortable that newly-installed US Federal Reserve (“Fed”) Chair Janet Yellen would not make any substantial changes to the trajectory of Fed monetary policy.
A generally risk-friendly, carry trade environment persisted from February 2014 until mid-year. While geopolitical tensions flared in the Middle East and Russia/Ukraine, any market setbacks were short-lived as improving economic growth in the US, coupled with prospects for easier monetary policy in regions with slowing growth, such as Japan, Europe and China, supported risk assets. For example, the European Central Bank (“ECB”) cut policy interest rates into negative territory and, by the end of the period, expectations were for additional rate cuts and the announcement for non-conventional easing measures. Similarly, the Bank of Japan surprised markets late in the period with fresh stimulus measures given lackluster growth trends. The related decline in developed market government bond yields and credit spreads were also supportive for equity markets. At the end of the period, the US equity market was trading close to all-time highs and US Treasury yields were close to their lows for the period. However, credit markets did not fare as well in the second half of 2014, particularly US high yield and emerging market debt. The higher weightings of oil and gas credits in these asset classes resulted in widening spreads and increased volatility as oil prices began to decline in an accelerated fashion in the fourth quarter.
Detractors from Performance
Stock selection and an underweight position in both the electronics and computer software industries were primary factors that detracted from performance relative to the Standard & Poor’s North American Technology Sector Index. Within electronics, the fund’s short position in semiconductor company Intel (h) and overweight position in network testing company JDS Uniphase held back relative performance. Shares of Intel appreciated during the reporting period due to strong revenue growth and the company’s decision to continue its share repurchase program. Within computer software, an underweight position in the common stock of software giant Microsoft detracted from relative performance. Shares of the company rose steadily throughout the reporting period due to strong demand for the company’s cloud platform and a robust product line.
Elsewhere, the fund’s underweight position in shares of computer and personal electronics maker Apple and an overweight position in internet search giant Google weighed on relative results. Holdings of global media company Discovery Communications (b), not holding shares of strong-performing network equipment company Cisco Systems and the fund’s overweight positions in online travel company Priceline.com and social networking service provider Twitter hindered relative performance.
The fund’s cash and/or cash equivalents position during the period detracted from relative performance. Under normal market conditions, the fund strives to be fully invested and generally 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 computer systems industry contributed to relative performance. Within this industry, not owning shares of diversified technology products and services company International Business Machines (IBM) contributed meaningfully to results. In addition, overweight positions in computer and personal electronics maker Hewlett-Packard and technology solutions provider CDW and holdings of cloud security and compliance solutions provider Qualys (b)(h) supported relative results. Shares of IBM declined due to weak earnings as a result of reduced sales across most of its segments and management’s decision to reduce guidance.
Stocks in other sectors that contributed to relative results included the fund’s short position in shares of 3D printers manufacturer 3D Systems (h) and overweight positions in online information portal Yahoo! and social networking service provider Facebook. Shares of Yahoo! rose during the reporting period due to increased consumer growth, improved initiatives in mobile, native, social and video,
3
MFS Technology Portfolio
Management Review – continued
and lower costs. Holdings of media firm Time Warner (b) and the fund’s decision to overweight strong-performing semiconductor company Freescale Semiconductor (h) and expense management software company Concur Technology (h) also helped support relative performance.
Respectfully,
Matthew Sabel
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 12/31/14
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 12/31/14
Average annual total returns
| | | | | | | | | | | | |
| | | Share Class | | Class inception date | | 1-yr | | 5-yr | | 10-yr | | |
| | | Initial Class | | 6/16/00 | | 10.71% | | 15.92% | | 10.95% | | |
| | | Service Class | | 8/24/01 | | 10.40% | | 15.60% | | 10.67% | | |
| | | | |
| Comparative benchmarks | | | | | | | | |
| | | Standard & Poor’s 500 Stock Index (f) | | 13.69% | | 15.45% | | 7.67% | | |
| | | Standard & Poor’s North American Technology Sector Index (f) | | 15.28% | | 14.83% | | 9.15% | | |
| (f) | Source: FactSet Research Systems Inc. |
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.
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.
Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from amounts reported in the financial highlights.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
5
MFS Technology Portfolio
EXPENSE TABLE
Fund Expenses Borne by the Contract Holders During the Period,
July 1, 2014 through December 31, 2014
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, 2014 through December 31, 2014.
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
7/01/14 | | | Ending Account Value
12/31/14 | | | Expenses Paid
During Period (p)
7/01/14-12/31/14 | |
| Initial Class | | Actual | | | 0.93% | | | | $1,000.00 | | | | $1,073.06 | | | | $4.86 | |
| | Hypothetical (h) | | | 0.93% | | | | $1,000.00 | | | | $1,020.52 | | | | $4.74 | |
| Service Class | | Actual | | | 1.18% | | | | $1,000.00 | | | | $1,071.94 | | | | $6.16 | |
| | Hypothetical (h) | | | 1.18% | | | | $1,000.00 | | | | $1,019.26 | | | | $6.01 | |
| (h) | 5% class return per year before expenses. |
| (p) | “Expenses Paid During Period” are equal to each class’s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
Notes to Expense Table
Expense ratios include 0.03% of investment related expenses from short sales that are outside of the expense limitation arrangement (See Notes 2 and 3 of the Notes to Financial Statements).
6
MFS Technology Portfolio
PORTFOLIO OF INVESTMENTS – 12/31/14
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – 96.5% | | | | | |
| Broadcasting – 6.2% | | | | | | | | |
| Discovery Communications, Inc., “C” (a) | | | 29,356 | | | $ | 989,884 | |
| Time Warner, Inc. | | | 24,928 | | | | 2,129,350 | |
| Twenty-First Century Fox, Inc. | | | 64,217 | | | | 2,466,254 | |
| Walt Disney Co. | | | 5,140 | | | | 484,137 | |
| | | | | | | | |
| | | | | | $ | 6,069,625 | |
| | | | | | | | |
| Brokerage & Asset Managers – 0.9% | |
| Allied Minds PLC (a) | | | 50,251 | | | $ | 284,846 | |
| Intercontinental Exchange, Inc. | | | 2,533 | | | | 555,462 | |
| | | | | | | | |
| | | | | | $ | 840,308 | |
| | | | | | | | |
| Business Services – 6.4% | | | | | | | | |
| Accenture PLC, “A” | | | 6,628 | | | $ | 591,947 | |
| Cognizant Technology Solutions Corp., “A” (a) | | | 20,717 | | | | 1,090,957 | |
| Equifax, Inc. | | | 3,284 | | | | 265,577 | |
| Fidelity National Information Services, Inc. | | | 17,813 | | | | 1,107,969 | |
| FleetCor Technologies, Inc. (a) | | | 6,937 | | | | 1,031,601 | |
| Gartner, Inc. (a) | | | 8,268 | | | | 696,248 | |
| Global Payments, Inc. | | | 5,858 | | | | 472,916 | |
| IHS, Inc., “A” (a) | | | 4,024 | | | | 458,253 | |
| Wex, Inc. (a) | | | 5,343 | | | | 528,530 | |
| | | | | | | | |
| | | | | | $ | 6,243,998 | |
| | | | | | | | |
| Cable TV – 0.8% | | | | | | | | |
| Time Warner Cable, Inc. | | | 5,342 | | | $ | 812,305 | |
| | | | | | | | |
| Computer Software – 15.6% | | | | | | | | |
| Adobe Systems, Inc. (a) | | | 21,173 | | | $ | 1,539,277 | |
| Citrix Systems, Inc. (a) | | | 1,847 | | | | 117,839 | |
| Dassault Systems S.A. | | | 3,447 | | | | 209,779 | |
| Intuit, Inc. | | | 1,500 | | | | 138,285 | |
| Microsoft Corp. | | | 85,879 | | | | 3,989,080 | |
| Oracle Corp. | | | 101,182 | | | | 4,550,154 | |
| Qlik Technologies, Inc. (a) | | | 17,444 | | | | 538,845 | |
| Red Hat, Inc. (a) | | | 19,177 | | | | 1,325,898 | |
| Salesforce.com, Inc. (a) | | | 47,570 | | | | 2,821,377 | |
| VMware, Inc., “A” (a) | | | 563 | | | | 46,459 | |
| | | | | | | | |
| | | | | | $ | 15,276,993 | |
| | | | | | | | |
| Computer Software – Systems – 17.5% | |
| Apple, Inc. (s) | | | 46,388 | | | $ | 5,120,307 | |
| Benefitfocus, Inc. (a) | | | 9,211 | | | | 302,489 | |
| CDW Corp. | | | 15,399 | | | | 541,583 | |
| EMC Corp. | | | 134,905 | | | | 4,012,075 | |
| Guidewire Software, Inc. (a) | | | 10,668 | | | | 540,121 | |
| Hewlett-Packard Co. (s) | | | 116,434 | | | | 4,672,496 | |
| New Relic, Inc. (a) | | | 140 | | | | 4,878 | |
| Qualys, Inc. (a) | | | 12,903 | | | | 487,088 | |
| ServiceNow, Inc. (a) | | | 6,367 | | | | 432,001 | |
| SS&C Technologies Holdings, Inc. | | | 10,765 | | | | 629,645 | |
| Vantiv, Inc., “A” (a) | | | 11,909 | | | | 403,953 | |
| | | | | | | | |
| | | | | | $ | 17,146,636 | |
| | | | | | | | |
| | | | | | | | |
| Issuer | | Shares/Par | | | Value ($) | |
| | | | | | | | |
| COMMON STOCKS – continued | | | | | |
| Consumer Services – 3.2% | | | | | | | | |
| Ctrip.com International Ltd., ADR (a) | | | 3,900 | | | $ | 177,450 | |
| Priceline Group, Inc. (a) | | | 2,572 | | | | 2,932,620 | |
| | | | | | | | |
| | | | | | $ | 3,110,070 | |
| | | | | | | | |
| Electrical Equipment – 2.1% | |
| Amphenol Corp., “A” | | | 17,916 | | | $ | 964,060 | |
| TE Connectivity Ltd. | | | 17,711 | | | | 1,120,221 | |
| | | | | | | | |
| | | | | | $ | 2,084,281 | |
| | | | | | | | |
| Electronics – 7.9% | |
| Altera Corp. | | | 53,255 | | | $ | 1,967,240 | |
| Broadcom Corp., “A” | | | 36,404 | | | | 1,577,385 | |
| JDS Uniphase Corp. (a) | | | 98,081 | | | | 1,345,671 | |
| Mellanox Technologies Ltd. (a) | | | 10,336 | | | | 441,657 | |
| Microchip Technology, Inc. | | | 53,667 | | | | 2,420,918 | |
| | | | | | | | |
| | | | | | $ | 7,752,871 | |
| | | | | | | | |
| Entertainment – 0.5% | |
| AMC Networks, Inc., “A” (a) | | | 7,270 | | | $ | 463,608 | |
| | | | | | | | |
| Internet – 21.4% | | | | | | | | |
| Alibaba Group Holding Ltd., ADR (a) | | | 4,532 | | | $ | 471,056 | |
| eBay, Inc. (a) | | | 24,580 | | | | 1,379,430 | |
| Facebook, Inc., “A “ (a) | | | 58,043 | | | | 4,528,515 | |
| Google, Inc., “A” (a)(s) | | | 14,932 | | | | 7,923,815 | |
| Google, Inc., “C” (a) | | | 1,360 | | | | 715,904 | |
| LinkedIn Corp., “A” (a) | | | 6,547 | | | | 1,503,911 | |
| Twitter, Inc. (a) | | | 22,067 | | | | 791,543 | |
| Yahoo!, Inc. (a) | | | 59,676 | | | | 3,014,235 | |
| Yelp, Inc. (a) | | | 11,473 | | | | 627,917 | |
| | | | | | | | |
| | | | | | $ | 20,956,326 | |
| | | | | | | | |
| Network & Telecom – 2.2% | |
| Juniper Networks, Inc. | | | 43,796 | | | $ | 977,527 | |
| Qualcomm, Inc. | | | 15,383 | | | | 1,143,418 | |
| | | | | | | | |
| | | | | | $ | 2,120,945 | |
| | | | | | | | |
| Other Banks & Diversified Financials – 8.0% | |
| MasterCard, Inc., “A” | | | 36,818 | | | $ | 3,172,239 | |
| Visa, Inc., “A” | | | 17,632 | | | | 4,623,110 | |
| | | | | | | | |
| | | | | | $ | 7,795,349 | |
| | | | | | | | |
| Specialty Stores – 2.5% | |
| Amazon.com, Inc. (a) | | | 7,960 | | | $ | 2,470,386 | |
| | | | | | | | |
| Telecommunications – Wireless – 1.3% | |
| American Tower Corp., REIT | | | 8,126 | | | $ | 803,255 | |
| SBA Communications Corp. (a) | | | 3,712 | | | | 411,141 | |
| | | | | | | | |
| | | | | | $ | 1,214,396 | |
| | | | | | | | |
Total Common Stocks
(Identified Cost, $69,907,927) | | | | | | $ | 94,358,097 | |
| | | | | | | | |
7
MFS Technology Portfolio
Portfolio of Investments – continued
| | | | | | | | |
| Issuer/Expiration Date/Strike Price | | Number of
Contracts | | | Value ($) | |
| | | | | | | | |
| PUT OPTIONS PURCHASED – 0.0% | |
| Computer Software – Systems – 0.0% | |
| International Business Machines Corp. – February 2015 @ $165 (Premiums Paid, $65,389) | | | 45 | | | $ | 34,020 | |
| | | | | | | | |
| Issuer | | Shares/Par | | | | |
| MONEY MARKET FUNDS – 5.6% | |
| MFS Institutional Money Market Portfolio, 0.09%, at Cost and Net Asset Value (v) | | | 5,425,072 | | | $ | 5,425,072 | |
| | | | | | | | |
Total Investments
(Identified Cost, $75,398,388) | | | | | | $ | 99,817,189 | |
| | | | | | | | |
|
| SECURITIES SOLD SHORT – (2.0)% | |
| Computer Software – Systems – (0.4)% | |
| Arrow Electronics, Inc. (a) | | | (7,200 | ) | | $ | (416,808 | ) |
| | | | | | | | |
| Electronics – (1.2)% | |
| ASML Holding N.V. | | | (4,100 | ) | | $ | (442,103 | ) |
| Linear Technology Corp. | | | (9,500 | ) | | | (433,200 | ) |
| Sanmina Corp. (a) | | | (12,000 | ) | | | (282,360 | ) |
| | | | | | | | |
| | | | | | $ | (1,157,663 | ) |
| | | | | | | | |
| Network & Telecom – (0.4)% | |
| Harris Corp. | | | (5,200 | ) | | $ | (373,464 | ) |
| | | | | | | | |
Total Securities Sold Short
(Proceeds Received, $1,720,241) | | | | | | $ | (1,947,935 | ) |
| | | | | | | | |
OTHER ASSETS, LESS
LIABILITIES – (0.1)% | | | | | | | (114,991 | ) |
| | | | | | | | |
| NET ASSETS – 100.0% | | | | | | $ | 97,754,263 | |
| | | | | | | | |
| (a) | | Non-income producing security. |
| (s) | | Security or a portion of the security was pledged to cover collateral requirements for securities sold short and certain derivative transactions. |
| (v) | | Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. |
At December 31, 2014, the fund had cash collateral of $87,979 and other liquid securities with an aggregate value of $3,364,006 to cover any commitments for securities sold short and certain derivative contracts. Cash collateral is comprised of “Deposits with brokers” in the Statement of Assets and Liabilities.
The following abbreviations are used in this report and are defined:
| ADR | | American Depositary Receipt |
| PLC | | Public Limited Company |
| REIT | | Real Estate Investment Trust |
See Notes to Financial Statements
8
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 12/31/14 | | | | | | | | |
Assets | | | | | | | | |
Investments – | | | | | | | | |
Non-affiliated issuers, at value (identified cost, $69,973,316) | | | $94,392,117 | | | | | |
Underlying affiliated funds, at cost and value | | | 5,425,072 | | | | | |
Total investments, at value (identified cost, $75,398,388) | | | $99,817,189 | | | | | |
Deposits with brokers | | | 87,979 | | | | | |
Receivables for | | | | | | | | |
Fund shares sold | | | 317,805 | | | | | |
Dividends | | | 44,324 | | | | | |
Other assets | | | 1,117 | | | | | |
Total assets | | | | | | | $100,268,414 | |
Liabilities | | | | | | | | |
Payables for | | | | | | | | |
Securities sold short, at value (proceeds received, $1,720,241) | | | $1,947,935 | | | | | |
Investments purchased | | | 508,031 | | | | | |
Fund shares reacquired | | | 3,976 | | | | | |
Payable to affiliates | | | | | | | | |
Investment adviser | | | 3,592 | | | | | |
Shareholder servicing costs | | | 46 | | | | | |
Distribution and/or service fees | | | 1,129 | | | | | |
Payable for independent Trustees’ compensation | | | 77 | | | | | |
Accrued expenses and other liabilities | | | 49,365 | | | | | |
Total liabilities | | | | | | | $2,514,151 | |
Net assets | | | | | | | $97,754,263 | |
Net assets consist of | | | | | | | | |
Paid-in capital | | | $70,801,425 | | | | | |
Unrealized appreciation (depreciation) on investments | | | 24,191,107 | | | | | |
Accumulated net realized gain (loss) on investments and foreign currency | | | 2,761,731 | | | | | |
Net assets | | | | | | | $97,754,263 | |
Shares of beneficial interest outstanding | | | | | | | 8,674,978 | |
| | | | | | | | | | | | |
| | | Net assets | | | Shares
outstanding | | | Net asset value
per share | |
| Initial Class | | | $16,061,687 | | | | 1,381,442 | | | | $11.63 | |
| Service Class | | | 81,692,576 | | | | 7,293,536 | | | | 11.20 | |
See Notes to Financial Statements
9
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 12/31/14 | | | | | | | | |
Net Investment loss | | | | | | | | |
Income | | | | | | | | |
Dividends | | | $606,351 | | | | | |
Interest | | | 2,014 | | | | | |
Dividends from underlying affiliated funds | | | 2,506 | | | | | |
Total investment income | | | | | | | $610,871 | |
Expenses | | | | | | | | |
Management fee | | | $624,279 | | | | | |
Distribution and/or service fees | | | 170,000 | | | | | |
Shareholder servicing costs | | | 9,679 | | | | | |
Administrative services fee | | | 22,081 | | | | | |
Independent Trustees’ compensation | | | 2,795 | | | | | |
Custodian fee | | | 17,676 | | | | | |
Shareholder communications | | | 13,727 | | | | | |
Audit and tax fees | | | 56,187 | | | | | |
Legal fees | | | 702 | | | | | |
Dividend and interest expense on securities sold short | | | 21,620 | | | | | |
Miscellaneous | | | 12,064 | | | | | |
Total expenses | | | | | | | $950,810 | |
Fees paid indirectly | | | (9 | ) | | | | |
Reduction of expenses by investment adviser | | | (4,050 | ) | | | | |
Net expenses | | | | | | | $946,751 | |
Net investment loss | | | | | | | $(335,880 | ) |
Realized and unrealized gain (loss) on investments and foreign currency | | | | | | | | |
Realized gain (loss) (identified cost basis) | | | | | | | | |
Investments | | | $3,371,328 | | | | | |
Written options | | | 167,129 | | | | | |
Securities sold short | | | (94,603 | ) | | | | |
Foreign currency | | | 253 | | | | | |
Net realized gain (loss) on investments and foreign currency | | | | | | | $3,444,107 | |
Change in unrealized appreciation (depreciation) | | | | | | | | |
Investments | | | $5,607,108 | | | | | |
Securities sold short | | | (90,351 | ) | | | | |
Net unrealized gain (loss) on investments | | | | | | | $5,516,757 | |
Net realized and unrealized gain (loss) on investments | | | | | | | $8,960,864 | |
Change in net assets from operations | | | | | | | $8,624,984 | |
See Notes to Financial Statements
10
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 | | | 2014 | | | | 2013 | |
Change in net assets | | | | | | | | |
From operations | | | | | | | | |
Net investment loss | | | $(335,880 | ) | | | $(256,618 | ) |
Net realized gain (loss) on investments and foreign currency | | | 3,444,107 | | | | 1,805,834 | |
Net unrealized gain (loss) on investments | | | 5,516,757 | | | | 16,035,792 | |
Change in net assets from operations | | | $8,624,984 | | | | $17,585,008 | |
Distributions declared to shareholders | | | | | | | | |
From net realized gain on investments | | | $(1,746,337 | ) | | | $(56,282 | ) |
Change in net assets from fund share transactions | | | $17,068,687 | | | | $11,248,784 | |
Total change in net assets | | | $23,947,334 | | | | $28,777,510 | |
Net assets | | | | | | | | |
At beginning of period | | | 73,806,929 | | | | 45,029,419 | |
At end of period | | | $97,754,263 | | | | $73,806,929 | |
See Notes to Financial Statements
11
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 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $10.71 | | | | $7.93 | | | | $6.92 | | | | $6.84 | | | | $5.67 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment loss (d) | | | $(0.02 | ) | | | $(0.02 | ) | | | $(0.04 | ) | | | $(0.05 | ) | | | $(0.00 | )(w) |
Net realized and unrealized gain (loss) on investments | | | 1.16 | | | | 2.81 | | | | 1.05 | | | | 0.13 | | | | 1.17 | |
Total from investment operations | | | $1.14 | | | | $2.79 | | | | $1.01 | | | | $0.08 | | | | $1.17 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(0.22 | ) | | | $(0.01 | ) | | | $— | | | | $— | | | | $— | |
Net asset value, end of period (x) | | | $11.63 | | | | $10.71 | | | | $7.93 | | | | $6.92 | | | | $6.84 | |
Total return (%) (k)(r)(s)(x) | | | 10.71 | | | | 35.18 | | | | 14.60 | | | | 1.17 | | | | 20.63 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 0.94 | | | | 1.05 | | | | 1.18 | | | | 1.28 | | | | 1.38 | |
Expenses after expense reductions (f) | | | 0.93 | | | | 1.05 | | | | 1.13 | | | | 1.08 | | | | 1.07 | |
Net investment loss | | | (0.20 | ) | | | (0.27 | ) | | | (0.51 | ) | | | (0.77 | ) | | | (0.07 | ) |
Portfolio turnover | | | 35 | | | | 48 | | | | 62 | | | | 90 | | | | 140 | |
Net assets at end of period (000 omitted) | | | $16,062 | | | | $15,428 | | | | $13,019 | | | | $14,598 | | | | $15,844 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale dividend and interest expense (f) | | | 0.91 | | | | 0.95 | | | | 1.00 | | | | 1.00 | | | | 1.00 | |
See Notes to Financial Statements
12
MFS Technology Portfolio
Financial Highlights – continued
| | | | | | | | | | | | | | | | | | | | |
| Service Class | | Years ended 12/31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Net asset value, beginning of period | | | $10.35 | | | | $7.69 | | | | $6.73 | | | | $6.66 | | | | $5.54 | |
| Income (loss) from investment operations | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) (d) | | | $(0.05 | ) | | | $(0.05 | ) | | | $(0.06 | ) | | | $(0.08 | ) | | | $(0.00 | )(w) |
Net realized and unrealized gain (loss) on investments | | | 1.12 | | | | 2.72 | | | | 1.02 | | | | 0.15 | | | | 1.12 | |
Total from investment operations | | | $1.07 | | | | $2.67 | | | | $0.96 | | | | $0.07 | | | | $1.12 | |
| Less distributions declared to shareholders | | | | | | | | | | | | | | | | | | | | |
From net realized gain on investments | | | $(0.22 | ) | | | $(0.01 | ) | | | $— | | | | $— | | | | $— | |
Net asset value, end of period (x) | | | $11.20 | | | | $10.35 | | | | $7.69 | | | | $6.73 | | | | $6.66 | |
Total return (%) (k)(r)(s)(x) | | | 10.40 | | | | 34.72 | | | | 14.26 | | | | 1.05 | | | | 20.22 | |
Ratios (%) (to average net assets)
and Supplemental data: | | | | | | | | | | | | | | | | | | | | |
Expenses before expense reductions (f) | | | 1.19 | | | | 1.30 | | | | 1.48 | | | | 1.53 | | | | 1.63 | |
Expenses after expense reductions (f) | | | 1.18 | | | | 1.30 | | | | 1.42 | | | | 1.33 | | | | 1.32 | |
Net investment loss | | | (0.45 | ) | | | (0.52 | ) | | | (0.74 | ) | | | (1.13 | ) | | | (0.04 | ) |
Portfolio turnover | | | 35 | | | | 48 | | | | 62 | | | | 90 | | | | 140 | |
Net assets at end of period (000 omitted) | | | $81,693 | | | | $58,379 | | | | $32,010 | | | | $14,681 | | | | $5,652 | |
| Supplemental Ratios (%): | | | | | | | | | | | | | | | | | | | | |
Ratio of expenses to average net assets after expense reductions
excluding short sale dividend and interest expense (f) | | | 1.16 | | | | 1.20 | | | | 1.25 | | | | 1.25 | | | | 1.25 | |
| (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) | | The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. |
See Notes to Financial Statements
13
MFS Technology Portfolio
NOTES TO FINANCIAL STATEMENTS
| (1) | | Business and Organization |
MFS Technology Portfolio (the fund) is a non-diversified 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 shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans.
The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services – Investment Companies.
| (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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests primarily in securities of issuers in the technology industry. Issuers in a single industry can react similarly to market, economic, political and regulatory conditions and developments.
In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 changes the accounting for repurchase-to-maturity transactions (i.e., repurchase agreements that settle at the same time as the maturity of the transferred financial asset) and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU 2014-11 to the fund, management expects that the impact of the fund’s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, 2015.
Balance Sheet Offsetting – The fund’s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund’s Significant Accounting Policies note under the captions for each of the fund’s in-scope financial instruments and transactions.
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 may be 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 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
14
MFS Technology Portfolio
Notes to Financial Statements – continued
third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund’s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund’s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an 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. 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. The following is a summary of the levels used as of December 31, 2014 in valuing the fund’s assets or liabilities:
| | | | | | | | | | | | | | | | |
| Investments at Value | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Equity Securities: | | | | | | | | | | | | | | | | |
United States | | | $93,248,986 | | | | $— | | | | $— | | | | $93,248,986 | |
China | | | 648,506 | | | | — | | | | — | | | | 648,506 | |
United Kingdom | | | — | | | | 284,846 | | | | — | | | | 284,846 | |
France | | | — | | | | 209,779 | | | | — | | | | 209,779 | |
| Mutual Funds | | | 5,425,072 | | | | — | | | | — | | | | 5,425,072 | |
| Total Investments | | | $99,322,564 | | | | $494,625 | | | | $— | | | | $99,817,189 | |
| Short Sales | | | $(1,947,935 | ) | | | $— | | | | $— | | | | $(1,947,935 | ) |
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 uses derivatives for different purposes, primarily to increase or decrease exposure to a particular market or segment of the market, or security, to increase or decrease interest rate or currency exposure, or as alternatives to direct investments. Derivatives are 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.
The derivative instruments used by the fund were written options and purchased options. The fund’s period end derivatives, as presented in the Portfolio of Investments, 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, 2014 as reported in the Statement of Assets and Liabilities:
| | | | | | |
| | | | | Fair Value (a) | |
| Risk | | Derivative Contracts | | Asset Derivatives | |
| Equity | | Purchased Equity Options | | | $34,020 | |
| (a) | The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. |
15
MFS Technology Portfolio
Notes to Financial Statements – continued
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, 2014 as reported in the Statement of Operations:
| | | | | | | | |
| Risk | | Investments
(Purchased Options) | | | Written Options | |
| Equity | | | $253,846 | | | | $167,129 | |
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, 2014 as reported in the Statement of Operations:
| | | | |
| Risk | | Investments
(Purchased Options) | |
| Equity | | | $2,017 | |
Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain, but not all, over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk whenever possible by entering into an 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. Upon an event of default or a termination of the ISDA Master Agreement, the non-defaulting party has the right 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. The fund’s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific ISDA counterparty is subject.
Collateral and margin requirements differ by type of derivative. Margin requirements are set by the broker or clearing house for cleared derivatives (i.e., futures contracts, cleared swaps, and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forward foreign currency exchange contracts, uncleared swap agreements, 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 that has been segregated to cover the fund’s collateral or margin obligations under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities as “Restricted cash” or “Deposits with brokers.” Securities pledged as collateral or margin for the same purpose, if any, are noted in the Portfolio of Investments.
Written Options – In exchange for a premium, the fund wrote call options on securities that it anticipated the price would decline and also wrote put options on securities that it anticipated the price would increase. At the time the option was written, the fund believed the premium received exceeded the potential loss that could 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 in 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 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. Losses from writing options can exceed the premium received and can exceed the potential loss from an ordinary buy and sell transaction. 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.
16
MFS Technology Portfolio
Notes to Financial Statements – continued
The following table represents the written option activity in the fund during the year ended December 31, 2014:
| | | | | | | | |
| | | Number of
contracts | | | Premiums
received | |
| Outstanding, beginning of period | | | — | | | | $— | |
| Options written | | | 11,148 | | | | 636,460 | |
| Options closed | | | (2,523 | ) | | | (204,047 | ) |
| Options exercised | | | (917 | ) | | | (51,352 | ) |
| Options expired | | | (7,708 | ) | | | (381,061 | ) |
| Outstanding, end of period | | | — | | | | $— | |
Purchased Options – The fund purchased call and put options for a premium. Purchased call and put options entitle the holder to buy and 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 hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or increase the fund’s exposure to an underlying instrument. Purchasing put options may hedge against an anticipated decline in the value of portfolio securities or currency or decrease the fund’s exposure to an underlying instrument.
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 call and put options which have expired are treated as realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument purchased. Upon the exercise or closing of a purchased put option, the premium paid is offset against the proceeds on the sale of the underlying security or financial instrument in order to determine the realized gain or loss on investments.
Whether or not the option is exercised, the fund’s maximum risk of loss from purchasing an option is the amount of premium paid. All option contracts involve credit risk if the counterparty to the option contract fails to perform. 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 entered 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, 2014, this expense amounted to $21,620. 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.
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. 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, 2014, is shown as a reduction of total expenses in 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, when filed, will remain subject to examination by the Internal Revenue
17
MFS Technology Portfolio
Notes to Financial Statements – continued
Service for a three year period. Management has analyzed the fund’s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
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, wash sale loss deferrals, and straddle loss deferrals.
The tax character of distributions declared to shareholders for the last two fiscal years is as follows:
| | | | | | | | |
| | | 12/31/14 | | | 12/31/13 | |
| Ordinary income (including any short-term capital gains) | | | $676,574 | | | | $— | |
| Long-term capital gains | | | 1,069,763 | | | | 56,282 | |
| Total distributions | | | $1,746,337 | | | | $56,282 | |
The federal tax cost and the tax basis components of distributable earnings were as follows:
| | | | |
| As of 12/31/14 | | | | |
| Cost of investments | | | $75,465,170 | |
| Gross appreciation | | | 24,919,688 | |
| Gross depreciation | | | (567,669 | ) |
| Net unrealized appreciation (depreciation) | | | $24,352,019 | |
| Undistributed ordinary income | | | 1,692,281 | |
| Undistributed long-term capital gain | | | 1,688,969 | |
| Other temporary differences | | | (780,431 | ) |
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 in the Statements of Changes in Net Assets are presented by class as follows:
| | | | | | | | |
| | | From net realized gain on
investments | |
| | | Year ended
12/31/14 | | | Year ended
12/31/13 | |
| Initial Class | | | $294,351 | | | | $12,970 | |
| Service Class | | | 1,451,986 | | | | 43,312 | |
| Total | | | $1,746,337 | | | | $56,282 | |
| (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% | |
MFS has agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund’s Board of Trustees. For the year ended December 31, 2014, this management fee reduction amounted to $3,911, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.75% of the fund’s average daily net assets.
18
MFS Technology 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 as short sale dividend and interest expenses incurred in connection with the fund’s investment activity), 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 modified by the fund’s Board of Trustees, but such agreement will continue at least until April 30, 2016. For the year ended December 31, 2014, 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 related to this agreement.
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, 2014, the fee was $9,535, which equated to 0.0115% 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, 2014, these costs amounted to $144.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the year ended December 31, 2014 was equivalent to an annual effective rate of 0.0265% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC.
Other – Effective November 1, 2014, this fund and certain other funds managed by MFS (the funds) have entered into a service agreement (the ISO Agreement) which provides for payment of fees solely by the funds to Tarantino LLC in return for the provision of services of an Independent Senior Officer (ISO) for the funds. Frank L. Tarantino serves as the ISO and is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the ISO Agreement with Tarantino LLC at any time under the terms of the ISO Agreement. Prior to November 1, 2014, the funds had entered into services agreements (the Compliance Officer Agreements) which provided 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. Prior to November 1, 2014, Frank L. Tarantino served as the ICCO. Effective October 31, 2014, Mr. Tarantino resigned as ICCO and the Compliance Officer Agreement between the funds and Tarantino LLC was terminated. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the Compliance Officer Agreement between the funds and Griffin Compliance LLC was terminated. For the year ended December 31, 2014, the aggregate fees paid by the fund under these agreements were $368 and are included in “Miscellaneous” expense in the Statement of Operations. MFS had agreed to reimburse the fund for a portion of the payments made by the fund for the services under the Compliance Officer Agreements in the amount of $139, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO, Assistant ICCO, and ISO.
The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in “Dividends from underlying affiliated funds” in the Statement of Operations. This money market fund does not pay a management fee to MFS.
For the year ended December 31, 2014, purchases and sales of investments, other than purchased option transactions, short sales, and short-term obligations, aggregated $43,609,403 and $28,260,700, respectively.
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MFS Technology 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 12/31/14 | | | Year ended 12/31/13 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Shares sold | | | | | | | | | | | | | | | | |
Initial Class | | | 154,813 | | | | $1,726,896 | | | | 122,093 | | | | $1,130,605 | |
Service Class | | | 2,474,889 | | | | 26,327,905 | | | | 2,064,321 | | | | 18,224,706 | |
| | | 2,629,702 | | | | $28,054,801 | | | | 2,186,414 | | | | $19,355,311 | |
| Shares issued to shareholders in reinvestment of distributions | | | | | | | | | | | | | | | | |
Initial Class | | | 26,095 | | | | $294,351 | | | | 1,411 | | | | $12,970 | |
Service Class | | | 133,454 | | | | 1,451,986 | | | | 4,872 | | | | 43,312 | |
| | | 159,549 | | | | $1,746,337 | | | | 6,283 | | | | $56,282 | |
| Shares reacquired | | | | | | | | | | | | | | | | |
Initial Class | | | (239,877 | ) | | | $(2,642,049 | ) | | | (324,299 | ) | | | $(2,911,302 | ) |
Service Class | | | (954,609 | ) | | | (10,090,402 | ) | | | (594,183 | ) | | | (5,251,507 | ) |
| | | (1,194,486 | ) | | | $(12,732,451 | ) | | | (918,482 | ) | | | $(8,162,809 | ) |
| Net change | | | | | | | | | | | | | | | | |
Initial Class | | | (58,969 | ) | | | $(620,802 | ) | | | (200,795 | ) | | | $(1,767,727 | ) |
Service Class | | | 1,653,734 | | | | 17,689,489 | | | | 1,475,010 | | | | 13,016,511 | |
| | | 1,594,765 | | | | $17,068,687 | | | | 1,274,215 | | | | $11,248,784 | |
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, 2014, the fund’s commitment fee and interest expense were $282 and $0, respectively, and are included in “Miscellaneous” expense in the Statement of Operations.
| (7) | | Transactions in Underlying Affiliated 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 an affiliated issuer:
| | | | | | | | | | | | | | | | |
| Underlying Affiliated Fund | | Beginning
Shares/Par
Amount | | | Acquisitions
Shares/Par
Amount | | | Dispositions
Shares/Par
Amount | | | Ending
Shares/Par
Amount | |
| MFS Institutional Money Market Portfolio | | | 2,619,617 | | | | 29,667,722 | | | | (26,862,267 | ) | | | 5,425,072 | |
| | | | |
| Underlying Affiliated Fund | | Realized
Gain (Loss) | | | Capital Gain
Distributions | | | Dividend
Income | | | Ending
Value | |
| MFS Institutional Money Market Portfolio | | | $— | | | | $— | | | | $2,506 | | | | $5,425,072 | |
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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 (one of the series of MFS Variable Insurance Trust II) (the “Fund”) as of December 31, 2014, 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, 2014, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Technology Portfolio as of December 31, 2014, 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 13, 2015
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MFS Technology Portfolio
TRUSTEES AND OFFICERS – IDENTIFICATION AND BACKGROUND
The Trustees and Officers of the Trust, as of February 1, 2015, 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 111 Huntington Avenue, Boston, Massachusetts 02199-7618.
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
| INTERESTED TRUSTEES |
Robert J. Manning (k) (age 51) | | Trustee | | February 2004 | | Massachusetts Financial Services Company, Chairman, Co-Chief Executive Officer and Director; President (until 2009); Chief Investment Officer (until 2010) | | N/A |
| | | | |
Robin A. Stelmach (k) (age 53) | | Trustee and President | | January 2014 | | Massachusetts Financial Services Company, Executive Vice President and Chief Operating Officer | | N/A |
| | | |
| INDEPENDENT TRUSTEES | | | | | | |
David H. Gunning (age 72) | | Trustee and Chair of Trustees | | January 2004 | | Private investor | | Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Director/Non-Executive Chairman |
| | | | |
Steven E. Buller (age 63) | | Trustee | | February 2014 | | Chairman, Financial Accounting Standards Advisory Council; Standing Advisory Group, Public Company Accounting Oversight Board, Member (until 2014); BlackRock, Inc. (investment management), Managing Director (until 2014), BlackRock Finco UK (investment management), Director (until 2014) | | N/A |
| | | | |
Robert E. Butler (age 73) | | Trustee | | January 2006 | | Consultant – investment company industry regulatory and compliance matters | | N/A |
| | | | |
Maureen R. Goldfarb (age 59) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
William R. Gutow (age 73) | | Trustee | | December 1993 | | Private investor and real estate consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman | | Texas Donuts (donut franchise), Vice Chairman (until 2010) |
| | | | |
Michael Hegarty (age 70) | | Trustee | | December 2004 | | Private investor | | Brookfield Office Properties, Inc. (real estate), Director; Rouse Properties Inc. (real estate), Director; Capmark Financial Group Inc. (real estate), Director |
| | | | |
John P. Kavanaugh (age 60) | | Trustee | | January 2009 | | Private investor | | N/A |
| | | | |
Maryanne L. Roepke (age 58) | | Trustee | | May 2014 | | American Century Investments (investment management), Senior Vice President and Chief Compliance Officer (until 2014) | | N/A |
| | | | |
Laurie J. Thomsen (age 57) | | Trustee | | March 2005 | | Private investor; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010) | | The Travelers Companies (insurance), Director |
| | | | |
Robert W. Uek (age 73) | | Trustee | | January 2006 | | Consultant to investment company industry | | N/A |
| | | | |
| OFFICERS | | | | | | | | |
Christopher R. Bohane (k) (age 41) | | Assistant Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Assistant General Counsel | | N/A |
| | | | |
Kino Clark (k) (age 46) | | Assistant Treasurer | | January 2012 | | Massachusetts Financial Services Company, Vice President | | N/A |
| | | | |
Thomas H. Connors (k) (age 55) | | Assistant Secretary and Assistant Clerk | | September 2012 | | Massachusetts Financial Services Company, Vice President and Senior Counsel; Deutsche Investment Management Americas Inc. (financial service provider), Director and Senior Counsel (until 2012) | | N/A |
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MFS Technology Portfolio
Trustees and Officers – continued
| | | | | | | | |
Name, Age | | Position(s)
Held with Fund | | Trustee/Officer
Since (h) | | Principal Occupations
During the Past Five Years | | Other Directorships (j) |
Ethan D. Corey (k) (age 51) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
David L. DiLorenzo (k) (age 46) | | Treasurer | | July 2005 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| | | | |
Timothy M. Fagan (k) (age 46) | | Chief Compliance Officer | | November 2014 | | Massachusetts Financial Services Company, Chief Compliance Officer; Vice President and Senior Counsel (until 2012) | | N/A |
| | | | |
Brian E. Langenfeld (k) (age 41) | | Assistant
Secretary and Assistant Clerk | | June 2006 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Susan S. Newton (k) (age 64) | | Assistant
Secretary and Assistant Clerk | | May 2005 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
Susan A. Pereira (k) (age 44) | | Assistant
Secretary and Assistant Clerk | | July 2005 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Kasey L. Phillips (k) (age 44) | | Assistant Treasurer | | September 2012 | | Massachusetts Financial Services Company, Vice President; Wells Fargo Funds Management, LLC, Senior Vice President, Fund Treasurer (until 2012) | | N/A |
| | | | |
Mark N. Polebaum (k) (age 62) | | Secretary and
Clerk | | January 2006 | | Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary | | N/A |
| | | | |
Matthew A. Stowe (k) (age 40) | | Assistant Secretary and Assistant Clerk | | October 2014 | | Massachusetts Financial Services Company, Vice President and Senior Counsel | | N/A |
| | | | |
Frank L. Tarantino (age 70) | | Independent
Senior Officer | | June 2004 | | Tarantino LLC (provider of compliance services), Principal | | N/A |
| | | | |
Richard S. Weitzel (k) (age 44) | | Assistant Secretary and Assistant Clerk | | October 2007 | | Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel | | N/A |
| | | | |
James O. Yost (k) (age 54) | | Deputy Treasurer | | September 1990 | | Massachusetts Financial Services Company, Senior Vice President | | N/A |
| (h) | Date first appointed to serve as Trustee/officer of an MFS Fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Mr. Manning served as Advisory Trustee. Prior to January 2012, Messrs. DiLorenzo and Yost served as Assistant Treasurers of the Funds. Ms. Stelmach was appointed as President of the Funds as of October 1, 2014. |
| (j) | Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”). |
| (k) | “Interested person” of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of a position with MFS. The address of MFS is 111 Huntington Avenue, Boston, Massachusetts 02199-7618. |
Each Trustee (except Ms. Stelmach, Mr. Buller and Ms. Roepke) has been elected by shareholders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. The Trust does not hold annual meetings for the purpose of electing Trustees, and Trustees are not elected for fixed terms. Messrs. Butler, Kavanaugh, Uek and Mses. Thomsen and Roepke are members of the Trust’s Audit Committee.
Each of the Fund’s Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of February 1, 2015, the Trustees served as board members of 135 funds within the MFS Family of Funds.
23
MFS Technology Portfolio
Trustees and Officers – continued
The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.
| | |
Investment Adviser Massachusetts Financial Services Company 111 Huntington Avenue Boston, MA 02199-7618 | | Custodian State Street Bank and Trust Company 1 Lincoln Street Boston, MA 02111-2900 |
Distributor MFS Fund Distributors, Inc. 111 Huntington Avenue Boston, MA 02199-7618 | | Independent Registered Public Accounting Firm Deloitte & Touche LLP 200 Berkeley Street Boston, MA 02116 |
Portfolio Manager Matthew Sabel | | |
24
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 Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2014 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.
In connection with their deliberations regarding the continuation of the investment advisory agreement, 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 for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds 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 Fund.
In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance of the Fund for various time periods ended December 31, 2013 and the investment performance of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable 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 and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, 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 and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. 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 a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of 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 in 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 Inc. and MFS, the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups 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 three-year period ended December 31, 2013, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s Initial Class shares was in the 1st quintile relative to the other funds in the universe for this three-year period (the 1st quintile being the best performers and the 5th quintile being the worst performers). The total return performance of the Fund’s Initial Class shares was in the 2nd quintile for the one-year period and the 1st quintile for the five-year period ended December 31, 2013 relative to the Lipper performance universe. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.
25
MFS Technology 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 and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that MFS currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to any comparable institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts, 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 expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.
The Trustees also considered whether the Fund may benefit from any economies of scale in the management of the Fund in the event of growth in assets of the Fund and/or growth in assets of the MFS Funds as a whole. They noted that the Fund’s advisory fee rate schedule is subject to a contractual breakpoint that reduces the Fund’s advisory fee rate on average daily net assets over $1 billion. The Trustees also noted that MFS has agreed in writing to waive a portion of the management fees of certain MFS Funds, including the Fund, if the total combined assets of certain funds within the MFS Funds’ complex increase above agreed upon thresholds (the “group fee waiver”), enabling the Fund’s shareholders to share in the benefits from any economies of scale at the complex level. The group fee waiver is reviewed and renewed annually between the Board and MFS. The Trustees concluded that the breakpoint and the group fee waiver were sufficient to allow the Fund to benefit from economies of scale as its assets and overall complex assets grow.
The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.
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 current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other 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 any 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 for 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 benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research 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 Fund.
Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2014.
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MFS Technology Portfolio
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are 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 is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and 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. Copies of the fund’s Form N-Q also 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 “Market Commentary” and “Announcements” sub sections in the “Market Outlooks” section of mfs.com or by clicking on the fund’s name under “Variable Insurance Portfolios — VIT II” in the “Products” section of mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The following information is provided pursuant to provisions of the Internal Revenue Code.
The fund designates $1,177,000 as capital gain dividends paid during the fiscal year.
For corporate shareholders, 58.82% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction.
27
rev. 3/11
| | | | |
| FACTS | | WHAT DOES MFS DO WITH YOUR
PERSONAL INFORMATION? | |  |
| | |
| Why? | | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. |
| | |
| What? | | The types of personal information we collect and share depend on the product or service you have with us. This information can include: • Social Security number and account balances • Account transactions and transaction history • Checking account information and wire transfer instructions When you are no longer our customer, we continue to share your information as described in this notice. |
| | |
| How? | | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons MFS chooses to share; and whether you can limit this sharing. |
| | | | |
Reasons we can share your
personal information | | Does MFS share? | | Can you limit this
sharing? |
For our everyday business purposes – such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | | Yes | | No |
For our marketing purposes – to offer our products and services to you | | No | | We don’t share |
| For joint marketing with other financial companies | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your transactions and experiences | | No | | We don’t share |
For our affiliates’ everyday business purposes – information about your creditworthiness | | No | | We don’t share |
| For nonaffiliates to market to you | | No | | We don’t share |
| | |
| Questions? | | Call 800-225-2606 or go to mfs.com. |
28
| | |
| Who we are |
| Who is providing this notice? | | MFS Funds, MFS Investment Management, MFS Institutional Advisors, Inc., MFS Fund Distributors, Inc., MFS Heritage Trust Company, and MFS Service Center, Inc. |
| | |
| What we do |
| How does MFS protect my personal information? | | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include procedural, electronic, and physical safeguards for the protection of the personal information we collect about you. |
How does MFS
collect my personal information? | | We collect your personal information, for example, when you • open an account or provide account information • direct us to buy securities or direct us to sell your securities • make a wire transfer We also collect your personal information from others, such as credit bureaus, affiliates and other companies. |
| Why can’t I limit all sharing? | | Federal law gives you the right to limit only • sharing for affiliates’ everyday business purposes – information about your creditworthiness • affiliates from using your information to market to you • sharing for nonaffiliates to market to you State laws and individual companies may give you additional rights to limit sharing. |
| | |
| Definitions |
| Affiliates | | Companies related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share personal information with affiliates, except for everyday business purposes as described on page one of this notice. |
| Nonaffiliates | | Companies not related by common ownership or control. They can be financial and nonfinancial companies. •MFS does not share with nonaffiliates so they can market to you. |
| Joint Marketing | | A formal agreement between nonaffiliated financial companies that together market financial products or services to you. •MFS doesn’t jointly market. |
| | |
| Other important information |
| If you own an MFS product or receive an MFS service 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
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. During the period covered by this report, 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. During the period covered by this report, the Registrant did not grant a waiver, including an implicit waiver, from any provision of the Code.
A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Messrs. Robert E. Butler, John P. Kavanaugh and Robert W. Uek and Mses. Maryanne L. Roepke and Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Butler, Kavanaugh and Uek and Mses. Roepke and Thomsen are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Items 4(a) through 4(d) and 4(g):
The Board of Trustees has appointed Deloitte & Touche LLP (“Deloitte”) to serve as independent accountants to each series of the Registrant (each a “Fund” and 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, 2014 and 2013, audit fees billed to each Fund by Deloitte were as follows:
| | | | | | | | |
| | | Audit Fees | |
| | | 2014 | | | 2013 | |
Fees billed by Deloitte: | | | | | | | | |
MFS Blended Research Core Equity Portfolio | | | 42,052 | | | | 41,534 | |
MFS Bond Portfolio | | | 61,256 | | | | 60,777 | |
MFS Core Equity Portfolio | | | 43,944 | | | | 43,404 | |
MFS Emerging Markets Equity Portfolio | | | 44,322 | | | | 43,777 | |
MFS Global Governments Portfolio | | | 59,237 | | | | 58,516 | |
MFS Global Growth Portfolio | | | 54,158 | | | | 53,497 | |
MFS Global Research Portfolio | | | 42,809 | | | | 42,282 | |
MFS Global Tactical Allocation Portfolio | | | 57,700 | | | | 56,997 | |
MFS Government Securities Portfolio | | | 50,410 | | | | 49,793 | |
MFS High Yield Portfolio | | | 65,409 | | | | 64,614 | |
MFS International Growth Portfolio | | | 44,322 | | | | 43,777 | |
MFS International Value Portfolio | | | 45,077 | | | | 44,524 | |
MFS Massachusetts Investors Growth Stock Portfolio | | | 43,944 | | | | 43,404 | |
MFS Money Market Portfolio | | | 25,939 | | | | 25,612 | |
MFS New Discovery Portfolio++ | | | 0 | | | | 41,311 | |
MFS Research International Portfolio | | | 42,052 | | | | 41,534 | |
MFS Strategic Income Portfolio | | | 65,151 | | | | 64,359 | |
MFS Technology Portfolio | | | 42,052 | | | | 41,534 | |
MFS Total Return Portfolio+ | | | N/A | | | | 0 | |
MFS Utilities Portfolio++ | | | 0 | | | | 41,310 | |
MFS Value Portfolio++ | | | 0 | | | | 41,310 | |
| | | | | | | | |
Total | | | 829,834 | | | | 943,866 | |
For the fiscal years ended December 31, 2014 and 2013, fees billed by Deloitte for audit-related, tax and other services provided to each Fund 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 | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS Blended Research Core Equity Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,040 | | | | 1,252 | |
To MFS Bond Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,025 | | | | 1,223 | |
To MFS Core Equity Portfolio | | | 4,900 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,013 | | | | 1,201 | |
To MFS Emerging Markets Equity Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,007 | | | | 1,194 | |
To MFS Global Governments Portfolio | | | 2,400 | | �� | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,019 | | | | 1,203 | |
To MFS Global Growth Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,005 | | | | 1,188 | |
To MFS Global Research Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,011 | | | | 1,199 | |
To MFS Global Tactical Allocation Portfolio | | | 22,076 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,088 | | | | 1,343 | |
To MFS Government Securities Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,073 | | | | 1,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
To MFS High Yield Portfolio | | | 2,400 | | | | 4,900 | | | | 4,730 | | | | 4,674 | | | | 1,049 | | | | 1,246 | |
To MFS International Growth Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,017 | | | | 1,213 | |
To MFS International Value Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,087 | | | | 1,297 | |
To MFS Massachusetts Investors Growth Stock Portfolio | | | 4,900 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,050 | | | | 1,267 | |
To MFS Money Market Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,040 | | | | 1,245 | |
To MFS New Discovery Portfolio++ | | | 3,700 | | | | 2,400 | | | | 7,200 | | | | 4,674 | | | | 1,014 | | | | 1,204 | |
To MFS Research International Portfolio | | | 4,900 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,030 | | | | 1,222 | |
To MFS Strategic Income Portfolio | | | 2,400 | | | | 4,900 | | | | 4,730 | | | | 4,674 | | | | 1,005 | | | | 1,187 | |
To MFS Technology Portfolio | | | 2,400 | | | | 2,400 | | | | 4,730 | | | | 4,674 | | | | 1,006 | | | | 1,186 | |
To MFS Total Return Portfolio+ | | | N/A | | | | 3,700 | | | | N/A | | | | 7,243 | | | | 70 | | | | 1,378 | |
To MFS Utilities Portfolio++ | | | 3,700 | | | | 2,400 | | | | 7,329 | | | | 4,673 | | | | 1,026 | | | | 1,226 | |
To MFS Value Portfolio++ | | | 3,700 | | | | 2,400 | | | | 7,199 | | | | 4,673 | | | | 1,029 | | | | 1,241 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total fees billed by Deloitte To above Funds: | | | 79,076 | | | | 56,700 | | | | 102,138 | | | | 100,721 | | | | 20,704 | | | | 26,388 | |
| | | |
| | | Audit-Related Fees1 | | | Tax Fees2 | | | All Other Fees3 | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Fees billed by Deloitte: | | | | | | | | | | | | | | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Blended Research Core Equity Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Bond Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Core Equity Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Emerging Markets Equity Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Global Governments Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Global Growth Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Global Research Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Global Tactical Allocation Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
To MFS and MFS Related Entities of MFS Government Securities Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS High Yield Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS International Growth Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS International Value Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Massachusetts Investors Growth Stock Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Money Market Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS New Discovery Portfolio*++ | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Research International Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Strategic Income Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Technology Portfolio* | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Total Return Portfolio*+ | | | N/A | | | | 1,589,808 | | | | N/A | | | | 0 | | | | N/A | | | | 0 | |
To MFS and MFS Related Entities of MFS Utilities Portfolio*++ | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
To MFS and MFS Related Entities of MFS Value Portfolio*++ | | | 1,686,271 | | | | 1,589,808 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | |
| | | Aggregate fees for non-audit
services: | |
| | | 2014 | | | 2013 | |
Fees billed by Deloitte: | | | | | | | | |
To MFS Blended Research Core Equity Portfolio, MFS and MFS Related Entities# | | | 1,697,779 | | | | 1,612,954 | |
To MFS Bond Portfolio, MFS and MFS Related Entities# | | | 1,697,764 | | | | 1,612,925 | |
To MFS Core Equity Portfolio, MFS and MFS Related Entities# | | | 1,700,252 | | | | 1,612,903 | |
To MFS Emerging Markets Equity Portfolio, MFS and MFS Related Entities# | | | 1,697,746 | | | | 1,612,896 | |
To MFS Global Governments Portfolio, MFS and MFS Related Entities# | | | 1,697,758 | | | | 1,612,905 | |
To MFS Global Growth Portfolio MFS and MFS Related Entities# | | | 1,697,744 | | | | 1,612,890 | |
| | | | | | | | |
To MFS Global Research Portfolio, MFS and MFS Related Entities# | | | 1,697,750 | | | | 1,612,901 | |
To MFS Global Tactical Allocation Portfolio, MFS and MFS Related Entities# | | | 1,717,503 | | | | 1,613,045 | |
To MFS Government Securities Portfolio, MFS and MFS Related Entities# | | | 1,697,812 | | | | 1,613,007 | |
To MFS High Yield Portfolio, MFS and MFS Related Entities# | | | 1,697,788 | | | | 1,615,448 | |
To MFS International Growth Portfolio, MFS and MFS Related Entities# | | | 1,697,756 | | | | 1,612,915 | |
To MFS International Value Portfolio, MFS and MFS Related Entities# | | | 1,697,826 | | | | 1,612,999 | |
To MFS Massachusetts Investors Growth Stock Portfolio, MFS and MFS Related Entities# | | | 1,700,289 | | | | 1,612,969 | |
To MFS Money Market Portfolio, MFS and MFS Related Entities# | | | 1,697,779 | | | | 1,612,947 | |
To MFS New Discovery Portfolio, MFS and MFS Related Entities#++ | | | 1,701,523 | | | | 1,612,906 | |
To MFS Research International Portfolio, MFS and MFS Related Entities# | | | 1,700,269 | | | | 1,612,924 | |
To MFS Strategic Income Portfolio, MFS and MFS Related Entities# | | | 1,697,744 | | | | 1,615,389 | |
To MFS Technology Portfolio, MFS and MFS Related Entities# | | | 1,697,745 | | | | 1,612,888 | |
To MFS Total Return Portfolio, MFS and MFS Related Entities#+ | | | N/A | | | | 1,616,949 | |
To MFS Utilities Portfolio, MFS and MFS Related Entities#++ | | | 1,701,664 | | | | 1,612,927 | |
To MFS Value Portfolio, MFS and MFS Related Entities#++ | | | 1,701,537 | | | | 1,612,942 | |
| + | The MFS Total Return Portfolio was reorganized into the MFS Total Return Series, a series of MFS Variable Insurance Trust, as of August 16, 2013. Effective September 11, 2013, MFS Total Return Portfolio was terminated as a series of the Registrant. |
| ++ | The MFS Value Portfolio, MFS New Discovery Portfolio, and MFS Utilities Portfolio were reorganized into the MFS Value Series, MFS New Discovery Series, and MFS Utilities Series, respectively, each a series of MFS Variable Insurance Trust, as of August 8, 2014. Effective October 15, 2014, MFS Value Portfolio, MFS New Discovery Portfolio, and MFS Utilities Portfolio were each terminated as a series of the Registrant. |
| * | 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 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)(2)(iv) of Regulation S-K or this Item.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | Based upon their evaluation of the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
| (b) | There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| (a) | File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated. |
| | (1) | Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. |
| | (2) | A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) 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
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| By (Signature and Title)* | | ROBIN A. STELMACH |
| | Robin A. Stelmach, President |
Date: February 13, 2015
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.
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| By (Signature and Title)* | | ROBIN A. STELMACH |
| | Robin A. Stelmach, President (Principal Executive Officer) |
Date: February 13, 2015
| | |
| By (Signature and Title)* | | DAVID L. DILORENZO |
| | David L. DiLorenzo, Treasurer (Principal Financial Officer and Accounting Officer) |
Date: February 13, 2015
| * | Print name and title of each signing officer under his or her signature. |
